Cryptocurrency has been the umbrella covering every digital currency –coin and token– within the ecosystem. Although, there are some fundamental similarities between a coin and a token. Both can be a medium of exchange and processing payments and value representation.
However, what differentiates the two crypto assets is their utility. All coins are tokens, but not all tokens are coins. In addition, these crypto-assets employ cryptography, a secure encryption technology that helps protect against fraud and double-spending, ensuring the integrity of crypto-based crypto assets.
What is a Coin?
A coin is a digital asset that is unique to its blockchain. This means a coin can operate and execute transactions on the blockchain protocol it is built on. As a result, these coins can be exchanged from one person to another in a peer-to-peer manner without needing an intermediary or a central authority. The first digital currency, Bitcoin, is a typical coin example.
For instance, the Bitcoin blockchain is used for all bitcoin transactions, and every transaction is protected by encryption and is only accessible to network members. Similarly, the Ethereum blockchain’s native token is Ether, and the Ethereum blockchain is used for all transactions involving Ether. In addition, the blockchain records every coin transaction, and there are typical methods to mine coins based on the consensus algorithm.
One distinguishing feature of a coin is that it can be mined using a cryptocurrency mining process, which uses either a proof-of-work (PoW) or a proof-of-stake (PoS) verification consensus mechanism. The consensus mechanisms are how coin transactions on the blockchain are verified and validated. PoW solves complex mathematical computations with massive computer power and generates coins to reward miners. The PoS mechanism generates and validates transactions based on coin staking. As a result, coins are used to pay network transaction fees.
Furthermore, a coin is a digital asset for a blockchain network that functions as a store of value and a medium of exchange. As a result, it always has a unique blockchain that it does not share with any other kind of asset. Coins function as a blockchain’s main currency, which is why they are frequently referred to as native currency.
What is a Token?
A token differs from a cryptocurrency coin in that a crypto token does not require its blockchain network. This means a token is a digital asset based on an existing blockchain. As a result, it is not unique to a blockchain but to a specific decentralized project. Also, tokens are non-mineable digital units of value that exist in blockchains as registry entries.
Crypto tokens are developed with a specific function; using smart contracts and an established blockchain network, a token represents value units. Tokens leverage the network by sharing compatibility with the native cryptocurrency of another blockchain. Hence, it is up to the person or the team behind the token project to decide what it will be used for and highlight it in the token whitepaper; it may be anything from fund-raising to facilitating access to services. Like other crypto assets, these tokens are decentralized, serve as a medium of exchange, and rely on cryptographic signatures for security and record-keeping.
Tokens can be created using several widely accepted token standards, most of which are based on Ethereum. The two most popular token standards are ERC-721, which enables non-fungible tokens that are unique and cannot be exchanged for other similar tokens, and ERC-20, which allows the creation of tokens that can interact within Ethereum’s ecosystem of decentralized applications (dApps).
In addition, tokens are permissionless and trustless. Permissionless; this means anyone can use it without special authorization. Trustless refers to a system that is run according to predefined network protocol rules rather than being under the control of a single central authority.
Types of Tokens
Tokens rely on programmable code, which developers can change and modify to perform an infinite number of functions. As a result, classifying tokens can be complex, but the vast majority fall into a few distinct categories.
Application tokens are another name for utility tokens. They are employed to provide people with access to a product or service. For example, users can access a blockchain-based service through utility tokens. For instance, Basic Attention Token (BAT) is cryptocurrency advertisers use to pay publishers on the Brave web browser. Publishers then give BAT rewards to their viewers for viewing ads. Unfortunately, they are also scarce because most tokens are expected to appreciate in value due to their scarcity.
A security token is a unique token issued on a blockchain with or without permission and represents a stake in an external asset or company. Furthermore, security tokens are conventional securities like stocks, bonds, and other securities issued by governmental and corporate bodies and transformed into digital tokens on the blockchain. The holders of security tokens also receive a deduction from company profits, and these digitized crypto-assets can be used to create financial securities.
Money is transferred using transaction tokens, typically to ensure meager fees. Stablecoins are tokens that fall into this type of token, such as Tether (USDT), Binance USD (BUSD), and Dai (DAI). They are usually pegged to fiat money and collateralized. As a result, they are useful as a medium of exchange and a store of value because they are immune to cryptocurrency’s prominent volatility.
Governance tokens grant the token holder the ability to vote and propose changes to the blockchain project. Token holders directly impact the protocol’s operation and direction by owning the token. Hence, voting is made possible by governance tokens. The number of tokens you own is proportional to the number of votes; if you own a token, you have a vote. Similarly, if you own two tokens, you have two votes, etc.
An NFT (Non-fungible Token) is a digital authentication certificate that ties ownership to particular physical or digital assets, like works of art, real estate, movies, or music. They are unique cryptographic tokens that are available on a blockchain and are used to signify ownership of exclusive content online. They can also be exchanged or traded on exchanges like other tokens.
Coin vs. Token: The Difference
The success of decentralized projects has helped tokens gain popularity and value, while coins are still considered a good investment. One of the most inventive inventions to emerge from the development of cryptocurrencies is the concept of tokens. They fill in the gaps that are typically left by blockchains. However, which asset type you invest in entirely depends on what you want to do with your cryptocurrency. Knowing whether a cryptocurrency has a blockchain is an easy way to tell the difference between crypto coins and tokens. If it has a blockchain, it is a coin; if it does not, it is a token.
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