The word “crypto” refers to a wide range of currencies. There is a distinction between coins and tokens. Let’s take a closer look.
Entering the cryptocurrency market can be a difficult and intimidating task. You’ve probably heard of Bitcoin, but what about the thousands of other coins and blockchain projects out there?
To gain a better understanding of the crypto markets, divide cryptocurrencies into two categories: coins and tokens.
What Is A Coin?
A coin is a type of cryptocurrency unique to the blockchain it uses.
As an improvement or alternative to Bitcoin and other current public ledgers, many blockchains are built from scratch. A pre-built open-source blockchain can also be used to create a blockchain, although doing so still takes time and requires a certain level of technical knowledge. It is difficult to launch a coin since a blockchain must be built in order to generate a coin.
Bitcoin, or BTC, is an example of a coin. It is used to pay network transaction fees and is powered by a separate blockchain with the same name. Since Bitcoin (BTC) was the first widely used cryptocurrency, subsequent coins are referred to as altcoins or alternative coins. Every altcoin also has a separate, independent network of its own.
The top 10 cryptocurrencies that can be considered coins are listed below.
Bitcoin
Ethereum
BNB
Cardano
XRP
Solana
Polkadot
Dogecoin
TRON
Avalanche
All coins share several common features:
Operate On Their Own Blockchain
Running on their own blockchains, all cryptocurrencies operate without exception.
The term “coins” refers to native cryptocurrencies that are active on both their original chains and the forks of those networks (new chains produced as a result of protocol changes). For instance, when the Bitcoin blockchain split into two distinct blockchains, Bitcoin and Bitcoin Cash, BTC continued to be the native coin of the original chain, while BCH, a brand-new coin, emerged for the forked chain. Unparalleled technical solutions are provided by independent blockchains, which enable the development of new features. Among the elements that impact a coin’s intrinsic worth are its efficiency and security, as well as the underlying blockchain technology.
Act as money
Coins can serve as digital money because they possess the characteristics of traditional money, such as security, scarcity, longevity, mobility, and a capacity to hold value. Companies, including Microsoft, PayPal, Starbucks, Virgin Airlines, and others, have already accepted some crypto coins as a form of payment.
Can Be Mined
The majority of blockchains use a method called mining to create a new currency.
The network users who approve transactions receive brand-new coins as payment. Users also pay a network charge each time they conduct a transaction on the network, which is used to purchase rewards.
Although there are many other methods for confirming transactions, proof of work (PoW) and proof of stake (PoS) are the most popular. PoW networks’ validators utilize colossal amounts of processing power to validate transactions. Staking coin holdings is necessary for the PoS technique to validate transactions.
What Is a Crypto Token?
A token is a digitally stored unit of value that stands in for an object or service.
Tokens, unlike currencies, are issued on top of existing networks and do not have their own blockchain. Tokens are not mined during the transaction validation process like coins are. They are instead minted. The total quantity of tokens issued is subject to the requirements that the issuing project has specified.
Tokens can serve a variety of functions. They may be employed to provide access to specific services or to raise money. Some tokens can even serve as a substitute for coins on another network. They are referred to as “wrapped tokens” and track the value of the underlying asset. A stablecoin, for instance, is a sort of token that closely tracks the price of the US dollar, and it is also fairly common.
The top ten tokens in the crypto market.
Tether
USD Coin
Binance USD
Dai
Wrapped Bitcoin
LEO Token
Shiba Inu
Lido Staked Ether
FTX Token
Chainlink
How tokens are created
In truth, it requires remarkably little technical ability. I wouldn’t recommend it for a complete beginner, but it shouldn’t take as long as you think for someone with some programming knowledge. However, the developer must spend part of the native currency on the blockchain on which the token is formed.
If the token is produced on Ethereum, for example, the creator will need to spend some Ether to get the network’s miners to validate the token transaction (creation).
Not just the creation of the token requires payment of fees, all token transactions on a blockchain do as well. Therefore, in order to move application-specific tokens between users or between the app and the user, any application built on Ethereum must do so using Ether currency.
Similar to how coin transactions require fees to be paid to those protecting the network, so does this.
The Purpose Of Tokens
Crypto tokens perform a variety of functions within the blockchain ecosystem. They can represent digital or real assets, offering ownership rights and allowing for fractional ownership. Tokens are also used to access certain features and services within decentralized applications (dApps). They support funding through Initial Coin Offerings (ICOs) or Security Token Offerings (STOs) and offer incentives to users in the form of rewards or governance rights. Tokens are critical in establishing decentralized economies, stimulating innovation, and improving the functioning and value proposition of blockchain networks.
Tokens’ key benefits
A dApps and token creator can save time and money by not having to build their own blockchain. They can benefit from the security of the native blockchain and use the benefits of cryptocurrencies with their application.
Not only does it save them time, but it also eliminates the need to find miners to validate their transactions if they had established their own blockchain and coin instead of using dApps and tokens.
To build a robust, impenetrable blockchain, many miners are required. Instead of having hundreds of weak, largely centralized blockchains, it makes much more sense for numerous computers to cooperate on a single shared blockchain that can support multiple applications.
How tokens work
Tokens work through smart contracts on existing blockchain networks, typically Ethereum or Binance Smart Chain. They are digital assets that represent value and are created and managed using smart contract protocols. Here’s how tokens work:
Smart Contracts Creation: Tokens are created through smart contracts, which are self-executing contracts with predefined rules and conditions. These contracts run on blockchain networks and can be programmed to issue, manage, and transfer tokens.
Token Standards: There are different token standards that define how tokens should be created and operated. The most common token standards on Ethereum are ERC-20 (fungible tokens) and ERC-721 (non-fungible tokens or NFTs). Each standard has specific functions and features tailored to its use case.
Token Issuance: The process of token issuance starts with a smart contract that defines the total supply of tokens, their name, symbol, and other parameters. The creator of the token can then mint the initial supply and distribute it to specific addresses or sell it through Initial Coin Offerings (ICOs) or other fundraising methods.
Token Ownership and Transfer: Tokens are owned and controlled by users who hold private keys to their respective wallet addresses. These addresses are associated with a balance of tokens on the blockchain. Token holders can transfer their tokens to other addresses through blockchain transactions, which are recorded and verified by the network’s nodes.
Token Utility and Use Cases: Tokens can have various use cases, depending on the purpose for which they were created. Some tokens act as a digital representation of assets like real estate or commodities, while others grant access to specific features or services within decentralized applications (dApps).
Interoperability: Tokens built on blockchain networks like Ethereum are often interoperable, meaning they can be seamlessly integrated with other dApps and services on the same network. This interoperability enhances the usability and versatility of tokens.
Security and Consensus: Tokens inherit the security and consensus mechanisms of the underlying blockchain network. This ensures that transactions involving tokens are secure, transparent, and tamper-resistant.
Token Standards Updates: Occasionally, token standards may be updated or improved to address specific issues or add new features. These upgrades can be implemented through a process known as token migration, where old tokens are swapped for new ones based on the updated standard.
The Key Differences Between Coins Vs. Tokens
| Feature | Coins | Tokens |
|---|---|---|
| Native Blockchain | Have their own independent blockchain | Built on existing blockchain platforms like Ethereum |
| Purpose | Function as digital currencies and medium of exchange | Serve various purposes, representing assets, granting access to dApps, and more |
| Decentralization | Typically decentralized and permissionless | Rely on the decentralization of the underlying blockchain |
| Use Cases | Primarily as a medium of exchange and store of value | Diverse use cases, including representation of assets, access to features, fundraising |
| Interoperability | Interoperate with other blockchains | Interoperable with other dApps and services within the same blockchain ecosystem |
| Creation | Independently minted and issued | Created through smart contracts on the existing blockchain |
| Security and Consensus | Secured by their own blockchain’s consensus mechanism | Inherit the security and consensus of the underlying blockchain |
| Examples | Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC) | ERC-20 tokens, ERC-721 (NFTs), Binance Coin (BNB) |
Conclusion
The fundamental difference between coins and tokens lies in their underlying technology and purpose within the blockchain ecosystem. Coins operate on their own native blockchain networks, serving as a form of digital currency or store of value. At the same time, tokens are built on existing blockchain platforms and represent various assets, utilities, or functionalities. Coins have their independent network, security, and consensus mechanisms, whereas tokens rely on the infrastructure and security of the blockchain, they are created on. Understanding this distinction is essential for navigating the cryptocurrency landscape and choosing the right digital assets for specific use cases or investment purposes.
FAQs
Q. Are coins and tokens interchangeable terms?
A. No, coins and tokens are not interchangeable terms. Coins refer to digital currencies that operate on their own blockchain networks, while tokens represent assets or functionalities on existing blockchain platforms.
Q. Can tokens be used for payments like coins?
A. Yes, some tokens, such as stablecoins, are designed to mimic the value of fiat currencies and can be used for payments, similar to coins. However, not all tokens serve this purpose, as they can represent various assets, utilities, or access rights.
Q. Which is more valuable, coins or tokens?
A. The value of coins and tokens varies depending on factors such as their use case, adoption, market demand, and scarcity. Some coins, like Bitcoin and Ethereum, have significant value due to their popularity and widespread adoption. Likewise, certain tokens may gain substantial value if they play a crucial role in decentralized applications or DeFi platforms.
Q. How are coins and tokens created?
A. Coins are typically created through a process called mining or minting, depending on the blockchain’s consensus mechanism. Tokens, on the other hand, are generated through smart contracts on existing blockchain platforms like Ethereum.
Q. Are coins and tokens subject to the same regulations?
A. Generally, both coins and tokens are subject to relevant regulatory frameworks depending on their classification as securities, commodities, or currencies in different jurisdictions. However, due to their diverse nature, the regulatory treatment may vary.
