Aside from the popular names like Bitcoin and Ethereum, thousands of other crypto coins and tokens have gained prominence with the rising popularity of terms like blockchain, web3, metaverse, etc., in our day-to-day lives. As the Financial Conduct Authority in the UK estimated, there are about 20,000 cryptocurrencies in the market today. However, among this number, cryptocurrency tokens and coins are two different things, not to be confused with each other. Do you understand the crypto token vs coin distinctions?
The coins vs tokens debate may tend to get confusing for beginners initially. To make your journey with crypto trading a tad easier, we will explore the main differences between coins and tokens and simplify the terminologies for our readers!
Crypto Coins vs Tokens: Difference Between Coins and Tokens
A blockchain network may have a native asset or coin, but one can also use it to build many tokens on top of it.
Cryptocurrencies, or crypto coins, are independent of other platforms since they are native to their own blockchains. Bitcoin and Ether are two examples of cryptocurrencies. Now, while Ethereum has its own native coin called Ether, hundreds of other projects are also built on the Ethereum network, which have their own tokens.
Therefore, cryptocurrency tokens are built on top of other blockchains. Some organizations may create various utility or security tokens built on an existing blockchain for a variety of purposes. Examples of tokens include any NFTs, Polygon (MATIC), and 0x (ZRX)
Tokens are a subset of cryptocurrencies
Since all cryptocurrencies have their underlying blockchains, all tokens can be considered as a subset of cryptocurrencies. Tokens are built using already existing blockchains. Thus, tokens and coins are both interrelated but are not exactly the same.
Crypto Token vs Coin: What is a Crypto Coin?
To understand crypto coins vs tokens thoroughly, let’s go through the definitions now. In simple words, crypto coins are the underlying assets of a blockchain network. They can be a store of value and can also be actively traded on exchanges. Because they store value, they can be exchanged for fiat currency whenever one wants to. Cryptocurrencies derive their value from their native blockchain.
Crypto coins use cryptography to record and secure transactions using decentralized ledger technology. One may wonder why it is called a blockchain’s native currency; since it is issued directly by the blockchain network on which it runs, the term ‘native currency’ was coined.
The blockchain protocol may issue such coins for many purposes, such as payment of transactional fees, keeping its network secure, and more.
Crypto Token vs Coin: What Is a Token?
Among crypto coins and tokens, cryptocurrency tokens are created on top of existing blockchains. One doesn’t need to create a new blockchain network to issue tokens. It can simply run on another blockchain.
Many exciting projects have been built on the Ethereum network which utilize their own cryptocurrency tokens: the Layer 2 scaling solution Polygon being a shining example. Non-Fungible tokens, commonly known as NFTs, are also a common instance of tokens. Many organizations and celebrities have released NFTs of their own in recent times, built upon blockchains like Ethereum.
Tokens Use Smart Contracts
Cryptocurrency tokens utilize smart contracts – self-executing contracts on blockchains like Ethereum and Solana. Any deed of ownership of an asset, points earned in a game, or money may be considered as someone’s balance in a smart contract. This balance itself represents tokens. Anyone whose balance is non-zero in a smart contract owns tokens. A smart contract maps addresses to these balances(tokens) and adds or subtracts tokens.
Crypto Coins and Tokens: What is a Digital Asset?
In terms of blockchain, all tokens and coins are considered digital assets. Digital assets are simply non-physical assets that can be used to create value through tokenization on a blockchain.
Why does the distinction between Cryptocurrency Tokens and Coins matter?
A crypto enthusiast should ideally know the differences between cryptocurrency tokens and coins. In the crypto space, there is enough confusion regarding the two terms, hence the distinction between the two matters.
By knowing the differences between coins and tokens, you can firstly gauge the investment potential of a particular digital asset depending on the project it is associated with. Further, since the two have different functionalities (i.e. a crypto coin would let you pay for transactions on the native blockchain, while a crypto token may present exclusive governance benefits), crypto token vs coin is an important distinction to know.
Perks of Tokenizing
Now that we understand the crypto token vs coin differences, we should also understand the many perks that come out of tokenization.
- Removal of intermediary: Tokenization helps to issue more autonomous power to every stakeholder of a product or an asset. It removes the requirement of an agent or middleman who can try to make extra profits by taking advantage of a weaker stakeholder.
- Security: Tokenization on a secure blockchain using smart contracts heightens security protocols, reducing chances of piracy, etc.
- Transparency: Since initial token offerings are executed on a blockchain using distributed ledger technology, each transaction is recorded on a digital ledger. Every transaction also needs to be approved by every node on the blockchain, which removes the chances of favoring a specific transaction.
- Increased autonomy: Due to tokenization, several people get access to be a part of a project or an asset, increasing the chances of funding and distribution of the benefits in a democratized manner. Tokenization implements decentralization in a true sense.
Types of Tokens
Tokens are broadly divided into the following:
- Security tokens: Security tokens digitally represent shares of a company, contract, or project. Thousands of security tokens are being traded on crypto exchanges now. Security tokens provide ownership rights to the holder of the token.
- Utility tokens: Cryptocurrency tokens that allow the holder of the asset to perform a specific function or utility for which the token was created. Such tokens also provide users access to a particular blockchain-based product or service.
Other than the above, some tokens like Non-Fungible Tokens (NFTs) represent unique assets like pieces of art, etc., that cannot be traded at equivalency.
As we established before, any active trader or investor in the crypto markets should know the difference between tokens and coins. It is also important for developers to have the relevant information before starting out in the crypto industry. We hope this blog has clarified the token vs coin distinctions for you satisfactorily!
Interested in knowing more about crypto and blockchain? Blockverse can be just the place for you!
FAQs
What is the Purpose of Cryptocurrency Tokens?
Tokens can be used to store value, make purchases, etc. Using a blockchain network, tokens can also be issued to allocate ownership rights for units of an asset to different people, crowd-funding, distributing profits, etc.
Is Bitcoin a Token or a Coin?
Normally, all coins are considered tokens, but all tokens are not coins. Bitcoin is technically a coin since it is native to its own blockchain.
Why Are There So Many Cryptocurrencies?
Anyone can use blockchain technology and the open-source code of existing projects to create new projects and issue new cryptocurrency tokens. Being open-source is one of the main reasons blockchain projects have become so popular, and subsequently, so many tokens and coins were created.
