If you are new to the world of cryptocurrencies, you may confuse the terms “coin” and “token”, particularly when the terms are often used interchangeably. Both coins and tokens represent stores of value. How do they differ then?
On a fundamental level, coins and tokens are very similar. It is possible to use coins instead of tokens and vice versa. Knowing the difference between the two can help you have a better understanding of these terms. In this article, we look at the differences between coins and tokens and understand some of their features.
What Is a Crypto Coin?
A coin is a native digital currency of a blockchain that acts within its financial system. It can act as a medium of storage and can be exchanged for an agreed-upon value between parties. Users can trade it for another cryptocurrency or token from a different blockchain via peer-to-peer trading or through a crypto exchange.
Here are some features of coins:
- Coins have their own underlying blockchain, which keeps track of all transactions. They are issued directly by the blockchain protocol they are associated with. For instance, Ethereum receipts upon transactions are sent to the Ethereum blockchain. If the same person later sends you in Bitcoin, the receipt is sent to the bitcoin blockchain. All transactions are encrypted, and community participants have access to all records.
- Coins can be used as alternatives to cash. Bitcoin was proposed as a solution to the flaws in the traditional payment system (trust-based model) after the 2008 recession as a hedge against inflation. Many new alternatives, such as ETH, NEO, and Litecoin, were available to the market later on. In 2020, multiple companies like Tesla, Blackrock, and MicroStrategy made their investment in crypto projects. Tesla rules out their merchandise that offers users the option to make payments in Dogecoin. El Salvador adopted Bitcoin with the US dollar in 2021.
- You can mine a coin. For instance, Bitcoin is mined based on the proof-of-work consensus protocol. Proof-of-Work systems require a mining process for the maintenance of the networks. Bitcoin miners use this protocol to expand their mining. Another approach is proof-of-stake, a particularly energy-efficient and environmentally-friendly approach. PoS networks incentivize the participants to stake native coins. Cardano is one of the biggest crypto projects to adopt this system.
What Is a Token?
A token is a digital unit that is built on another blockchain, such as Ethereum, NEO, etc. Depending on the characteristics, there are different token classifications like security tokens, utility tokens, security tokens, non-fungible tokens (NFTs), and more.
Tokens are based on smart contracts that incorporate code and programs. These are arithmetic and logical operations or prerequisites that validate the process. Each blockchain makes use of smart contracts. For example, Ethereum uses its ERC-20 and NEO uses Nep-5.
When tokens are issued, they migrate from one location to another. Token migration involves transferring an investor’s balance from, say, an Ethereum wallet to a new compatible wallet for a specific project.
Coins vs. Tokens
Tokens and coins differ fundamentally in that we may consider all coins as tokens, but not all tokens are coins.
Another major distinction between coins and tokens is that coins have their own blockchains, while tokens do not. While coins are primarily used for payments, tokens have few specific use cases apart from payments, such as incentives for users, representation of collectibles, artwork and personalized access rights, and enabling voting rights.
As the blockchain industry continues to mature, the number of unique digital assets will continue to grow, serving the diverse needs of all participants in the ecosystem, from corporate partners to individual users.
The crypto ecosystem relies on tokens and coins to allow users to interact with blockchain-enabled digital assets. A multitude of new social and economic opportunities will emerge as a result of these digital assets, resulting in enhanced industry work, interactivity, and value creation. Knowing the differences between the two is essential to being an informed crypto investor.