Understanding the difference between coins and tokens is a herculean task in the context of cryptocurrencies. Even though both these terms are often used interchangeably, they refer to two different concepts in the crypto ecosystem.
While it’s not a crime to use these terms interchangeably per se, one must grasp a clear understanding of coins and tokens to learn more about the future of crypto and blockchain.
Therefore, Liquid wants to explain some of the fundamental differences between tokens and coins.
What is a coin?
Coins refer to cryptocurrencies built on their independent blockchain network. The most famous example is Bitcoin (BTC), which is also the world’s largest cryptocurrency by market capitalization.
Bitcoin is powered by its native blockchain network. Similarly, Litecoin (LTC) and Ethereum (ETH) function on their respective blockchains. These blockchains may differ in their size, rules, miners, performance, etc.
Some of the popular coins are Bitcoin (BTC), Ripple (XRP), Ethereum (ETH), Dogecoin (DOGE), and Litecoin (LTC).
How are digital coins used?
Digital coins are designed to serve the same purpose as physical coins: Transfer of value. In the crypto ecosystem, digital coins enable the transfer of payments. Digital coins also store value directly linked to their demand and supply. Therefore, the value of digital coins is often volatile.
There are a few exceptions to this, though. For instance, Dash (DASH) ownership will allow the customer to vote on decisions proposed to the DASH network. In the case of Bitcoin, however, the only way to get more Bitcoin is to buy or mine them. Lest we forget, you can also accept Bitcoin as a form of payment.
What is a token?
In the meantime, tokens refer to cryptocurrencies that don’t have a blockchain network of their own. Instead, these cryptocurrencies are built on another blockchain. Users can create digital tokens using one of the many platforms in the DeFi (Decentralized Finance) ecosystem.
Ethereum is one of the most popular choices, thanks to its support for smart contracts. Most of the digital tokens found today are ERC-20 tokens since the Ethereum platform easily enables creating tokens on top of the Ethereum blockchain.
Currently, thousands of tokens exist in the market. Tether (USDT), USD Coin (USDC), DAI, UMA, and Basic Attention Token (BAT) are some of the commonly-used digital tokens out there. These tokens may have powers other than value transfer.
How are digital tokens used?
Much like digital coins, tokens also enable the transfer of value. However, in most cases, a digital token does have some additional powers than being a medium of payment. Anyone can create digital tokens to fulfill specific functionalities.
For instance, a privacy-focused Brave browser uses the Basic Attention Token (BAT) to reward its users for browsing the web. Customers get paid in BAT when they view advertisements from publishers who have partnered with the Brave browser.
Different types of digital tokens exist for various purposes.
- Security tokens work as proof of investment in real-world assets such as equities and fixed income. These are issued during Security Token Offering (STO).
- Utility tokens are designed to provide access to a particular service or product. For example, the FIL token can access the Filecoin platform.
- Asset tokens are digital tokens linked to real-world assets such as real estate, gold, etc. In this case, a token represents the real-world investment.
- Stablecoins are digital tokens that have a fixed value. These are often pegged against fiat currencies like USD or EUR.
- Non-fungible tokens represent unique items, which could be real or virtual. Items used within a game are an example of these tokens.
- Payment tokens are almost similar to digital coins since they enable a transfer of payment in return for goods and services.
Some services create payment tokens to get rid of intermediaries as well. In most cases, the customer would be rewarded for using these tokens over a traditional payment method. Compared to building a coin from scratch, creating a token through the Ethereum platform would take considerably less time.
Token Vs. Coin — The core differences
To sum up, some of the key differences between a digital token and a digital coin are as follows:
- Digital coins are based on their native blockchain network, tokens are built on the existing blockchain.
- Digital coins can be used for processing payments, but tokens are suitable for multiple needs.
- Digital coins are more difficult to create than tokens that can be built based on the existing blockchain like Ethereum.