Token vs Coin: What is the Difference?
Both terms are used interchangeably nowadays which can lead to some confusion among new users. They refer to product/asset that is based on the blockchain technology.
Coins differ in the fact that they are native to their blockchain. Their main role is to serve as money in the digital space. This means that they are used as a medium of exchange and as a store of value.
On the other hand, tokens aren’t native to a blockchain. They are built over an existing one by using smart contracts. They can be referred to as assets because their main function isn’t to act as money. They can have different purposes like giving preferential access to a trading app, preferable trading fees, more interest earned on the digital assets stored at a platform, etc.
What is a Crypto Coin?
Coins act as money in the crypto world. The oldest and most popular cryptocurrency – Bitcoin – is a great example. It has its own blockchain. If someone wants to create a new cryptocurrency of that type, he can create a new blockchain or use an existing one and try to improve it. Also, new coins are obtained through mining – a process that requires a lot of computing power but may pay well to the miners. Popular examples are Bitcoin, Litecoin, Solana, Cardano, and others.
What are Coins Used for?
Their primary functions are to serve as money – money’s main characteristics are being secure, scarce, durable, and portable, and to serve as a store of value and medium of exchange. They are also used as a reward for miners and validators. Validators are those who enable consensus mechanisms to run. The two major types of consensus mechanisms are Proof of Work (PoW) and Proof of Stake (PoS). The first type rewards the nods for solving complex puzzles to validate transactions. The second type rewards nodes for staking a particular digital asset which validates that a certain transaction should go through.
What are Tokens?
Tokens are digital unit of value that represents a utility or an asset. They don’t have their own blockchain. Instead of that they are issued on top of existing ones and usually use smart contracts. These smart contracts enable digital units to fulfill much more purposes. They aren’t mined. Instead of that they are issued by the creator of the project (a process called “minting”).
Another feature is that it’s not necessary for them to be all alike – an example of that are NFTs (due to the versatile functions that they have). The easiest way to mint them is to use special ready-made solutions. Using such platforms doesn’t require to have any coding skills and is relatively simple. However, creating a token of such type with more advanced functions may require to have more technical skills.
The lack of need to create a blockchain can help the creators of the project to focus on the platform and its quality rather than the technical aspects of creating a blockchain. Another benefit is that owners don’t have to use different non-custodial wallets for them. Popular crypto tokens are Thether, Binance USD, and Shiba Inu.
What are Tokens Used for?
Due to the higher amount of features that these cryptocurrencies have, we will group them into several categories:
- Security – they are very often used in initial public offerings (ICO) and don’t give any property to their buyers. They don’t have any particular utility meaning that they are easier to be regulated and that’s why they are predominantly used for ICO;
- Equity – they are like stocks. Buying them provides their owner with shares over a company or a project. Because of that, they are also very often used for raising money;
- Utility – they are used to give access to an application or specific services. Some of them can be used for voting in Decentralized autonomous organizations (DAO);
- Payment – they are used as means of payment. One example is stablecoins. The most popular of them (USDT, USDC, BUSD) follow the price of the US dollar. Others that are fixed to the value of other assets are ironically called “wrapped coins”.
It’s important to say that usually, a token can fall into more than one category. Some examples that are used in ICO can give certain rights to their buyers making them fall into the security and utility category. Others may fall in the payment and equity categories.