Although they are sometimes used interchangeably, these two words – coin and token – have different meanings. They may not seem that different at first glance, but in reality they often serve fundamentally different purposes.
Being able to tell crypto coins and tokens apart is an important skill for any crypto investor. So, let’s find out how they differ and whether one can be considered to be a better investment option than the other.
What Is a Crypto Coin?
Coins are crypto assets that have their own underlying blockchains and protocols. They operate in a way that is similar to how fiat currencies work and are mostly designed to be payment methods or storages of value.
Crypto coins are what people usually think of when they hear the word “cryptocurrency” – digital currency. The most popular ones are Bitcoin, Ethereum, and Ripple.
What Is a Crypto Token?
Unlike coins, tokens don’t have their own blockchains. Instead, they run on other cryptocurrencies’ networks. They are usually developed by various organizations and projects on top of other chains.
Seeing as they use the same blockchain, digital tokens and their “original” coin may sometimes share some similarities – and they are usually compatible. However, tokens are (typically) not designed to be purely a store of value or a payment method: they are a different asset type.
Tokens vs Coin: the main differences
There are quite a few blockchains that support the creation of tokens. The most popular one is Ethereum – it houses the most commonly used token standard, ERC-20.
All tokens rely on a technology called smart contracts and have four defining characteristics. They have to be:
Transparent
Everyone can see and verify both the transaction data and the rules that govern the token.
Programmable
Tokens are developed and launched using smart contract technology. They are used to outline and program the token’s features, functions, purpose, and rules.
Trustless
Tokens are decentralized – instead of relying on a central authority, they are run by the rules defined in its protocol using smart contracts.
Permissionless
Finally, tokens have to be accessible to everyone. They cannot require any particular credentials from potential holders and users.
What Do Tokens Actually Do?
First and foremost, tokens can be used in the same way coins are – as a speculative asset to be invested in. However, unlike crypto coins, they have actual purposes, and can also represent physical assets or even certain utilities or services.
Tokens allow crypto projects to give some of their users special access to things like exclusive merch sales, dApps, blockchain games, and more. They can also be used to vote on various governance proposals and protocol upgrades.
Types of Crypto Tokens
Tokens can be divided into several different sub-groups depending on their design and purpose. Let’s take a look at the most common ones.
Non-Fungible Tokens (NFTs)
NFTs, or non-fungible tokens, are probably the most well-known type on this list. They serve no practical purpose and are mostly made and treated as luxury items. Each non-fungible token represents a separate asset.
Non-fungible tokens are essentially digital certificates of ownership. They usually represent unique digital assets such as pieces of art, videos, or even tweets. They are developed in the same way as other tokens – using smart contracts technology.
Utility Tokens
Utility tokens provide their holders access to goods and services. Sometimes they simply give you the right to interact with a platform or a digital product, other times they give a discount on fees, or make access to that platform completely free. They are the backbone of most dApps and other DeFi projects. As a result, owning a utility token may provide you with benefits far beyond monetary ones.
Utility tokens are typically not regulated and are not considered to be investment products.
Security Tokens
Security tokens are associated with external assets that can be traded as securities. They are a tokenized version of bonds, stocks, property, and so on. Because of this, their issuance and exchange are typically heavily controlled by various financial regulators.
Sometimes, a security token only represents a stake or a share in the asset it is tied to. Its holders can receive special benefits, such as part of the profit or the ability to partake in some decision-making processes. Unlike traditional securities, tokens can provide market participants with transparency, instant settlement, and other substantial benefits that come with being a crypto.
There are two types of security tokens: equity and asset-backed tokens.
Governance Tokens
Governance tokens do exactly what their name suggests – they give their holders access to governance decisions such as deciding which new upgrade will be pushed through. Typically, these decisions get applied automatically as the system operates on smart contracts. However, sometimes they are carried out manually by the team managing the project.
Governance tokens can empower their holders and thus make projects that use them significantly less centralized.
Examples of Crypto Tokens
There are many different tokens out there. NFTs include popular collections like the Bored Ape Yacht Club (check out our price prediction for their native token, ApeCoin, here) or even the world’s first tweet. The best example of a governance token is Maker (MKR).
The majority of tokens nowadays are still based on the Ethereum blockchain. However, some other networks are also starting to attract more and more developers, especially as ETH gas fees continue to rise. Tron and Solana are two other popular chains that have smart contract functionality and get chosen by many token creators.
Some cryptocurrencies have different token versions on different blockchains – for example, the stablecoin USDT.
The Difference Between a Coin and a Token
The primary difference between coins and tokens is the fact that the former have their blockchain while the latter does not. Additionally, tokens are usually built with an actual purpose in mind, so their price is typically determined by more than just the law of supply and demand and market speculation – although this is also true for some coins, especially those that have extra features like Ethereum or ones that can be used as payment in some places like BTC.
There are thousands of various tokens in circulation, a lot more than coins. That is because the former is much easier to create, as one doesn’t need to code an entirely new blockchain to make them.
Being able to differentiate tokens and coins is important as it helps you to better understand the cryptocurrency you’re trading or investing in. Ultimately, however, you can always look up whether a cryptocurrency is a coin or a token online.
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