When you get involved with cryptocurrencies, unavoidably, you stumble across the token vs coin dilemma.
While they both represent blockchain-based cryptocurrencies, a token is not the same thing as a coin. The distinction becomes essential when choosing to invest or build a cryptocurrency.
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What is a coin?
Traditionally, we define a coin as a piece of metal with an official stamp, issued by the government and used as a currency.
As for cryptocurrencies, the coin definition is that of a digital currency powered by its own blockchain, with no physical real-world equivalent.
The blockchain ledger works like a database that is passed around from one node to another. The data represents the entries about how many units of currency each address holds. The conditions in which the data is passed and the ways the nodes communicate with each other is defined by a set of rules called a protocol.
The characteristic of being based on its own blockchain is significantly important for a coin. By being able to establish its own protocol, the coin gets the highest level of independence and flexibility. The company or group that started it can decide on every aspect of the cryptocurrency, like consensus mechanism, fees, or transaction mechanism.
The original crypto coin, Bitcoin, holds the characteristics of a legitimate currency, being a unit of account, a store of value, and a medium of exchange. However, most of the coins that followed do not meet the requirements of a currency, some even having the characteristics of a token.
The coins that followed Bitcoin are called Altcoins. There are over a thousand altcoins and the majority are a variation of Bitcoin, hence the name.
What is a token?
The Cambridge Dictionary defines token as:
- An action or a gift that expresses feelings or intentions.
- A piece of paper with a particular amount of money printed on it that can be exchanged in a shop for goods of that value.
- A round metal or plastic disc that is used instead of money in some machines.
In the cryptocurrency market, a token is a digital representation of an asset. The asset represented by the crypto token may embody a utility, tradable commodity, loyalty point, voting rights, and more.
A token is built on top of the blockchain platform, therefore it uses a predetermined protocol, with no say in the network’s development. Tokens are defined by the smart contract, and additionally, may gain value through their purpose.
To better understand how that may happen, let’s take a look at Bananacoin.
A few Russian entrepreneurs developed an Ethereum token and called it Bananacoin. They intended to raise funds to expand their banana farm in the Vientiane province of Laos. Each Bananacoin token was set to hold the value of one kg of bananas export price.
Instead of receiving 1kg of bananas for each token they bought, buyers received Bananacoins that represented the same value.
A token is leveraging an existing coin, therefore it’s subjected to any uses and limitations the network has.
You can make your own cryptocurrency in under half an hour through a smart contract. However, the ease and speed of building a token are paid in fees to the platform.
The differences between coins and tokens
#1 Different algorithm
There is a clear distinction between coins and tokens regarding the algorithm:
- A coin is based on its own blockchain;
- A token is based on a smart contract on top of an existing blockchain.
#2 Different utility
Apart from the algorithm, a coin has money utility. Additionally, it can be used to back applications, smart contracts, validate transactions, or used for staking.
For example, Bitcoin is a coin that only holds “money” utility. Another coin that has money utility is Ether, which is also used to fuel the Ethereum network’s smart contracts.
On the other hand, a token is a digital representation of an asset, tradable commodity, loyalty points, and others.
Maker is a great example of this situation. This ERC-20 token is based on a smart contract on the Ethereum chain that backs and stabilizes the value of the DAI stablecoin. Also, MKR is used to pay transaction fees on the Maker system and to provide holders with voting rights within the system’s continuous approval voting system.
SIDENOTE. ERC-20 is a technical standard used to issue and implement tokens on the Ethereum blockchain.
#3 Different fees system
While trading, a coin can be traded on its own with little to no fees. But when you trade a token you have to pay a fee for the network it’s based on.
On the Ethereum platform, every operation requires a fee paid in Ether, which is called gas. The gas is used to allocate EVM (Ethereum Virtual Machine) resources and execute instructions contained in the smart contracts.
#4 Vulnerability to 51% attacks
A coin may be susceptible to a 51% attack if its network is not developed enough. However, because it’s built on an existing network, the token is improbable to be the target of such an attack.
SIDENOTE. A 51% attack is an attack on the blockchain by a miner (or group of miners) who owns more than 50% of the network’s mining hashrate or computational power. A 51% attack is also known as a Majority Attack.
Token vs coin – Which is better to develop or invest in?
Coins and tokens do not replace each other, but they serve different purposes. Each one of them is better in the appropriate context.
Crypto coins offer the highest degree of independence and flexibility. On the other hand, they are expensive to build and need large communities to support and adopt them.
The best usage for a crypto coin is as money, to be used as a store and exchange of value.
If the project you want to develop is focused on the cryptocurrency, meaning that the main goal is to develop it and/or build a platform based on it, or propose a new financial system; then the coin is the better choice.
Crypto tokens, on the other hand, are cheap, fast, and easy to develop. They require no maintenance but come with dependence on the main network, which gives little to no flexibility. Tokens may work as side projects that bring funds to the main business, or in any way that they represent real assets that can be moved around without physically touching them.
As for investors, you first need to know that both tokens and coins can be traded on exchanges as long as they are listed. The difference comes in usage cases. A coin usually has money utility. And if you want to invest in one, not for the sake of exchanging it later but to use it, then make sure there are vendors who actually accept that cryptocurrency. On the other hand, tokens can still be used inside the DApps they are meant for even when they have no other utility.