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 as a coin. The distinction becomes essential when choosing to invest in 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 currency units each address holds. The conditions in which the data is passed and the ways the nodes communicate with each other are 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 establishing 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.
A few examples of coins, besides Bitcoin, are:
- Bitcoin Cash;
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.
A token is a digital representation of an asset in the cryptocurrency market. 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, Tether is a known token that operates on the ERC20 standards. This way, Tether is built on the Ethereum blockchain, and it can be sent to any Ethereum address.
Its primary function as a token is being a utility crypto digital asset within projects. On the blockchain, there are thousands of tokens currently in use. However, they can be classified as follow:
- Utility tokens – grant access to a blockchain-based service; in short words, you will need a certain utility token to perform actions on an altcoin’s network.
- Transactions tokens can be found as tokens such as Tether (USDT), Binance USD (BUSD), and many others, which are generally backed up by fiat money and are tied to it. This way, tokens are not subject to crypto’s notorious volatility, and therefore they can be used as a medium of trade and store of wealth.
- Security tokens are known as stocks and shares that have been transformed into digital tokens on the blockchain. Holders of this type of token are entitled to a piece of the firm they’ve invested in.
- Non-fungible tokens – are one-of-a-kind cryptographic tokens that exist on a blockchain and are used to digitally represent the ownership of unique content. This token can be traded or swapped but can be irreplaceable.
- Governance tokens – people who have this type of token can propose and vote for the modification of a blockchain project, and doing so, influence the direction of a project. Usually, these tokens are created as ERC20 and ERC721.
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.
Here are a few examples of tokens:
Token vs Coin – What’s the difference
#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
Another major difference between coin and token, apart from the algorithm, is that a coin has money utility. Additionally, it can be used to back applications, and smart contracts, validate transactions or used for staking.
For example, Bitcoin is a coin that only holds “money” utility. Another coin with 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 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
One of the main goals of the cryptocurrency revolution is to bring about a more secure financial system with no single point of failure. Therefore, the network’s strength comes as a major difference between coin and token.
A coin may be susceptible to a 51% attack, especially in the early stages when the network is just forming. 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?
By now, the difference between coin and token should be quite clear. However, 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 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.
On the other hand, Crypto tokens 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 some vendors 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.