What is the difference between a token and a coin?
Coin vs Token
Whenever a novice cryptocurrency investor goes deeper into the subject of hodling and trading crypto, eventually they end up on the crossroad of coins and tokens, which as much as they seem to be alike are two different terms, describing two different cryptocurrency representative forms. Crypto coins and tokens are both intertwined with the blockchain technology, they are also traded in a similar manner, however they are not the same thing.
To further understand the concepts of these two essential cryptocurrency terms, one should explore the different ways the blockchain network can be used in order to store and track both crypto digital assets and digital depictions of assets. The coin denotes a type of digital medium of exchange with a certain value and the token represents an asset which can be exchanged within a specific blockchain.
What is a crypto token?
All cryptocurrencies go hand in hand with a blockchain of their own, which means that without the foundation of the blockchain a cryptocurrency cannot fulfil its purpose – to be transacted and thus available to the user. Since creating a blockchain requires a lot of work and resources, it can be very challenging for crypto startups to set a foot in the crypto market. However, if you take advantage of other cryptocurrency’s blockchain, then you can create a token, which may be different from the traditional crypto coin but can still be developed as a viable way of holding assets in the crypto world.
The digital tokens rely on an already established blockchain and actively take advantage of its functional attributes. Tokens only symbolize something that can be exchanged but they themselves don’t have value, it is the thing that they represent and are backed up by that holds value. The token smart contracts are the ones which take care of executing and tracking the transactions of tokens.
The Ethereum coin functions on its own blockchain platform and therefore all other cryptocurrencies that run on its blockchain are considered tokens. In that case the crypto tokens are merely part of the specific blockchain network, in order to be transacted and used within it, but they don’t control it.
The People’s Network or Helium as it is mostly referred to, proposes another great example of the difference between token and coin. Whenever a hotspot transfers data to and from other devices, the owner of the hotspot receives a reward which is meant to incentivise them for participating in the network. The more data one gadget transfers, the bigger the reward. In that case Helium gives their network contributors their native token HNT. Although this token is available on the cryptomarket for anyone interested to invest in it, HNT is not meant to act as an actual financial incentive, that means that at its core the token is just used to represent the fruits of labor of the Helium network participant, who can later sell it and then make money off of the HNT.
Types of tokens
There are different types of tokens and here are listed a few of them:
- Security tokens – used to record ownership of almost anything that has value in the physical world like gold and other valuable assets in the digital sphere. A very well known security token is the Bitcoin Capital (BCap).
- Utility tokens – grant the user access to products and services and are used in ICOs (Initial Coin Offerings) as incentives. Some of the most popular utility tokens are: Basic Attention Token (BAT), which is given to the users of the Brave browser; MATIC is the utility token used to pay gas fees on the Polygon network and LINK, which is a reward for all people who provide data to the Chainlink platform.
- Platform tokens -meant to support decentralized applications on the blockchain. For instance, Uniswap is one of those applications, which has its own token that is given as a reward to those who invest in the app.
- Non-fungible tokens – record ownership of any digital product – videos, pictures, art, etc. At the very beginning the NFTs were part of the Ethereum blockchain and are nowadays thriving in special NFT marketplace platforms like Solsea, Binance NFT and OpenSea.
What is a crypto coin?
The crypto coins are most often regarded as a type of digital money and they embody the value of the cryptocurrency. All coins are transacted on their own blockchain where all the transfers are recorded. For example, Bitcoin is the native coin of the Bitcoin digital currency and is therefore based on the Bitcoin blockchain. That leads to the statement that only coins have a blockchain platform of their own where crypto coin transactions are handled.
You can earn crypto coins by either trading fiat money or a different altcoin for a specific cryptocurrency coin. Something else that distinguishes the coins from the tokens is that they are representing a digital form of money, which is the reason why nowadays you can purchase a variety of products and take advantage of services by paying in crypto coins. Unlike tokens, coins can be mined and are not created to serve other purposes, except being used as a medium of exchange.
The most important conclusion that has to be made is that all cryptocurrency coins can become tokens but not all the crypto tokens can become coins. The latter can be conversely true, only if the creators of the token establish their blockchain on which the token can then operate as an independent native crypto coin of the exact blockchain network.
* The given information aims to satisfy basic knowledge needs for crypto enthusiasts and is not marketed as professional cryptocurrency investing or trading advice.
Zornitsa is the Editor-in-chief at Coinlabz. She is involved in researching the impact of blockchain technology and the way crypto is transforming peoples’ perceptions of finances.