Coins vs Tokens: What are their differences?

2024-04-13 11:38:39

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Exploring the contrast between Crypto Coins and Crypto Tokens

In the journey and exploration of digital assets, one term you undoubtedly hear daily is 'Cryptocurrencies', and in the course of listening or partaking in discussions, you may come across the mention of Coins; some other times, Tokens. But what exactly are they? Are they different or do they basically mean the same thing? Before delving into the disparities between them, it's crucial to have a comprehension of the underlying technology that propels them forward — The Blockchain.

A blockchain is a decentralised digital ledger that records transactions across numerous computers. It's design ensures transparency, security and permanence (immutability) by constructing a sequence of blocks in a sort of chain-like manner with each block containing a record of transactions (hence the name, Blockchain!). This foundational technology underpins cryptocurrencies, facilitating peer-to-peer (P2P) transactions without reliance on institutions like traditional banks. Now, the major distinction between a cryptocurrency being a Coin or a Token lies in the fact whether the cryptocurrency has it's own blockchain or not. These terms are commonly used interchangeably, but that shouldn't be so because they are inherently different!

A Crypto Coin (or simply, Coin) is a cryptocurrency that has/runs on its own blockchain. It is native to it's own specific blockchain and in a broad sense, has two (2) main usecases: as a medium of payment or as a store of value, serving functions such as facilitating transactions, transferring value seamlessly and preserving wealth. Some examples of Coins are BTC, ETH, LTC, SOL, DOGE etc.

A Crypto Token on the other hand, are cryptocurrencies established on already existing blockchains. They do not have their own blockchain, but rather run and rely on the underlying blockchain network they are created and deployed on. This design gives way for interoperability — the ability of a digital asset to interact and be used on several blockchains (cross-chain compatibility).

Tokens can represent a variety of assets including utility tokens, security tokens and even non-fungible tokens (NFTs). They often serve purposes within decentralized applications (DApps) and are predominantly use in decentralized finance (DeFi). There are various types of tokens based on their usecases:

  • Utility Tokens grant access to services or features within a network or decentralized application (DApp). A good example is Uniswap (UNI).

  • Security Tokens represents ownership stakes or claims on assets and are essentially tokenized securities.

  • Non-fungible Tokens (NFTs) are unique digital assets that are not divisible. They are often digital art pieces and collectibles. Users can create them by minting on an NFT marketplace or designated platforms. Popular NFT collections include: Bored Ape Yatch Club, CryptoPunks, Pudgy Penguins, DeGods etc.

  • Governance Tokens empower users to participate in decision-making processes concerning a network or DApp. Some examples of governance tokens include: Optimism (OP), Sushi (SUSHI) and StarkNet (STRK) amongst others.

How are Coins and Tokens created?

The process by which Coins and Tokens are created varies significantly:

Coins are typically generated through Mining on a proof-of-work (PoW) blockchain, whereby powerful computers solve complex mathematical equations to validate transactions and add new blocks to the blockchain; or via Staking on a proof-of-stake (PoS) blockchain. For PoW blockchains such as Bitcoin, miners receive a number of coins as a reward after solving and finding a block thereby increasing the total coin supply in circulation. In PoS blockchains, validators 'stake' their coins on the network to secure the network and validate transactions, and in return receive newly minted coins based on their total stake.

Tokens are usually created by deploying a smart contract on blockchain platforms like Ethereum which have inherent support of such functionality. Smart contracts acts as the blueprint for the token, defining it's existence and core functionalities. They are self executing agreements with terms written directly into code before deployment. Developers can create and generate tokens by deploying contracts which follows a specified set of rules called Token Standards. On Ethereum blockchain for example, major token standards include ERC-20, ERC-721 and ERC-1155 token standards — they outline the rules and functionalities of the tokens. Tokens can be distributed through coin offerings (ICOs) or airdrops to raise funds for projects or encourage user engagement.

Coin vs Token: Key differences
Coin vs Token: Key differences

Examples of Popular Coins & Tokens

Popular Coins

Bitcoin (BTC): This is the first cryptocurrency ever created, and is the apex of all cryptocurrencies by market cap rankings. It is the native coin of the Bitcoin blockchain and strives to be a currency facilitating secure and global transactions.

Ether (ETH): Against popular belief, the native coin of the Ethereum blockchain is not called Ethereum, but rather Ether. It's blockchain being a decentralized global software platform supporting smart contracts and decentralized applications, paved the way for tokens and fostered diverse projects and decentralized ecosystems.

Ripple (XRP): Serving as both a payment protocol and cryptocurrency, Ripple concentrates on cost effective international money transfers aiming to streamline cross border transactions among financial institutions.

Popular Tokens

ERC 20 Tokens: The ERC 20 token standard is widely embraced on the Ethereum blockchain. Numerous tokens, like Chainlink (LINK) Uniswap (UNI), AltLayer (ALT) and Aave (AAVE) conform to this standard. These digital units serve purposes, such, as in decentralized finance (DeFi), gaming and governance within the Ethereum ecosystem.

Tether (USDT): Tether is a stablecoin designed to maintain a 1;1 peg with the US dollar. It operates across blockchain platforms, including Ethereum, Tron and Bitcoin. Tether offers speedy on-ramp and acts as a bridge between fiat currencies and cryptocurrencies.

Optimism (OP) & Arbitrum (ARB): These are governance tokens of Optimism & Arbitrum network respectively, both of which are a Layer-2 (L2) blockchains on Ethereum. Having run a widely successful airdrop campaign, both tokens have gone on to prove their dominance in the L2 space with record-low transaction fees.

Key Takeaways

— Having a keen understanding of the distinction between Coins and Tokens is crucial for any crypto enthusiast.

— Coins are any cryptocurrency that have their own native blockchain and are primarily applied as currencies for the payment of goods and services or adopted as a store of value eg. BTC, ETH, LTC etc.

— Tokens are digital assets that do not have their independent blockchain, but are rather built on existing blockchains (and typically have specific purposes within decentralized applications) eg. UNI, LINK, OP, ARB etc.

Disclaimer: All opinions, news, research, analyses or other information contained in this article are provided strictly for informational purposes only, and does not constitute investment advice. Cryptocurrency products are currently unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Faucet Crypto (“the website”), including its staff, is not affiliated with and does not endorse nor sponsor any of the mentioned services within this article. Conduct your own thorough research by contacting financial experts before making any investment decisions.