Crypto Coins vs Tokens
For people new to the crypto market, the difference between coin and token can be confusing. Often, people use the wrong terms to refer to different digital assets related to cryptocurrency. Although the difference might seem complicated, it isn’t. To summarise, digital currencies that have their own blockchains are referred to as ‘coins’. Cryptocurrencies that do not have their blockchains are called ‘tokens’.
Understanding the difference between crypto coins and tokens depends on the blockchains behind these cryptocurrencies. For instance, as a person looking for a car, you have two options: buy or rent a car. When you buy a car, you have to take care of its insurance, maintenance, tyres, gas, etc. However, if you choose to rent a car, you could pay a monthly payment, and in that case, you don’t have to worry about any issues that the car comes with. The owner of the rented car takes care of all that.
In the same way, coins are cryptocurrencies that use their own blockchain and hence, are responsible for creating the blockchain and maintaining it. On the other hand, when you use a token, you are using someone else’s blockchain as your infrastructure while you basically pay rent.
The best example, in this case, is Ethereum. Ethereum is a cryptocoin with its own blockchain that stores its value and validates the related blockchain transactions. However, there are other tokens that use Ethereum’s blockchain infrastructure as their backbone. ERC20 is one such token. By creating a token, the team could rely on Ethereum’s network to provide safety and stability to their own product without having to worry about the intricacies of the blockchain.
Coins are cryptocurrencies that are built on their independent blockchain network. The most popular example of a cryptocoin is Bitcoin, the largest coin by market cap. Bitcoin is powered by its native blockchain network. Similarly, other coins like Litecoin and Ethereum also function on their respective blockchains. However, these coins may differ in different aspects like size, rules, miners, performance, value etc.
Uses of coins
Digital coins of this kind are used to serve the same purpose as physical cash: transfer of value between two entities. In the crypto ecosystem, coins store their value intrinsically. Their value depends on their demand and supply in the crypto market. That is the reason why these coins are volatile. Some other coins like DASH also allow their blockchains to vote on decisions proposed to the DASH network.
Defining crypto tokens
The difference between coins and tokens is that tokens do not have their blockchain. Instead, these currencies often work on the blockchains established for other coins. For instance, ERC29 is one of the most popular tokens in the market. While it is an entirely independent cryptocurrency and has all the features associated with them, it does not have a blockchain of its own. That’s the reason why it uses Ethereum’s infrastructure to back its transactions. Other instances of tokens are USDT, USD Coin, DAI, UMA and BAT. These tokens are based on different blockchain networks created for and supporting different crypto coins like Bitcoin, Litecoin and Ethereum.
Uses of tokens
Much like other digital cryptocurrencies, tokens also exist because they have the ability to transfer value from one entity to another. However, in most cases, the transfer of value by using tokens comes with additional powers also—for instance, BAT, which is a privacy-focused digital token rewards its users for browsing the web. Users get paid in BAT tokens when they view advertisements from publishers partnered with the Brave browser.
Other uses of tokens:
- Security tokens are used for validating proof-of-investment in real-world assets like equities and fixed income
- Utility-based tokens can be used to provide access to a particular service or product. For example, the FIL token can be used to access the Filecoin platform.
- Stablecoins are also digital tokens that have a fixed value
- Non-fungible tokens are unique items that are real or virtual which can be bought or sold over the blockchain
- Payment tokens can be used to pay for goods and services just like regular cash
There are lots of services that create tokens to get rid of intermediaries. In most cases, the services which create these tokens reward their users for using them and getting rid of intermediaries. These tokens are used in real-life situations because creating tokens on Ethereum takes significantly less time and is easier to maintain. Hence, businesses can profit from creating tokens on other blockchains and making themselves more profitable by removing intermediaries without investing too much time and energy.
Coins vs Tokens: Other Differences
There are a lot of differences between crypto tokens vs coins other than their dependence on the blockchain. Here are some of the other core differences between them:
|Tokens are suitable for different and specific needs, which might include making payments and other value-based functions.||Digital coins are usually used for processing payments|
|Tokens are generally created and used by businesses to fulfil specific purposes. For instance, they can be created to make payments cheaper and lower transaction times||Coins are difficult to create because they need their own blockchain networks and hence, are not feasible for businesses|
|Tokens don’t have their own blockchain networks. They use other coins’ infrastructure to support themselves||Coins have their own blockchain networks on which tokens can be created|
|Tokens aren’t responsible for maintaining the blockchain||Coins have to maintain the blockchain network from time to time to keep the servers running|
Types of Tokens
Here are some of the different types of tokens and their functionalities in the crypto market:
Platform tokens are created specifically for supporting applications based on the blockchain. Like the blockchain, these applications are also decentralised and require tokens to sustain them and validate transactions. For instance, Uniswap is a decentralised application that allows users to trade in different tokens of Ethereum. The platform itself uses Uniswap tokens to facilitate its functions. This token is given out to the people who use their platform.
Security tokens are like stablecoins. They represent different reserved assets like fiat currency or commodities for people who don’t want to actually buy those assets tangibly. For example, if people want to buy gold but don’t want to hold gold tangibly, someone could create a token that mimics the price of gold. Hence, the person would technically own gold, but the token would be much safer because it would have the backing of a blockchain. These coins are called security tokens because they are secured by a stable asset behind them.
Transactional tokens can be used as a way to transfer money reliably and fast. Tokens can be created that mimic fiat currencies to make sure people don’t suffer from the volatility of the crypto market. Many businesses also form their own tokens to facilitate business transactions via crypto to avoid paying intermediary fees.
Utility tokens have a value tied to their ownership. For example, the BAT (Basic Attention Token) is an ethereal token that can advertise on the Brave browser. For example, if you wanted to advertise on the Brave browser, you could use BAT. In simpler words, utility tokens can be used in specific places and situations to fulfil a purpose like advertising or other commercial intents.
Governance tokens allow the holders of these tokens to vote on certain things. For instance, Uniswap is also a governance token that can be used to vote on the decisions taken regarding the Uniswap Exchange. By holding more tokens, investors have more decision-making power on such platforms. In this way, users are incentivised to keep more tokens in their wallets for a long time.
FAQs on Tokens
Is Bitcoin a crypto token or a crypto coin?
Bitcoin is a cryptocurrency that works on its own Bitcoin blockchain. Hence, it is a cryptocoin, not a token. In fact, there are tokens that can be created on the Bitcoin blockchain that can be used for different purposes.
What are some other uses of tokens other than the transfer of value?
Crypto coins allow individuals to make payments using cryptocurrency and transfer money from one party to another. However, with the usage of tokens, people can also use them to gain rewards on various platforms, such as currency tokens, utility tokens, security tokens, and asset tokens.
Can a token become a coin?
Because the difference between token vs coin is that there is no native blockchain in tokens, a token based on Ethereum – for instance – can be converted into a full-fledged coin by creating its own blockchain infrastructure.
How to invest in crypto tokens and crypto coins?
Buying and selling crypto coins and tokens has never been easier. No matter which tokens you want to buy and which crypto coins you want to invest in, we’ve got you covered. With more than 100 currencies available on our platform, CoinSwitch Kuber, you can engage in hassle-free trading within minutes. If you’re new to this market and are looking to learn more about the differences between tokens and cryptocoins before you decide to put your money in, we’ve got you. Head on over to our YouTube channel for the best tutorials on crypto investments and trading.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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