Have you ever taught? Why is it Dogecoin and not Dogetoken? Tokens and coins are often used interchangeably in cryptocurrency but represent distinct entities within the digital asset space.
Coins, also known as cryptocurrencies, operate independently on their own native blockchain networks. Examples include Bitcoin (BTC) and Ethereum (ETH). These coins have their dedicated blockchains, serving as both a medium of exchange and a store of value within their respective ecosystems.
On the other hand, tokens exist on existing blockchains, often created and hosted on platforms like Ethereum’s ERC-20 standard. They don’t possess their own independent blockchain but are built atop established networks.
Confused? Let’s dive more into this.
What Is a Coin?
As mentioned above, Coins are cryptocurrencies belonging to a blockchain. They are independent of other chains and cannot be used on other chains in their native form; in other words, a crypto coin is a cryptocurrency native to its blockchain.
Good Examples will be:
- Bitcoin’s blockchain coin is BTC
- Ethereum’s blockchain coin is ETH
- Litecoin’s blockchain coin is LTC
- Polygon’s blockchain coin is MATIC
The primary purpose of these coins is to serve as 1) a store of value and 2) a medium of exchange. In this manner, they function much like other currencies or forms of money.
One aspect of crypto coins that differentiates them from crypto tokens is how they are created (proof of work vs proof of stake). A coin is produced through mining, meaning (in its easiest form) computers solve complex math puzzles and validate transactions to produce coins. The first computer to solve the problem gets rewarded with newly minted coins. This ensures that the network is secure and decentralized.
We refer to the process as proof of work (PoW) or proof of stake (PoS). You can read more about this from below links:
Some common proof-of-work coins include Bitcoin (BTC) and Litecoin (LTC). Both of these are coins native to their respective blockchains. When miners find a new block, they receive new coins as a reward for securing the network. This incentivizes people and groups to mine independently, helping to keep the network decentralized.
As for proof of stake, two popular examples include Ethereum’s ETH and Cardano’s ADA. Both coins had a pre-mine, meaning some or all of the supply was created at inception. Instead of miners using computing power to secure the network, PoS blockchains rely on “validators” to secure the network by locking up or “staking” tokens. The larger the stake, the greater the potential rewards.
There are different types of coins, which vary based on how the coin is created. Let’s discuss on it:
- Native Coins: These coins run on their own blockchain and serve as the main currency of the network. Examples include Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC).
- Forked Coins: These coins are derived from an existing blockchain by splitting or branching off. Examples include Bitcoin Cash (BCH), Bitcoin SV (BSV) and Ethereum Classic (ETC).
- Wrapped Coins: These coins represent another asset on a different blockchain. They allow users to access cross-chain functionality and liquidity. Examples include Wrapped Bitcoin (WBTC) and Wrapped Ether (WETH).
- Stablecoins: Stablecoins are coins that are pegged to the value of another asset, such as fiat currency or gold. They aim to provide price stability and reduce volatility. Examples include Tether (USDT) and USD Coin (USDC).
Now that we know about coins, let’s see what tokens are
What Is a Token?
A token is a digital asset built on top of another blockchain. In other words, the difference between a token and a coin is that a token can be created in addition to the blockchain’s base layer native coin. This feature also allows for potential interoperability or a token to be used on several blockchains.
Tokens can represent anything from a physical object to a virtual currency. For example, Ethereum’s native currency, Ether, is a token.
Tokens are often created through an Initial Coin Offering (ICO), similar to an Initial Public Offering (IPO) in the traditional stock market. ICOs are a way for startups to raise money by selling tokens that will be used on their platform.
Tokens can be developed for a wide range of uses other than being a form of money. The most common types of tokens are:
- Utility tokens: This can allow users to do things like play games, access decentralized services, avoid ads, and tip content creators in the case of the Brave browser.
- Governance tokens: This user have the right to vote on proposed changes to the protocol and are therefore called governance tokens. Examples include Maker (MKR), Compound (COMP), Aave (AAVE), and most other tokens. You can read more about this here. What are governance tokens?
- Security tokens: These tokens could be digital representations of almost any type of asset, including insurance policies, equities, or bonds.
- Non-fungible tokens (NFTs): NFTs are unique tokens that cannot be replicated. Users can mint NFTs to create digital art, music, and more. The token has an original marker on the blockchain, proving that the person who owns the wallet the NFT lies in does, in fact, own the token.
Tokens are usually “pre-mined,” meaning developers use a smart contract to issue new tokens and distribute them to users.
A few popular examples of crypto tokens include Tether (USDT), USDC, and Uniswap (UNI). USDT is the largest stablecoin by market cap, allowing investors to move into dollars while remaining within the crypto ecosystem. UNI is Uniswap’s governance token. Uniswap is a decentralized exchange That allows users to swap between different tokens without needing a third-party intermediary.
Takeaway from this article:
Coins are more suitable for general transactions and value preservation, while tokens are more suitable for specific purposes and value creation. However, this does not mean that coins and tokens are mutually exclusive or incompatible. They can work together and complement each other in the crypto ecosystem. For example:
- Users can use coins to buy tokens or use tokens to pay for fees on coin networks.
- Users can wrap coins into tokens or unwrap tokens into coins to access cross-chain functionality and liquidity.
- Users can stake coins or tokens to earn rewards or participate in governance.
- Users can swap coins or tokens using decentralized exchanges (DEXs) or automated market makers (AMMs).
