Understanding the Difference Between Coins and Tokens
The cryptocurrency hype continues into 2021 with an unprecedented boom on major coins such as Bitcoin and Ether. The crypto industry is evolving every day and will seemingly rule the traditional financial world. Despite the known volatility of digital assets from their introduction, people are still anxious about them and want to try their luck by investing in them.
However, one thing that might confuse the new class of investors is the crypto industry terminologies. For instance, many people place coins and tokens under the digital coins umbrella and even use the words interchangeably. Surprisingly, there is a big difference between the two, and every cryptocurrency enthusiast must know the difference. Read more to find out.
What are Crypto Coins?
Coins refer to digital assets that are native to their blockchain network. They do not exist in the real sense but operate and function within the database that tracks their transactions and verifies them through a network of computers.
The main purpose of digital coins is to serve the functions of money and eradicate the problems associated with fiat currencies. Therefore, coin holders can use them to pay for products and services or save them as investments.
Going by the definition of currency, coins qualify to be regarded as cryptocurrencies. A currency is a medium of exchange, a store of wealth, and a unit of account. Bitcoin, which was the first digital coin, meets these characteristics, although other crypto coins such as Ethereum still serve other functions. All other digital coins other than Bitcoin are termed altcoins.
While coins are usually created from scratch with independent blockchain ecosystems, some exist by modifying existing codes. For instance, Bitcoin Cash and Litecoin are created through Bitcoin codes, and others using Bitcoin code variations.
Cryptocurrency enthusiasts can own coins from mining or exchange fiat currencies for their crypto worth. New coins get generated through the crypto mining process. Individuals or groups use high-power computers to execute complex mathematical computations to validate transactions and, in return, get rewarded with crypto coins.
What is a Token?
One reason for the confusion and interchangeability of coins and tokens is that they are both virtual assets representing a value. However, tokens have significant differences from coins. The first notable distinction is that tokens do not exist independently as coins but are decentralized apps hosted by an existing blockchain such as the Ethereum blockchain. In simpler terms, a token requires the infrastructure of an already existing coin to operate.
Unlike coins, which can be used as a medium of exchange, tokens are digital assets meant for a specific application on the blockchain network supporting them. They are digital assets with a value but not independent digital currencies as it is with the coins.
Creating them is a much easier task when compared to cryptocurrency mining protocols. You do not have to build a blockchain network from scratch or modify existing codes. Anyone can create a token by following a template on a chosen blockchain network such as Ethereum blockchain and create functional tokens with smart contracts.
However, token developers need to pay a fee using the blockchain network’s native coin. For instance, developers creating tokens on the Ethereum blockchain need to have some Ether to pay miners to validate their tokens. Token holders must always have some Ether reserves since the fee applies to token creation and all token transactions.
Once tokens are created, they are usually distributed through Initial Coin Offerings (ICOs), a financing project by raising small amounts of capital from a large pool of investors. Investors use the underlying coin to buy tokens, making them part of the upcoming project, having garnered certain rights to it.
Tokens exist in four different forms, including security, utility, equity, and payment tokens, in which FINMA, the Swiss financial regulators have issued definitions.
Utility tokens are tokens that allow holders to have access to a specific proportion of decentralized applications. They are usually limited in supply, and their value is expected to increase in most cases.
Security tokens are also known as asset tokens and are usually distributed in a token sale where investors pool their money in anticipation of profits.
Payment tokens serve the sole purpose of making payments to specific goods or services, while equity tokens represent the shares to a specific company.
Coins and tokens have some common attributes that make them easily interchangeable or seem confusing for some users. At the same time, they have notable differences, as seen, although the difference may not be easy to note without a comprehensive guide to blockchain technology and cryptocurrencies.
However, certain aspects are quite straightforward. A coin, for instance, operates independently and does not require any other platform to exist. It’s a complete medium of exchange and can be used to exchange any goods or service. Tokens, on the other hand, depend on existing blockchain networks built by coins to operate. They are also mediums of exchange, but with a specific, focused purpose.
Further, when conducting business, you can easily exchange coins for their fiat worth. However, it would be challenging to cash tokens outside a particular project unless the entity has an agreement with a certain exchange. All in all, both exist in the virtual world and are rapidly evolving and transforming the crypto industry.