Understanding the difference between Coin and Token
Today, we’ll look at a topic that confuses newcomers and some veterans in cryptocurrency: Coin vs. Token.
Almost everyone gets confused with these terms. People often refer to tokens as coins and vice versa. However, there are several distinctions between a crypto ‘coin’ and ‘token’.
Let’s go over and explain some of the key differences between the two:
What is a coin?
A coin is a digital asset with its own blockchain network. It is also known as the blockchain’s native token. It serves as a payment for transaction fees for utilizing the blockchain. Coins serve as a substitute for fiat money. Holders can exchange it for products and services. Unlike fiat cash, coins can be divided into fractions. Bitcoin, Ether, Litecoin, Dogecoin, and Monero are some of the most well-known coins.
Every blockchain network has its own coin:
- Bitcoin (BTC) is used and runs on the Bitcoin blockchain.
- Ether (ETH) is a cryptocurrency that operates and functions on the Ethereum network.
- Solana (SOL) is a cryptocurrency that operates and functions on the Solana blockchain.
To explain further: The Ethereum network’s native currency is ether. When users want to build a new block on Ethereum, they must pay a transaction fee to the validators. This fee is also known as ‘gas’.
Coins are used in the same way as fiat currency: an exchange of value. Frequently, they have no use other than money. But, some blockchains allow other functions such as staking. Stakers have a chance to become network validators. Staking coins can also grant voting rights.
What is a token?
Tokens, unlike coins, do not have their blockchain. They are created on existing blockchains that facilitate the establishment of smart contracts, such as Ethereum. Tokens are typically generated for utility by decentralized apps. Anybody can create tokens on any blockchain network.
Tokens allow developers to build services on existing blockchains rather than creating their own blockchain. It saves them time and resources. Tokens can eventually become currencies if the project develops its own blockchain and migrates its tokens as coins.
Types of tokens:
DeFi tokens: DeFi is a new universe of blockchain-based services that mimic traditional financial services, including lending, borrowing, trading, and insurance. These protocols enable tokens that serve various functions. It can also be exchanged or held in the same way, just like a coin.
Governance tokens: These are one-of-a-kind DeFi tokens. It grants holders the ability to participate in the future of a DeFi platform. These platforms do not have centralized authorities as they are decentralized in nature.
For example, the popular savings protocol Compound assigns a token called COMP to all users. The holders have a say in how the Compound is maintained. The more COMP tokens one owns, the more voting power s/he has.
Non-Fungible tokens: NFTs grant ownership rights to a virtual object. NFTs make it difficult to replicate digital products. They’ve also been used to distribute a limited number of digital artworks or sell one-of-a-kind virtual commodities, such as unique video game items.
Security tokens are a new asset category that promises to be the cryptocurrency equivalent of traditional securities. Some examples include stocks and bonds. In addition, major businesses and start-ups are exploring these to replace the current method of raising capital.
Coin vs Token
- Tokens do not have a native blockchain, whereas coins do.
- Because a token sits on an existing blockchain, it is less expensive to generate than a coin.
- Tokens can eventually become coins if the project creates its own blockchain and migrates it to the new network.
- Binance Coin, Tron, and Zilliqa are examples of successful migration cases that formerly existed as tokens on the Ethereum blockchain.
- Coins are typically used as a payment cryptocurrency, whereas tokens serve various purposes.
Coins are commonly used as money. But, some coins have other functions. Some include power applications, acting as a stake to validate network transactions, powering smart contracts, and more.
Tokens, on the other hand, serve specific purposes. If they are designed to be used in a DApp, the application would determine their function. In certain circumstances, they are for voting rights, rewards, and others.
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