Things can get confusing navigating through the Web3 space. The new decentralized iteration of the internet comes with its own concepts and terms that might sound confusing to a newcomer. You might have heard the terms coin and token used interchangeably before, however, they refer to two separate concepts. People often confuse the two terms since they both fall under cryptocurrencies. So, in order to make the right investment, here’s the full guide on the difference between coins and tokens.
Coins and Tokens are Digital Assets
First, let’s look at the big umbrella that coins and tokens fall under. Digital assets are generally anything that is stored digitally and that holds a certain value. They are non-tangible assets that can be created and stored in digital format. These usually refer to digital content such as photos, videos, and books.
However, recently, blockchain technology has provided the ability to transform this digital content into actual assets you can own and trade on an immutable ledger. This is where coins and tokens came from. They are a subset of digital assets that use cryptography as a means to ensure the authentication of assets.
Although both are considered blockchain-based digital assets, coins and tokens’ main difference is that coins run on their own blockchain, while tokens are created on top of an existing blockchain. Let’s further explain the main differences between the two.
What Is a Coin?
A coin is another term for cryptocurrency that has its own blockchain. What does this mean? It means that you cannot create a cryptocurrency without having an underlying blockchain network. For example, Bitcoin (BTC), Ether (ETH), and Binance Coin (BNB) all are coins or cryptocurrencies that operate on their own independent blockchains.
Coins can be traded, used as a medium of exchange, and used to store value. They resemble fiat money in their characteristics. Both cryptocurrency and fiat are fungible, portable, secure, durable, and limited in supply. However, since coins operate on a distributed ledger, they don’t require intermediaries or middlemen to conduct transactions.
In a way, cryptocurrencies are meant to act as real and physical currency with added cryptographic security. In fact, some crypto coins have already been accepted as a medium of exchange by certain companies like Microsoft, Home Depot, Tesla, Subway, and way more.
Another coins characteristic is that they can be mined. Crypto mining is the process of generating new coins into a certain network. Miners who participate in the verification process of transactions get rewarded with newly mined coins. Some coins, such as Bitcoin, have a limited supply of 21 million coins.
So, coins have the following characteristics:
- Native to their own blockchain. No dependence on another platform.
- Can be used as a medium of exchange.
- Fungible. They can be exchanged for another asset of the same value.
- Can be mined to generate more coins.
- Examples: Bitcoin, Ethereum, BNB, Ripple, Litecoin.
What Is a Token?
Tokens on the other hand represent digital assets or utilities. Unlike crypto coins, tokens do not operate on their own blockchain. Instead, tokens require another blockchain to operate on. The most common blockchain network to create tokens is the Ethereum blockchain due to its smart contract feature.
In other words, Ether is the native crypto coin for the Ethereum blockchain. However, there are many tokens that were also built on top of the Ethereum network such as Like Tether (USDT) and USD Coin (USDC).
Note: Although some tokens such as the USD Coin has the word “coin” in them, they are in fact tokens. To avoid confusion, you should refer to the underlying blockchain. If the asset has its own blockchain, it is a coin. If it operates on another blockchain, it is a token.
Unlike coins, tokens have multiple uses. Crypto startups often create tokens to raise funds. Raising capital from tokens is usually done through an initial coin offering (ICO) where coins are sold to investors.
The simple way of creating tokens facilitated many small businesses to create their own tokens on top of an existing blockchain. This is one of the benefits of tokens, creating them doesn’t require the hassle of creating a new blockchain. Instead, businesses can depend on another network to do the job.
Another use case for tokens can be seen in decentralized apps (dApps) and decentralized autonomous organizations (DAOs) as a governance mechanism for voting on specific protocols.
So, tokens have the following characteristics:
- Dependent on another blockchain. Don’t have their own network.
- Can be used as a means to raise funds for projects, governance perks, stocks, and other token-gated access.
- Can be fungible or non-fungible.
- Can be minted on the decentralized ledger.
- Examples: Tether USDT, Uniswap UNI, and Bored Apes Yacht Club.
Token standards define the technical guidelines of a token based on its smart contract. Smart contracts are self-executing programs that automate the actions required in an agreement or contract. Each blockchain has its own token standards.
We will go over some of the most famous Ethereum-based token standards. Each Ethereum-based token follows an Ethereum Request for Comment (ERC) standard that provides smart contract specifications.
The ERC-20 standard is usually used to create fungible tokens. Meaning that tokens can have the same value and thus can be interchangeable. Just like the US dollar. One dollar will always equal one dollar.
An example of ERC-20-based tokens is stablecoins such as Tether’s USDT. Each USDT token is equal to another USDT token.
The ERC-721 standard is used to create non-fungible tokens (NFTs). Non-fungible means that no 2 NFTs can be regarded as equals or can be interchangeable for the same value. Non-fungible tokens are often used as a certificate of ownership for digital assets.
This standard has allowed the concept of tokenization. Tokenization is the process of transforming ownership and rights of an asset into digital form. These assets could be digital art, music, videos, or in-game items. NFTs’ unique characteristics allow tokens to have visual representation by linking with them images stored on distributed servers.
The ERC-1155 standard is used to create both fungible and non-fungible tokens using the same contract. Since the ERC-20 and ERC-721 standards are not interchangeable, the ERC-1155 standard came to optimize both standards into one. This way, projects can issue fungible and non-fungible tokens efficiently by deploying one smart contract instead of two.
Types of Tokens
Stablecoins are crypto tokens that are designed to have a stable price. They are usually pegged to a stable currency such as the US dollar. They are considered to be an alternative for the high volatility of some of the popular crypto coins such as Bitcoin (BTC) and Ether (ETH).
Examples: Tether (USDT), USDC.
Utility tokens, from their name, grant holders a certain utility such as access to a certain product or service. These tokens are often distributed during a project’s initial coin offering (ICO). Utility tokens are not only used in blockchain-based activities, in fact, some utility tokens grant real-life access to physical products, memberships, and exclusive access to events.
Although NFTs can have utility, not all utility tokens are non-fungible. In fact, the majority of utility tokens are fungible ERC-20 tokens.
Examples: ApeCoin (APE), Decentraland (MANA), and Enjin Coin (ENJ).
Non-fungible Tokens (NFTs)
NFTs are arguably the most well-known crypto tokens that get circulated within the crypto space. Just like other tokens, NFTs can be traded and exchanged on a dedicated marketplace. However, NFTs are non-fungible, which gives each token its unique value.
NFTs act as a certificate of ownership for both digital and physical assets. Their underlying smart contract technology allows NFTs to be trackable and traceable on the blockchain. They can represent many different assets ranging from digital art to governmental documents. In addition, NFTs can serve as utility tokens granting holders access to events, voting rights, and other token-gated perks.
Examples: Bored Apes Yacht Club (BAYC), CryptoPunks, and Pudgy Penguins.
Security tokens are the digital form of traditional investments such as stocks or bonds. For example, a company that wishes to issue fractional ownership can tokenize shares of investments instead of issuing stocks.
Examples: BCAP, EXOD, VUE.
Exchange tokens are tokens that are issued by crypto exchange platforms such as Binance. These tokens are created usually to increase the exchange’s liquidity. However, these tokens can become very volatile. They are commonly used to pay transaction fees on the exchange and for governance purposes such as acquiring voting rights on the platform.
Examples: Binance USD (BUSD), FTX (FTT), Uniswap (UNI).
Coins vs. Tokens: Conclusion
Coins and tokens can get pretty confusing once you get into the crypto space. However, it is vital to differentiate between the two for a better understanding and less risk when it comes to crypto investments. In summary, you can easily look up if a certain digital asset is a coin or a token by looking at whether it operates on a native blockchain or not. If it has its own blockchain then it is a coin, if not, it is a token.