The Basics: Difference(s) Between Coins and Tokens
Tokenization is an intrinsic part of the Blockchain technology and one of the biggest values of the concepts of digital scarcity that Bitcoin created.
Blockchain allows us to create transferable digital tokens that can be easily transferred between two people, but the same token cannot belong to more than one person at a time.
So, tokenization is a method that converts rights to an asset into a digital token and is essential to digitalizing assets while still maintaining the concept of digital scarcity.
Before we talk more about how do we model a token to be a useful part of a blockchain let’s make a differentiation between coins and tokens.
The wild fluctuations of Bitcoin prices have thrown the whole industry into the media limelight, especially for the past year. Suddenly, more and more people are interested in blockchain technology whether because they really understand the industry potential or because they see that something is going on and don’t want to miss it.
Given that blockchain industry for the most people is still relatively new, and that regulations tend to lag behind, people are learning best practices. The same is true of language. But, in that case, who is to be blamed for the inaccurate information or misnomers that appear. The term cryptocurrency is in itself actually a misnomer since a currency technically represents a unit of account, a store of value and a medium of exchange. All these characteristics describe Bitcoin, the first decentralized cryptocurrency.
CoinMarketCap, the most popular website that tracks all the cryptocurrencies in the world, has categorized them in two groups — coins and tokens. In this learning path, it is very easy to miss the thin lines that actually makes terms like coin and token different.
Digital Coins
Coins are basically standalone cryptocurrencies based on their own blockchain. They are universal stores of value and mediums of exchange that operate independently of any platform. They can be traded like any other fiat currency (e.g. USD), which means that you can invest, buy and sell.
Bitcoin — An Example of a Digital Coin
Source: CoinMarketCap website
Bitcoin is by far the best-known cryptocurrency coin around the world, but there are many, many more (at the time of writing there were 831 altcoins listed on CoinMarketCap). These alternative digital coins (frequently referred to as “altcoins”) were either created by modifying bitcoin’s open-source code (also known as “hard-forking”; a typical example of a successful hard-forked altcoin is Bitcoin Cash), or built from scratch by creating a completely new independent blockchain and protocol, like Ethereum (Ether — ETH), Ripple (XRP), Cardano (ADA), etc.
Many cryptocurrency coins are nothing more than digital money (think Bitcoin, but also Litecoin, Monero, etc.), so you can use them to store value, transfer money or price goods or services in them. However, other than these monetary uses, some digital coins have more useful features. For instance, NEO is staked in a wallet to earn a dividend known as GAS, which you need to pay a transaction fee when sending a token on the NEO network, while holding enough DASH allows users to vote on important decisions for the Dash network.
Digital Tokens
Unlike coins, digital tokens are virtual assets that are built and hosted on existing blockchains and only have value within the economy of their ecosystem. That makes them abstractions of value and ties them to specific platforms, so CoinMarketCap has an additional column in the category of “Token” called “Platform” to identify the platform used to build the token. Many tokens are built on top of Ethereum (e.g. Augur, Golem, OmiseGo, Status, etc; they are known as ERC-20 tokens), but there are a number of other platforms available for the tokens to be built upon, like NEO, Omni, Waves, etc. At the time of writing this article there were 795 digital tokens listed on CoinMarketCap.
OriginTrail — An Example of a Digital Token
Source: CoinMarketCap website
Digital tokens typically grant their owners the ability to take part in some kind of activity. Most of them exist to be used with decentralized applications, or dApps. For instance, Musicoin allows users to watch music videos or stream songs on the Musicoin platform, Binance token allows people to trade on their platform with significantly lowered fees, while some tokens represent physical things that people buy and sell using smart contracts.
Finally, it’s especially important to understand the definitions of different types of tokens, as some of them fall into highly regulated territory of securities.
Most tokens issued by means of Initial Coin Offering (ICO) are security tokens, as people buying them are investing their money during the ICO with the expectation of profit. Equity tokens represent some stock or equity in the company that issues it, but the lack of regulatory guidance makes it difficult to run such ICOs. Payment tokens have no other purpose than to pay for goods and/or services, while utility/application tokens provide users with (future) access to either a product or service.
The defining characteristic of utility tokens is that they are not designed as investments, which (if properly structured) exempts them from laws governing securities. In such cases, utility token creators usually refer to their crowdsales as Token Generation Events (TGEs) or Token Distribution Events (TDEs), to emphasize their intention to not engage in a securities offering.
Conclusion
Cryptocoins are native to their own blockchains and are most often used as digital money, though some coins do have other meaningful uses, such as fueling applications or contract and token transactions. On the other hand, digital tokens are built on top of another blockchain, and if they were created to be used on a dApp, their purpose will depend on the decentralized application itself. A huge benefit of creating a digital token is saving time and resources, while having many computers work on one shared blockchain that dApps can run on also makes it significantly less vulnerable to hacker attacks.
This brings us to another point: if the token is meant to be used as an internal and intrinsic part of token economy of a decentralized system it has to be carefully thought out and incentivized to be used as much more than an investment vehicle. This means that the token needs to have a clear utility and controlled velocity.
Utility tokens are used for a particular functionality in a blockchain application. Some of the ways in which utility tokens are applied nowadays are for governance, staking mechanisms and in-dApp currencies. These tokens usually are not tied to any particular asset and their value derives from network effects.
Having a token grow in value might be good for an investor, but really bad for the product. That is why we decided to create a modification of Osterwalder’s Business Model Canvas that we call the Token Modeling Canvas.
