Understand the fundamental of cryptocurrency coins and tokens, as well as their key differences.
Most cryptocurrency investors can’t differentiate coins and tokens. Understanding their fundamentals can help investors choose the right crypto assets to invest in.
At a high level, crypto coins and tokens are very alike. Both can be traded at exchanges, or make transactions. The main difference between coins and tokens is their formalization. Crypto coin creation will formalize its own blockchain, while token creation relies on another blockchain platform. We can consider crypto coins are independent trees, and tokens are their branches. Branches cannot survive by themselves, but trees can.
What is a Crypto Coin?
When the first cryptocurrency Bitcoin was introduced, it also defined the attributes of crypto coins. Below are the three main criteria for crypto assets to be considered as crypto coins.
- Crypto coins have their own blockchain: Like Bitcoin or Ethereum, they have their own blockchain for their own transactions handling. You can buy or sell Bitcoin in the Bitcoin network and buy or sell Ethereum in the Ethereum network. However, you cannot buy Bitcoin on the Ethereum network.
- Crypto coins have their own transaction handling. The fundamental of Bitcoin blockchain is its distributed ledger system, where all transactions are recorded in each block. Therefore, crypto coins can be used as cash to exchange goods or services, and all transactions are recorded in their own blockchain.
- Crypto coins can be created via mining: The concept of mining has evolved from the initial Proof of Work standard that creates additional Bitcoins, to the latest popular Proof of Stake standard. Crypto coins should have their own mining mechanism for miners to earn additional coins.
What is a Token?
Tokens are created under crypto coin technology. Therefore, it automatically inherits many of the attributes from crypto coin, such as being used for payment or transactions. However, tokens don’t have their own blockchain. They have to be under the coins’ blockchain platform.
NFT (Non-Fungible Token) is a popular token ecosystem that was created under the Ethereum platform. Or tokens like Maker (MKR), Augur (REP) are also created under the Ethereum platform. The other crypto coin platforms like ONT, and Klaytn also have their own tokens.
What are the differences?
As mentioned above, both crypto coins and tokens can be used for transactions. However, the transaction methods are different between this two. While crypto coin transactions can be handled by their own blockchain, token transactions need to go through smart contracts, which is a piece of code that facilities transactions between users. Each blockchain has its own smart contract or standard. For example, Ethereum uses ERC-20, and NEO uses Nep-5.
Let's give another example of tokens in our day-to-day life. We can consider Amazon gift cards as tokens, the Amazon gift cards can be used in the amazon.com network. Without the amazon.com network, we cannot create Amazon gift cards. The gift card cannot be used on other networks, like buying things on bestbuy.com. At the same time, these gift card transactions are recorded within the Amazon network.
Benefits of creating tokens over coins
Why there are more tokens than coins out there? The main reason is tokens don’t need to have their own blockchain, and it is relatively easier to be created compared to creating a whole new blockchain system. In addition, decentralized exchanges like Uniswap can facilitate tokens swap within the Ethereum platform. Without thinking about blockchain management and transaction handling. The product team can focus on the product instead of the blockchain network infrastructure.
Different types of Tokens:
- Platform tokens: Tokens that support decentralized applications in the blockchain world, Uniswap token is a good example.
- Security Tokens: Tokens created to back physical assets. For example, instead of buying physical gold, you can buy the token that was backed by physical gold, and you can swap your token with the actual gold. The tricky part is the token provider should prove they do have the real assets for the 1:1 swap.
- Transaction Tokens: Tokens are mainly used for transactions. xDai token is a good transaction token example.
- Utility Tokens: Tokens can be used for commercial purposes. Such as Brave’s Basic Attention Token(BAT)
- Governance Tokens: Tokens that allow people to vote in its ecosystem, like Uniswap token, the more you hold, the more controllability you have in the Uniswap system.
Where to find tokens and coins:
Coinmarketcap is a comprehensive website where you can find most crypto coins and tokens.
Coin: https://coinmarketcap.com/coins/views/all/
Token: https://coinmarketcap.com/tokens/views/all/
Bonus point:
Tokens can also be migrated to crypto coins. In some cases, Defi projects would start with an initial coin offering (ICO) under the Ethereum network. When the project is matured, they can build their own blockchain coin and migrate the original tokens over.
Thanks for reading.
