Tokens and Coins

The terms token and coin are often used interchangeably in the cryptocurrency world. Technically, there are differences and there are occasions when we need to be precise.

Some confusion about tokens arises from the definitions found in English language dictionaries. The Oxford Dictionary defines a token as “a thing serving as a visible or tangible representation of a fact, quality, feeling, etc.” and also “a voucher that can be exchanged for goods or services, typically one given as a gift or forming part of a promotional offer.”

Yuan Shih-Kai 1916 Silver Commemorative Dollar [Image Source: Wikimedia]

In the English language, a token can still have other definitions. However, from a cryptocurrency perspective, only the two definitions above matter.

A coin is more simply defined. A coin is “a flat, typically round piece of metal with an official stamp, used as money.” Even though bitcoin is not a round piece of metal with an official government stamp, it is used as money. So bitcoin is a coin.

Coin Versus Token

Bitcoin aspires to be a digital currency that can be used to purchase all manner of goods and services globally. Arguably it is. Bitcoin accomplishes its mission without representing any tangible or asset.

Bitcoin is therefore not a token. Satoshi Nakamoto did not name the digital currency bittoken for that reason. Even though the Oxford Dictionary says a token can be exchanged for goods and services, a token is usually limited to a specific subset of goods and services. In that respect, tokens are subset of coins.

Coins are clearly currency. Tokens, which may also be used as currency and bought and sold on cryptocurrency exchanges, may also have a different purpose.

There are generally two classes of tokens: asset tokens and network tokens.

Asset Tokens

Asset tokens are a digital representation of something of value. Examples of assets that can be tokenized include: gold, IOUs, rewards shares, voting rights, and other valuable things. Here are some tokens that clearly offer rewards:

  1. Onegram’s (OGC) token represents a claim to one gram of gold.
  2. Augur’s Reputation (REP) token represents the claim to a portion of Augur’s market fees.
  3. TenX’s (PAY) token represents a claim to a portion of TenX’s aggregate payment volume.

Network Tokens

Network tokens have a specific use in the peer-to-peer network of the underlying cryptocurrency project. These tokens are often used to pay for resources and are also known as protocol tokens or decentralized app tokens (dapp tokens). Tokens that are clearly used to pay for resources within the cryptocurrency project’s network or platform include:

  1. Ether (ETH) for smart contracts on the Ethereum Network.
  2. Golem Network Token (GNT) for compute power on the Golem Network.
  3. Steem (STEEM) for content creation and curation on the Steem Network.

Commonalities

Tokens and coins have their differences, but both are bought and sold on cryptocurrency exchanges. Even though cryptocurrency coins have no intrinsic value, they have a price. The price is determined by the economics of supply and demand. The laws of supply and demand also apply to tokens.

Tokens and coins are both defined by supply. There can be a limited supply (like 21 million BTC) or infinite supply (like unlimited ETH).

Tokens and coins may be deflationary. The monetary base of deflationary cryptocurrencies cannot be increased.

Cryptocurrency tokens and coins use consensus algorithms, digital signatures, peer-to-peer networks, and cryptographic hashes.