Coin vs Tokens — Are they the same thing?
In the world of cryptocurrencies, there are fewer words that you will encounter more than the words coins and tokens. They are at the centre of the crypto-verse, and almost everything revolves around them.
A few weeks ago, I had reached out to a couple of friends to explain both concepts to me, and the responses were all confusing. They did offer some interesting answers and analogies, but they were not exactly beginner-friendly. If you’re currently in that position like I was a few weeks back, you’re in the right place, let’s hold hands and figure this out together!.
Are you a Coin or a Token?
Let’s start with an analogy. Say you need housing accommodation, you have two valid options
- You could build one for yourself or
- You could rent one
Building a house for yourself means sourcing for the land, acquiring the materials and getting the labour needed to successfully build your house, not to mention — the architect to design the plan. This can be a very expensive option, but the advantage is that the house would be yours.
If you choose the second option, you will only need to search for an apartment or a house in your most preferred location, pay the rent and move in.
Going by the illustrations above — in the world of blockchain, if you were to go with option one, you would be recognised as a coin, but if you were to go with the second option, you would be recognised as a token.
The subtle differences
From our example above, the major difference between them is that coins exist on their own native blockchain network, while tokens can be said to be renting space on other blockchain networks.
Confused?
Don’t be.
Bitcoin is a coin, not just because it has a ‘coin’ appended to its name. It is considered a coin because it exists on the bitcoin blockchain.
Ether, the native currency of Ethereum, is a coin because it exists on the Ethereum network.
Other cryptocurrencies exist on the Ethereum network, but because they are not the indigenous forms of payment for the Ethereum network, they are referred to as Tokens. Some examples of tokens are Basic Attention Token (BAT), BNT, Tether — these are tokens that are hosted on the Ethereum network.
Characteristics of Coins
- They exist on their own blockchain network — all the transactions are handled and recorded on their own blockchain.
- They are digital versions of money but on the blockchain, and can be used as a medium of exchange and a store of value.
- When spent, coins do not move from one owner to another, the record only changes on the blockchain.
Characteristics of Tokens
- Tokens represent assets or deeds (They certify ownership, we will explain this in our upcoming article on NFTs.)
- When spent, tokens can be ‘physically’ exchanged. For example, an NFT (Non-fungible Token) can be transferred from one owner to another.
- The trade of tokens is governed by smart contracts (We will discuss smart contracts soon.)
Types of tokens
There are different types of tokens namely;
Platform tokens — support Decentralized Applications (Dapps) on the blockchain. They are used to deliver apps to users e.g Uniswap.
Security tokens — they represent legal ownership of physical or digital assets. Security tokens can represent assets like bonds, stocks, real estate shares e.t.c
Transactional tokens e.g Dai tokens — are used for transactions. They can be used to transfer money quickly and at lower costs
Utility tokens e.g BAT — have a value attached to their ownership or they can actually be used to make purchases. It is the token used to pay for running adverts on crypto-supported browsers like Brave browser.
Governance tokens — They allow the holders of the coin to vote on decisions in decentralized autonomous organizations or DAOs.
Conclusion
So, there you have it. Although both terms are often used interchangeably, they are different.
Congratulations. If you have stuck with me throughout the series, it’s safe to say that you are now well-grounded in the basics of blockchain and cryptocurrency. We will delve deeper into the world of blockchain, cryptocurrencies and web3. Having just explained the differences between coins and tokens, our next topic will be on the trending subject of Non-fungible Tokens ( NFT’s). Be sure to check in.
ICYMI: Read about crypto wallets here.
