Coins or Tokens: The Ultimate Guide to Crypto Investments
What’s the Difference and Which One Should You Choose
Technically, crypto coins and tokens are alike but have been evolved on taking a couple of more specific meanings according to context. They are considered to be two different things as all coins are basically tokens, but not all tokens can be coins.
Depending on whether it’s the native currency for its own blockchain or not, a cryptocurrency might be a coin or a token. The main distinction is that whereas a crypto coin has its own blockchain, a crypto token is created on top of an existing blockchain. Ethereum, for example, has its own specialized blockchain, but Chainlink is built on top of Ethereum, which is already in use.
Another significant distinction between the two is their utility. Tokens contain a wide range of capabilities that allow their holders to achieve things they otherwise would not be able to do with coins.
Both crypto coins and tokens, on the other hand, operate similarly since they both represent a utility on which the price of the coin or token is dependent. The growth and adoption of the token determine the price of the coin or token.
Let’s dive in.
What is a crypto coin?
The characteristics listed below distinguish crypto coins from crypto tokens.:
- Crypto coins operate on blockchains: A native crypto coin’s transactions are tracked on their own underlying blockchain. When a transaction is completed with Ether (the Ethereum blockchain’s native token), it is done on the Ethereum blockchain, where it is recorded and encrypted,, and it is only accessible by its Ethereum network members.
- Crypto coins act as a currency: a coin such as Bitcoin was mainly created to replace fiat currency or at least offer an alternative way of payment. However, coins can act the same way as a real currency, that is payment of purchases. They can be used for buying and selling things online and offline on merchants who accept crypto coins.
- Crypto coins are mainly distributed through mining: crypto mining is a method of verifying transactions on a digital ledger for a blockchain using machines with extensive computing power. To achieve decentralized consensus, a blockchain requires a protocol to verify the integrity of the new blocks, through proof-of-work (PoW) consensus mechanism. However, there is an increasingly alternative method which is the proof-of-stake (PoS) protocol. Staking requires holding a crypto coin for an extended period to earn block rewards. Several coins consider the move from PoW to PoS to achieve more environmentally sustainable practices.
What is a crypto token?
Tokens do not have their own blockchain, as previously stated. Tokens are based on smart contracts, which are a set of scripts including numerous restrictions that allow programmers to construct a cryptocurrency. As a result, producing a token is far easier than creating a crypto coin since, rather than creating a blockchain from scratch, a crypto token may be created and run directly on an existing blockchain. For example, Ethereum will provide a safe environment for smart contract execution and transaction validation.
Crypto tokens are valuable assets. In blockchain wallets, they can be transferred, traded, bought, sold, and stored. Every transaction involving a crypto token is handled through the blockchain. If a crypto token, such as ERC-20, is developed on the Ethereum blockchain, the Ethereum platform will handle all transactions for that token.
A token can be used as a coin, but it can also be used for other purposes. Based on their utilization, the four most important categories are as follows:
Utility tokens: are the most widely used crypto tokens. They can allow frictionless transactions over a blockchain, fund project development, allow payments for decentralized services, and more dependent on their various use cases. They are typically issued as part of an initial coin offering (ICO) and are used to capitalize a network and raise funds. To enable access to a product or service, a corporation can establish a token. The token’s value is then determined by the popularity and use of that product or service. Companies can also utilize utility tokens to build a unique incentive scheme that allows users to execute specific behaviors inside the ecosystem and be reimbursed for them. In light of the above, if more people desire to use the product or service, or if the incentives are very appealing, the demand for the utility token increases, and the price of the token rises, making it more valuable.
A great example of a utility token is BNB. The asset is used for various purposes on Binance, including paying for fees or voting on new token listings.
Governance Tokens: allow holders to influence the direction of a protocol by providing voting power on a blockchain project. The main usage of a governance token is power distribution. They’re primarily employed in DEFI protocols and are the first step toward full decentralization. A protocol that holds a governance token gives powers and rights to its users, who can primarily act on the following:
- Vote for different fees
- Implement UI changes
- Change fee reward distribution
- Revise development fund
Also, holders of governance tokens, can stake, borrow, and make money.
Maker (MKR), for example, is a governance token that allows its holders to vote on protocol issues affecting the decentralized stablecoin DAI. MKR holders have the ability to vote on regulation modifications that allow DAI to maintain its price stability.
Security tokens/equity tokens: are digitalized versions of traditional securities (that function similarly), but they are stored, sold, and traded on a blockchain network. They typically reflect some form of ownership, such as a stake of the corporation issuing the token. Security tokens, similar to stocks, bonds, and other equities, can be issued by businesses. As a result, security tokens are utilized for the securitized tokenization of properties, bonds, equities, real estate, and other real-world currencies, making them regulated.
An example of security token is BCAP issued by Blockchain Capital.
Non-Fungible Tokens (NFTs): are a form of proof of ownership for a one-of-a-kind digital or physical product such as art, music, in-game items, or movies. The uniqueness of NFTs stems from the fact that each one has a digital signature, making it difficult to exchange or compare them (thus, non-fungible). They also provide exclusive ownership rights, which means that they can only have one owner at a time, and that ownership can be easily verified because to the use of blockchain technology. Digital art, in-game assets such as digital plots of land, music as NFT tokens, digital posters to promote a film, and other uses for NFTs are prevalent.
After discussing both crypto token and coins, here are the main differences between the two:
