Cryptocurrencies (Article 6)

Today we will look at the differences between Crypto-coins and crypto-tokens and how to distinguish between them.

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After learning what bitcoin is, how it works, its evolution and what technological foundations it was based on, it is time to explore the field further. To do so, we need to be able to distinguish between the two main types of cryptocurrency: coins and tokens. The key point is to know there is a difference, but the exact differences are a technicality that you perhaps will only need to know once you become more deeply involved with cryptocurrencies. Nonetheless, it can be helpful to have this knowledge.

Fundamentally, it is not that complicated: all coins are tokens but not all tokens are coins. So, while all cryptocurrencies are tokens, only some of them are coins. Think of it as apples and fruit; all apples are a fruit but not all fruits are apples. In practice, the two terms ‘coins’ and ‘tokens’ are used to describe two different things that are being distinguished based on their utility. Most importantly, don’t worry if you confuse the terms, because it is only important that you attribute the right properties to the cryptocurrency you are interested in. Now let’s focus on the differences and see what this means in practice:

Coins:

• Native to blockchain: Crypto-coins are the currency of the blockchain, like bitcoin is the native currency of Bitcoin blockchain and ether (or ETH) is the native currency of Ethereum blockchain.
• One per blockchain: a blockchain will have only one native currency, any other currency is built on top of the blockchain as a layer 2.
• Money: coins are used as a form of currency to pay for operations on the blockchain.
• Mineable: coins can be mined by anyone when they create new blocks.
• Digital: coins represent online transactions or account balances. There is no transfer of goods or ownership.
• On-chain: coin transactions are performed and recorded in blocks on the blockchain.
• Trust-backed: crypto-coins are only backed by the current value people are willing to pay for them.
• Liquid: coins are like money; they provide high liquidity.

Tokens:

• On top of blockchain: Crypto-tokens are built on top of a blockchain; for example, Chainlink, Dai and Uniswap are built on top of the Ethereum blockchain. If the tokens go out of business, Ethereum blockchain will still be there, but if the Ethereum blockchain no longer exists, those tokens will have to relocate to another blockchain or just disappear.
• Many per blockchain: there is no limit to the number of tokens that can be built on top of a blockchain.
• Asset/deed: tokens are used as a digital certificate of a physical asset or a deed.
• Not mineable: tokens are pre-mined, which means that they are created at the start of the project and sold/traded afterwards.
• Physical: tokens represent a physical asset or a service that is performed in the physical world, including payments.
• Off-chain: token transactions are recorded off-chain and mainly through smart contracts.
• Application-backed: tokens are backed by the application they cover in the real world; their value is secured unless their application in the physical world seizes to exist.
• Less liquid: tokens don’t provide the same liquidity that coins offer.

While you may find this interesting, I am expecting that some of you now may be asking: ‘Okay, but how do I easily determine if a cryptocurrency is a coin or a token?’ Well, you can figure it out by asking yourself three questions:

1. Is the currency native to a blockchain? Or do its transactions get recorded on the blockchain?
2. Does it have value by itself and is it not backed by an asset or deed?
3. Can you mine it?

Three yeses mean it is a coin, but if you answer NO to any of the above questions, then the cryptocurrency under consideration is a token. Then you will have to determine which type of token it is. Some token types are:

• Utility tokens: these are tokens with specific use cases. One example is Chainlink, which supports the use of advanced smart contracts on any blockchain.
• Payment tokens: payment tokens work as money in a similar fashion to coins, but they are not the native currency of the blockchain they are deployed on.
• Security tokens: such tokens are used to confer the ownership of a security like e.g. a financial stock or a bond.
• Stablecoins: while the name may suggest otherwise, stablecoins are tokens (remember, all coins are tokens, so, technically speaking, they can be called coins) and — contrary to other coins — Stablecoins have a stable value, as they are pegged by fiat currency.
• DeFi tokens: DeFi is short for Decentralized Finance. Simply put, DeFi tokens are used to facilitate and allow access to financial services on the blockchain. DeFi will be covered in more details in a future article.
• NFTs: NFT stands for ‘Non-Fungible Token’, which means it is a one-of-a-kind token. Thus, unlike regular tokens and coins, where any two units have the same value and are indistinguishable, each NFT is unique. NFTs will be covered in a future article.
• Meme tokens: Meme tokens are created for fun without any intrinsic value or use case. The most famous meme coins are Dogecoin and Shiba Inu.
• Governance tokens: governance tokens allow their holders voting rights, mainly in DAOs. (DAOs will be explained in a later article).
• Asset-backed tokens: asset-backed tokens are garnering great interest in regular economic activities, as the word ‘tokenization’ is becoming very popular among investors at the moment. ‘Tokenization’ describes the creation of crypto-tokens that can be used to represent ownership of some physical asset like gold, precious stones, etc.

To determine if a cryptocurrency is a coin or a token, you can simply consult here for coins and here for tokens. But if you plan to invest in cryptocurrencies, then you have to be able to distinguish between the two.

These are the basic differences between coins and tokens. However, the field has developed so much that different variations have come into existence, such as not-mineable coins.

The large number of cryptocurrencies in existence is mainly a result of each one of them either performing a specific function or providing a better solution to a specific problem: for example, ETH is used to pay fees for any operation done on the Ethereum blockchain, HBAR offers higher security and faster operations while being carbon negative, DOT offers interoperability between blockchains, while XRP facilitates international transfers between banks.

Blockchains and consensus (Article 7)