Web3 Surfers
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Crypto Coin vs. Crypto Token

Understanding the common misunderstandings

Photo by Shubham Dhage on Unsplash

Before getting started, an important note:-

  • A coin is used to pay for goods and is a replacement for traditional money. E.g. BTC, ETH, and ADA
  • A token offers utility through a service of some kind or represents an asset. E.g. USDT, MANA, and LINK**
  • Tokens still hold monetary value. They can be traded, swapped, or sold for their market price just as coins can. However, their sole purpose is not to replace traditional money.

So what is Crypto Coin?

  • As we’ve covered, a cryptocurrency coin is a direct competitor to traditional money like the US Dollar. However, they offer a lot more than just value.
  • Coins operate on their own blockchain; these projects are also known as Layer 1 cryptocurrency projects. This means that all transactions of a coin are logged on its native blockchain.
  • For example, all ETH transactions can be found on the Ethereum blockchain using tools like EtherScan.io.
  • This means that cryptocurrency coins are self-reliant, as they do not require someone else’s blockchain to host their project.
  • Okay, so, we said coins and tokens are not the same. But… sometimes they are. All crypto coins are tokens but not all tokens are coins. Just like all poodles being dogs but not all dogs being poodles.
  • This is because coins are the native token of a Layer 1 blockchain (the base network), meaning that each blockchain will have its own crypto coin. For example, Cardano has ADA, Bitcoin has BTC, and Solana has SOL.

What is Crypto Token?

  • Tokens don’t have their own blockchain. Instead, they are built upon a Layer 1 protocol that will have its own crypto coin. The token will offer a service or utility to the blockchain’s ecosystem that the coin does not.
  • For example, the MANA token is built on the Ethereum blockchain. It offers the utility of interacting with the Decentraland metaverse — buying and selling in-game items, land, etc.
  • You cannot use ETH in Decentraland, despite being built on its blockchain. This is what makes MANA a token and not a coin.
  • Unlike coins, which simply use their blockchain to record transactions, tokens rely on smart contracts. The blockchain takes the code of a smart contract, reads it, and then completes the trade.
  • When a token is swapped, traded, or spent it moves digital location — from one wallet to another.
  • This is unlike coins, which don’t move; instead, the blockchain records how much of the coin people hold through a ledger. This is a decentralized digital file that records every transaction and everyone’s “bank balance” on the blockchain.

Differences between Crypto Coin and Crypto Token

Coins are

  • A medium of exchange
  • A store of value
  • Stored on their own blockchain
  • Balances are recorded using a ledger

Tokens are

  • An asset, utility, or service
  • Provide utility
  • Stored on a blockchain that isn’t it’s own
  • Moves location when traded, swapped, or sold

How Does A Crypto Token Affect A Crypto Coin’s Price?

  • A crypto token’s price will fluctuate due to the demand for the token. If Decentraland increases in users and more people want to spend money on the game, its token (MANA) will increase in value.
  • Whereas, a crypto coin’s price will move depending on the success of its entire ecosystem. For example, Ethereum’s price will go up if its entire ecosystem is healthy and sought after — not just the ETH coin. This includes the success of projects like Decentraland.
  • A token’s price is tied exclusively to the success of its individual project. On the other hand, a coin’s price moves depending on its entire blockchain. In a way, by purchasing a coin you are also investing in the other projects in its ecosystem.

What Types of Tokens Exist? 🤔

Utility Tokens

  • Utility tokens offer utility to the holder. The token(s) will be used to access a function within an ecosystem. Outside of its specific use case, it’s useless — other than price speculation.
  • For example, BAT is a popular utility token built on the Ethereum blockchain. It allows users to tip content creators through the Brave browser, but it’s useless otherwise. You can’t use BAT in Decentraland or pay for your groceries. Your BAT must stay in the Brave cave 🦇.
  • This type of token is much less like digital money and much more like a piece of software. Their main purpose is to fulfill a function.
  • That being said, a utility token can go up or down in value. This will usually be a result of the function of the token becoming more popular. However, being used to transfer value isn’t its main cause

Security Tokens

  • Security tokens, on the other hand, are more like a stock. According to Investopedia, in traditional finance, security is:

A fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation via stock.

  • In the crypto world, it isn’t much different. A security token is a digital representation of an asset. This could be a tokenized stock, such as the ones found on FTX, that follows the price of traditional securities like Tesla. It could also be a token that represents a share in an investment fund or tokenized real estate

Governance Tokens

  • Ever heard of a DAO? To vote in one, you need governance tokens.
  • Simply put, they grant you access to voting in a DAO, allowing you to influence the future of the project.

NFTs

  • NFT stands for non-fungible token.
  • NFTs are tokens that prove you are the owner of something. You own the token that authenticates your ownership, not the image itself.
  • They’re usually closest to a utility token, as they often provide additional benefits other than owning an asset. However, in cases where an NFT is just a piece of art you own, they’re closer to being a security token.
  • There is no single rule of thumb when deciding whether NFTs are a security or utility token. It goes on a case-by-case basis. This is why regulatory bodies are having such a nightmare deciding how to regulate them.

Taxing Tokens

  • Due to utility, security, governance, and NFTs being so vastly different, taxes are complicated.
  • If we’re honest, giving out crypto tax advice is not something we have the qualifications for. However, Koinly has some great crypto tax guides so give them a look if you’re concerned.

Thanks for reading the article 😊😊😊

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