Hello everyone! Today, I want to cover the difference between Coins and Tokens in the world of Cryptocurrency. While both Coins and Tokens are definitely considered Cryptocurrencies, I have noticed recently that many people, especially those newer to Crypto, use the two terms interchangeably. I don’t see anything wrong with doing so, but I want to make sure people are at least aware of the differences between the two and what they have grown to represent. The usage of each has grown and adapted as the cryptocurrency itself has matured and identifying the differences has not always been easy. Today, however, the nomenclature of coins and tokens has settled to represent two distinct entities and value propositions. So let’s take a look at the specifics of Coins and Tokens!
Let’s start out with Coins, since they are easier to define and rationalize in my opinion. To me, a coin is what you would traditionally associate with Cryptocurrency. Coins have their own network that is separate from every other coin. Whether this network is blockchain, a directed acyclic graph, or another means of tracking/confirming transactions, each Coin will have developed and implemented their own network. Some coins have copied Bitcoin’s blockchain technology and others have implemented different graphs like Iota. It is important to note, however, that Coins with similar Blockchains to Bitcoin will still have completely separate Blockchains from that of Bitcoin (Read here if you don’t know what I mean by Blockchain). This is why they are classified as a different coins . Coins also focus more on the transaction speed, cost, and reliability of the actual Cryptocurrency network. The difference between two blockchain-based coins is often how they utilize the Blockchain to optimize one of those three categories. Finally, coins are almost always used as a means to transfer money between to people. Coins rarely represent more than a simple currency.
Tokens, on the other hand, can cover a much broader range of cryptocurrencies. The two main differences from Coins is that they are built on top of another Coin’s blockchain and that they provide the ability to participate in some sort of activity.
Let’s start with that first difference since it is the more definite difference between the two. All tokens have been built to run on a Coins blockchain using smart contracts. That means that no token has implemented its own network of tracking and confirming transactions. Tokens take advantage of the Blockchain or network that has already been implemented successfully by another coin. Most tokens you will see are actually built using Ethereum’s Blockchain and Smart Contracts, therefore called ERC20 (Ethereum Request for Comment) tokens.
The second difference is that tokens often represent an asset or utility for some decentralized application. Often, the token grants the holder part ownership in a company or allows the owner to use some sort of application this token has implemented. While they are still traded and hold value, a Tokens value is generated by the underlying abilities the token grants or the asset it is representing (part ownership). Tokens are often a means of performing a Kickstarter-esque campaign. Companies or developer teams will hold a token offer to obtain the resources they need to implement some sort of decentralized technology. The token, then in turn, represents part ownership of the company, unlike a Kickstarter.
In conclusion, I want to reiterate some of the key fundamentals between the two forms of Cryptocurrency. Coins represent a Blockchain network or similar graph that is a means of moving value between users. Therefore, Coins obtain their value from the underlying network it has implemented and its ability to send those Coins reliably, quickly, and cheaply. Tokens, on the other hand, are built upon one of these networks using smart contracts and represent some sort of asset or ability to perform some action. Tokens still have value and are traded because so, but their value is derived from the asset or ability they represent, not the Blockchain on top of which it was built. If you want get started buying and eventually selling some of this Coins or Tokens, I put together a quick starter guide to get you off the ground quickly!