The world of blockchain and cryptocurrency is expanding very fast and it’s becoming more and more accepted by new users around the world. If you’re a beginner, then by now you’ve probably come across a bunch of jargon and technical terminology that you try to wrap your head around.
One particular and very common point of confusion when it comes to digital assets is that most traders tend to think that digital currencies like Bitcoin (BTC) and digital tokens like Uniswap (UNI), for example, are more or less the same. The truth is, they couldn’t be more wrong. Cryptocurrencies or crypto coins and tokens represent, in fact, very different aspects of blockchain technology.
In this article, we’ll help you discern between coins and tokens, and decide which one is better suited for your developing skills or investment plans.
What Are Cryptocurrencies?
Bitcoin (BTC), Monero (XMR), Ether (ETH), Litecoin (LTC), and Ripple (XRP) are some of the most popular crypto coins. They all have one thing in common: they exist independently on their own blockchain. These crypto coins can be received, sent, or mined.
As their name suggests, coins are prone to have similar characteristics as fiat money, meaning they’re divisible, fungible, limited in supply, and portable. Moreover, crypto coins are developed to be used for the same purpose as fiat money, i.e. as a payment method (with some exceptions).
When it comes to crypto coins, another term you should be familiar with is the so-called altcoins, which represent the alternative coins to BTC. Some of these altcoins are based on BTC’s open-source protocol (e.g. Litecoin or Dogecoin (DOGE)), while others have been developed on an entirely new blockchain, such as Ether or Monero.
Bitcoin was developed in 2009 by a programmer or a group of programmers known by the name of Satoshi Nakamoto. It’s the first digital cryptocurrency based on blockchain technology, and to this day, it’s the most widely used crypto worldwide.
It was designed as a decentralized virtual currency that isn’t regulated or issued by a central bank or a government. These coins are transferred from user to user on a peer-to-peer Bitcoin network. Bitcoin transactions are confirmed by network nodes through complex cryptography, also known as Bitcoin miners, and then the confirmed Bitcoin transactions are recorded on a decentralized, distributed public ledger, also known as blockchain.
What Are Crypto Tokens?
Unlike crypto coins, crypto tokens don’t exist on their own blockchain, meaning that they are created on an already existing blockchain platform. The most popular platform for creating tokens is the Ethereum network because it supports the creation of smart contracts that double as tokens.
These Ethereum-based tokens are called ERC-20 tokens. Some of the most popular ERC-20 tokens include the stablecoin Tether (USDT), EOS (EOS), Tron (TRX), and OmiseGo (OMG). NEO is another platform for developing tokens.
There are four main types of cryptographic tokens.
The utility tokens are designed to be used within decentralized applications (dApps) and their networks. They give you access to a certain part of the dApp such as a product offering or a specific service. Because of the limited supply of utility tokens, it’s often expected from them to increase in value. Basic Attention Token (BAT), an ERC-20 token, and Golem Token (GBT) are some of the most popular utility tokens.
Security tokens are tokens that are issued by an Initial Coin Offering (ICO), which is a form of crowdfunding. Basically, they represent the investments in a specific project. Even though security tokens adopt the value from the project startup, they don’t provide the holders with ownership of the tokens in the startup. Individuals usually buy security tokens with the hope that they’ll increase their value in the future. Polymath and Swarm are some of the most popular security tokens.
Payment tokens are designed for only one purpose – to serve as a medium of exchange, store of value, and unit of account. Simply put, you can use them as a payment method for goods and services, the same way you use fiat currencies, such as USD or EUR. The best payment tokens according to CoinMarketCap are Binance Coin (BNB), Tether (USDT), and Dogecoin (DOGE).
If the token represents particular equity or stock in the company that has issued it, then this token is called an equality token, such as Atlant. Unfortunately, only a few companies have made serious attempts at this type of Initial Coin Offering, due to the fact that there aren’t many regulatory instructions in terms of what is legal and what isn’t.
How Do Coins and Tokens Differ?
The usage of different algorithms for creating tokens and coins is perhaps the main difference between coins and tokens. Crypto coins are developed using blockchain technology, while crypto tokens are based on smart contracts and use already existing blockchains.
Coins have money utility and can be used to backup smart contracts, apps, confirm transactions, or engage in staking. For instance, BTC is a coin that only holds money utility, while ETH can also be used to fuel the smart contracts on the Ethereum network.
Unlike coins, tokens are digital representations of tradable commodities, assets, and loyalty points. As an example, we can take Maker (MKR), an ERC-20 token built on a smart contract on the Ethereum network, which is used to back up and stabilize the value of the DAI stablecoin. At the same time, you can use Maker to pay the transaction fees on the MKR system and to obtain voting rights as a holder within the voting system.
Whether you can trade coins or tokens you are obligated to pay fees for the network on which the coin or the token is built. If you use a token that is based on the Ethereum blockchain, for every activity you’ll be obligated to pay a fee in Ether, also known as gas. Gas is used to distribute the resources of the Ethereum Virtual Machine (EVM) and implement the instructions from the smart contract.
The 51% Attack
The crypto revolution from the very beginning strives for a more secure financial system that won’t have any points of failure. In the early stages of their development, crypto coins are vulnerable to 51% attacks, i.e. an attack on the coin’s blockchain by a group of miners or a single miner who owns over 50% of the computing power of the network (also known as a Majority Attack). The reason for this is that the mining power of an early crypto coin community isn’t strong enough and can easily be reproduced by a third party.
On the other hand, tokens are developed on an existing network whose mining power is already robust enough to protect itself from third-party attacks, which automatically makes tokens are less vulnerable.
How to Choose Between Coins and Tokens
Now that you know the difference between a token and a coin, you can see that they cannot replace one another and that they have different purposes. Every one of them is considered superior in a suitable context.
Cryptocurrency coins can give you the highest level of flexibility and independence. However, their development is expensive and they need huge communities to adopt and support them. The best use of cryptocurrency coins is as a medium of exchange and a store of value, similar to how you use fiat money.
Unlike coins, cryptocurrency tokens are fast and easy, and cheap to build. Tokens don’t need maintenance due to the fact that they’re built on an already existing network, but here they lose their flexibility. Therefore, tokens are better as a side project that will provide additional assets to the main business, or in cases where they represent real assets that can be transferred digitally with no need for physical touch.
If you are interested in the difference between coins and tokens as an investor, then you have to know that they both can be traded on crypto exchanges, as long as they are supported by the chosen cryptocurrency exchange, such as Coinbase or Binance. The real difference comes in the means of use.
A Few Words Before You Go…
By reading this article you certainly found out the real meaning of tokens and coins, and you can see they’re not even close to similar, in fact, they’re quite different. To choose which one is more suitable for you, you should take into account their use cases. In the end, even though it can be overwhelming at times, it’s good to have numerous digital assets that appeal to different traders.