Since the inception of Bitcoin in 2009, the register of the cryptocurrency world has expanded and now includes new terms like coins and tokens. While these words are often used interchangeably by both novice investors and seasoned traders, they are actually different. In this article, we’ll be exploring the unique properties of these assets. By the end, you’ll be able to effectively navigate the crypto market by having a clear understanding of “crypto coins vs tokens: is there a difference?
KEY TAKEAWAYS:
- Crypto coins are virtual currencies that operate on their own blockchain.
- Crypto tokens are digital assets that are created on an existing blockchain.
- Tokens are of different types, including exchange tokens, stablecoins, non-fungible tokens (NFTs), and utility tokens.
- While coins are primarily a medium of exchange, tokens serve various functions, such as providing voting rights and access to specific services.
What Are Crypto Coins?
These are digital currencies that operate on their own blockchain. Just like traditional money, they are primarily used to buy goods and services, transfer wealth, and as a store of value. For instance, Bitcoin (BTC) is a coin that operates on its own blockchain and can be used for purchases and as a store of value.
Coins also play a role in the network security and consensus mechanisms of their blockchain. Ethereum (ETH) is a crypto coin that is used to pay for transactions and to carry out computational services on the Ethereum network. Also, ETH can be staked by participants to secure the network and earn rewards. Crypto coins are created through processes like mining and staking. Furthermore, because of their foundational role in their networks, coins are considered more stable and are widely accepted compared with tokens.
Pros
- Stable:They are often more stable because of their large market cap.
- Secure: Crypto coins have stronger security measures, making them less prone to attacks.
- Widely accepted: They are more widely accepted in the real world.
Cons
- Less flexible: Coins are less flexible than tokens in terms of their use cases.
- Higher competition: It’s difficult for new coins to gain traction because the market is highly competitive.
What Are Crypto Tokens?
Crypto tokens are digital assets that are created on an existing blockchain. Since they don’t have their own blockchain, they are hosted on platforms like Binance Smart Chain, Ethereum, and Solana. Tokens are of different types, with each serving a specific purpose. Let’s highlight them below:
- Asset-backed tokens: They represent ownership of actual physical assets such as commodities, real estate, and other tangible goods. Digix Gold Token (DGX) represents ownership of physical gold, and one DGX token represents one gram of gold.
- Exchange tokens: Exchange tokens are created by cryptocurrency exchanges as special cryptos that serve different uses within the platform’s ecosystem.
- Governance tokens: Governance tokens give their holders voting rights in the development and operation of a blockchain project or decentralized autonomous organization (DAO). The Uniswap (UNI) token gives users the right to vote on critical governance decisions within the Uniswap protocol.
- Non-fungible tokens (NFTs): NFTs are unique digital assets that represent the ownership of specific content like music, art, or other collectibles.
- Payment tokens: They are designed to function as a medium of exchange for goods and services. A good example is Bitcoin (BTC), which is a digital currency used for peer-to-peer transactions.
- Privacy tokens: Privacy tokens provide better anonymity and confidentiality for transactions. For example, Monero (XMR) uses cryptography to make transactions private and untraceable.
- Security tokens: Security tokens represent ownership of real-world assets like bonds, real estate, and shares in a company.
- Stablecoins: Stablecoins are cryptocurrencies whose value is pegged to a stable asset such as gold and fiat currency to minimize their volatility. For instance, Tether (USDT) is pegged to the US dollar.
- Utility tokens: They help users to interact with the products or services within a blockchain ecosystem. Ethereum (ETH) is a utility token used to pay for transactions and computational services on the Ethereum blockchain.
- Wrapped tokens: Wrapped tokens represent another original cryptocurrency but on a different blockchain. Wrapped Bitcoin (WBTC) is a tokenized version of Bitcoin that can be used on the Ethereum network.
Pros
- Flexible: Tokens can be tailored to a wide range of use cases.
- Customizable: They can easily be customized to fit specific rules and functionalities.
- Easy to create: Tokens are simpler to create when compared with coins.
Cons
- Relies on parent blockchain: The success of a token is tied to the success of the blockchain it’s built on.
- Less secure: Tokens are usually more vulnerable to security issues, especially if their underlying blockchain has issues,
Key Differences Between Crypto Coins and Tokens?
Although coins and tokens are both digital assets used within the crypto world, they differ in the following ways:
- Functionality: Coins basically serve as a medium of exchange, while tokens provide various functions like giving voting rights and access to a specific service.
- Creation process: Coins are created through processes like mining and staking. On the other hand, tokens can be issued using smart contracts on an existing blockchain network.
- Governance: Crypto coins have their own governance systems, whereas tokens are governed by the rules of the blockchain they are built on.
Conclusion
Understanding the distinction between crypto coins and tokens helps you recognize the unique roles they play in the cryptocurrency ecosystem. For investors, it guides them to make better decisions. Whether you are looking for a store of value or investing in a decentralized project, knowledge of these foundational concepts will help you navigate the diverse crypto world.