In the crypto community, the terms "coins" and "tokens" are frequently used interchangeably, despite the fact that they refer to distinct things. So, what makes they different?
Coins and tokens both fall under the cryptocurrency category, which is basically a digital asset built on blockchain technology. In the crypto community, the terms "coins" and "tokens" are frequently used interchangeably, despite the fact that they refer to distinct things. So, what makes coins and tokens different from one another? Let's find out.
Definition of a coin
Coins are digital assets linked to a blockchain. They can't be used on other chains in their natural form and are independent of other chains.
Bitcoin, Ethereum, and Dogecoin are a few of the most well-known coins.
A coin is created by mining, which is (in its simplest form) the process by which computers validate transactions and solve challenging math problems to create coins. Coins that have just been produced are awarded to the first computer to solve the issue. This guarantees the network's decentralization and security.
Coin characteristics
Decentralization
There is no central authority or middleman in control of coins. Coins are ruled by their community's consensus as well as the regulations of their protocol. Users now have more control and privacy over their financial activities.
Security
Cryptography and encryption are used to protect coins. That's why coins can be safe from fraud, censorship, and hacking. Users don't need to rely on outside parties to know if their coins are secure and genuine.
Scarcity
Most coins have a restricted supply determined by their algorithm. This has a deflationary impact, increasing the currency's value over time. Bitcoin, for example, has a total supply of 21 million, whereas Ethereum is deflationary. Not all currencies, however, are scarce, such as Dogecoin, which has no production limit.
Coin types
Native Coins
These are coins that run on their own blockchain and act as the network's primary currency. Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC) are a few examples.
Forked Coins
These are coins that are created by breaking or branching off from an existing blockchain. Bitcoin Cash (BCH), Bitcoin SV (BSV), and Ethereum Classic (ETC) are a few examples.
Wrapped Coins
Coins that represent another asset on another blockchain. They provide users with cross-chain functionality and liquidity. Wrapped Bitcoin (WBTC) and Wrapped Ether (WETH) are two examples.
Stablecoins
These are coins whose value is tied to another asset, such as fiat currency or gold. They intend to promote price stability while reducing volatility. Tether (USDT) and USD Coin (USDC) are two examples.
Definition of a token
Tokens operate on top of an existing blockchain. A token can represent a variety of things, including utility, governance rights, ownership shares, and others.
Tokens are typically "pre-mined," which means that developers employ a smart contract to create new tokens and distribute them to users.
Token characteristics
Utility
Tokens are required to use the decentralized applications (dApps) for which they were designed. Tokens can be used by users to pay fees, execute actions, and receive benefits.
Governance
Tokens can give users a voice in the blockchain or dApp decision-making process. Tokens can be used to vote on ideas, changes, or upgrades by users.
Interoperability
Tokens can allow for cross-chain communication and compatibility. Tokens, unlike currencies, can be supported by several blockchains.
Tokens function as digital currency for the protocol that provides them. They may give users access, rights, or prizes.
Token types
Utility tokens
These tokens provide access to a service or function on the blockchain or dApp. Examples include Uniswap (UNI) and Chainlink (LINK).
Governance Tokens
These tokens allow users a say in how the blockchain or dApp is run. Maker (MKR), Compound (COMP), Aave (AAVE), and the vast majority of other tokens are examples.
Security tokens
Security tokens are tokens that represent a portion of ownership or a claim on an asset or income stream. Securities regulations and compliance apply to them. Polymath (POLY) is one such example.
Non-fungible tokens (NFTs)
They stand for one-of-a-kind, undivided digital assets, including works of art and collectibles. They differ in value and are not interchangeable. Bored Apes and CryptoPunks are a couple of examples.
The differences between coins and tokens
Apart from their characteristic differences, tokens and coins are different based on their use cases. Tokens are more appropriate for particular applications and value creation, whereas coins are more ideal for general transactions and value preservation. However, this does not imply that coins and tokens are in conflict or mutually exclusive. They can even cooperate and strengthen one another in the crypto ecosystem.
For instance, tokens can be used to pay for fees on coin networks or to purchase coins from users. For rewards or to take part in governance, users can stake coins or tokens. Or, to access cross-chain functionality and liquidity, users can either wrap currencies into tokens or unwrap tokens into coins. Users can also exchange coins or tokens with one another utilizing decentralized exchanges (DEXs) or automated market makers (AMMs).
Disclaimer: The information herein is for reference purposes only and should not be considered financial, investment, or trading advice. Please conduct your own research and due diligence before making investment decisions. You understand that you are using the Information provided at your own risk.