Learn about the differences between a cryptocurrency coin and a cryptocurrency token
The concept of cryptocurrency has been in existence even before Bitcoin came to be. Bitcoin, however, became the first and most widely adapted cryptocurrency. Its appeal is greatly attributed to its decentralized nature, all of which are made possible by a public ledger technology that securely records and validates all transactions called the blockchain.
The creation of Bitcoin heralded the emergence of other crypto coins and tokens in the market. In the realm of cryptocurrencies, the terms “coins” and “tokens” are used loosely and interchangeably, and are both often regarded as cryptocurrencies in general. However, although their meaning and usage interlap with one another, there are subtle differences that need to be considered in order for us to better understand the technology.
How are cryptocurrency coins and tokens different?
Cryptocurrencies are digital or virtual currencies that, as the name suggests, are used as a medium of exchange—that is, in sending and receiving payments on the blockchain.
Cryptocurrencies act as an umbrella term, wherein coins and tokens are its two subcategories. All coins and tokens are considered cryptocurrencies, despite the fact that most coins and tokens do not actually function as currency per se.
To learn more about cryptocurrencies and how they work, you can read our beginner’s guide here. In this article, we’ll be focusing on what these coins and tokens are, and how the two terms are different from each other.
What are coins?
Coins, like cryptocurrencies, are a type of virtual currency primarily used as a medium of exchange for digital payments. Interchangeably termed as altcoins, coins are practically alternative cryptocurrencies to Bitcoin.
Several coins available in the market today were built from the foundations of Bitcoin’s open-source protocol with a few subtle changes to its underlying codes, therefore creating a whole new coin with different sets of features. Examples of altcoins that are direct variants of Bitcoin are Litecoin, Dash, and Dogecoin.
Some coins, on the other hand, were not derived from Bitcoin’s protocol but were created from their own separate native blockchain—in other words, they’ve created a decentralized protocol of their own that is entirely different from that used on Bitcoin. Examples of these kinds of coins are Ethereum, Ripple, Nxt, and Omni.
Whether derived from the Bitcoin protocol or not, all coins share the same key characteristic: They possess their own independent blockchain.
What are tokens?
Tokens are a type of cryptocurrency that represent any tradeable and fungible asset or utility, and, unlike coins, they reside on top of another blockchain.
Furthermore, the use case for tokens can go beyond a medium of exchange. Tokens can be a representation of customer loyalty points, viewing hours for streaming content, stake on an asset, another cryptocurrency, or virtually anything at all.
The most prominent use case for tokens, in particular, are for initial coin offerings (ICOs), a type of crowdfunding campaign where tokens are created, sold, and distributed to participants as a sort of investment. Tokens here usually represent a currency (e.g., 1 token for 0.00005000 BTC), a means of payment for a service/product, a share or stake in the startup company, and many more. Additionally, in order to send your tokens, the transaction may require you to hold some of the blockchain’s native cryptocurrency, such as Ether for Ethereum, to be paid as a fee.
A blockchain, which cryptocurrency tokens operate on, acts as a medium for the creation and development of decentralized apps through smart contracts. Smart contracts are self-executing codes that are used to process and manage the assets in which the tokens represent, and then fulfill the desired actions as indicated in the smart contract when its preset conditions are met. As tokens are often created by smart contracts, they are usually used in conjunction with smart contract–based decentralized apps (dApps).
Summary: Coins vs. Tokens
The daily and continuing development of new coins and tokens is a positive indication of how cryptocurrencies are making a significant mark in the worldwide market. While most of the coins and tokens in circulation today are far from perfect—even Bitcoin has its limitations—there’s no doubt that the blockchain industry is flourishing and that cryptocurrencies will soon be a large part of our everyday lives in the very near future.
– Article written by Tinny