Dear Cryptobreaker Users! It’s so funny that:
Many people get confused between tokens and coins, just like they do after seeing the identical twins. They view both as interchangeable( coins are coins, and tokens are also coins).
However, if we delve deep and study both, we come to know that there is a world of difference between them.
To explore such differences in detail, we have curated this comprehensive blog post, in which we will study:
- What exactly are tokens and coins in terms of cryptocurrency?
- Real-life examples of tokens and coins?
- How do they significantly differ?
- Where are they used?
So, are you ready to clear this confusion and discover the differences between tokens vs coins?
If yes! Let’s begin…….
What are Coins?
In cryptocurrency, coins refer to the digital assets that operate on their own blockchains and serve as a medium of exchange. These fungible and portable currencies are decentralized in nature and enable transactions without the help of intermediaries( Banks, payment processors, and other financial institutions). As promised in the intro, we will discuss some of its examples in the section below.
Examples of Crypto Coins
There are multiple coins in cryptocurrencies. We are not going to explain all of them, but the major ones.
Bitcoin: Even if you have nothing to do with the world of crypto, you would have heard this name at least once. Bitcoin is one of the most popular crypto coin that is used to maintain transactions between individuals.
Ethereum: The second name after Bitcoin that is heard the most is Ethereum. There are multiple other functions of it, but enabling the smart contracts makes this currency one of the most popular among users.
Litecoin: One of the earliest coins that was generated to produce new blocks and validate transactions. With its lower transaction fee, it is one of the suitable currencies to use.
XRP: Another cryptocurrency that is useful in cross-border transactions and uses a consensus protocol to facilitate payments.
Dogecoin: You will be surprised that this coin was generated as a meme or a joke. However, with time, it gained huge popularity and is used for payments and sending money.
What are Tokens?
On the contrary, tokens are those digital currencies that operate on existing blockchains and are created using blockchain platforms like Ethereum, Binance Smart Chain, etc. These currencies are integrated with a specific project’s ecosystem and are used to pay for services and represent the assets within that platform. Unlike coins, there are multiple types of tokens that we will discuss briefly.
Examples of Tokens
Here are some examples of these digital currencies.
Uniswap: Uniswap is a governance token that lets UNI holders participate in platform governance and influence its future developments.
Chainlink(LINK): Chainlink is a decentralized network in which “Link tokens” are used for data services and smart contracts.
Tether(USDT): The USDT coin is linked to the US dollar. Such a token is widely used for rapid fund transferring between crypto exchanges.
Wrapped Bitcoin: Warped Bitcoin is a tokenized version of the Ethereum blockchain. This token offers flexibility and a 1:1 peg to the original Bitcoin.
Tokens vs Coins – Key Differences
Once you have reviewed both coins and tokens with their examples, it’s time to explore how they differ. In this section, we will discuss at least 4 differences between them.
Tokens vs Coins – Blockchain Ownership
Let’s know the difference between tokens vs coins with respect to blockchain ownership.
Coins: Coins are those digital currencies that have their own blockchains( as we have discussed in the previous section). For example;
- If we talk about Bitcoin, it runs on the Bitcoin blockchain.
- Ethereum runs on the Ethereum blockchain.
- Similarly, XRP is directly linked to the XRP blockchain.
As so on……..
In short, we can say that a blockchain is incomplete without such digital currencies.
Tokens: Instead of having their own blockchains, these digital assets rely on the previous blockchain of crypto coins, such as Ethereum. BAT, BNT, Tether, and others. Additionally, tokens depend on smart contracts that every blockchain uses. For example, ERC-20 is used by Ethereum, and NEP-5 is used by NEO.
2. Tokens vs Coins – How They Are Created
How are they made? This is a question that is often raised by many users. Don’t worry, this heading will differentiate them concerning their creation.
Coins: If we talk about coins, they are created by a consensus mechanism, named Mining. In this mechanism, miners use powerful hardware and solve complex mathematical puzzles to create new blocks and validate transactions. In return, the blockchain protocol rewards them with newly generated coins. However, the process of mining is not too easy, as it requires a high level of energy. Some coins can also be generated by the Staking mechanism, in which validators stake their currencies, create new blocks, and receive newly generated coins.
Tokens: On the other hand, tokens are created in decentralized apps that use smart contracts of previous blockchains of coins. In this process, users send some of the blockchain’s main coin (like Ether) to the app. In return, they receive an allocated amount of tokens. Additionally, tokens are quite easy to generate compared to coins, as they don’t require building a blockchain using mining or staking mechanisms.
Tokens vs Coins – Value Proposition
To find a difference between tokens and coins concerning their economic value proposition, read the section below.
Coins: To understand the value proposition of coins, remember this one sentence: “The lower the supply, the higher the value”. Coins like Bitcoin have a limited supply( only 21 million Bitcoins can be mined or supplied). This limited supply creates a high demand and value price of such coins, making them more scarce, as well as valuable.
Tokens: However, the price of tokens is directly linked to the growth of the platforms they are associated with. Investors view these currencies as investment opportunities that depend on the success of any specific project or service.
Tokens vs Coins – Primary Function(Use Cases)
Finally, we will differentiate both these two digital assets by keeping their primary functions in front of the eye.
Coins: Coins have some primary functions. To know them, read the line below.
- Coins like Bitcoin and Ethereum are used for long-term investments, and they are referred to as “digital gold” for storing.
- Coins like Ethereum are used for paying the gas fee( required for executing a contract on the Ethereum blockchain platform).
- They serve as a medium of exchange, like regular currencies.
- These digital assets allow users to make purchases and transfer wealth.
Tokens: Below are some use cases of tokens.
- These digital assets represent the ownership of an asset.
- Tokens provide access to services or features within a platform.
- In various voting situations, they serve as votes.
- Unlike some digital coins, they are also used for paying for goods and services.
Before You Go
The crypto landscape is full of such people for whom coins are tokens and tokens are coins. However, the reality is opposite. Many factors make these digital assets different from each other. To discuss them in detail, we prepared this guide.
We started this guide with brief overviews and examples of both tokens and coins. After it, we curated a detailed section to explore the differences between Tokens vs Coins. Factors like value proposition, technology behind them, and their uses show us that they are not the same.
