What is cryptocurrency?
Prior to delving into the differences between coins and tokens, let’s elaborate on what a cryptocurrency actually is. In simplest terms, a cryptocurrency is a digital or virtual money based on blockchain technology. Blockchain, in turn, is a distributed ledger enforced by a divergent network of computers. The ledger acts like a book that records transactions pertaining to a variety of assets such as money, real estate, or intellectual property.
Any data or information shared among blockchain users are transparent, immediate, and immutable. The last term indicates that everything recorded on a blockchain is there to stay for good. No one, not even an administrator, can remove, modify, or tamper with it. As blockchain is mainly decentralized, no government authorities such as banks or financial institutions can supervise it. Hence, it would be super easy to double-spend or counterfeit that virtual money. Well, at least in theory.
To prevent this, a method called cryptography is implemented to secure cryptocurrencies. Wait, what on earth is cryptography now?! It is a method of securing data from unauthorized access by employing techniques of encryption. In fact, it is cryptography that enables all characteristics that blockchain boasts like immutability, security, and privacy.
A short history of cryptocurrency
The notion of cryptocurrency might be young, but this is not the case with cryptography. Its roots date back to the 1980s when the so-called blinding algorithm was invented. Dealing with secure and immutable digital transactions, the algorithm was a cornerstone of modern-day virtual currency.
In 2008, by implementing cryptography, a group of individuals came up with the fundamentals for what is now the leader in the crypto market. In 2009, the first cryptocurrency dubbed Bitcoin (BTC) went live. Its actual creator has never been known other than the pseudonym Satoshi Nakamoto. Normally, it’s been a while before Bitcoin reached the value it has today and received formal recognition as means of payment. The first to do so was WordPress in 2012.
The rise of Bitcoin spurred the development of other cryptocurrencies. In 2023, somewhat more than a decade later, there are over 20,000 cryptocurrencies.
What is a cryptocurrency used for?
Since cryptocurrency is not controlled by financial institutions or governments, it is generally used for cross-border and online money transfers. This is precisely the reason Bitcoin was created – to bypass long delays and high fees typical of banks and payment processors. BTC made it possible to transfer money from one part of the world to another almost instantly.
But are online money transactions the sole purpose of cryptocurrency? Well, it basically depends on whether we’re talking about coins or tokens, as well as the blockchain network they are built on.
What is a coin?
In simple terms, a coin is a digital asset native to the blockchain network it’s running on.
Bitcoin propelled the development of blockchains, either from scratch as a completely new network or as improved versions of Bitcoin. A blockchain can also be built using a pre-built open-source platform, but it’s time-consuming and requires a specific level of experience. Creating and launching a coin without a blockchain isn’t possible.
An inevitable example of a coin is, expectedly, Bitcoin (BTC). It’s powered by its native namesake blockchain. Apart from being used to pay for goods or services, BTC is used for paying transaction fees on the network. As the first cryptocurrency, BTC drove the creation of other coins, dubbed alternative or altcoins.
What all coins have in common are three basic features: they can be used as money, they can be mined, and they operate on their native blockchain. Some of the top-ten coins are:
- Bitcoin (BTC)
- Ethereum (ETH)
- BNB (BNB)
- Ripple (XRP)
- Cardano (ADA)
- Dogecoin
- Polygon (MATIC)
- Solana (SOL)
- Polkadot (DOT)
- Litecoin (LTC)
How are coins created?
In the majority of blockchains, new coins are issued during the process referred to as mining, which involves validating new transactions. Miners, i.e., individuals who validate them are given rewards in terms of newly minted coins. Simultaneously, whenever a user makes a transaction on a blockchain, they are charged a fee. The fee is further spent on rewards for miners.
There are multiple mining mechanisms, but the two most common are Proof of Work (PoW) and Proof of Stake (PoS).
What is a token?
A token is referred to as a digital unit of value standing for an asset or utility. They are issued on existing blockchains and as such, they can’t be mined during the process of transaction validation but are minted instead. How many tokens can be minted depends on the conditions determined by the project issuing tokens.
Since they operate on other cryptocurrency blockchains, tokens rely on smart contracts. Whenever a token is spent, it moves from one place to another, unlike coins whose position doesn’t change, only account balance. A perfect example of this is NFT (non-fungible token) trading. As they are unique items with sentimental or artistic values, they need to be handled manually.
The top-ten tokens include:
- Tether (USDT)
- USD Coin (USDC)
- Binance USD (BUSD)
- Shiba Inu (SHIB)
- Dai (DAI)
- Wrapped Bitcoin (wBTC)
- Unused LEO (LEO)
- Chainlink (LINK)
- Bitcoin Cash (BCH)
- Stellar (XLM)
- OKB (OKB)
How are tokens created?
Given that tokens don’t have their own blockchains but are built on existing ones, their creation is a bit different from that of the coins. The simplest way to build new tokens is to implement specific ready-made solutions intended for generating tokens. It’s not necessary to have coding skills to use such platforms, as the process is nearly as simple as making a website with a builder.
But more technical skills are needed to create a token with more advanced features as a smart contract must be deployed first. Smart contracts are self-executing digital contracts whose terms and conditions are written as code on a blockchain.
Coins vs. tokens: The key difference
To put it as simply as possible, the essential divergence between a coin and a token lies in the fact that a coin has its own blockchain. A token, on the other hand, is built on another existing blockchain network that has its native currency. In most cases, those are Bitcoin, Ethereum, or Binance Smart Chain.
Erm, wait, what? Yes, it does sound confusing at first. But to get a clearer picture, take Bitcoin (BTC) and Ether (ETH) for illustration. The two coins have been developed on their native blockchain platforms, Bitcoin and Ethereum, respectively. As such, they are typically used as a payment method.
The situation is a bit different with tokens. They use an already existing platform, Ethereum for example. The network’s native currency, ETH, is used to pay for gas fees necessary to fuel token transactions on the blockchain.
The tricky part here is that, when it comes to their usage, coins and tokens tend to overlap. For further distinction, coins identify as assets with (most of) the following features:
- Limited supply: the overall number of assets is capped at a certain supply and constant;
- Uniformity: all versions of the assigned denomination have the same value;
- Fungibility: one asset is equal to another;
- Portability: assets can be transferred and swapped;
- Divisibility: every asset can be split into smaller units;
- Durability: units can be implemented multiple times with no loss of value;
- Acceptability: assets are widely accepted at crypto exchanges as a medium of exchange.
In contrast, tokens are more versatile and have extended functionality going beyond money.
Versatility of tokens
While the functionality of coins isn’t solely restricted to payments, they barely have a further classification that would help users differentiate one sort of coin from another. Tokens are much different in this regard, as they can be categorized into four groups.
Security tokens
Typically, the majority of tokens distributed during initial coin offerings (ICOs) fit into this category. They don’t have any other specific utility and are thus better contenders for regulation.
Equity tokens
In case a token stands for any amount of stock or equity in a company, it’s called an equity token. However, only several companies have chosen such an ICO owing to the absence of adequate regulatory guidance regarding this matter.
Utility tokens
These tokens allow users to access certain products or services. They are typically built on smart contract blockchains that serve a particular function in the crypto ecosystem.
Governance tokens
These types of assets enable holders to vote and thus make decisions about the direction of a blockchain project. Their main function is to prevent centralized decision-making and allow the holder to participate in running the project.
Payment tokens
The primary and only function of these tokens is to pay for products and services. Their main goal is to be a decentralized payment tool without traditional middlemen. As such, they have no other functions and shouldn’t be confused with regulated fiat currencies (EUR, USD, GBP).
It’s worth noting that this categorization isn’t always clear-cut. One token may fall into different groups at the same time. Hence, a security token can also function as a utility or governance token.
What to buy, a coin or a token?
The discrepancy between coins and tokens is not dramatic, but it may cause troubles sometimes if overlooked on a regular basis. A handy way to decide which you need is to pay attention to what you’re purchasing. If you tend to buy products more frequently than services, then coins may do better. If it’s the other way around, utility tokens might be more useful. After all, what you will buy is solely up to you and your preferences. What you need to keep in mind, though, is to always do your due diligence and never spend more money than you can afford to lose.
