Most of the new cryptocurrency users are puzzled by the words “Coins” and “Tokens.” They think that both of these terms mean the exact same thing and can be used interchangeably. But people with a better understanding of the industry know that these are two different terms.
Coins and tokens both of them carry out transactions using distinct encryption and cryptographic mechanisms to ensure that there is no tampering of the digital assets. So, what are the differences between the two? With this article, we will pinpoint the differences between coins and tokens, understand their respective significance, and their purpose in the crypto industry.
Coins In Crypto
Coins are digital assets that are native to their particular blockchain network. Examples include Bitcoin on the Bitcoin network, ETH on Ethereum, and SOL on the Solana network. These currencies operate on independent ledgers and can be processed, sent, or received within their respective ecosystems.
Coins have certain features that are similar to the traditional forms of currencies, which include value exchange. For instance, coins and traditional currencies are limited in supply, they are portable, divisible, and fungible.
Coins primarily serve as a store of value, a medium of exchange, and a unit of account, akin to the physical form of currency. However, coins like Ether can serve as more than a value exchange since they can be used within their blockchain to facilitate transactions, build and run apps, and support decentralized systems.
Coins are produced by mining, which involves computers solving complex, mathematical puzzles and validating transactions to produce them. Coins carry the following benefits and characteristics:
- Scarcity – Many coins have a capped supply that needs to be determined ahead of time using algorithms. This capped supply can cause the coin to become more valuable over time if the demand of the coin increases.
- Decentralization – Coins are decentralized; they are not controlled by central authorities. This lets the owner of the coins enjoy their ownership.
- Security – Coins are protected using encryption and cryptography methods. This allows coins to be resistant to fraud, censorship, and hacking.
Tokens In Crypto
Tokens are also digital assets that exist on blockchain networks, but they do not have their own individual blockchain and require other platforms to operate. The most popular platform for the creation of tokens is Ethereum, and most fungible tokens on Ethereum follow the ERC-20 standard.
Tokens can represent anything, including governance rights, utility, and ownership. Tokens are usually pre-minted by the developers of the project using smart contracts, allowing controlled distribution to users. However, the total supply and issuance can vary based on the token’s design.
Unlike coins, tokens come with a wide range of applications that make them serve more than a currency. They can be used as a voting tool in a decentralized framework or can be used to give access to specific services. Tokens are usually categorized into utility tokens, governance tokens, and security tokens, depending on their function and regulatory status. Tokens offer the following benefits and features:
- Interoperability – Some tokens can be used on more than one blockchain. This is possible through tools known as bridges or wrapped tokens. These tools help tokens move from one network to the other.
- Governance – Tokens can also give power to their users. Tokens are known to provide their users with the right to vote on how the blockchain project or app will be managed. Due to this property, the project can come to a decision in a decentralized manner.
- Utility – Utility tokens are important for decentralized applications because users need tokens to pay fees, receive benefits, and take action.
Key Differences: Coins Vs Tokens
Coins and tokens can be majorly differentiated based on their main function and the technology that has been used behind them. In the same way, understanding how crypto differs from traditional financial assets can shape smarter investment choices. Learn more in our guide on Crypto vs. Stocks.
Coins such as Bitcoin and Ether, on the one hand, protect the blockchain and are an integral part of the blockchain ecosystem. They are considered important because they carry out and validate transactions on the blockchain.
Tokens (such as Compound-COMP or Uniswap-UNI) are built on existing networks and are usually related to specific dApps or projects.
Coins are perceived to hold the same value and serve the same purpose as traditional currency in a digital format, so it is primarily used as a transactional value, while tokens exhibit more versatile use cases. Tokens provide voting power to their users, provide payment tools for DeFi protocols, represent ownership of physical assets like real estate and gold, or also represent profit-sharing in blockchain projects.
Minting (or creating) coins is comparatively more complicated than creating a token, as to create a coin, one will have to build a new blockchain, which is a difficult task. One would need a great amount of skills, a huge amount of money, and a lot of time on their hands. Tokens are easier to create since they are deployed as smart contracts on existing blockchains. This makes them more accessible and flexible for projects and developers.
When To Use Coins And Tokens
Coins and tokens are used in different spaces and, therefore, users need to understand the appropriate context of their usage and make informed decisions. To transfer value, engage in activities like networking participation or staking, or store wealth, coins are the perfect option. They provide the underpinning for blockchain platforms and are vital for a platform’s operation and security.
On the contrary, tokens are more project-based applications that let developers build custom, project-oriented solutions without having to deal with the challenge of building a blockchain. While coins are usually used in gaming and DeFi, it is typically tokens that power these specific ecosystems. A few coins, like IOTA or Helium, are designed for IoT ecosystems and allow secure machine-to-machine value transfer.
Now, the question that inevitably arises is, when do you use coins and when do you use tokens?
The usage of coins or tokens ultimately depends on the users’ intentions and the purpose of the application. For example, coins are better for value transfer and paying transaction fees, and tokens are better for getting access to services in an ecosystem.
Coins also offer the possibility of a long investment term due to their inherent value; tokens offer flexibility for developers using custom solutions on a project. While both can provide utility, governance functionality is more commonly built into tokens than coins.
Conclusion
We have already discussed how people consider coins and tokens to be the same terms used synonymously, and they do seem to appear similar at first glance, but they have distinctive roles and functionalities in the crypto space.
Coins work on their own blockchain(s) and have very basic functions, mainly for network security and transfer of value. Tokens, on the other hand, are created on the existing blockchains using smart contracts. The main aim of these tokens is to help the project carry out specific functions. If you wish to participate in the blockchain ecosystem, it is important that you understand the differences between coins and tokens to make informed decisions.
See less
