Token vs Coin: What is the Difference?
Token vs Coin yields millions of results across search engines like Bing and Google due to a demand for answers on the real differences between two terms, mostly used interchangeably.
Why are certain digital assets referred to as coins, and why do some have tokens attached to them on crypto-tracking websites such as CoinMarketCap and others?
Below, we examine what they are, their differences, and examples that will help you categorize numerous cryptocurrencies you have been coming across on crypto news portals and exchanges.
Token vs Coin: What does coin mean?
To explain the terms, let us understand that the two exist and came into being through the power of blockchain technology.
Coins are primarily cryptocurrencies that are native to a particular blockchain. They are exclusive to a particular chain and cannot be used on other blockchains due to a lack of interoperability.
They have several use cases, including serving as a store of value, exchange medium, and unit of account.
You may have come across a term called mining. This is the process by which coins are produced. Mining allows computers relying on application-specified integrated circuits (ASICs) to solve complex math puzzles, which helps validate transactions to create coins.
Miners are rewarded with newly minted coins, and their contributions are highly invaluable to the decentralization and security of a network.
On having a decentralized feature, no intermediaries (central banks, clearinghouses, or insurance companies) are in charge of the coin's circulation. Instead, they are governed by their protocol's rules and the project's community's consensus.
With this, users enjoy privacy and freedom over their funds and transactions – something many, like Satoshi Nakamoto (creator of BTC), felt centralized financial institutions have taken away from people.
On security, to prevent cybercriminals from engaging in unscrupulous activities using virtual currencies in fraud, censorship, and hacking, cryptography and encryption are used to protect coins.
This way, users do not need to entrust the safety and authenticity of their coins to third parties.
The last and most recognizable feature of coins is scarcity. Digital coins were created to challenge the status quo (fiat currency system), so they must possess all the attributes of currency money.
Predetermined by their respective algorithms, most coins have a total and maximum supply, which positively reflects their value over time.
With this in mind, you should know that four types of coins categorize the assets you have been reading about or trading online. They are native, forked, wrapped, and stable.
Native coins run on independent blockchains and oversee all the activities of that particular network. Great examples are Bitcoin (BTC), Litecoin (LTC), Dash (DASH), Ethereum (ETH), Solana (SOL), Cardano (ADA), and Dogecoin (DOGE), among others.
Stablecoins are pegged to the value of fiat currencies (USD, EUR, and GBP), commodities (gold, silver), and other cryptocurrencies. Examples are USDC, USDT, BUSD, and DAI.
Wrapped coins represent different assets on different blockchains. This was introduced to allow liquidity and cross-chain functionality for users. Wrapped Ether (WETH) and Wrapped Bitcoin (WBTC) are examples.
Ethereum Classic (ETC), Bitcoin Satoshi Version (BSV), Ethereum Proof-of-Work (ETHPoW), and Bitcoin Cash (BCH) are examples of Forked Coins – they were derived from their originally existing chains.
Token vs Coin: What does token mean?
Unlike coins, tokens are housed in existing blockchains and rely on the possibilities of the technology for their operations.
While coins are mined, tokens are pre-mined, and this means that the development team behind a protocol employs smart contracts to issue and distribute new tokens to their users.
With the explanation of tokens in mind, you should know that there are four types; utility, governance, security, and non-fungible. Non-fungible tokens (NFTs) represent indivisible, indestructible, verifiable, and non-interoperable digital items such as collectables and art. Many popular NFTs are issued through Ethereum, including the Bored Ape Yacht Club, Axie Infinity, Otherdeeds from the Otherside Metaverse, NBA Top Shots, and Azuki.
Utility tokens help users access functions and services on a blockchain or decentralized application (DApp). Examples include Uniswap (UNI). Governance tokens confer something like voting rights to users where they have a say in the governance of a particular DApp or chain. Compound (COMP), Aave (AAVE), and Maker (MKR) are examples of governance tokens.
The last are security tokens, representing a share of ownership or claim on an income stream or asset. Polymath (POLY) is part of security tokens and, unlike the others, is subject to third-party influence such as regulation and compliance.
Author: Raphael Minter
Raphael Minter/ Albert Zuhnden (preferred pen name) is a crypto finance writer, data miner, and fundamental analyst. Raphael has written hundreds of articles about centralized and decentralized financial instruments such as precious metals, commodities, stocks, and cryptocurrencies. He broke into digital finance in 2016 and believes digital assets and blockchain technology is the future of finance.