When getting started in the world of cryptocurrency, there are many concepts and terms that you'll need to familiarize yourself with. It can be easy to get lost in the mix of all the jargon, but you must learn what each of these terms means to understand better how cryptocurrencies work.
One prime example is the difference between a crypto coin and a token. These two terms are often used synonymously by people who don't know any better, but they have different meanings. This article will help you understand what crypto coins and tokens are, how they differ from each other, and how they're created.
What is a crypto coin?
Coins are cryptocurrency's native assets. They have different use cases, such as peer-to-peer payments, value storage, etc. In some cases, such as with Bitcoin and Litecoin, coins are designed to serve as "digital gold" - that is, store of value assets whose limited supply encourages investors to hold them rather than spend them.
A crypto coin is a standalone currency independent of any other platform. It works as a medium of exchange within its ecosystem, and it can be used to facilitate transactions between individuals in the ecosystem.
What is a token?
A token represents a unit of value that an organization creates to self-govern its business model and empower its users to interact with the product being built. They represent programmable units of value with which people can interact to obtain goods and services or participate in specific behaviors.
Tokens can be used as currencies to buy and sell things, they can be used as a store of value like an investment asset, or they can be staked to earn rewards on the network. Different blockchains have different rules around how tokens are created and managed.
Tokens are generally issued on top of another blockchain. The most common application is issuance on top of Ethereum's blockchain, which can process transactions more quickly than Bitcoin. The ERC20 standard describes the functions programmers need to follow to create a new token that will operate on the Ethereum blockchain.
Is Bitcoin a coin?
Yes. Bitcoin is both coin and token at the same time. A token is crypto built on an already existing blockchain. Bitcoin is a native cryptocurrency that has its blockchain.
A coin can be called a native cryptocurrency if it has its blockchain. But you can also have tokens built on top of other blockchains like Ethereum, NEO, Lisk, etc.
These tokens have unique characteristics and attributes, making them different from the coins they are built on top of.
Is Ethereum a coin?
Ethereum is a protocol that doesn't have a coin / token.
It is the platform on which people can build apps and create smart contracts, tokens, and coins.
Ethereum has its own currency called Ether. Ether can be used for:
• Making payments in the Ethereum network
• Creating smart contracts (not all of them require fees to run)
• Pay for gas fees so miners or validators will process your transactions
The term "ether" is used to describe the currency token of the Ethereum blockchain. Ether is used to pay for services on the Ethereum blockchain and is often called "gas" because it powers the network. If you want to run a transaction or smart contract on the Ethereum platform, you need to pay a fee in ether.
The more complex your transaction or contract, the more ether you need to pay for this service. Because it is used as fuel for running transactions on the network, you will never spend your ether unless you use your wallet to send funds or deploy contracts.
Bitcoin vs. bitcoin cash?
Bitcoin is a coin. It's called "Bitcoin." If you want to be technical, you can call it "Bitcoin Core" or even "BTC." But in the end, they are names for the same thing: Bitcoin.
As for Bitcoin Cash , it's a different coin that uses the same name as bitcoin. Same ticker symbol, BTC. And Bitcoin Cash is also a coin - not a token.
These coins were created using the same underlying protocol as bitcoin, known as "the Bitcoin Protocol." So this is where the confusion comes in. Many people will call both coins "bitcoin" because they were created using the same protocol. But this isn't very clear because it gives people the impression that they are the same coin - when they are not. They are different coins with different purposes and different names.
To be more technical about it, you can say that bitcoin and Bitcoin Cash were both created using what is known as "the Bitcoin protocol" (this protocol was originally called "Bitcoin Core").
The bottom line here is that these are two different coins with two different purposes.
What is the difference between a token and a coin?
Understanding these differences can help you make better-informed decisions about which cryptocurrencies are right for your portfolio.
Crypto coin and Token Definition
In simple terms, a coin is any cryptocurrency that can operate independently. That means that it can be used to pay for goods and services or pay other individuals. Bitcoin is the original cryptocurrency, and it functions as a coin. Other examples of coins include Litecoin, Namecoin, PPCoin, and Dogecoin.
A token is a unit of value that an organization creates to self-govern its business model and empower its users to interact with the product / platform the organization has built. Tokens are created on existing blockchains through an initial coin offering (ICO) or initial token offering (ITO). In contrast to coins, tokens do not have their own blockchain.
All Crypto coins have a blockchain that stores transactions.
Coins and tokens both run on top of their own blockchains. In the case of Bitcoin, Ethereum, and other altcoins, those blockchains use proof-of-work mining to create new coins over time and reward miners.
In contrast, some projects choose to create their blockchain from scratch with different features from Bitcoin or Ethereum. For example, EOS offers faster transaction times than Ethereum without requiring miners to provide hash power for security. Other projects might offer additional features like smart contract functionality or decentralized storage.
Crypto and Token Structure
The second difference between coins and tokens is in their structure. A coin tends to have an independent structure where it defines how new coins will be created and how transactions will be processed. On the other hand, the tokens are completely dependent on the structure of their parent blockchain.
Coin's ledger is maintained by miners who use special software to solve mathematical problems to validate transactions happening on the network. Tokens have no such mechanism and rely on their parent blockchain for validation of transactions, which are validated through mining like in the case of Bitcoins or through a consensus mechanism like in the case of Neo (NEO).
Crypto coin and Token Functionality
A coin's functionality is limited to being transacted as a medium (currency), which can be used to purchase goods and services. Token's functionality goes beyond being used as a currency, as it can also be used in several other applications.
Some tokens can be considered 'equity' or ownership of an asset, such as Augur and Gnosis. Some tokens come with voting rights, such as Aragon, whereas some tokens provide access to certain products and services like Filecoin, Storj, Siacoin, and Basic Attention Token.
Crypto coin and Token Governance
Another difference between coins and tokens is how they are governed. Blockchain projects that issue coins usually have a built-in mechanism for coin holders to vote for important decisions regarding the project, eg, Bitcoin has soft forks / hard forks, Ethereum has soft forks / hard forks / DAO forks, and Dash has masternodes voting on proposals. However, this is not the case for all coins, eg, Monero doesn't have any governance features at the moment, but they are planning on implementing one soon.
Crypto Coin and Token Creation
Coins are created through mining, a process where transactions for various forms of cryptocurrency are verified and added to the blockchain digital ledger. New coins are awarded to the miners who solve complex mathematical problems that authenticate transactions for existing coins.
Tokens can also be created through mining or staking, a method used by networks such as Tezos, where users stake their tokens to validate transactions on the network. This allows them to earn rewards in newly issued tokens while maintaining the integrity of the network. However, tokens are more commonly created through an Initial Coin Offering (ICO), which is a way of raising funds for cryptocurrency projects. Early investors can buy newly issued tokens during an ICO in exchange for established cryptocurrencies like Bitcoin or Ethereum.
Crypto and Token Transactions
Transactions for coins only require a public and private key to be exchanged between two parties and recorded on the blockchain digital ledger. There are no additional requirements for coins to be transacted.
Tokens may have additional requirements for transactions beyond public and private key exchange, such as:
• The token must be listed on an exchange that supports the token and matches buyers with sellers.
• The sender's account must have been previously approved by the issuer of the token.
• The transaction must meet certain conditions set by the token's issuer, such as requiring a minimum amount of tokens to be transferred at one time.
Standalone Nature of Coins and Token
Coins are standalone currencies that have their native blockchain. Bitcoin, Litecoin, Dash, Monero, NEO, and Ethereum are examples of coins. Tokens are built on top of another blockchain. They can be used as utility or security tokens or even as currency tokens by some projects. The most prominent example of a token is ERC20, built on top of the Ethereum blockchain.
Coins can be transacted directly without the need for a third party and can also be used for peer-to-peer payments. Tokens usually represent some kind of asset or utility that is often found within a specific ecosystem.
Coins are considered currency, while tokens are not. Coins generally have their own payments network, while Tokens don't have their own payment network, so they rely on other platforms like Ethereum to create their transactions.
The essential difference between coins and tokens is their function. Coins aim to fulfill a monetary function. They're used as a medium of exchange, like dollars or euros, or yen, which means you can use them to store and transfer value among friends or buy goods at local shops by transferring money electronically. Tokens, by contrast, are more like software that powers a platform that aims to achieve a certain goal.
Tokens aren't designed to be used as currency (though they may have their own exchangeable features). Instead, they're built to help facilitate a particular action on the platform, like digitally signing in on your phone with an identity token or accessing video content with a video-streaming token.