When looking at blockchain, the concepts of coins and tokens come up almost all the time. Sometimes both concepts are used interchangeably which is not correct, since they refer to two completely different concepts. In this article, we are going to take a look at what a coin and token actually are, how they differ and how they are used.
Let’s start with a coin. A crypto coin is built off an independent blockchain and is native to a specific blockchain network. There are a number of crypto coins currently in use including Bitcoin, Ethereum, Cardano etc, many of which you have probably heard of. The name of the coin is similar to the blockchain because it belongs to the blockchain network. Crypto coins are basically just data that is stored on a blockchain and is used as money in the digital space. Similar to physical currencies, crypto coins hold value and can be used in exchange for digital and even real-world goods and services, or to transfer value from one person to another on a blockchain. Like physical money, crypto coins can be stored for long periods of time and you can exchange it for something of equal value at a later stage. The value of coins are extremely volatile because it depends on the supply and demand of the coin. Since coins are a digital asset, a fluctuation in its supply and demand can occur at any point making the value of the coin change with it.
Unlike coins, tokens refer to cryptocurrencies that are built off an existing blockchain and therefore don’t possess a native blockchain. There are many platforms currently available that make it possible for users to build tokens. Ethereum is a popular and widely used platform for token creation. It is both easy to use and provides support for smart contracts which allow for secure, automated and transparent cryptocurrency transactions. Tokens that are built off the Ethereum blockchain are known as ERC-20 tokens. NEO is another blockchain that offers a platform to build tokens and is also quite popular. The tokens built on NEO are known as NEP-5 tokens. Similarly to crypto coins, crypto tokens are used to transfer value. However, this is not it’s only use-case. Digital tokens can be used to incentivise users to perform certain tasks. For example the internet browser, Brave, awards users with Basic Attention Tokens (BAT) for viewing privacy-respecting ads.
There are a number of token types that exist. Firstly, we have security tokens which can be used as a proof of investment for real-world equities. Utility tokens can be used to provide access to a particular product or service. Payment tokens can be used to transfer payment between two parties. Asset tokens are used to link to real-world asset ownership, such as real estate and non-fungible tokens represent unique real-world or digital assets. Each type of token has its own use-case, making tokens versatile in their capabilities.
There are vast differences between tokens and coins. One clear difference is how they are built, where coins are built on a native blockchain, tokens are built on an existing blockchain. Coins can only be used for transferring value or to make payments, whereas tokens have a number of use-cases as we have noted with the different types of tokens. Unlike coins which are complex to build since building a coin requires you to build a blockchain, there are many blockchain platforms, such as Ethereum, that provide users with easy ways to get started with coin creation off an existing blockchain. Another major difference between coins and tokens is the way that they are obtained. Coins are mined whereas tokens are obtained through ICOs (Initial Coin Offerings) which is when companies try to fund their projects by allowing investors to buy an offering in the company in exchange for a token which can be used to buy products, services or shares in the company.
As you can see, coins and tokens are two distinct concepts in blockchain. Even though there are times when the terms are used interchangeably, it is important to understand their differences before investing in and using cryptocurrencies in your blockchain projects.