When first getting into cryptocurrencies, you may become confused about the difference between a coin and a token. These two terms are used all the time when talking about cryptocurrencies, and many people either mix them up or refer to them as the same. They are different, however, and if you are considering getting into cryptocurrencies, you will need to understand that difference. This guide will explore what coins and token are, how they differ and what their uses are.
In order to understand what coins and token are, we first need to define what cryptocurrencies are. Both coins and tokens are regarded as cryptocurrencies, even if some people consider that to be inaccurate. In simple terms, cryptocurrency is digital or virtual currency that is encrypted using cryptography. Bitcoin was the first decentralized cryptocurrency powered by something called the blockchain, a public ledger that records all transactions made.
If you are not familiar with what blockchain is, we will quickly explain it but it’s recommended that you refer to another article that will help you fully understand the concept. But in short, imagine blockchain as a distributed public ledger that has records of all transactions ever made. Everyone has the same copy of that ledger, which means everyone has a list of all transactions. Whenever a transactions is made, it is verified and added to the blockchain, where everyone has a record of it. Blockchain is considered to be a highly secure systems as it is secured using cryptography, and it is very difficult for hackers to make any changes to it when everyone has the same ledger.
Now that we have a rough idea about what cryptocurrency and blockchain are, we can move on to coins and tokens. The short answer to the question how tokens and coins differ would be that coins have their own blockchains, while tokens are built on preexisting ones. That is not the only difference, they also have different usages. Confused? It’s understandable. Hopefully, the token and coin descriptions we have provided in this article will help you make sense of it all. So, without further ado, let’s get to it.
What are coins?
A coin definition you will often encounter is that it is a digital currency native to its own blockchain. Like Bitcoin. Coins are also known as altcoins, which is a term to refer to coins that are alternative to Bitcoins. Altcoins are built using Bitcoin’s open-sourced protocol but with changes to its underlying codes, which results in a new coin with its own features. However, coins are not always based on Bitcoin’s open-source protocol. Some coins, such as Ethereum, Ripple and Omni have created their own blockchains and protocols.
Unlike tokens, coins are generally used the same way money is. A coin can be used to pay for goods or services on the Internet, though some real-life places accept payments via popular coins like Bitcoin as well. It can be stored or exchanged for another currency, or simply transferred to someone else. While coins like Bitcoin have no other functions besides acting like money, there are coins that have additional features. Ethereum being a great example.
Ethereum is a platform that makes developing decentralized applications much easier. It utilizes smart contracts and allows the development of applications on the Ethereum blockchain. Because those applications can be based on the Ethereum blockchain, there is no need for developers creating an app to make their own blockchain. Originally, Ethereum was a single blockchain, but as a result of hack that led to over $50 million being stolen, it was hard forked. The original blockchain was split into two blockchains, the Ethereum Classic (ETC), which is the continuation of the original blockchain, and Ethereum (ETH), a new chain. Generally, when people refer to Ethereum, they mean ETH, the new chain. In short, Ethereum can be used in the same way as Bitcoin, although being able to use it to pay for something in real life is pretty rare. However, unlike Bitcoin, it also has other functions. And it’s not the only coin with additional features.
Coins can be mined or bought via various exchange services. Cryptocurrency mining is a complicated concept but the gist of it is that mining is basically verifying the transactions that happen on the blockchain. The mining process requires special software and a lot of computer resources. As a reward for verifying a transaction, the miner gets coins. It’s a lot more complicated than that, but that’s another topic for another article. Mining coins has become a very popular means of making money, but it’s not as easy as it was a couple of years ago. As a result, instead of mining, a lot of people buy coins from exchange services, hoping that the coin will increase in value and they will be able to sell the coin for much more than what they initially paid for. Bitcoin was a popular investment choice in 2017, early 2018 because it started drastically increasing in value, reaching $20,000 at its peak. However, the Bitcoin bubble burst and its value has since dropped, being worth $6,800 at the time of writing. Nevertheless, coins remain a popular investment.
Coins have become known as currency that can provide a certain level of anonymity. While all transactions made on a blockchain are recorded and publicly displayed, those transactions are very difficult to connect to a specific person. If you take Bitcoin for example, your Bitcoin wallet address would be somewhat anonymous because your personal information is not attached to it. However, that anonymity may be hard to maintain when trying to exchange Bitcoins to real money. Unfortunately, this sense of anonymity has attracted a lot of criminal activity. Regualr payments can be tracked quite easily and this makes it easy to catch criminal activity. However, when criminals use Bitcoin or other coins, it can be more difficult. The infamous Silk Road marketplace hosted on the deep web allowed Bitcoin as the only means of payment in efforts to prevent law enforcement from tracking down vendors and buyers. Payments in cryptocurrency, particularly Bitcoin, are also common when dealing with malware. File-encrypting ransomware usually demands that victims buy decryptors using Bitcoin so that the crooks are more difficult to trace.
Coins are generally means of payment or making money, while tokens have a wider functionality and they cannot be considered as money in the same way as coins are.
What are tokens?
Unlike coins, tokens are created on existing blockchains, such as on Ethereum, which is the most popular platform to have tokens based on. Compared to coins, tokens are much easier to create. It’s not necessary to alter codes from a protocol or create a blockchain, it’s enough to just follow a template on the blockchain. This saves developers a lot of time and resources. If developers wanted to create their own blockchain and coin instead of building their token on an already existing blockchain, they would need to find miners, who would be the ones verifying transactions (mining). A blockchain with little to no miners would not be considered secure. Therefore, it is much better to build tokens on a shared blockchain.
Commonly, tokens are utilities that allow the holder to get access to certain applications on a blockchain, which are called dApps. A person would not be able to access dApps without acquiring their tokens. Developers of an dApp have control over how many tokens are created and how they will be used. Those tokens become available for purchase on crypto exchange services soon after a project (dApp) is launched.
There are different types of tokens, although there is no unified classification. Generally, tokens are divided into security and utility tokens. Security tokens are similar to shares in the sense that investors purchase them in hopes of making a profit in the future. They are usually sold during an ICO (Initial Coin Offering) for investors to obtain. A utility token is what is used to gain access to a dApp. When the dApp is developed and becomes available to the public, people obtain tokens in order to use it.
In many cases, when start-ups are developing dApps, they launch an ICO to raise funds. As mentioned already, an ICO is an abbreviation of Initial Coin Offering. In simple words, an ICO is an event during which a start-up offers their tokens in exchange for coins, usually Bitcoin and Ether. Investors take part in ICOs and buy thousands worth of tokens, with the hopes that their value will increase when the ICO is finished and the tokens become available on crypto exchange services. While it comes with higher risks, buying tokens as soon as an ICO begins can be the most beneficial because tokens are the cheapest in the beginning. Their price increases as the ICO goes on.
ICOs are high-risk investment. They are largely unregulated, which means scams are commonplace. There have been cases when a company hosted an ICO event, raised the funds but then took off with the money without delivering anything. Token value also tends to fluctuate quite rapidly. There is no guarantee that a token will indeed increase in value significantly, particularly because many investors exchange the tokens they acquired as soon as they are available on exchange services. This causes the token value to decrease significantly. There are the two main reasons why tokens are such high-risk investments.
There are also payment tokens, which are used only for good and service payments.
For those new to the crypto world, coins and tokens may look as one and the same. However, fundamentally they are very different. One of the most basic explanations for that difference is that coins are native to their blockchains, while tokens are built on top of existing blockchains. Their usage is also quite different.
Coins like Bitcoin are essentially means of paying for goods or services. Bitcoins are also accepted in certain real-life places, which cannot be said about other coins. There are also coins that have more features. Ethereum, for example, while also used as a payment option, provides a platform for the creation of decentralized applications. Basically, it allows tokens to be created on the Ethereum blockchain. Tokens can also be used to pay a service, but usually they are created to be used on dApps. For what purpose tokens will be used on an application depends entirely on the dApp it’s meant for.
Both coins and tokens are means of investment. Bitcoin was particularly popular late 2017 early 2018 due to its rapidly increasing value, which could have earned investors thousands of dollars. However, many investors also lost a lot of money when the value plummeted sometime in the first quarter of 2018. Even if both tokens and coins are high-risk investments, they can also be high in rewards, which is what makes them so appealing. Tokens in particular can be an easy means of earning quick money if you invest in the right ICO and do it early enough. However, proper research and understanding is essential before making any kind of investment into cryptocurrency.
While the difference between coins and tokens can be confusing at first, the deeper you delve into the cryptoworld, the easier it will be to understand everything. It’s not the easiest field of study, but it can certainly be rewarding.