Differences and Similarities Between Cryptocurrency Tokens and Coins

In the cryptocurrency industry, the terms “coins” and “tokens” are frequently used interchangeably, but they actually relate to separate ideas.

Given that they both fall under the general category of cryptocurrencies, it is simple to mix them up.

A cryptocurrency is a digital asset built on the blockchain.

Both tokens and coins fall under this category.

Coins and crypto tokens are virtually the same from the perspective of the average user.

But their technological construction differs.

Understanding this distinction may enable cryptocurrency users to make more intelligent judgments.

This article will describe the distinctive qualities that distinguish coins and tokens from one another.

What Are Cryptocurrency Coins?

Any cryptocurrency with a stand-alone, autonomous blockchain, such as Bitcoin, is referred to as a coin.

Developers built these cryptocurrencies from the ground up.

The network specifically aims to accomplish a particular objective.

For instance, Bitcoin functions as a secure, fixed-price medium of trade and a censorship-resistant store of wealth.

Bitcoin (BTC) is the most liquid cryptocurrency, with the greatest market cap and realized market cap in the industry.

Coin projects often draw inspiration from earlier technologies or cryptocurrencies and combine them into a tailored network.

Ethereum is a different prominent coin (ETH).

Decentralized apps can be created and executed on the Ethereum network.

The native coin of the blockchain, ETH, lets users transmit assets and pay for computer power.

Although the technology underlying cryptocurrency coins are frequently created from scratch, they might draw design cues from the past.

Consider Litecoin (LTC), which was developed using the same source code as Bitcoin but with significant speed improvements.

To add to the confusion, the coding for Dogecoin (DOGE), another well-known coin, was based on that of Litecoin.

Read: All You Need To Know About Cryptocurrency

How Cryptocurrency Coins Work

When Bitcoin was developed, it was intended to take the place of conventional fiat currencies.

It was created to function similarly to paper money and metal coins, along with other cryptocurrency coins.

It can be used for many of the same things that US dollars or euros are typically used for.

All coins share several common features:

They operate on their own blockchain

Without exception, every cryptocurrency uses its own blockchain to operate.

Coins are native cryptocurrencies active on their original chains and their forks from protocol updates.

When Bitcoin split into Bitcoin and Bitcoin Cash, BTC remained the native token, while BCH emerged on the forked chain.

An autonomous blockchain enables the development of new features and provides exceptional technical solutions.

The coin’s inherent worth is influenced by a number of elements, including the effectiveness and security of the underlying blockchain technology.

They Act as Money

Coins can serve as digital money because they possess the characteristics of traditional money, such as security, scarcity, longevity, mobility, and the capacity to hold value.

Companies such as Microsoft, PayPal, Starbucks, Virgin Airlines, and others have already accepted some cryptocurrency coins as a form of payment.

They Can Be Mined

The majority of blockchains use a method called mining to create a new currency.

The network users who approve transactions receive brand-new coins as payment.

Users also pay a network charge each time they conduct a transaction on the network, which is used to purchase rewards.

Although there are many other methods for confirming transactions, proof of work (PoW) and proof of stake (PoS) are the most popular.

PoW networks’ validators use colossal amounts of processing power to validate transactions. 

The PoS technique requires staking coin holdings.

Read: Proof of Work Vs Proof of Stake in Blockchain

What Are Cryptocurrency Tokens?

Tokens, also known as crypto tokens, are units of value that blockchain-based initiatives or organisations create on top of already-existing blockchain networks.

Despite frequently being closely compatible with the coins of that network, they belong to a completely different category of digital assets.

While platforms that are built on top of particular blockchain protocols create tokens, those blockchains’ native assets are cryptocurrencies.

For instance, ether is the native coin of the Ethereum blockchain (ETH).

The Ethereum blockchain is used by numerous different tokens in addition to ether, which is the native cryptocurrency of the platform.

Among the cryptocurrency tokens created with Ethereum are CryptoKitties, LINK, DAI, and COMP.

These tokens can perform a wide range of tasks on the platforms for which they are designed, such as playing games, engaging in decentralised finance (DeFi) procedures, and accessing platform-specific services.

Crypto tokens can be created using several widely accepted token standards, the majority of which are based on Ethereum.

The two most popular token standards are ERC-721, which enables non-fungible tokens that are uniquely unique and cannot be exchanged for other similar tokens.

Then, ERC-20, which enables the creation of tokens that may interact inside Ethereum’s ecosystem of decentralised apps.

As of 2022, thousands of ERC-721 tokens and hundreds of thousands of distinct ERC-20 tokens were in circulation.

The variety of tokens will likely continue to increase significantly at a rapid rate as new tokens are created to address the growing use cases for blockchain technology.

Read: The Benefits of Diversifying Your Cryptocurrency Portfolio

Token Standards

In order to create tokens, a framework is needed.

It outlines both the smart contract and the token’s functionality.

Each blockchain has its own set of token specifications.

Since Ethereum is the most popular blockchain for launching tokens, we’ll look at the common requirements for Ethereum-based tokens here.

Ethereum Requests for Comments introduce Ethereum standards (ERC).

ERC-20

ERC-20 is a standard for fungible tokens.

If a token is fungible, it means that all of its types and values are the same, making it interchangeable.

This criterion is typically applied when creating tokens for voting, payments, staking, etc.

For instance, Chainlink (LINK) is an Ethereum network-based ERC-20 coin.

As a form of payment, it supports Chainlink network activities.

Every issued LINK token is always equal to every other LINK token.

ERC-721

A standard for non-fungible tokens (NFT) is called ERC-721.

These tokens are one-of-a-kind and cannot be traded for tokens of the same kind.

For making collectables, digital art, access keys, or in-game objects, non-fungible tokens are ideal.

Their special qualities make it possible for an NFT to be connected to a picture kept on an outside server.

This enables a token to have a visual representation.

Zerion Genesis NFTs are one instance of an NFT use case.

When using Zerion’s trading aggregation, a wallet that contains certain NFTs is exempt from costs.

ERC-1155

A variety of token kinds, including fungible, non-fungible, and semi-fungible tokens, as well as other configurations, can be created using the ERC-1155 token standard.

Let’s assume that the intention is to develop a game with two different token types: one for in-game purchases (a fungible token) and another for in-game products (an NFT).

It is more efficient to establish a single, smart contract using ERC-1155 than it is to create two distinct contracts using ERC-20 and ERC-721.

Read: Hot Wallet vs Cold Wallet in Cryptocurrency

How Cryptocurrency Tokens Work

Cryptographic tokens are often programmable, trustless, permissionless, and transparent.

Programmability simply refers to the fact that they operate using software protocols made up of smart contracts that describe the characteristics and capabilities of the token and the ground rules of the network.

When permissionless, anyone can use the system without specific authorization.

Trustless refers to a system that is administered according to the guidelines established by the network protocol rather than being governed by a single central authority.

Finally, transparency implies that everyone can see and verify the protocol’s rules and transactions.

Crypto tokens, like cryptocurrencies, can store value and be traded.

Still, they can also be made to seem like real-world objects, more conventional digital objects, or even a specific utility or service.

For instance, cryptocurrency tokens can represent both intangible goods like processing power or data storage space and actual assets like real estate and works of art.

Additionally, tokens are widely utilized as a governance mechanism for voting on particular criteria, such as protocol updates and other choices, that determine the course that various blockchain projects will take in the future.

Tokenization is the process of developing crypto tokens to carry out these diverse purposes.

Conclusion

Any cryptocurrency enthusiast who intends to delve far into the crypto world must understand the distinction between a coin and a token.

This article’s comprehensive explanation of coins and tokens should make it easier for you to understand cryptocurrency terminology.

In summary, determining if a cryptocurrency has a blockchain or not will allow you to determine whether you are dealing with a crypto coin or token.

A coin runs on its own blockchain, whereas a token runs on an existing blockchain.

Coins are typically used as a form of payment, whereas tokens have a wider range of applications.

They may represent a valuable object, provide access to special services, or even represent a work of digital art.

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