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. To put it simply, a cryptocurrency is a digital asset built on the blockchain, and both tokens and coins fall under this category.
From the perspective of the average user, coins and crypto tokens are virtually the same, 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 Coins?
Any cryptocurrency with a stand-alone, autonomous blockchain, such as Bitcoin, is referred to as a coin.
These cryptocurrencies have been built from the ground up, and the overall network is specifically intended to accomplish a particular objective. For instance, Bitcoin functions as a secure, fixed-price medium of trade and a censorship-resistant store of wealth. The most liquid cryptocurrency on the market is Bitcoin, or BTC (also known as bitcoins), which also has the greatest market cap and realised market cap in the cryptocurrency industry.
Coin projects frequently take cues from earlier technologies or other cryptocurrencies and combine them into a cutting-edge network tailored to a particular need.
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, allows users to transmit and receive assets as well as pay for the computer power needed to complete specified tasks.
Although the technology underlying cryptocurrency coins is 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.
How 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, so that 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 that are active on their original chains as well as on their forks (new chains produced as a result of protocol updates). As an illustration, when Bitcoin was divided into Bitcoin and Bitcoin Cash, BTC continued to be the native token of the original chain while BCH, a brand-new coin, 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 a capacity to hold value. Companies including 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 utilise colossal amounts of processing power to validate transactions. Staking coin holdings is necessary for the PoS technique to validate transactions.
What Are 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 having close compatibility 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.
On the platforms for which they are designed, these tokens can perform a wide range of tasks, such as playing games, engaging in decentralised finance (DeFi) procedures, and accessing platform-specific services.
Crypto tokens can be created using a number of widely accepted token standards, the bulk 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, and ERC-20, which enables the creation of tokens that may interact inside Ethereum’s ecosystem of decentralised apps.
In circulation, as of 2022, are thousands of ERC-721 tokens and hundreds of thousands of distinct ERC-20 tokens. 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.
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 are used to introduce Ethereum standards (ERC).
A standard for fungible tokens is called ERC-20. If a token is fungible, it means that all of its types and value are the same, making it interchangeable. Typically, this criterion is 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.
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, enabling a token to have a visual representation.
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.
How 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.
Anyone can utilise the system without specific authorization when it is permissionless. 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, but they can also be made to seem like real-world objects, more conventional digital objects, or even a specific utility or service. For instance, there are cryptocurrency tokens that stand in for both intangible goods like processing power or data storage space as well as actual assets like real estate and works of art. Additionally, tokens are widely utilised as a governance mechanism for voting on particular criteria like 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.
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 is one that 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 serve to represent a valuable object, provide access to special services, or even a work of digital art.
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