Everything in the crypto-verse revolves around coins and tokens. In some cases, both terms are often used interchangeably, but are they the same thing?
If you’re struggling with telling the difference between them, we’re here to hold your hands through the learning curve. In this article, we will be exploring coins vs tokens, so tag along.
Differences between coins and tokens
Let’s imagine that you are a fitness enthusiast. You have recently resolved to be more consistent with your fitness journey and want to work out daily. To hit your fitness goals, you need a gym. You have two options
- To build your own mini gym at home or
- Sign up for a public gym membership
Option one would offer you the most convenience, but it would also require that you do all the heavy lifting (All pun intended.) - setting up the space, researching and buying the equipment you need.
With option two, you only need to register at the gym nearest to you and show up every day to use their facility.
Assuming the gym is a blockchain, if you were to go with the first option of building out your own gym, you would be a coin. But if you were to go with the second option of joining a public gym, then you would be a token.
From our analogy above, we can define coins as assets that are native to their own blockchain and tokens as assets that exist on other blockchains. Bitcoin - the premier cryptocurrency is a coin not just because of its suffix, but because it is the native asset of the bitcoin blockchain. Also, Ether is the native asset of the Ethereum blockchain. MATIC is native to the Polygon blockchain and BNB is native to the Binance blockchain.
Coins often have a broader function associated with them, in comparison to tokens which serve a smaller niche function.
As already established, tokens do not have their own parent blockchain but are hosted on other established blockchains like Ethereum. Currently, most of the world’s crypto tokens are created and hosted on the Ethereum blockchain. This is because Ethereum provides the easiest environment for token launching. Popular examples of tokens are Basic Attention Token (BAT), Tether (USDT), Shiba Inu (SHIBA), Uniswap token (UNI), Chainlink (LINK) and many more.
Why are tokens important?
Just like coins, tokens are also assets with value. They can be bought, sold and transferred. With tokens, a team can develop their own cryptocurrency by simply piggybacking on an existing blockchain. This provides them with an already existing system of securing and validating transactions without the hard labour of building a blockchain from the ground up. This is simpler, cheaper and faster.
Characteristics of a coin
- They exist on their native blockchain
- They are used as virtual currencies and can serve as a medium of exchange and a store of value.
- When spent, coins do not change hands from one owner to another, only the balance in your wallet changes
Characteristics of a token
- They have no native blockchain and can exist on multiple blockchains
- Ownership can be transferred from one person to another e.g Non-fungible tokens
- The trade of tokens is governed by smart contracts
Types of Crypto Tokens
- Platform tokens: These are tokens that are used to deliver decentralized applications or DAppsto users. An example of a platform token is Uniswap.
- Security tokens: Security tokens are used to represent legal ownership of physical and digital assets like bonds, stocks, real estate shares and others. They derive value from an external asset that can be traded under a financial regulation as security.
- Transactional tokens: They are used to facilitate transactions and can be traded for goods and services. They function like traditional currencies and can provide additional benefits in some cases e.g DAI token.
- Utility tokens: These are tokens created to be used as a form of payment for services within an ecosystem. Typically, a utility token benefits from the security of the platform while providing the platform with the activity needed to strengthen its economy e.g, the Basic Attention Token (BAT) used in the Brave browser.
- Governance tokens: These are tokens that allow owners to act as shareholders and to take part in the decision-making process of a protocol. Governance token holders like MKR tokens can collaborate, debate, and vote on how to manage the Maker protocol.
Wrapping it up
If you made it all the way here, congratulations. You now have a solid understanding of coins vs tokens, what they are, and their similarities and differences. We trust that moving forward, you can use both terms like a pro, in the appropriate context.
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