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Types of cryptocurrencies: Coin vs token

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PDAX

June 24, 2022

6 min read

BeginnerTokensCrypto Basics

TL;DR

The terms “coin” and “token” are often used interchangeably within the cryptocurrency space but they do have many differences depending on utility and development. Coins are used primarily as a mode of payment, while tokens have specific use cases within certain applications such as decentralized finance (DeFi) or play-to-earn (P2E) gaming. 

Coins also exist within their own blockchains, while token protocols are developed separately on top of existing blockchains. 

Coin vs Token: What’s the difference?

Cryptocurrency, much like fiat money, comes in different forms. But unlike dollars, pesos, francs, yen, and dinars–which are mainly just for purchasing things–crypto can come in a much more diverse range of classifications depending on their utility. 

From stablecoins, security coins, to memecoins–a cryptocurrency can be called a lot of names. But first, we have to discuss the fundamental difference between a coin and a token, and why these details matter to begin with.

What makes a coin?

If you’re just starting out in the world of crypto, it’s so easy to confuse tokens and coins, especially when industry leaders and experts sometimes use the terms interchangeably.

Both coins and tokens offer a certain value that allows consumers to trade and engage in transactions with one another. However, there are a number of technical differences between these two:

A coin operates on its own blockchain - Cryptocurrencies like Bitcoin and Ethereum are built on their own blockchain networks. These networks have their own protocols that run independently from one another–hence bitcoins (BTC) can only be used on the Bitcoin network and Ether (ETH) on Ethereum. 

Blockchains are basically online data storage systems that function as decentralized ledgers, similar to what accountants use to take note of the sales, expenses, and other transactions that take place within a business–except that everyone in a blockchain network always has an updated copy. Thus, the Bitcoin network is a ledger of who has how much bitcoin at any given time, and the same goes for Ethereum. 

A coin functions as cash - Cryptocurrencies were initially conceived as an alternative to traditional fiat money, but instead of being officially issued by a government, they rely instead on algorithms that are maintained by the community of users themselves.  

Since Bitcoin was first introduced, more and more people have gradually adopted crypto for facilitating payments, and commercial institutions too, like Tesla and Microsoft now accept most major cryptocurrencies in exchange for their products and services.

Coins are “minted” as a reward for node operators  - Mining is the process of creating new coins as a reward for node operators who supply the computing upkeep for a blockchain. In traditional proof-of-work (PoW) blockchains like Bitcoin, the nodes mine tokens by competing with one another to solve difficult cryptographic puzzles. 

Meanwhile, in proof-of-stake (PoS) blockchains like Cardano (ADA) and Solana (SOL), the network relies on staking instead of mining, where node operators have to put up a financial collateral to participate in the network. Afterwards they too are rewarded with newly minted coins proportional to the amount of their stake.

What makes a token?

Though tokens can also be used as cash since they also carry value, tokens also have a number of distinguishing characteristics that separate them from coins:

Tokens are built on top of other blockchains - Tokens are cryptocurrencies whose protocols operate on top of other blockchains. Tokens find it convenient to just use the underlying structure to set up a decentralized application (dApp) from which their tokens can be used.

From a developer perspective, think of it as the difference between buying a car versus renting a car. Buying a car is a lot like setting up your own blockchain. It’s very costly to set up and maintain, but you have the privilege of full ownership and you can decide everything from the engine down to the paint job. On the other hand, renting a car gives you the experience of owning a car, but without some of the privileges involved if you otherwise owned it. 

Blockchain developers find it easier to “rent” instead of developing their own network from scratch. Some tokens for example like Tether (USDT) and The Basic Attention Token (BAT) are simply renting on top of the Ethereum network to run their own protocols. They’re able to have their own tokens, but their network capabilities and speeds are also limited by the qualities of the blockchain that they’re built on. 

Tokens have specific use cases - Like actual real-world tokens that can only be used in specific locations like casinos, arcades, or train stations–cryptocurrency tokens are also meant to be used for specific applications such as in play-to-earn (P2E) video games like Axie Infinity Shards (AXS) and Smooth Love Potion (SLP), or in lending platforms like Compound (COMP) or Aave (AAVE). 

Some tokens are also “non-fungible” which means that they can be programmed in such a way that they can exist as a singularly unique code of data on the blockchain. Fungibility simply means that something can be swapped for something exactly like it–such as one bitcoin is just as good as any other bitcoin. But non-fungible tokens or “NFTs” can be made as unique assets like artwork, digital land, jewelry, or rare in-game items that only one person can own, and are thus irreplaceable.

Conclusion

Though coins and tokens are terms that have many similarities and are often thrown about carelessly, knowing their distinguishing features can be really useful when deciding a cryptocurrency’s value and longevity, which can be useful for investors when building their portfolios. After all, some coins often increase in value the more quality dApps are built on top of them, and likewise, newly-launched tokens can get a boost from just picking the right blockchain to build on.

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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.

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