If you are new to the world of crypto, you may already be confused by the many terms that need to be understood to explore this world. One of the terms that is often heard is crypto coins and tokens. Not a few people think that these two things are the same, even though in reality, coins and tokens have differences.
Knowing the difference between crypto coins and tokens will help you understand the crypto market better. Projects from crypto coins and tokens do have their own challenges in terms of technology. By understanding the differences, you can also discuss the development of crypto technology and how it affects the market. In this article, you will learn the difference between crypto coins and tokens and how they are used as part of the crypto world.
Understanding the Use of Digital Currency
Coins and tokens are types of digital currencies that can be owned, used, and exchanged. They exist only in digital form and have no physical counterpart. Although all cryptocurrencies are digital products, not all digital currencies are part of cryptocurrencies. The main difference between coins and tokens really depends on their uses.
While coins and tokens are similar in offering a secure way to use digital assets in the form of currency, they also serve as a store of value asset, as well as an easy way to make payments online. This digital asset uses cryptographic technology with high-level encryption that prevents double-spending, thereby maintaining the integrity of the crypto asset itself.
Blockchain itself is a decentralized database that is divided into many nodes in a computer network that record the ownership of digital assets using cryptography. The blockchain network makes digital asset creation, exchange, and storage possible. The decentralized structure of the blockchain allows everyone to make transactions using coins and tokens directly without the need for third parties such as banks or governments. The absence of a third party makes transactions faster, easier, and cheaper.
What are Crypto Coins?
A crypto coin is a digital asset originating from a blockchain network that is used as a medium of exchange or store of value. Coins can only be used within their own blockchain network, which means that existing coins cannot be transferred to other networks. Crypto coins are also used to make payment transactions within the network.
Crypto coins are created through mining activities, which involve a transaction verification process that uses proof of work (PoW) or proof of stake (PoS) consensus. PoW requires enormous computing power to solve mathematical problems in the network to verify transactions that occur in the network. The process then creates coins which are rewarded to miners. Meanwhile, PoS consensus validates transactions based on coin ownership. Cryptocurrencies are part of a decentralized network, which means they do not need a third party such as a bank to function. Instead, computer nodes manage all transactions and activities in the network.
What are Crypto Tokens?
A crypto token is a representation of a unit of value built on a blockchain network using smart contracts. Tokens usually operate on a blockchain network, sharing compatibility using smart contracts. For example, Tether (USDT) is a popular token that operates using the ERC20 standard and is built on the Ethereum blockchain, and can be sent to other Ethereum addresses.
The primary function of a token is the utility of digital crypto assets within the project. They can be used as a reward for an action, a fundraiser, or a means of payment. Currently, there are thousands of tokens that can be used. However, these tokens can be classified into five types, namely:
Utility tokens give users access to services that exist in the blockchain network. For example, the Basic Attention Token (BAT) is used by advertisers in the Brave web browser to pay publishers, who then pay their readers in BAT when they view an ad.
Tokens like Tether (USDT), Binance USD (BUSD), and DAI are also known as stablecoins. They are guaranteed and pegged to the fiat currency that is behind them. This means they are not easily affected by the high volatility of crypto assets. Making them more useful as exchange assets as well as a store of value.
Conventional securities, such as stocks and bonds, that have been converted into digital tokens on the blockchain are included as security tokens. This type of token gives the holder an entitlement/share of a company in which they invest. They can also profit from the company.
Non-Fungible Tokens (NFT)
NFTs, or non-fungible tokens, are a type of crypto token that is currently popular in today’s society, with transactions reaching at least 17 billion US dollars. This token represents ownership of unique digital products, such as works of art, music, and pictures, which are stored on the blockchain network. NFTs can be traded, but they cannot be duplicated or exchanged with one another, making it difficult to calculate a price benchmark.
Government tokens give their owners the right to propose or vote on changes in a blockchain project. With this, token owners can make changes directly to the progress of a project and the direction of the existing protocol.
The crypto token project uses several token standards to create a new token. ERC-20 and ERC-721 are examples of the most frequently used token code standards, making it easy to create new tokens for integration into the Ethereum blockchain. The ERC-20 token is used to integrate other tokens into Ethereum’s DApps, while ERC-721 is designed to create NFT tokens.
Is Bitcoin a Token?
Now that you understand the basic difference between a coin and a crypto token, we can begin to evaluate whether Bitcoin is a coin or a token. Bitcoin itself is a coin because it has its own blockchain network. Bitcoin was the first crypto coin ever created, and other cryptocurrency projects were developed with reference to Bitcoin’s technology. For example, Ethereum clarified the concept of a decentralized currency to popularize smart contracts that run when predetermined conditions are met.
The Difference between Crypto Coins and Tokens
Coins were developed to be used directly as currency as well as a store of value asset. In other words, users or coin owners can use them to pay for purchased goods or services. On the other hand, tokens can be used for payments. But they also serve other functions and play an important role in DeFi, gaming, and DEXs.
For example, AAVE is the protocol token of Aave. Aave itself is a DeFi protocol that offers crypto lending services and lending other funds without any intermediaries. The Aave protocol is built on top of the Ethereum network, and all transactions using the AAVE token are executed with the ERC20 token standard.
Coins are created on the blockchain network. The underlying project has to be built with security protocols as well as a reward system for block miners/validators. The process of creating coins, setting the number of coins, and storing transaction data must also be made clear for coins to exist on a blockchain.
On the other hand, tokens rely on pre-existing protocols within the blockchain that they use as a base of operations. What’s interesting is that tokens can run on several different blockchains. This provides advantages in the form of speed and flexibility. Which supports the possibility that they can be traded with other digital assets more easily. An example is Tether, which uses the Ethereum, Tron, Bitcoin, Algorand, SLP, and OMG blockchains.
Coins and tokens are both digital assets and have a lot in common. They can be used to represent value as well as a medium of exchange. The main difference between them is that coins can only run on their own blockchain. Whereas tokens can be used on multiple blockchains. Functionality is another factor for tokens that differentiates them from coins. Tokens can have many functions, not only as a means of payment. Unlike coins which can only be used to exchange goods and services or store value. But these two assets are a critical part of the crypto ecosystem. Making it easier for users to interact with blockchain-based digital assets. A knowledgeable investor will benefit from understanding the differences between these two assets. So, which asset is more attractive to you?