What's the difference between a coin and a token?
The terms “coin” and “token” are frequently used interchangeably in the cryptocurrency world, but they are distinct.
Coins function as a digital currency, while tokens serve various other purposes.
A coin is tied to its own Layer-1 blockchain, (don’t worry if you don’t understand what a Layer-1 blockchain is, I will explain it in a different post) whereas tokens are developed on top of existing blockchains.
At first glance, all cryptocurrencies might seem identical. A crypto token is a crypto token, right? Not exactly.
Coins and tokens differ in their origins, applications, and technological foundations. Understanding this distinction is essential for anyone aiming to delve deeper into the world of cryptocurrency.
Keep reading to discover the differences between coins and tokens.
What Are Cryptocurrency Coins?
A cryptocurrency coin is a digital currency native to its blockchain. For instance:
Bitcoin’s blockchain coin is BTC.
Ethereum’s blockchain coin is ETH.
Litecoin’s blockchain coin is LTC.
The primary purposes of these coins are:
To act as a store of value.
To function as a medium of exchange.
In this respect, they resemble traditional currencies or monetary forms.
Examples of Proof of Work Coins:
Bitcoin (BTC) and Litecoin (LTC).
Both of these coins are native to their respective blockchains. When miners discover a new block, they earn new coins as a reward for maintaining the network’s security. This encourages decentralized mining, ensuring the network remains distributed.
Litecoin, an early fork of Bitcoin, uses the Scrypt algorithm instead of Bitcoin’s SHA-256 algorithm. Key differences include:
A maximum supply of 84 million instead of 21 million.
Average block time of 2.5 minutes rather than 10 minutes.
Halving every 840,000 blocks instead of 210,000.
A major difference between cryptocurrency coins and tokens is that tokens are built on top of an existing blockchain rather than being native to it. In simpler terms, while a coin is intrinsic to its blockchain, a token can be created alongside the native coin. This also enables potential interoperability, where a token can operate across multiple blockchains.
Tokens have diverse applications beyond serving as digital money. Common types of tokens include:
Utility Tokens
Governance Tokens
Security Tokens
Non-Fungible Tokens (NFTs)
Utility Tokens Utility tokens enable users to perform actions such as playing games, accessing decentralized services, or bypassing ads while tipping content creators, as in the Brave browser.
Governance Tokens These tokens allow holders to vote on proposed changes to the protocol.
Security Tokens These represent tokenized assets like insurance policies, equities, or bonds.
Non-Fungible Tokens (NFTs) NFTs are unique digital assets that cannot be replicated. Creators can mint NFTs to produce digital art, music, and more. Blockchain markers confirm ownership.
Popular Examples of Tokens:
Tether (USDT): The largest stablecoin by market capitalization, allowing users to move into a dollar-equivalent asset while staying in the crypto space.
Uniswap (UNI): The governance token for Uniswap, a decentralized exchange enabling token swaps without third-party involvement.
Key Takeaways
The distinctions between coins and tokens may seem nuanced but are crucial. A coin is always native to its blockchain, with only one native currency per chain. Tokens, on the other hand, are created on top of an existing blockchain, allowing multiple tokens to coexist on a single network. Ethereum, for instance, supports numerous ERC-20 tokens (utility tokens) and ERC-721 tokens (NFTs).
Understanding the difference between tokens and coins can be critical when deciding which cryptocurrencies to use or invest in. Depending on the goal within the crypto ecosystem, individuals might need to choose between a coin and a token.
While cryptocurrencies may appear similar on exchanges, their underlying differences—like those between coins and tokens—are significant and well worth understanding for serious investors.