Token vs Coin: The Difference
Token vs coin, what’s exactly the difference?
I’ve come across a lot of confusion on this within the community, both for newcomers and people already involved in cryptos.
Sometimes, the terms coin and token are often interchanged for the other.
People may use the word token in place of coin, and coin to refer to what is a token.
While coins and tokens share a number of similarities, a lot of people use both terms inaccurately as they do not exactly mean the same thing.
So search no more, here you will find out exactly what these two are and how they differ.
How it all works
Before you discover the differences between coins and tokens, it’s worth explaining how cryptos work.
It will make perfect sense to you once you learn what the underlying technology is based on.
First, let’s discuss what a blockchain is.
In short, blockchain is a technology that provides a specific database (ledger) which contains a few important entries.
For example, when you create a wallet address, it will be recorded on the blockchain.
Whenever you transact within the network, it will also be reflected on the ledger — as in when you send or receive the funds.
And it’s not just your actions that are recorded, but everyone else’s too.
All of the above has to be passed around among the network participants (nodes) in order to work.
The way it’s passed around is dictated by the protocol.
Protocol is a way of communication between the nodes and the blockchain.
It enforces a certain set of rules that have to be followed in order to participate in the network.
Simply, if you were running a full node, you have to follow the protocol’s rules to communicate with other nodes.
Every protocol has its own set of rules and they define what a cryptocurrency coin is about.
What is a coin?
In the simplest sense, a cryptocurrency coin is a type of digital currency that has its OWN blockchain.
Essentially, for a cryptocurrency to qualify as a coin, it must have a blockchain on which it operates and functions.
Bitcoin for example, was built on its own blockchain and therefore it’s a coin.
There are cryptos which were developed on completely new blockchains and some of them were built on top of Bitcoin’s technology that was modified to provide more functionality or solve other problems.
These are called altcoins.
Any crypto becomes a coin as long as it runs on its own blockchain.
To name a few, Bitcoin Cash (BCH), Namecoin (NMC), Dash (DASH) and Litecoin (LTC) are popular examples of altcoins built on variations of the Bitcoin blockchain.
In certain scenarios, a coin could simply undergo a hardfork and split the chain in two in a contentious manner meaning that both versions of the coin will continue to exist after the fork and under different set or rules.
The most recent coin split took place on November 15th 2018 in the Bitcoin Cash community where the original BCH coin had split into BCH ABC and BCH SV.
There are also other coins which have nothing to do with Bitcoin.
These blockchains where developed on an entirely new protocol to support their native cryptocurrency.
Some of them are among the big players such as Ethereum (ETH), Ripple (XRP), Monero (XMR), Waves (WAVES), Neo (NEO), Cardano (ADA) and Omni (OMNI).
Because of their unique blockchain, they are also classed as coins.
What is a token?
Any project developed and implemented on an already existing blockchain is not a coin — it’s a token.
These already existing blockchains that allow for the creation and distribution of tokens on their platforms are enabled by a feature known as smart contracts functionality.
The most widely used token creation platform is Ethereum and these tokens are called ERC-20.
Other blockchain token creation platforms include Waves, Neo, Omni, and Qtum.
Tokens are created on smart-contract-enabled blockchains that are already established
Tokens are created and issued via a crowdfunding technique known as initial coin offering (ICOs).
In an ICO, the developer of the token sells the token to investors in exchange for fiat money or other well established coins like BTC or ETH.
Tokens utilize the features and benefits of the blockchain on which they are built upon.
Essentially, developers do not have to go through the time consuming and complex process of developing their own blockchain or modifying an existing one in order to create a token.
For example, Icon token (ICX) is an ERC-20 token of the Icon network.
This token relies on the Ethereum blockchain to provide decentralization, privacy, and security for its system.
Some of the popular tokens in the crypto space include: EOS (EOS), Binance Coin (BNB), OmiseGo (OMG) and Icon (ICX) to name a few.
It’s worth nothing that some tokens might start as a token, but then could migrate their users onto its own mainnet creating a coin.
An example of such a migration could be Tron (TRX).
The subtle difference
To sum up, the main difference between a coin and a token is the platform on which they are hosted.
Coins are hosted on their own independent blockchain while tokens are hosted on the blockchain of another cryptocurrency.
However, this is not the only difference between these two.
The purpose of a coin is fundamentally financial; it is created to act like money.
A coin can be used to buy products and services, it can be transferred to another person as a means of financial settlement, and it can be a store of value.
Essentially, you can use a coin just how you would use physical money.
Although some developers may give coin holders special rights on the platform, the primary essence of a coin is to facilitate transactions.
Tokens can also serve as a means of exchange as token holders can use it to pay for products and services within the platform — however, their purpose is not strictly financial.
They also grant token holders the ability to participate in activities on the platform.
For example, some tokens can grant you voting rights, a share of the company’s dividends and profits, rewards, discounts and more.
Coins as long as they are recognized and accepted as a means of exchange can be used to pay for goods and services.
Companies like Microsoft, Overstock and WordPress and other small merchants already recognize and accept major coins like Bitcoin as a unit of value.
Essentially, coins are not restricted to use within their platforms unlike tokens may not be used outside the ecosystem of the particular network for which they were created.
Coins are a lot more difficult to create as the developer would have to build a separate blockchain all over to develop a new platform or modify an existing one to a point it would actually solve problems the original chain didn’t and back it all up with a sound white paper outlining the concept.
With tokens, a developer with the basic technical knowledge and skills can easily develop a new token on another blockchain.
Because of how easy it is to create tokens, almost 80 percent of digital currencies are tokens.
To round up the differences, think of coins as digital money and think of tokens as something that represents digital assets.
Whenever you get confused always remember; you cannot buy a coin with a token, but you can buy a token with a coin.
Apart from the distinct differences in structure and utility, digital coins and tokens are generally similar.
Both coins and tokens are vital components of the cryptocurrency world, and none is particularly better than the other.
I hope you will now be able to recognize and differentiate between a coin and a token.
BCH – qrr63e483sl5c0rzqjf8pnds26pegex0h52gc6tndx
ETH – 0x2F678cF4A0bc4B2D6F4e22A3A1bfC4BA746BDDBe
BTC – 3DsiPb26ugH4N7urkq6P3T9meSp2NMNqan
LTC – MU4iw9ydysAu9egDsp6gmiQ45DX6ujYBqQ
Disclaimer: You should do your own due diligence, research and analysis before you invest any money in cryptocurrencies. Cryptocurrencies are highly volatile and classed as high-risk investments. You should never invest any money unless you’re prepared to lose your capital. The author of this article holds the said assets and might be biased towards them.