When dealing with cryptocurrency, even if you’re a newbie, you’ve definitely heard about not only crypto coins but also crypto tokens. These are some of the fundamental concepts of the crypto world and understanding what are they and what differentiates them from one another is essential knowledge if you want to go further in the world of crypto.
Difference Between Crypto Coins and Tokens
Both crypto coins and crypto tokens can be considered a kind of currency. That is, they are both digital monetary assets that can be stored and transferred. What distinguishes them from one another is their technical realization and their further implementations.
The most basic and the most superficial difference between the two is that coins are deployed within their own blockchain network and can be ported to other blockchains by means of wrapped tokens.
Tokens, in turn, are supported by certain blockchains but don’t have their own dedicated blockchain.
Read more: Wrapped Tokens: Unwrapping the Pros and Cons
Defining Crypto Coins
Coins are in the first place cryptocurrencies that have their own dedicated blockchains. The coin is the native and the main currency within the network. Transaction fees are paid in it while the network participants get it for sustaining the network.
With the necessity to sustain the network, miners and validators come into play. Sustaining the decentralized network, providing its security, and processing the transactions requires a great deal of computing resources and energy. Miners and validators contribute their resources, for which they receive gratifications in the form of network coins.
Miners engage differently depending on the type of blockchain in question. Proof-of-work type of network involves solving complex mathematical equations requiring a great deal of computing resources.
In a proof-of-stake network, validators are chosen to create new blocks and validate transactions based on the amount of cryptocurrency they hold and are willing to “stake” as collateral.
The Purpose of Crypto Coins
For the most part, coins serve purposes that are in this or that way related to storing a monetary value.
Bitcoin is the first crypto coin-based cryptocurrency, a classic benchmark by which all other coins referred to as “altcoins” are inspired. It is fully decentralized and has its own independent value.
In turn, Ripple (XRP) is an auxiliary token for classic banking systems, so it is organized based on a rather centralized approach.
Another kind of coin is stablecoins, coins whose value depends on the value of particular fiat currencies. For instance, USDT is a coin version of USD.
There are also meme coins, a rather bizarre phenomenon, as these coins are introduced basically as a joke, but can become eventually extremely popular and valuable as was the case with Dogecoin.
As you can see, their coins may have various purposes and have different degrees of decentralization. What’s notable about all of them is that they all are deployed within their own blockchain network.
The Function of Crypto Tokens
Like coins, crypto tokens can also serve to store valuable assets. The fundamental difference between them is that tokens do not have a native blockchain network. In addition to that, there are some blockchains that serve as platforms for tokens, one of the most famous ones is Ethereum.
Tokens are divided into fungible and non-fungible. Fungible tokens exist in unlimited quantities and can be used identically to coins as a form of currency. Instead, non-fungible tokens, commonly known by the abbreviation NFT, are tokens that exist in one copy, which makes them not sot versatile as regular currencies, but opens a wide range of new implementations, an example of which is the monetization of digital art.
Blockchain Applications Powered by Smart Contracts
Smart contracts are self-executing agreements with the terms of the contract directly written into code. Tokens are often used within these smart contracts to facilitate and automate various functions and interactions.
Decentralized Finance (DeFi)
Decentralized Finance is a rapidly growing and innovative area in the blockchain and cryptocurrency space. It aims to recreate something similar to a traditional financial system but in an open-source and decentralized environment. Crypto tokens play a leading role in DeFi since they can be used for a variety of functions.
Utility tokens are tokens that are used not so much as a way to store and transfer assets, but rather as a utility within a particular application. They can serve different purposes, often being a kind of internal currency for an application used to acquire goods or services the app offers or as a form of gratification for users for certain actions.
Difference between Coins and Tokens
As it was previously mentioned, the main difference between coins and tokens is that coins are based on their native blockchain while tokens rely on an external network. This state of affairs provides a different set of rules for the crypto assets.
Coins are best at storing value and as a means of transferring value between users, which makes them good at being used as currencies. Tokens store values as well, but their nature makes them applicable for a variety of other usage cases. They can be used for utility, security, digital collectibles, governance rights, and more.
Tokens can also be launched very quickly which enables their usage for smaller and more particular projects.
It’s worth mentioning that both types of crypto assets depend on each other in many ways and are used in tandem for the organization of the cryptocurrency infrastructure.
Comparing Crypto Coins and Tokens to Traditional Financial Instruments
Crypto coins and tokens present a serious alternative to traditional banking systems. A traditional bank is a centralized institution that is run by physical persons and is in many ways related to the state, government, law, etc. Crypto assets are in turn the product of modern technology one of whose main principles is decentralization. This gives a bunch of ways we can benefit from and much space for productive investments, entrepreneurship, and even creativity. Here are some features and benefits of crypto coins and crypto tokens compared to traditional financial instruments:
- Custody of your assets: In traditional banking, the assets you store belong first and foremost to the bank. If the bank goes bankrupt, for example, you may lose your assets. When it comes to crypto assets, the whole thing works in an opposing way: there is no chance you can lose your assets and they are fully reserved to you as everything relies on the decentralized and autonomous network. This gives you not only a guarantee of your assets’ safety but also more freedom when it comes to disposing of them.
- Anonymity: Your crypto wallets aren’t directly linked to your personality which makes it much harder to figure out, by whom your payments and transactions are made.
- Lower fees and fast transaction speed: The decentralized nature of blockchain removes the necessity of high fees whereas the transactions can occur at a much faster rate.
- Lots of opportunities: The world of cryptocurrency offers not only an in many ways more convenient and efficient payment methods, but also opens you a whole lot of other opportunities: trading on the cryptocurrency exchange market, investing in various projects, and even creating your own projects which can turn out to bring solid revenues. Besides that, when it comes to tokens, they have a bunch of uses in modern applications which makes them especially interesting for developers.
Coins and tokens are two fundamental types of crypto assets that are based upon different technological principles, but both are widely used and in many ways depend on each other. We hope that this article has clarified for you some fundamental aspects of coins and tokens and now you have a better understanding of when and why they are used. Thank you for your attention, stay tuned!