They may be interchanged but not the concepts
The rapid advancement of technology that has disrupted much of the processes and mechanisms in the financial systems is still yet to sink in into general consciousness. But as the prevailing pandemic is still nowhere beyond being contained to return the world back to former degrees of default living conditions, the majority of populations abruptly were made to shift to digital lifestyles. What resulted was a cacophony of misused and mistermed words meant to mean many other different things.
And coins and tokens were not spared.
What is What?
Too often, coins and tokens are used interchangeably without batting an eyelash. But the truth is, these two most-used terms each represent concepts different from each other in the world of crypto. Getting a deeper understanding of how the crypto ecosystem works on top of blockchain technology might as well start with coins and tokens.
Digital Coins
Coins are standalone cryptocurrencies that have their own independent blockchain network. Conceptualized and developed to fulfill a need or achieve a goal, a crypto project typically started with little funding. The most famous in this classification is Bitcoin, a decentralized and secure store of value. Being the first cryptocurrency as a medium of exchange, Bitcoin is tops in token liquidity (BTC) with a crypto market capitalization of already over 1 trillion dollars and 54.10% market dominance. Altcoins are cryptocurrencies other than Bitcoin with their own blockchain networks, monetary policies, consensus mechanisms, miners, performance, goals, etc.
Second behind Bitcoin is Ethereum, whose blockchain project is an all-purpose decentralized blockchain platform for the creation of various smart contract projects using its native coin ether (ETH). Whereas other coins can also be created by a project (ERC-20). Rounding up the Top 10 by market cap are Binance Coin (BNB), Ripple (XRP), Cardano (ADA), Polkadot (DOT), Litecoin (LTC), Stellar (XLM), Bitcoin Cash (BTC), and Theta (THETA).
Uses of Digital Coins
To better understand that a coin is native to its own blockchain, Bitcoin navigates on the Bitcoin Blockchain; Ether navigates within the Ethereum blockchain; and so forth and so on. As with transactions of these digital coins, it is peer-to-peer where payments are transferred digitally, not physically as there is no physical form of it, but data instead. It is the blockchain that keeps track of all transactions transpiring verified by nodes or participating computers on a global scale. As such, digital coins like Bitcoin function much like physical money. It can be used to transfer value like sending or receiving money. Coins also function as a store of value where it can be deposited and saved for potential growth. It can be exchanged for another cryptocurrency. And it can also be used as payment for goods or services sought or received.
Other than the abovementioned features, digital coins serve as fuel to transactions on the blockchain. An example is Ether that fuels transactions on the Ethereum network. Even with other tokens being built on the Ethereum blockchain, it still requires Ether to send the created ERC-20 token. Holders of a certain amount of digital coins may have voting rights within the network, allowing them to be heard on issues regarding decisions on the token or the network.
Token Relevance
Tokens are cryptocurrencies that are not standalone, bearing the fact that they are not built on a blockchain of their own but on another blockchain. Creators and developers make use of other blockchains to build their own tokens, such as on either Ethereum, Polkadot, Kusama, or Elrond Mainnet, to name a few. Coinmarketcap lists the top 10 coins as of the latest that includes: Tether (USDT), Uniswap (UNI), Chainlink (LINK), USD Coin (USDC), Wrapped Bitcoin (WBTC), BitTorrent (BTT), Crypto.com Coin (COR), FTX Token (FTT), Binance USD (BUSD), and Aave (AAVE).
With thorough research, one can find valuable tokens from a heap of thousands bearing powers other than just a medium of payment since they were created to perform various functions. Types of digital tokens are as follows:
1.Security Tokens — They function as proof of investment representing real-world assets like fixed income and other equities. One can avail during an STO or security token offering.
2. Asset Tokens — These are digital tokens that represent real-world assets such as gold, oil, gas, real estate properties, and others.
3. Stablecoins — These are tokens whose fixed values are pegged to the US dollar or the euro.
4. Payment Tokens — This type of token facilitates the transfer of payment for products or services availed. Its function is closely similar to that of digital coins.
5. NFTs — non-fungible tokens are not divisible and created only to represent peculiar items especially in the fields of art, sports, and gaming.
Conclusion
Digital coins and tokens allow value transfer via the Internet basically to decentralize, meaning, without the need for expensive third parties like lawyers. Users are usually rewarded when these DeFi (decentralized finance) platforms are accessed and utilized. It would be easier and faster to build tokens on an external blockchain than creating a coin from nothing and building a blockchain of its own. While digital coins are utilized for the transfer of payments, tokens can also function like that as well plus a host of other functionalities to meet certain needs like voting rights, cashback rewards, ownership, NFTs, and a lot more. Mining activities are mainly the source of digital coins while tokens find their way through ICOs.
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Coin VS. Token: What Is The Difference? was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.