Token vs Coin: What’s the difference?

Overview

Token vs Coin is the topic of today that we will look closely and that often confuses people who are new to cryptocurrency.

Most people are used to going with the term “coin” to refer to what others call “tokens”, and vice versa. And to make it even more confusing certain people will use either name to refer to all the digital assets currently available.

Nonetheless, the differences between crypto coins and crypto tokens are significant, so you must know them in detail!

What is the reason for the confusion over the two terms? So let’s look at this Token vs Coin guide and understand how to use the terms correspondingly. With this Token vs Coin guide and explanations of what coins and tokens are, we will provide examples of coins and tokens, and explain how each one is used.

Whether a digital asset is a token or a coin will be easily recognizable for you by the end of this guide. This is CryptoGoldie’s contribution and trial to make this topic clearer to our users.

So let’s dive in!

Token vs Coin: Defining the Coin

An asset that is native to its blockchain is how we can most easily define a digital coin. Let’s take for example Bitcoin, Litecoin, or Ether. Each of these coins exists on its native blockchain.

So, in fact :

  • Bitcoin blockchain creates native coins called Bitcoins where they operate and function
  • Ethereum blockchain creates native coins called Ethers where they operate and function
  • NEO blockchain creates native coins called NEOs where they operate and function

Digital coins can be transacted between users. However, this happens virtually and physical coins don’t get transacted as coverage of value when you send and receive virtual coins. Every coin exists solely as data on a large and global database. Checked and verified by computers around the world,  this database (or blockchain) keeps track of all the transactions.

Before continuing reading, if you’re not already familiar with blockchain technology, one quick tip is to read our post Blockchain – The Beast Has Awaken To Revolutionize The World Unpredictably to know everything in detail.

 You must understand blockchain before trying to understand the difference between a coin and a token!

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Token vs Coin: The Usages of Coins

In the same way as a real-life coin, Digital coins are used as well as money. Coins like Bitcoin, Litecoin, and Matic need to be seen just like the coins in your wallet or piggy bank. In most cases, a coin doesn’t serve any other purpose than to be used as money. These “cash only” coins are used:

  • For money transactions (pay and receive payments using them)
  • As a store of value (save them and later swap them for something more valuable)
  • As a unit of account (you can price goods or services in them)

So, in this context, if we take Bitcoin as an example:

  • You can pay for goods and services all over the internet and in many real-world places with BTC.
  • Bitcoin can be stored for a long period and it can change the value and be traded to acquire profit. In cases where nothing happens to the price, you can then swap it for something of equal value.
  • BTC prices for the things that you buy.

There is no other use for Bitcoin other than these monetary uses. It doesn’t need to be used to operate a certain application and it can’t be staked to earn more Bitcoins. It is used as money and that is all.

On the other hand, certain digital coins (such as Ether, NEO, and DASH) have more features than just being useful as a form of money. These uses are listed below:

  • The Ethereum network uses Ether (ETH) to fuel transactions. You can easily create and send tokens on Ethereum, but you will need Ether to send a token. Mining costs are funded this way – the computers that verify transactions on the Ethereum network get paid.
  • Tokens can be built on NEO, just like they can on Ethereum NEO When sending a token on the NEO network, you need to pay in GAS for the transaction as a fee, in the same way, that Ether is used to pay Ethereum fees. GAS is the dividend that you receive when NEO is staked in a wallet.
  • Finally, the Dash network allows users holding enough Dash (DASH) to vote on important decisions for their network. For instance, there could be an idea suggested about upgrading the DASH network. Only those who have a great portion of Dash can vote to decide whether the upgrade should happen. The holders of DASH are awarded voting rights to have a say in how the project evolves.

Note: Crypto dividends are awards in coins or tokens for holding a certain asset. A good example is NEO’s GAS. Users who leave coins in a wallet and stake them to secure the network receive this payment as a reward. At a set rate for doing this the holder is paid GAS. Only blockchains established on a Proof of Stake (PoS) consensus make this available.

Token vs Coin: Examples of Coins

Today, coins are all the largest market cap digital assets. However, a large market cap is not what all coins have. More than 900 different examples of coins have been listed by the Industry price website Coinmarketcap.

Surely, we are not going to list every digital coin here. Coinmarketcap has the full list for you. We will mention the most familiar and popular. With this list, it will be easier for you to understand what we mean when we use the term ‘coin’.

  • Bitcoin (BTC)
  • Bitcoin Cash (BCH)
  • Litecoin (LTC)
  • Ethereum (ETH)
  • Ripple (XRP)
  • Cardano (ADA)
  • Stellar (XLM)
  • NEO (NEO)
  • NEM (XEM)
  • Monero (XMR)

 Note: The three or four letters after each digital asset’s name is called the ticker i.e. abbreviation of the name. The ticker and not the full name is what you will stumble upon on most of the exchanges.

Token vs Coin: Defining a Token

Existing blockchains allow users to create tokens native for that particular blockchain. In fact, the most common blockchain token platform is Ethereum thanks to the creation and facilitation of smart contracts. ERC-20 is the codename of tokens that are built on the Ethereum platform.

Nonetheless, others exist such as Waves, Lisk, NEO, and Stratis. Tokens that NEO uses are known as NEP-5 tokens.

On one of these platforms, anyone is allowed to make their custom token.

Token vs Coin: How Tokens are Created

In fact, it takes surprisingly little technical ability. I wouldn’t recommend it to a complete newbie, but it wouldn’t take as long as you might think for someone with a bit of programming experience. However, the developer will need to spend some of the native coins on the blockchain the token is being created on.

Let’s take the Ethereum network for example where the token will be created. In such a case, the creator will need to spend some Ether to get the network’s miners to validate the token transaction (creation).

For all token transactions on a blockchain, not just the creation of the token, it’s important to remember that fees need to be paid. Therefore, to transfer the application-specific tokens from one user to another or between the app and the user any application built on Ethereum must use Ether coins.

This is the same as how coin transactions need fees to be paid to those securing the network.

Token vs Coin: The Usages of Tokens

Decentralized applications or dApps are where most tokens exist and are used. Developers can create their tokens, and they can decide how many units they want to make and where these new tokens will be sent after they have been created. At this point, they will need to pay some of the native cryptocurrency on the blockchain they are creating the token on.

Tokens are often used to activate features of the application they were designed for once they have been created.

Musicoin is an interesting example of this. It is a token that allows users to access different features of the Musicoin platform from watching a music video to streaming a song, etc.

One of the most famous exchanges Binance also has its token. BNB (Binance Token) tradings for users means 50% fewer fees.

On the other hand, some tokens are created for a whole different kind of purpose i.e. to represent a physical thing. For example, in a case where you are willing to sell your house using a smart contract you can’t physically put your house into the smart contract.

So, for this purpose, tokens can be used to represent your house.

Another interesting example of a token that represents a physical thing is WePower (WPR) representing electricity. Functioning as a dApp the WePower project allows users to buy and sell electricity on the blockchain using smart contracts. A certain amount of energy is represented by its token (WPR).

Token vs Coin: Benefits of Creating a Token

Any developer of a dApp and token doesn’t have to create their own blockchain, which saves them time and resources. While benefiting from the security of the native blockchain they can use the features of cryptocurrency with their application.

If developers created their own blockchain and coin instead of a dApp and token they would need to find miners to verify their transactions, too so time isn’t the only thing this approach saves them.

A strong blockchain that can’t be attacked is not an easy goal to reach as it takes a lot of miners to create. It makes much more sense for many computers to work on one shared blockchain that several applications can run on rather than there being thousands of weak, mostly-centralized blockchains.

It’s just a much longer, much more expensive process.

Token vs Coin: Additional Info How Tokens Work Through the Example Civic

Decentralized applications that are built on top of different blockchains can become compatible with their services through the use of tokens. Civic is one good example of this,  using a token called CVC.

Encrypted identities on the Ethereum blockchain are tracked by their application. Providing a cheaper, more reliable, and more efficient way to check identities is what it is aimed at. So,  how does it works?

Let’s say you were going on holiday abroad. Your identity will be checked and confirmed at lots of places on the way. The airline might be first. The airline, being a Civic’s partner will send you a QR code to ask for information about you (the traveler).

From your mobile device, using the Civic app, you’d send your details directly to the airline company. Even though the information is stored on the device it is fully encrypted to prevent it from being stolen. Prove that you’re the owner of the data received can be a fingerprint or iris scan.

Through Civic, various points along the way, the airport, the hotel, etc., can then use the same device to verify your identity. Using the blockchain, the data of your digital identity can be recognized and validated by each company or organization that uses Civic or some other service that may appear in the future. With Civic, the more times the application is used, the more trust third parties have in the digital identity stored.

In these identity-related services, the CVC token itself is used to transact. The tokens are the payment for the verifiers of IDs (banks, governments, and other trusted sources) to perform needed “know-your-customer” recognition. Then, records of this are stored on the blockchain/database.

To encourage using Civic some CVC is also sent to the user because the companies needing verification of documents will eventually need to buy more tokens from the users. This creates a win win win economy.

It is evident that the Civic token works in a way that is more than just monetary. Naturally, the Civic platform would not accept BTC, ETH, or NEO to use their services — it is just the CVC token. Of course, each transaction requires some Ether too because it is built on the Ethereum blockchain and the miners need to be paid.

Token vs Coin: Security, Equity, and Utility and Payment Tokens

Finally, when defining the token, let’s look at the three different types of tokens. The categorization is established according to their purpose – Security or Asset Tokens, Payment Tokens, Equity Tokens, and Utility Tokens.

Security, equity, utility, and payment tokens were first regulated in February 2018 by the Swiss Financial regulators FINMA which published guidelines to define and regulate the types of tokens. They needed to categorize the tokens and understand how to treat them differently when considering their legality:

Security Tokens – Security tokens are most tokens issued by ICO (Initial Coin Offering). Majorly, investors are investing their money in the ICO with the expectation of profit. Swiss jurisdiction treats the ICO in the same way as traditional securities.

Equity Tokens – An equity token is a token that represents some stock or equity in the company that issues it. However, such an ICO has not become fully adopted and few companies have accepted it because there isn’t much regulatory guidance about what is legal and what is not.

Utility Tokens – Also known as application tokens are used to provide people with access to either a product or service. Most tokens are expected to gain in value based on their limited supply making them also rare and with high potential to increase value over time.

Payment Tokens – payment tokens pay for goods and services.

After FINMA classified the types of tokens currently available, it carefully pointed out that each token could fall into more than one category.

More financial regulators will likely offer slightly different definitions as the environment becomes more established. Still, ICOs and tokens are new concepts. Understandably, the law hasn’t quite caught up yet.

Token vs Coin: Conclusion

After this Token vs Coin guide, you should be able to understand what is meant when someone says digital “coin” and digital “token”. It wasn’t that confusing after all, was it?

To recap with a simpler definition, a coin is native to its own blockchain and a token has been built on top of another blockchain, like Ethereum, NEO, or Waves.

Also, we can make a distinction in terms of their uses. Coins are most often used simply as money even though, some coins do have other uses like fueling applications, being used as a stake to validate a transaction on a network, or being used to fuel smart contract and token transactions.

On the contrary, tokens serve a different purpose. They are dependent on the dApp’s purpose if they are created on a dApp. For example, they could be used for features such as voting rights. In other cases, they are used to reward the users with things like discounted fees, etc. (like Binance) or for transactions on the dApp (like Civic).

Through these examples of both coins and tokens, we hope we have helped you to develop a clear understanding of how to easily distinguish them.

So, now that you know what is a coin and what is a token, list your favorite cryptos and say whether they are coins or tokens. Have fun 😊!!!   

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