What is the difference between a coin and a token?
Before you start investing in and trading various cryptocurrencies, you may find it useful to understand the differences between a coin and a token. Lots of people use these words interchangeably when talking about digital currencies, but coins and tokens aren’t exactly the same thing. In fact, they have very different use cases that you should be aware of.
In this AAG Academy guide, we’ll explain how coins and tokens are different and what they’re used for, and look at some of the most popular cryptocurrency coins and tokens in use today.
Bitcoin became the world’s first cryptocurrency when it made its official debut in 2009, so it may not surprise you to learn that it was also the world’s first cryptocurrency coin, and it set the standard for what exactly that means. So, what makes Bitcoin (BTC) a coin and not a token? Well, a coin is also a unit of cryptocurrency, but it has some unique characteristics.
There are three things that define a cryptocurrency coin, and these are:
1. A coin has a native blockchain Bitcoin isn’t just a cryptocurrency; it is also a blockchain. That means BTC operates on its own network and does not need to use another provided by a third party. When you pay someone with BTC, or someone pays you with BTC, it is all recorded on the Bitcoin chain.
2. A coin is a substitute for cash Bitcoin’s biggest goal has always been to replace conventional fiat cash, so it can be used just like traditional money. In fact, lots of corporations, including Microsoft, now accept Bitcoin as payment for goods and services. El Salvador has also made it an official currency.
3. A coin can be mined Native cryptocurrency coins can be mined using either the proof-of-work or proof-of-stake consensus mechanisms. In other words, it is possible to generate new coins yourself (rather than buying them) by contributing resources or cryptocurrency to the blockchain network.
As we touched on above, the primary goal of cryptocurrency coins is to replace traditional currencies. They can be used not only to pay for goods and services from supported merchants but also to transfer funds to others.
If you’ve ever had to transfer money overseas, you’ll know traditional bank transfers can take a long time, while using services like PayPal is incredibly costly. But transferring cryptocurrency coins is almost instant and inexpensive. Furthermore, cryptocurrency transfers can be mostly anonymous, with no need to identify who you are.
Cryptocurrency coins can also give you access to other cryptocurrencies. Lots of them, including Bitcoin, are available to purchase from centralized exchanges using nothing but a debit card in many countries. You can then swap those coins for tokens that cannot be purchased with traditional cash using one of many swapping services, like Uniswap.
What is a crypto token?
While cryptocurrency tokens share some things in common with cryptocurrency coins, they are actually very different. Tokens, unlike coins, do not operate on their own blockchain so they rely on others, such as Ethereum. Tokens utilize smart contracts, which determine how they operate, and they cannot be mined or generated in the same way as coins.
Tokens can be thought of as vouchers and coupons, which are limited in how they can be used, whereas coins are more like conventional cash with greater flexibility. Don’t assume tokens are useless, however. They actually serve many useful purposes.
What are crypto tokens used for?
Cryptocurrency tokens can also be used as a form of payment, but with some limitations. They are also commonly used to determine governance in a project or ownership of an asset. Here are the three main types of cryptocurrency tokens in use today:
1. Utility tokens Utility tokens are perhaps the most common type of cryptocurrency token, and they’re the closest to cryptocurrency coins in that they’re used for payment. However, unlike coins, utility tokens can only be spent on products and services created by the token’s issuer, or to unlock benefits offered by the token issuer.
For example, Smooth Love Potion (SLP) inside the popular play-to-earn game Axie Infinity can be used to breed digital pets that are turned into NFTs. The Binance Coin (BNB), which is actually a token despite its name, gives holders a 25% discount on trading fees.
2. Governance tokens Governance tokens give holders a say in a project’s future, so acquiring them not only lets you support an exciting prospect but also gives you a vote on how it is developed and operated. The more tokens you hold, the bigger your vote. However, many projects impose a limit on this to prevent one holder or a small group from having too much power.
3. Security tokens Security tokens are somewhat unique in that they can help merge the digital cryptocurrency world with the physical world. They offer ownership of an asset, which could be anything from shares in a company to real estate or vehicles. As things currently stand, security tokens are the only cryptocurrency that is strictly regulated in several major countries, including the U.S.
Utility tokens are essentially payment tokens, but they can only be used to buy goods and services created by the token’s issuer.
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About the author
Senior content writer
Senior copywriter for AAG Marketing team with the focus of educating our community on all things web3, blockchain and Metaverse.
This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.