The blockchain world is full of technical jargon, acronyms and phrases. It can all get a bit confusing. Especially when it comes to cryptocurrency. Terms like "tokens and coins" are often used interchangeably. Although they are both digital assets that can be bought, sold, and traded on the blockchain, there are fundamental differences between the two.
When it comes to entering the world of cryptocurrency, it pays to know what exactly you’re dealing with. Let’s take a look at what coins and tokens are, their similarities, how they differ, and why it matters.
A cryptocurrency that is classed as a “coin” means that it has been created on its own blockchain. You will often see these referred to as the “native coin” to a blockchain. For example, bitcoin (BTC) is native to the Bitcoin blockchain and Ether (ETH) is the native coin on Ethereum.
Coins act in a similar way to traditional money in the sense that they are used to store value and as a means of exchange.
Bitcoin was the very first crypto coin, and although thousands of other “altcoins” have popped up, Bitcoin is still the most popular on the cryptocurrency market.
Another term that pops up when discussing cryptocurrencies, is “altcoins”. The term came into being to describe any cryptocurrency that is an alternative to Bitcoin, and includes coins or tokens.
Most altcoins are developed in the likeness of Bitcoin with a similar framework. Many also have the same concept of scarcity built into them. The limited supply is what creates demand and reinforces the sense of value.
For example, the number of Bitcoins that can be created (mined) has been set and limited to 21 million. However, Ethereum, the second-largest blockchain after Bitcoin takes a slightly different approach with an “unlimited” supply which is capped at 18 million ETH per year.
Although the majority of altcoins resemble Bitcoin’s basic premise, each one has been developed with its own set of features to offer investors something different in an attempt to provide something better than the premier coin.
For example, some altcoins, like Ethereum, have the additional feature of smart contracts that enable other functions beyond cryptocurrency. Others use different processes to validate blocks of transactions in order to offer quicker transactions.
Bitcoin uses a Proof of Work consensus mechanism that uses a considerable amount of energy which can lead to slower transaction times. Altcoin Cardano (ADA) uses Proof of Stake— a consensus mechanism that uses less energy and is more efficient but is often considered to be less secure.
Cryptographic tokens are digital units of value created on the blockchain, BUT not on their own blockchain. Crypto tokens are digital assets that do not have their own blockchain, instead they use the blockchain of a different cryptocurrency.
This was all made possible by Ethereum. Ethereum was the very first programmable blockchain through the means of smart contracts. This means that developers can create and launch their own cryptocurrencies as “tokens” on the Ethereum network.
They use a standard known as the ERC-20 which enables the creation of cryptocurrencies as fungible tokens, meaning that a token is interchangeable with another token of the same type. For example, in the same way a $5 bill is indistinguishable in value from any other $5 bill, 1 ETH can be exchanged for 1 ETH.
Other smart contract-enabled blockchains have appeared, and use similar programming standards giving the same token-creation ability. For example, BNB Smart Chain (formerly the Binance Smart Chain) with its BEP-20 and TRC-20 on the TRON blockchain.
There are different types of tokens all made with different purposes in mind. And since this is the blockchain where there are no universal standards as yet, there can be many names for the same thing.
Value tokens: Also known as payment tokens, currency tokens, or transactional tokens act as a medium of exchange, store of value, and unit of account.
Governance tokens: A governance token gives its owners rights over the protocol that they are built on, or rights over the applications built on the protocol. They enable functionality such as protocol level voting, participation in governance decision making, and more.
Security tokens: Security tokens are the blockchain version of stocks in that they act like digital, decentralized shares giving rights of ownership of a company.
Utility tokens: Utility tokens are the most popular type of tokens and are designed to have a specific use. They give the owner access to a product or service on a specific blockchain.
Non-fungible tokens: A non-fungible token (NFT) is a token that proves ownership of a digital asset such as a unique digital image or characters or in-game items in online games.
READ MORE: What are NFTs and How Do They Work?
It’s worth noting here that some tokens overlap with different token types.
For example, the Basic Attention Token (BAT) is both a value token and a utility token. It has been created with a specific purpose to conduct transactions and obtain services on the BAT platform, and is used as a unit of account between the platform users.
Although the most popular altcoin is Ethereum’s Ether there are many others gaining popularity. Here are a few of the top altcoins (coins and tokens) available:
One of the most traded altcoins by volume, Tether tokens (USDT) are pegged at 1-to-1 with the US dollar and are also known as a “stablecoin”. They have been developed to reduce volatility as seen with other cryptocurrencies like Bitcoin and Ethereum. This makes them a great means for exchange and storage of value.
XRP is the native coin of the XRP Ledger. XRP is designed to be a bridge to other currencies which makes it an ideal choice for settling cross-border transactions. Using XRP Ledger instead of traditional banking methods, transactions can be completed in less than five seconds and at a fraction of the cost.
UNI is primarily a governance token built on the Ethereum based cryptocurrency exchange, UniSwap. UNI owners can vote on key UniSwap protocol changes and developments. As the 24th largest cryptocurrency by market cap, UNI can also be traded on exchanges, used to fund liquidity mining pools, grants, partnerships, and other growth-driven initiatives.
LINK is Chainlink’s native token and is an ERC677 token, which is an extension of the ERC-20 token standard. It has all of the original ERC-20 functionality but implements additional features. LINK is a utility token with a variety of purposes from incentivizing data accuracy to keeping contracts stable, and rewarding nodes for validating transactions.
Tokens enable the easier, quicker and cheaper creation of cryptocurrencies. Developers can create their own crypto without the need to build an entire blockchain.
Building a blockchain from scratch is a huge technical undertaking. It needs to be able to process transactions at speed and at low cost, and needs an ecosystem of validators willing to spend their computation effort to confirm its transactions.
This network of decentralized validators is also essential for the security of the blockchain. Developing a new coin means attracting enough volunteer validators to maintain the integrity of the chain and to avoid cyberattacks and fraudulent transactions.
The ability to create tokens offers a much quicker option to make cryptocurrency tokens. Instead of reinventing the wheel, developers can essentially “piggyback” on an existing blockchain, make use of and benefit from their existing technology, community, and security.
As blockchain technology is still very much in its infancy and it developing at a rate of knots, the language used to describe it is constantly evolving. If you’re going to be investing in, trading with, or providing access to cryptocurrency then having an understanding of the different terminology is essential.
Crypto APIs supports all ERC-20, ERC-721 and Omni layer tokens.
This publication is an opinion and is for informational purposes only. It is not intended to be investment advice. Seek a dully licensed professional for investment advice.