When it comes to crypto tokens and coins, it’s all about the blockchain.
“Crypto tokens” and “crypto coins” are often used interchangeably. But they’re not the same.
In this article, we’ll clarify what crypto coins and tokens are, how they function, how they differ, and why you should understand them both.
Coin of the Realm vs. a Subway Token
In the physical world, a coin is a unit of currency. As a formal medium of exchange, it can be used to purchase goods or services and be exchanged for equivalent amounts of currency — for example, two dimes and a nickel for a quarter.
Tokens, on the other hand, are not currency and cannot be used to purchase any goods or services. Instead, they often represent the right to a good or service.
Before digital passes and magnetic stripe tickets, many subway systems accepted tokens: one token, one ride. In decades past, laundromats and arcades also used physical tokens.
A similar difference applies to the world of crypto, though it gets a little more complicated.
How Cryptocurrency Works
Cryptocurrencies are mediums of exchange that exist entirely online. They live as software code that uses cryptographic methods to make them almost impossible to counterfeit.
Unlike a fiat currency, which can be physical (paper money and coins) or recorded digitally (in bank accounts), cryptocurrencies always exist digitally on a unique blockchain (a distributed ledger that records transactions in a way that can’t be altered).
Cryptocurrencies also exist apart from any governmental or third-party regulation — no single third party controls its transactions. Each “block” of recorded transactions is validated by participants in the blockchain before being permanently added to the chain.
The work of validating and recording blockchain transactions requires intense computation to solve tough mathematical problems, also known as “crypto mining.” For this work, a participant receives a reward in crypto coins but also, at times, tokens.
On a blockchain, much more happens than just the buying and selling of cryptocurrency. Participants may also have goods or services to sell — including physical assets.
How does that work?
The digital nature of a blockchain allows for the creation of smart contracts, which are agreements between two parties that can be embedded in software code and carried out automatically without requiring the intervention or oversight of a third party.
Crypto tokens use smart contracts. They can represent services and assets (digital or physical). Remember the subway token that entitled its holder to one ride? It’s the same idea.
But if it’s all software, what’s the difference between a crypto coin and a crypto token?
Distinguishing Crypto Tokens from Crypto Coins
It turns out there is a simple way to tell tokens and coins apart. It all has to do with blockchain technology.
As we discussed, each cryptocurrency exists on its own unique blockchain, where it is the “coin of the realm” for that blockchain. On Ethereum, you can use Ether (ETH), the blockchain’s currency.
But you couldn’t directly use ETH on Bitcoin’s blockchain. It would be like trying to spend Euros at a U.S. McDonald’s. It wouldn’t be accepted. But you can create digital assets with value — tokens — on someone else’s blockchain.
And that is really the core difference: a coin is the native currency of a particular blockchain. Anything else operating as a cryptocurrency or method of exchange on that blockchain is a token.
It becomes easier to understand with a few examples.
How a Token Functions on a Blockchain
Let’s say you have a service you’d like to sell. You could create an application that offers it built on someone’s blockchain. Maybe Ethereum, for instance, because it has a robust community supporting application developers.
An application could issue tokens that represent a unit of service. The token would embed a smart contract with details on the cost of the service and its parameters.
For example, you might want to stream video content you’re creating. Your application could create a token worth 10 hours of streaming or the streaming of a particular video. As payment, you could accept ETH or another popular token on the blockchain.
You could also create an asset and use the same approach. In this case, the token would represent the asset. The value of the token could rise and fall as the market’s value of the asset changes. The digital asset could even represent a physical one, like a piece of land.
So the token might behave much like a cryptocurrency’s coin: It might rise and fall, get traded, be bought as an investment, or be exchanged for other goods or services (almost like barter).
Because of this flexibility, there are many types of tokens, whereas a crypto coin is just a crypto coin.
Different Types of Crypto Tokens
Of the many types of crypto tokens, there are a few basic categories you’ll want to understand. Let’s take a look.
Utility tokens represent some function of the blockchain they’re on. For example, they might represent aspects of a loyalty program for using the blockchain or its services and have embedded rewards in their smart contracts for certain types and amounts of use.
Governance tokens are used to facilitate certain general oversight functions of a blockchain, such as the right to vote on improvements to the blockchain’s underlying code.
Security tokens have nothing to do with safety on a blockchain. They are closer to traditional securities, like stocks. In fact, they may embed security contracts that require regulation, such as by the SEC.
One type of token getting a lot of attention lately is the non-fungible token, or NFT. The subject of much speculative buying, NFTs have one important characteristic: uniqueness. Each carries in its smart contract a record of its authenticity and ownership that can’t be altered.
This makes NFTs perfect for collectors.
Much of the excitement surrounding them has been related to digital art. But, technically, they can represent anything digital as long as it’s unique.
Stablecoins (AKA commodity tokens) are a kind of cryptocurrency pegged to an underlying asset of value, such as the U.S. dollar. But they’re actually tokens, not coins.
This is because they are built on another cryptocurrency’s blockchain. The two largest are built on Ethereum.
Now that we’ve explained a bit about the difference between crypto tokens and coins, let’s examine why it matters.
Why Create a Token?
You may come across the word “tokenize,” which means that a digital asset is being created as a token, not a coin.
Why would someone choose to make a token instead of a coin?
Recall the blockchain technology that all cryptocurrencies rely on to exist. Building one from scratch isn’t easy. So even though much of the code needed to create a token might function as a coin, to create a coin, you’d have to make a stand-alone blockchain. And it’s lots of work.
But there’s another good reason.
An existing blockchain, like Ethereum, already has a large, active community. If you’re looking to introduce a service or sell an asset, that’s a huge advantage and addresses the issues of having to build a new blockchain and find a way to build an audience of users to support it.
Buying and Trading Crypto Tokens and Coins
As we mentioned earlier, crypto tokens can be a lot like crypto coins. You can buy them, trade them, and invest in them because they have value that can increase (or decrease). And you can refer to both coins and tokens as digital assets or cryptocurrencies.
But, usually, a token represents something else. It might be a right you can exercise (voting), or a service you as the holder of the token are entitled to (adding special effects to your personal videos). It could even represent an asset in the physical world you want to sell.
But the real litmus test is where it lives: Again, if it’s built on or exists on someone else’s blockchain, it’s a token. If it is the medium of exchange on its own proprietary blockchain, it’s a coin.
How do you navigate this incredibly rich world of crypto coins and tokens?
To start, find a good crypto platform that allows you to explore, buy, and trade both. Binance.US helps you find a wide range of choices: coins, tokens, and trading pairs (assets that can be exchanged for each other without having to be converted into a fiat currency).
To begin your crypto journey today, visit Binance.US.
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