Difference between coin and token

Difference between token and coin

Mistaking a coin for a token shouldn’t get you into a horrible trouble, just double-check transaction addresses and blockchains over which the transaction is meant to run.

Nonetheless, if you’re driven by sheer curiosity or just want some clarity for any other reason, here is a fairly short guide on our part.

We will demonstrate the coin and token difference and the particular functions that these two types of digital assets possess.

Difference between coin and token in cryptocurrency: coins

Let’s start with the notion of a coin. It is older than the notion of a token in the world of cryptocurrency, by the way.

A digital coin is tied to its respective blockchain: it is a blockchain’s main (and sometimes the only) currency.

Bitcoin blockchain generates bit-coins. No other coin can run on Bitcoin’s network and bitcoins, in their turn, cannot leave the Bitcoin blockchain. It is also true for Ether, Monero, Litecoin, or hundreds of other blockchains and their inherent cryptocurrencies.

How blockchain works is a blog topic on its own.

Discussing the difference between coin and token we mean exclusively virtual money. There cannot be a physical representation of bitcoin or any other digital currency, that would just contradict the definition. If anyone mints a physical coin, which you could see on countless stock pictures, that is in no way going to have the same value as a digital one. People can still buy it as a souvenir for whatever price they find appropriate.

Virtual money can be used for the same purposes the usual money is used: trading, gifting, and storing value. Some fraction of them goes off to cover the transaction fees.

One interesting use case of crypto-coins is network governance. In fact, people legally and transparently vote for important network changes with their money. This feature is not built into all cryptocurrencies by default: DASH has it, Bitcoin does not.

You see, blockchain developers may come up with any new utility for their coins they please.

It goes without saying that there are many ways to store coins. Virtual money is basically represented as computer code, and code needs a physical medium to exist on. So you can either store a whole copy of blockchain on your personal device or delegate the storage to a third party while retaining the right to safely access the funds on the addresses that belong to you.

Difference between coin and token: PoS and PoW coins

The utility of coins slightly differs depending on the network consensus. PoS consensus allows you to stake any number of coins to earn some mining rewards without the need to run a verification node yourself. Owning more coins in PoS is paramount. The more coins you possess—your own plus those delegated via staking—the more transactions you get to process and therefore earn even more.

In PoW, the number of coins you own is irrelevant; the total computing power is all that matters. PoS creators say that it’s more convenient to invest into coins than into mining equipment. Besides, you don’t have to waste loads of energy on mining in PoS.

Coin and token difference: tokens

All right, we know that coins are confused for tokens and vice versa. Roughly speaking, anything that has “-coin” in its name is certainly a coin, right? How about a more elaborate distinction between the two?

The utility of tokens is more specific than that of coins. Tokens can be created on an existing blockchain.

Think of the difference between coin and token in cryptocurrency as you would think of the difference between physical money and tokens. You can spend a specific token in exchange for a specific product or service.

It turns out that “coin” and “token” can be used interchangeably sometimes. A strict subdivision of these digital asset types is not practical. Exchanges often mention tokens as coins without any harmful consequences; “Initial Coin Offerings” are about tokens as often as they are about genuinely new blockchains & coins: compare Enjin Coin (ENJ) fundraising ICO to Mina Protocol (MINA) ICO. Enjin is an ERC-20 token, issued on the Ethereum blockchain. Mina is a whole new blockchain technology accompanied with a respective coin.

We can describe the difference between token and coin through a few more examples.

Imagine a fairly complex blockchain-powered video hosting service. The videos are stored on the blockchain, distributed among all the users (so there is no central server, like in case with YouTube). How do developers implement the following features?

  • Reward users for providing storage and bandwidth;
  • Regulate the maximum upload volume;
  • Reward content creators;
  • Provide users a way to support the developer team itself, etc?

Linking all these actions to a single token/coin is a straight way to mess everything up because one does not know, exactly, how much value a storage unit has compared to an upvote, for example. Let people rule it out themselves! Implement a token for each of the actions and add a main network’s token to stand for the value of the project as a whole; let the law of supply and demand take care of the rest.

Non-fungible tokens, (NFTs)

These digital assets fit the broader definition of a token we proposed above: they are created on an existing blockchain and have a very specific utility. As the name implies, each of the NFTs is “one of a kind”. Most commonly, it is a game item or a work of art. Even if identical items are issued, they always come in limited edition, each bearing a unique ID number.

Difference between crypto coin and token: PoS and PoW tokens

There does not seem to be any difference in how PoS and PoW tokens work. For example, Ethereum blockchain transitions from PoW to PoS with its EIP-1559 upgrade, and the token utility is going to stay the same.

Certain networks, like Waves Decentralized Exchange, do introduce a minor difference into the token economy. As you stake WAVES token, which is the primary network’s token, to a node, you may get extra tokens issued by the node maintainer.

Can I create my own token?

Sure! One famous fan of making tokens made two of them resemble his full name: Just (JST) and Sun (SUN). In general, there is not too much bureaucracy to deal with:

  • Burn or spend a reasonable quantity of a blockchain’s main currency;
  • Make a token comply with the rules of service. It is still easier to register a public company so that you can collect investment through the sale of shares.

Making a token is cool. You don’t have to create a blockchain to issue your own cryptocurrency, and that’s another token and coin difference. The only tiny discomfort that may bother you is that transferring your token back and forth would require some coins native to the blockchain.

Download Trustee - single multi-currency wallet for crypto
Share

Leave a Reply

Your email address will not be published. Required fields are marked *