Coins vs. Tokens - The Complete Guide

The main difference between tokens and coins is that digital tokens live on blockchains that already exist while digital coins have a specific and unique blockchain that they run on. While various tokens can be built on top of the blockchain of a coin, a new coin cannot be built on top of a token’s protocol. Understanding the distinctions between tokens and coins are crucial in order to fully grasp digital assets and cryptocurrencies.

What Are Coins?

Coins serve as the foundational blockchains on which different applications utilizing unique tokens are built. We can think of coins as the buildings of blockchain, while tokens are the offices that may come and go throughout a building’s history. In recent years, far more tokens have been created than blockchains due to the complexity involved in creating an entirely new blockchain. Besides taking more time to develop, creating a completely new blockchain entails searching for miners to verify and maintain the network. It also requires meticulously fortification against different attacks and malicious hacks. Yet perhaps the biggest argument for creating your own coin on an entirely new blockchain versus creating a token on an existing protocol is the freedom from having to depend on outside technical teams for improvements that are out of your own control.

Use Cases of Coins

With the development of smart contract technology, alternative coins and tokens, known as altcoins, were created. While certain altcoins were tokens built on top of the other blockchains, others used their own. All came with promises of bold new use cases across many different industries. Some of these were:

Ethereum: A platform used to launch many ICOs (Initial Coin Offerings) during 2017. Its native token, Ether (ETH) is used to maintain all transactions and is paid out to miners who support the network as well as project teams during ICOs. For example, during Jibrel's ICO, investors contributed Ether (ETH) and received Jibrel Network Token (JNT) in return.

Ripple: Used for real-time settlement, remittance and currency exchange utilizing the decentralized native cryptocurrency known as XRP.

NEO: Also known as the “Ethereum” of China, NEO has a number of tokens built on top of it. NEO holders receive GAS as a form of dividends, which is also considered as payment when transactions are conducted on the network.

What Are Tokens?

Unlike coins, tokens are blockchain agnostic. The birth of Ethereum, in 2015, enabled developers to launch new projects without having to build entirely new protocols. Creating tokens requires spending the coin of a particular blockchain to validate a token's creation as well as all transactions on its network. This is why ICOs raised funds in Ether "coin" and distributed their project's "token" to their investors. Tokens can represent a variety of functions and may facilitate fractional asset ownership, settlement etc. The most famous examples of tokens are ERC-20 tokens that were built on top of Ethereum.

Use Case of Tokens

The number of use cases for tokens on a smart contract-based blockchain is virtually limitless. Currently, all blockchain tokens fall into one of three categories that we explore below.

1. Utility Tokens

  • Access Tokens: Applications that are used to make API requests on behalf of users. These tokens represent the authorization of a specific application to access particular parts of a user’s data.
  • Work Tokens: Such tokens rely on the service provider staking the native token of the network to earn the right to perform work. Increased usage of the network causes an increase in the price of the token. As demand for the service grows, more revenue will flow to service providers.
  • Governance Tokens: Governance tokens allow holders to vote on changes in the network that they support. Typically, the number of tokens one holds is proportional to the number of votes they have.

2. Non-Fungible Tokens

Utility tokens are primarily fungible, meaning that one ZRX token is the same as another. However, there are also non-fungible tokens (NFTs). This is an important distinction as it means that the same token can be endowed with different attributes. Therefore, NFTs may provide the most immediately obvious use cases for tokens. Allowing tokens to have different characteristics provides a myriad of possibilities. These include the purchase of items in video games, as well as use cases in transportation and ticketing.

3. Security Tokens

Security tokens function similarly as securities and generally include projects whereby dividends or equity are granted to token holders. Security Token Offerings (STOs) can be broken down into subsets such as ETOs (Equity Token Offerings) and DTOs (Debt Token Offerings). Both enable the tokenization of practically any element of the existing financial system. Yet perhaps the most significant benefit of security tokens is the ability for instant and permissionless trading. This differs from stock markets, which are only open during business hours and do not allow for trading of hard-to-split assets such as real estate. Since security tokens are easily divisible and operate in 24/7 markets, such problems cease to exist. For the first time, investors can own .01% of a Picasso or a building, which they can then quickly sell to someone else.

Coin Swaps: Transitioning from Token to Coin

During the ICO mania of 2017, many ERC20 token projects saw their prices skyrocket. For teams that wanted to raise money fast, creating tokens instead of coins proved to be a wise choice. Since then, projects like Icon and Vechain have migrated to their own blockchains by conducting coin swaps. During a coin swap, holders and users exchange their tokens for mainnet coins. Such swaps are typically supported by major exchanges like Binance, making the process automatic for their users. Those keeping their tokens safe in their wallets, must manually exchange them.

Ultimately, cryptocurrency coins and tokens are vital parts of the digital blockchain asset class. Understanding the differences between the two is essential for any investor in the cryptocurrency space. Not only can events like coin swaps and mainnet launches have massive impacts on a coin's price, understanding the ecosystem, as a whole, can provide yet another avenue when evaluating the potential of a project.

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