Over the past two years, the cryptocurrency industry has rapidly developed and attracted the attention of many people. Some saw the possibility of quick earnings, while others preferred a more fundamental approach to studying theory to fully understand the essence of this sphere.
People are often confused between the terms "tokens" and "coins,” but these terms mean different things. Therefore, in this article, we will discuss the differences between tokens and coins.
What is a coin?
Coins (cryptocurrencies) differ from tokens as follows:
They work on their own blockchains. At the center of a cryptocurrency project is a blockchain, which tracks all transactions involving coins. For example, when using Ethereum for payment, the transaction passes through the Ethereum blockchain, and when sending Bitcoin, it goes through the Bitcoin blockchain. Each virtual transaction is encrypted and made accessible to any member of the network.
They act like money. The main goal of creating Bitcoin was to replace traditional money. The creation of other coins, such as ETH and Litecoin, was inspired by the paradoxical combination of transparency and anonymity of Bitcoin. With the help of cryptocurrencies, goods and services can be purchased from many large companies, including Amazon, Microsoft, and Tesla. Recently, Bitcoin was recognized as the official currency of El Salvador, along with the US dollar.
Cryptocurrency can be secured in two ways. One of them is the classic consensus algorithm, Proof-of-Work. Miners use it to generate income, but an increasing number of people are leaving because of the low profitability and complexity of crypto mining.
However, there is another way to earn cryptocurrency using a more energy-saving Proof-of-Stake algorithm. This method requires less electrical equipment and contributes significantly to the environment. For example, Ethereum and Cardano used staking as the consensus algorithm.
Here are the key differences by which you can determine whether it’s a coin in front of you.
- The issuance of cryptocurrencies is exclusively decentralized without a regulatory center.
- The coin verification is decentralized.
- The value of a cryptocurrency is completely regulated by the market; therefore, it directly depends on the ratio of supply and demand.
- Cryptocurrencies are issued on their own blockchains.
What is a token?
Unlike cryptocurrencies, tokens do not have their own blockchain, but function on networks of other cryptocurrencies. Smart contracts, which represent a set of codes, facilitate transactions or payments between users.
Each blockchain uses its own smart contract; for example, the ERC-20 standard in Ethereum. Token transactions are the movements of a token from one location to another. An example of this is NFT trading.
Unlike the cryptocurrency exchange algorithm, where coins do not move, only account values change, tokens move. This difference is also noticeable for the purposes for which coins and tokens are assigned - cryptocurrency is a digital version of money, whereas tokens can be assigned to third-party services or products.
Summary
Coins can be the basis for creating tokens, but tokens have more functions that can make them more than just currency.
Tokens can be used to prove ownership of real estate and businesses and can be used in voting and polling processes. In general, tokens provide people with more useful opportunities than simple speculation, which is what coin holders are most interested in.
Cryptocurrency coins are issued and operate on their own blockchains, whereas tokens work on third-party blockchains. The issuance and verification of tokens can be centralized or decentralized. The price of a token depends on a wide range of factors, in addition to the supply-demand ratio.
Thus, by nature, cryptocurrencies are coins, since the name of the first cryptocurrency contained the word "coin" - a coin, and people began to use the simplified name "cryptocurrency." Tokens are already assets of a slightly different nature, which we have described in detail above.
It is important to note that today, in the network, there is a lot of contradictory information regarding the attribution of tokens to cryptocurrency. From a technical point of view, cryptocurrency and tokens are different; however, to simplify the context, tokens can be mentioned as part of cryptocurrency.
However, in this case, the categories can be divided as follows: cryptocurrencies are assets on the blockchain, coins are assets based on their own blockchain, and tokens are assets operating in networks of existing blockchains.
