Coins and Tokens Simplified
Tokens and coins are two of the most popular words in crypto and could confuse a beginner. This is because they are often used to describe similar things even though they are different concepts.
Coins and tokens represent value and can be used to make payments. However they have their core differences. It is similar to comparing investors and traders — all traders invest, but not all investors trade.
Feeling confused? Let’s go over some of the major distinctions between tokens and coins. So that the next time you’re making a reference, you’ll know exactly what you’re saying.
First, what is a coin?
Bitcoin was the first-ever cryptocurrency, so we’ll use it to guide our definition.
The following qualities define a coin:
- Serves as money: The central idea behind coins is that they will be able to work in place of traditional currencies like the dollar, rand or euro. Today, you can buy anything from merchandise to services and artwork using crypto coins. Bitcoin is even a legal tender in El Salvador alongside the U.S. dollar.
- It operates on a dedicated blockchain: Coins are best described as cryptocurrencies that run on their dedicated blockchain. Bitcoin for example is built on the Bitcoin blockchain. In contrast, Shiba Inu is a token since it runs on a borrowed blockchain, “Ethereum”.
Confused about the blockchain? Here’s a quick breakdown.
Examples of coins include Bitcoin, Ethereum, Litecoin, Dogecoin, Polkadot, Binance Coin, and Cardano.
💡 Quick tip? Heard about Altcoins? Altcoins are alternative cryptocurrencies that were launched after Bitcoin’s success. For example, Ethereum, Litecoin, Shiba Inu are all considered altcoins.
What is a token?
A token can simply be described as a cryptocurrency built on a “borrowed” blockchain. So if you recall, Shiba Inu is referred to as a token since it is built on the Ethereum blockchain. For Shiba Inu to be considered a coin, its team will have to build its own blockchain which can take up significant time and resources.
It is possible for a token to migrate into a coin. An example is Tron, which was launched on the Ethereum blockchain in 2017. Tron was a token until 2019 when it migrated to its own network
Types of tokens
DeFi tokens: This is an emerging set of tokens designed to recreate traditional finance features on blockchain applications (dApps). Some popular DeFi tokens include AAVE, the token of the lending platform “Aave” and UNI, the token of decentralized exchange “UniSwap”.
Non-fungible Tokens (NFTs): NFTs are special tokens that provide ownership rights to a specific digital or physical asset. What makes them popular is that they cannot be replicated or copied by another person. NFTs have been used by artists, celebrities and brands to create and sell digital artwork.
Governance tokens: These are unique tokens that give holders the right to vote or decide the future of a blockchain platform or app. It is popular within DeFi and replaces the need for a board of directors or any central authority for decision making. Examples include “COMP”, the governance token of savings platform, Compound.
Should you buy tokens or coins
The difference between coins and tokens isn’t vast and largely comes down to utility. A quick way to identify which to use is by paying attention to the cryptocurrency that you’re buying. If it’s a product, most often you’ll need coins. If it’s a service, it’s likely to involve utility tokens.
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