Who has never mistaken a token for a coin before? I can bet that almost every crypto enthusiast has been in this confusion at one point in their crypto journey.
There is a very thin line between cryptocoin and token, especially at the fundamental level. Both of them are used for the almost same thing but they are not the same.
Cryptocoin and tokens can be used to process payments, they both represent a store of value and both can be exchanged for one another.
Cryptocoins and tokens, however, play different but similar roles in the cryptocurrency space. This explains why most crypto traders own both cryptocoins and tokens.
In this article, we will discuss some important differences between cryptocoins and tokens, so that you may start using yours wisely.
Table of Contents
What Is Cryptocoin?
The only difference between a physical coin and a cryptocoin is that a physical coin is a fiat currency controlled by a government, while a cryptocoin is a decentralised digital currency which is not controlled by any central authority.
Since the inception of Bitcoin, new coins are constantly being ushered into the crypto market. Coins like Ethereum, Litecoin, Dogecoin, Tether etc have all been recognised as cryptocoins which serve the same purpose as fiat money. They provide a store of value and act as a medium of exchange, however, they are not regulated.
There are some distinctive characteristics of these cryptocoins which are given below.
Features Of A Cryptocoin
It is good to know some of the inherent characteristics of these cryptocoins before you can consider using them for either transaction or investment.
1. Operates On The Respective Blockchain:
Blockchain technology is a public ledger that tracks and stores all transactions carried out with its native cryptocoin.
For example, for any transaction carried out on the Bitcoin blockchain, the receipt is stored on the Bitcoin blockchain.
The same thing happens when the transaction is carried out on the Ethereum blockchain.
Each transaction on the blockchain is encrypted and only accessible by any member of the network.
2. Acts As Medium Of Exchange:
The main purpose for creating the first cryptocoin was to replace fiat money. This drive for a transparent and anonymous means of transaction inspired the emergence of other coins like Ethereum, Tether, Litecoin etc.
Today, many big companies are accepting the use of cryptocoins as a method of payment. Companies such as Tesla, Amazon, and Microsoft allow people to purchase goods and services from them using cryptocoins.
Countries are gradually adopting cryptocoins as legal tender. A good example is El Salvador which adopted Bitcoin as her legal tender in 2021.
3. Can Be Mined:
Unlike fiat currency, cryptocoins can be mined and this can happen in two ways.
One can mine cryptocoins through the traditional mining method, using the Proof-of-Work system. This method is used to boost cryptocoin earnings but one of its limitations is that there are few coins left to mine as days go by. This makes the process quite difficult every day.
The alternative method is Proof-of-Stake. This approach is a more advanced approach with minimal energy consumption and ease of operation.
What Are Tokens?
Like we said in the introductory part, tokens are quite similar to cryptocoins and this is why they are easily mistaken for cryptocoins.
Tokens are a type of cryptocoin that exists on a blockchain and can be transferred from one account to the other, but their behaviour is incited by the implementations in smart contracts and not built on the blockchain software itself like cryptocoins.
If you want to transfer some units of tokens, an account signs a transaction which gives an order to the smart contract to debit several units of the token from its tally.
Most tokens and the majority of all smart contracts on the blockchain network are EIP-20 standardized, this makes it easy for wallets, exchanges, users etc to interact with them.
New forms of tokens are still being born frequently but they have different purposes.
For example, an owner of a governance token can vote as a citizen or a board member or a stakeholder while an owner of a transactional token can use it to transfer money to avoid steep bank fees.
We can’t talk about tokens without talking about the concept of “tokenization”. It is safe to say that the birth of NFTs also inspired the idea of tokenizing items and events such as a property deed, music, movie script, article etc.
Melanie Trump sold non-fungible tokens of her portraits while Burger King created a game that allows customers to win NFT collectibles.
So what’s behind this idea of tokenizing anything?
The idea is to create a non-interchangeable and non-transferable token of that item, script or video such that there’s only one original token of it, held by one person or group of persons. This token is recorded on the blockchain and assigned a unique code that can be verified on the blockchain by anyone.
Creating cryptocoins is capital intensive, skill-intensive and a very complex thing to do. There’s a need for machinery, programmers and excellent planning.
However, creating tokens is not as complex and as difficult as creating cryptocoins. Tokens can be created by anyone who has access to the software, computer and something to tokenize.
Tokenization is easy to do on many NFTs platforms, you can tokenize anything you wish to and anyone who picks interest can buy them.
Difference Between Cryptocoins And Tokens
The difference between token and coin isn’t a broad discussion but yet, it is largely misunderstood. However, it all boils down to utility.
What exactly do you need at a particular time? Maybe if you can answer this, then you will truly understand the difference between them both.
Cryptocoins and tokens both emerge on the blockchain which is a public ledger of encrypted record of digital transactions but the behaviour of tokens are created by the implementations on the blockchain and not the blockchain software itself as in the case of cryptocoins.
Cryptocoins and tokens can both be used as a store of value just like fiat currency like Naira, Dollar etc. However, cryptocoins are a form of money, though in digital form tokens are simply something that can be assigned a price.
One good way to decide which one to use is to analyse what you need to buy. Cryptocoin is a good option for buying products but tokens like utility tokens are better used to purchase services.
Additionally, cryptocoins are a measure of prices but prices are attached to tokens.
Since many crypto enthusiasts make use of cryptocoins and tokens, the confusion they experience as regards the difference between both is understandable.
However, the main distinguishing factor between cryptocoins and tokens is that coins are a form of money used for payments but tokens are assigned a price.