Today, both novices and experts in the cryptocurrency field often use coins and tokens as synonymous terms. However, there is a big difference between tokens and coins and that’s what we need to figure out. But why is this so important? It is one thing for members of the cryptocurrency community to understand the difference between a crypto token and Bitcoin, but it is another matter for newcomers to be confused with these terms at first.
What is a crypto coin?
Bitcoin was the first cryptocurrency that runs on its own blockchain and is used as a means of payment between participants. Therefore, Bitcoin has become the default standard and is called a crypto coin. To help understand this, let’s review some basic definitions.
A crypto coin is a digital currency that is created using cryptography methods and has its own blockchain where transactions take place. As mentioned above, the first and most well-known crypto coin is Bitcoin, which is transmitted within its blockchain.
One crypto coin cannot be directly transferred from its blockchain to another. For instance, you cannot transfer Bitcoin to an Ethereum address. This is because Ethereum has its own blockchain and unique addresses. Let’s highlight the main points that define crypto coins:
- Crypto coins within the same blockchain have the same characteristics. There are no privileged ones (all are equal). Crypto coins are also divided into parts.
- Limitation on issuance. Only a certain and prescribed amount of digital assets can be mined, and no more.
- Ability to be used as a payment instrument. This asset can be used to buy goods/services directly, without exchanging them for other currencies.
- Free exchange within the network. You can transfer cryptocurrency to anyone on your blockchain.
- All transfers are kept on the blockchain. Every transaction is confirmed and you can view the story of that transaction at any time.
- Transaction security is provided by the cryptographic algorithm.
Similarly, it is not possible to transfer cryptocurrency from one blockchain to another. But today, work is already underway to combine blockchains, and cross-chain technology is being used very actively. Such platforms significantly reduce the speed of transactions.
What is a crypto token?
Finally, the second basic concept. A crypto token is a digital currency created within an existing blockchain that performs the same functions as a coin. Crypto tokens built on Ethereum are the most common. However, the functionality of a crypto token is extended and it can be a digital certificate that guarantees a company’s commitment to the asset owner. So let’s highlight the main characteristics of the crypto token:
- Lack of its own blockchain since tokens are created based on already existing options.
- Dependence on the bandwidth of the network on which the crypto token is created.
- Applicability, as a rule, within a single project or product.
- Variety of applications depending on the tasks (participation in smart contracts, bonus/reward, game unit).
In terms of bandwidth, the situation in the Ethereum network today does not allow many projects to fully carry out their activities because as a result of the growth of transactions, fees have risen strongly.
It could be said that crypto tokens are digital assets that become a unique extension of smart contract platforms such as Ethereum. The functionality of crypto tokens depends entirely on the capabilities that the developers have built into the smart contracts. Now smart contracts enable secure and confidential transactions without external parties. In addition, such transactions are traceable and transparent.
Also, this asset meets a certain token standard to ensure compatibility with wallets and services on exchanges. The most common token standard is ERC-20.
What is the purpose of crypto tokens?
Today crypto tokens can be a payment instrument as well as an asset that allows you to get a part of a project. It all depends on the types of tokens. For instance, a utility token gives the user access to a company’s services/products after a certain time. Utility tokens are issued centrally and are needed to develop the project’s ecosystem. Typically, utility tokens are distributed during an ICO.
You can better understand the use of this asset by analogy with store gift certificates. They cannot be used, for example, as tickets to a concert or a football match. The certificate can be redeemed at a specific location and for a certain purpose — to get something from the store’s assortment.
But often the entire worth of a crypto token is only the speculative component and the opportunity to make money from the exchange rate. By the way, crypto tokens cannot be directly transferred from one blockchain to another.
Crypto token vs coin: what is the distinction?
So let’s summarize and highlight the key differences between these assets:
- Functionality. Coins are only used to pay for goods and services, while tokens are involved in more system tasks.
- Right of use. A project that issues tokens can put information or permissions into them that allow the owner to use something or buy certain types of goods.
- Currency role. A coin can only be digital money, and a token is not necessarily used to pay for goods and services. Tokens can be used within a project not only to support certain processes but also to pay for something.
So, we consider the main difference between crypto coins and tokens. Understanding the distinction between these digital assets is a very important point for any investor or person who wants to learn more about blockchain networks or smart contracts.