It’s easy to confuse between a coin and a token when learning the fundamentals of cryptocurrency. Both coins and tokens clash in similarity—they indicate a monetary value and can process transactions like at your local grocery store.
Coins and tokens are found on a blockchain—an open digital ledger that stores information on each transaction. The main difference lies in ownership.
Differences Between a Coin and a Token
Essentially, all coins are tokens, but all tokens are not coins!
A crypto coin uses its own blockchain to keep track of all the data. It takes significant resources and skills to create a coin. For example, the native coin for the Solana blockchain is SOL, while the native coin of the Avalanche blockchain is Avax. However, in the case of tokens, they depend on another cryptocurrency blockchain to operate. Many tokens operate on the Ethereum blockchain as it was the first programmable blockchain, which made it easy for developers to launch their tokens on the blockchain. Popular tokens on the Ethereum blockchain include WBTC, AAVE, and GRT among others.
A digital coin acts quite similar to traditional money. It stores a monetary value and can be used to complete transactions between two parties doing business with each other. The most familiar digital coin is Bitcoin. You can use it for any service—from buying a coffee to buying digital services.
Tokens have far more uses. While they can be held and traded as digital currency, they also serve dynamic functions. They can serve as smart contracts that give you unique ownership of digital assets like real estate and art projects. They can also be used as vouchers to buy exclusive online services. They can even act as loyalty points and commodities. Many software applications also use tokens for functions such as verifying identity and granting access to an app.
| Crypto Coin | Crypto Token |
|---|---|
| Built on its own blockchain | Built on an existing blockchain |
| Requires more resources and skills to create | Fairly easier to create as it does not have its own blockchain. |
| Can be used as digital money | Variety of uses |
Different Types of Cryptocurrency Explained
There are over 10,000 cryptocurrencies in circulation. A major reason for this surge is that it has now become fairly easy to create new coins and tokens. Blockchain technology is built on an open-source platform. Any developer is free to use the original code and build something new with it. The decentralized nature of blockchain has broadened the scope of cryptocurrencies and how they can be used.
Let’s look at some major types of cryptocurrencies that have emerged:
Utility Tokens
Utility tokens are special types of tokens used for financing the internal economy of a crypto project. The tokens are usually made to be the only acceptable mode of payment within the project's ecosystem. Utility tokens are mostly used for transactional purposes. ERC-20 tokens built on the Ethereum blockchain are regarded as the biggest utility tokens due to the booming NFT marketplace.
Security Tokens
A security token is a cryptocurrency version of an investment. It represents ownership or fractional ownership of a property, which exists on a blockchain. Properties secured under security tokens can range from cars, stocks, real estate, or any valuable asset. The owner's information is uploaded on the blockchain, which sends back an encryption that can only be accessed by the owner of such properties. The INX token works both as a security and utility token.
DeFi Tokens
Decentralized Finance—also known as DEFI—is a fast emerging world of cryptocurrency-based protocols that provides an alternative to traditional financial systems like insurance, lending, saving, and trading. The rapidly growing sector operates on smart contracts that make the entire process decentralized and remove any impact of third parties on the transactions. With Defi, users can easily control what happens to their digital assets in their wallets. Popular Defi tokens include Avalanche (Avax), Wrapped Bitcoin (WBTC), and AAVE.
Non-Fungible Tokens
Non-fungible tokens, or NFTs, are the most popular forms of tokens. They work as a unique cryptographic representation of a physical asset on a blockchain. NFTs provide ownership rights to unique digital assets. Anyone can create an NFT of their work, such as images or art. You could even find rare items in a video game being sold as NFTs. However, they carry a risk. The cryptographic assets do not have a permanent value. A user can buy an item for $20,000 and resell it for as low as $2,000 if there are no sufficient bids in the marketplace. The price of NFTs is not regulated.
Altcoins and Stablecoins
Bitcoin was the original cryptocurrency. All other cryptos that have emerged after Bitcoin are referred to as Altcoins. The most popular altcoins are Ethereum, Litecoin, and Cardano. Given the volatile nature of the currency, though, there are also some stable coins that have been created.
Stable coins are digital currencies supported or backed up by a fiat reserve or valuable asset like gold. They are not expected to fluctuate in value like other tokens, because the value of the coin is reflected by the value of its reserve. Tether stable coin, for example, is backed by a stable reserve of US dollars. A Tether coin is always equal to a US dollar.
Final Take
Digital assets such as coins and tokens are gaining widespread acceptance, driving up their utility and value. Whether you are interested in buying a token or a coin, evaluate the crypto project closely by looking at its use cases and application potential.
