When it comes to cryptocurrencies, you’ll unavoidably run into the token vs. coin debate.
A token is not the same as a coin, even though they both represent blockchain-based cryptocurrencies. When deciding whether to invest in or produce a cryptocurrency, the distinction is critical.
What is a Coin?
A coin is traditionally defined as a piece of metal with an official government stamp that is used as cash.
When it comes to cryptocurrencies, a coin is digital money that is powered by its own blockchain and has no physical counterpart in the real world.
The blockchain ledger functions similarly to a database that is transmitted from one node to the next. The information on how many units of currency each address has is represented by the data. A protocol specifies the conditions under which data is transmitted and the methods by which nodes connect with one another.
For a coin, the fact that it is built on its own blockchain is extremely crucial. The currency achieves the highest level of independence and flexibility by being able to create its own protocol. Every component of the cryptocurrency, including as the consensus mechanism, fees, and transaction mechanism, can be determined by the firm or organization that created it.
Bitcoin, the first crypto coin, is a unit of account, a store of value, and a medium of exchange, with all of the features of a genuine currency. However, the majority of the coins that followed did not fit the requirements of a currency, with some even resembling tokens.
Altcoins are the coins that came after Bitcoin. There are over a thousand altcoins, the most majority of which are Bitcoin variants, hence the term.
Apart from Bitcoin, here are a few examples of coins:
- Ethereum
- XRP
- Litecoin
- EOS
What is a Token?
Tokens are coins that do not have their own blockchain network. These cryptocurrencies, on the other hand, are based on a different blockchain. Users can create digital tokens on one of the DeFi (Decentralised Finance) ecosystem’s various platforms.
Because of its support for smart contracts, Ethereum is one of the most preferred options. ERC-20 tokens are the most common digital tokens today, as the Ethereum platform makes it simple to create tokens on top of the Ethereum blockchain.
Because a token is established on top of the blockchain platform, it follows a predetermined protocol and has no influence over how the network develops. Tokens are defined by the smart contract and may gain value as a result of their function.
Take a look at Bananacoin to get a better idea of how this could happen.
Bananacoin is an Ethereum token created by a group of Russian entrepreneurs. They planned to use the money to expand their banana estate in Laos’ Vientiane province. The value of each Bananacoin token was fixed to one kilogram of banana export price.
Instead than receiving 1kg of bananas for each token purchased, purchasers received Bananacoins of equal value.
Because a token is based on an existing coin, it is subject to the network’s uses and limits.
A smart contract can help you create your own coin in less than half an hour. The platform, on the other hand, is compensated for the ease and speed with which a token can be created.
Here are a few token examples:
- Tether
- Chainlink
- Huobi Token
- Hedge Funds
What is the difference between a token and a coin?
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Algorithm change
In terms of the algorithm, there is a clear separation between coins and tokens:
- Each coin has its own blockchain.
- A token is built on top of an existing blockchain and is based on a smart contract.
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Different utility
Apart from the algorithm, another significant distinction between a coin and a token is that a coin has monetary value. It can also be used to support applications, smart contracts, transaction validation, and staking.
Bitcoin, for example, is a coin with purely “money” utility. Ether, which is also used to power the Ethereum network’s smart contracts, is another coin with money utility.
A token, on the other hand, is a digital representation of an asset, tradable commodity, loyalty points, or other such items.
Maker is an excellent illustration of this. This ERC-20 token is built on an Ethereum smart contract that backs and stabilizes the DAI stablecoin’s value. MKR is also used to pay Maker system transaction fees and to grant holders vote rights in the system’s continuous approval voting mechanism.
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Various fee structures
A coin can be traded on its own with little or no expenses during exchanging. However, when you exchange a token, you must pay a charge to the network on which it is built.
Every action on the Ethereum platform necessitates the payment of a cost in Ether, which is referred to as gas. The gas is used to allocate Ethereum Virtual Machine (EVM) resources and execute smart contract instructions.
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Exposure to 51% of attacks
The cryptocurrency revolution aims to create a more secure financial system with no single point of failure. As a result, the network’s strength is a significant distinction between currency and token.
A 51 percent attack on a coin is possible, especially in the early phases while the network is still emerging. The token, however, is unlikely to be the target of such an assault because it is constructed on an existing network.
A 51 percent attack on the blockchain occurs when a miner (or group of miners) controls more than half of the network’s mining hash rate or processing power. A majority attack is also known as a 51 percent attack
Summary
Which is preferable to produce or invest in: a token or a coin?
By now, you should be able to tell the difference between a coin and a token. Coins and tokens, on the other hand, do not replace one another; rather, they serve different roles. In the right situation, each of them is superior.
Cryptocurrencies provide the greatest level of independence and flexibility. However, they are costly to construct and require big communities to support and embrace them.
A crypto coin’s best utility is as money, as a means of storing and exchanging value.
If the main purpose of the project is to develop cryptocurrency and/or build a platform based on it, or offer a new financial system, then the coin is the best option.
Crypto tokens, on the other hand, are inexpensive, quick, and simple to create. They don’t need to be maintained, but they are reliant on the main network, which limits their flexibility.
Tokens can be used as side projects to raise funds for the main business, or they can be used to represent real assets that can be moved around without having to touch them physically.
For investors, it’s important to understand that both tokens and coins can be exchanged on exchanges if they’re listed. The distinction is in the application scenarios. A coin’s primary function is to serve as a medium of exchange.
And if you want to buy one for the purpose of using it rather than trading it later, check sure there are sellers who take that coin. Tokens, on the other hand, can still be utilised within the DApps for which they were created, even if they have no further purpose.
