Coin VS Token: How Do They Differ?
Imagine that you’ve decided to start working out. While planning out your routine, you’ve come to a crossroads - should you purchase your own equipment, or sign up for a gym membership?
Both positions have their own pros and cons. If you were to buy your own training equipment, this would allow you to be independent, and train whenever you’d like. On the other hand, it would cost a lot of money and would require you to build a mini gym for yourself all on your own. These are the issues that would be avoided by buying a gym membership.
So, this example illustrates the relationship between crypto coins and tokens perfectly with their cons and pros equally.
In this section, we’re comparing crypto coins VS tokens. To be more specific, we’ll talk about what these two assets are, what are their main differences, and why this is something that you should know about, in the first place.
Ready? Let’s get right to it!
Video Explainer: Coin VS Token: How Do They Differ?
Reading is not your thing? Watch the "Coin VS Token: How Do They Differ?" video explainer
Crypto Token VS Coin (Animated Explainer & Examples)
What are Crypto Coins and Tokens?
To start things off, before we can really get into the comparison between crypto coins and tokens, we do need to figure out what these two assets are, in the first place.
Some of the most popular examples of crypto coins include Bitcoin, Ethereum, and Binance Coin. In other words, they are popular and very large crypto assets that have some sort of a broad function associated with them.
Tokens, on the other hand, are smaller crypto assets that usually serve a much more niche and specific purpose than coins. On top of that, tokens can’t exist on their own - instead, they are “hosted” on the blockchain of a crypto coin. So, you could say that tokens as so-called child coins that are based on the big environments of parent coins.
Here, it’s also worth mentioning that the term “cryptocurrency” can refer to both coins and tokens - it’s situation-dependent! So, to make it clear here is an example for you:
Imagine if coins are visualized as operating systems on your computer (Microsoft, Windows, or Apple's macOS), then crypto tokens are the programs that you launch in those Windows or macOS environments. Still, Microsoft Windows as a parent software can run without any additional programs, but with extra child apps, let's say Chrome internet browser, Microsoft Office package, and Cyberpunk game, it is more versatile and fun. Simple enough, isn’t it?
Now, a blockchain is a place where data, or information, is stored. I won’t go into detail on the topic in this section, but if you’re really interested to learn more about it, you can check out the section "What is the Blockchain?".
That being said, let’s reiterate the earlier point - crypto coins have their own blockchains, while crypto tokens are hosted on already-existing blockchains of the coins. In other words, tokens DO NOT have a blockchain of their own but they are children of bigger parents - coins, and they use their parents’ blockchain to launch and operate themself!
Another way you can look at it is via the example I’ve given at the beginning of this section. If you want to start working out and want to build a miniature gym of your own (with your own equipment, that is), you will be investing money, time, and a lot of patience. This is the same as when developing a new cryptocurrency - the developers must code the entire logic and functionality model of the brand new blockchain behind their future coin.
Sticking with this example, taking out a local gym membership will save you both money and a lot of time, as well. Thus, creating a token on an existing blockchain environment is much easier - no matter what sort of a function it will serve, the core, underlying logic behind it will still be that of the blockchain that it’s built on.
When discussing crypto coins and tokens, your best bet would be to think about Ethereum. It’s the second-largest crypto project in the world, right after Bitcoin, and is often referred to as the “global computer”.
The vast majority of all tokens on the current market are developed, created, and launched on the Ethereum blockchain. Without getting too technical, the main reason why this is the case is that Ethereum provides probably the best and easiest environment for token launch and it was the first highly adopted coin with such a smart blockchain environment that supports this functionality.
Returning back, a great example of the more well-known Ethereum-based tokens would be, the so-called, stablecoins. And yes, it sounds weird, but this is the one and only situation when tokens are called coins, even if they are still created on a parent blockchain of Ethereum, and not on their own. But they are the special ones, and here is why!
A stablecoin is a type of crypto token whose price is “pegged” (or tied) to the value of the dollar, and which is backed by actual dollars, as well. In other words, one stablecoin will always be worth one dollar. It’s like a virtual US dollar in a blockchain with always the same value of the tangible US dollar in real life.
To get a broader picture, the most popular stablecoin today is USDT (Tether). Tether is HUGE. As of writing this section, it’s the third-largest crypto asset, right after Bitcoin and Ethereum, and it possesses a market capitalization of over $78 billion. In addition, as I mentioned before, one Tether will always be worth one US dollar in value and will never change.
If Tether is so incredibly huge, then why doesn’t it have a blockchain of its own?
Once again, this is because of just how good Ethereum is when it comes to launching such crypto assets as stablecoins or any other types of tokens. The team behind Ethereum is constantly improving the technology, and making it easier, universal, and faster for developers to create and deploy tokens on the ETH blockchain.
Developers of new tokens don’t really need to think about building their own blockchain environment from scratch, they get fully universal functionality of Ethereum, all pre-ready in the box.
What are the Differences Between Coins and Tokens?
Continuing on with this chapter, we’ve established what crypto coins and tokens are. Now, what are the actual differences between these two?
Well, the biggest difference is just that - while crypto coins have blockchains of their own, tokens use the blockchains of existing coins. Though it’s worth mentioning that NOT ALL blockchains allow for tokens to be created on them!
Think about it this way - imagine that each crypto coin is some sort of a building. There are bigger buildings, smaller buildings, and so on. All of them serve different functions and have different features, right?
For example, some buildings have large garages where you can store a lot of cars. Then there are small buildings (for example, private houses) that might not have a designated place for a car, in general!
Well, in this case, let’s imagine that crypto tokens would actually be the cars that can be stored (or not) next to the buildings in the virtual city we just mentioned.
In the same manner, some crypto coin blockchains allow developers to create tokens on them, while others do not.
Why? Because coin developers simply designed their blockchains that way, just to serve different purposes. Some coins were built with the intention just to serve their own mission. For example, Bitcoin was designed to just be the money equivalent in the virtual world and that’s it.
On the opposite side, other coins were designed to serve not just their own, but additional features, by sharing their own functionality with tokens that could be launched and function in accordance with the parent coin on which those blockchain tokens were launched.
The most popular blockchains for token creation are Ethereum, the Binance Smart Chain, and TRON.
Another big difference between coins and tokens is that coins usually serve a larger purpose, and are more general in their use, while token utility concentrates on specific projects.
Sounds confusing? Allow me to give you a few examples.
Let’s take Bitcoin and the Uniswap token. Bitcoin is the largest cryptocurrency on the market. Most people agree that its use case is that of a “store of value”. Meaning that people invest in Bitcoin with the hope that their investments will grow in value, or at least that their money will retain its value.
A very general and broad use case, wouldn’t you agree?
Now, the Uniswap token is a token of the most popular decentralized crypto exchange, Uniswap. The exchange allows you to trade one type of Ethereum token for another, in an anonymous manner, and without any official company overseeing the process (thus, it’s decentralized). The Uniswap token, however, isn’t required for those trades.
So… What is it even used for, then?
Well, Uniswap token holders will be able to vote for changes and upgrades made to the exchange in question and might receive some discounts when swapping other tokens on the platform. Here, the use case of the Uniswap token is very niche and related strictly to the decentralized exchange platform.
Another great example would be the earlier-mentioned Ethereum coin, and its well-known token called Shiba Inu. Ethereum blockchain allows developers to create crypto projects in a fast and efficient manner, by using special Ethereum features such as smart contracts.
Smart contracts are basically automated agreements between two or more parties. I won’t go too in-depth into the topic, but if you’re interested to learn more about it, you can check out the section "What are Smart Contracts?". For now, it should suffice to say that smart contracts are an essential part of the Ethereum network.
Essentially, Ethereum is used as a launchpad for other projects - it’s like a computer that you run programs on. The Shiba Inu token, on the other hand, would be one of these programs - a token of the Ethereum.
It was created on the Ethereum blockchain and this means that Shiba Inu has all of the fundamental characteristics of the Ethereum blockchain and it works in accordance with the logic of this network. However, you might wonder - what’s the purpose of this token?
Well, Shiba Inu was created as something that’s known as a “meme token”. Essentially, it has no single, clear purpose, and is mostly used for investment and meme purposes. Nowadays, you may also use Shiba Inu to donate to certain animal charities. In addition, there’s artwork being created that’s inspired by the project, but once again, its uses are very niche.
Why Do the Differences Between Coins and Tokens Matter?
Moving on, we’ve now covered what are crypto coins and tokens, and how they’re different from one another. The last thing that we need to discuss in this section is the question of why these things should even matter to you, in the first place!
As you might have gathered already, coins and tokens are very different in how they work. Thus, anyone who is interested in crypto should be able to differentiate between the two. It’s one of the biggest questions in crypto.
However, to tell you my honest opinion, apart from being savvy about the topic and understanding how crypto works, you aren’t really going to need to know the specific differences between coins and tokens, especially if you’re simply investing in or trading crypto.
Sure, depending on if it's a coin or a token, the transaction fees are going to be different, and the logic behind the project will possess different features and quirks, too. But, to your average investor, this usually does not matter. Instead, people look into the ACTUAL PROJECTS, and their value proposition - not if it’s a coin or a token.