Table of Contents
- 1 Token vs Coin: What is a Coin?
- 2 Token vs Coin: What is a Token
- 3 Token vs Coin: Security Token, Equity Token, or Utility Token
- 4 Token vs Coin: Conclusion
Token vs Coin: What is a Coin?
- Bitcoin operates and functions on the Bitcoin blockchain
- Ether operates and functions on the Ethereum blockchain
- NEO operates and functions the NEO blockchain
Quick Tip: I should tell you this before you continue reading — if you’re not already familiar with blockchain technology, read our Blockchain Explained guide before you read this one. It is important you understand blockchain before trying to understand the difference between a coin and a token!
Token vs Coin: How is a Coin Used?Digital coins are generally used in the same way as a real-life coin is – as money. You can think of coins like Bitcoin, Litecoin, and Monero just like the coins in your wallet or piggy bank. Often, they don’t serve any other purpose than to be used as money. These “cash only” coins are used:
- To transfer money (you can give and receive value using them)
- As a store of value (they can be saved and later swapped for something useful)
- As a unit of account (you can price goods or services in them)
- BTC can be used to pay for goods and services all over the internet and in many real-world places too.
- You can store it for a long period of time and nothing happens to it. You can then swap it for something of equal value later.
- Things that you buy can be priced in BTC too.
- Ether (ETH) is used to fuel transactions on the Ethereum network. Tokens can be built on Ethereum, but Ether is still required to send a token. It funds the mining costs (it pays the computers that verify transactions on the Ethereum network).
- NEO (NEO) is staked in a wallet to earn a dividend. This dividend is known as GAS. Tokens can be built on NEO, just like they can on Ethereum. When sending a token on the NEO network, you need to pay GAS as a transaction fee, the same way that Ether is used to pay Ethereum fees.
- Finally, holding enough Dash (DASH) allows users to vote on important decisions for the Dash network. If there is an idea suggested to upgrade the DASH network, those holding enough Dash can vote to decide whether the upgrade should happen. These voting rights allow the holders of DASH to have a say in how the project evolves.
Note: Crypto dividends are coins or tokens that are awarded for holding a certain asset. A good example is NEO’s GAS. This is paid to users who leave coins in a wallet and stake them to secure the network. The holder is paid GAS at a set rate for doing this. It is only available on blockchains that use a Proof of Stake (PoS) consensus.
Token vs Coin: Examples of CoinsAll the largest market cap digital assets are defined as coins today. However, not all coins have a large market cap. Industry price website Coinmarketcap lists over 900 different examples of coins.
Bitcoin Cash (BCH)
Note: The ticker is the three or four letters after each digital asset’s name. Most exchanges refer to coins and tokens by their ticker, not their full name.
Token vs Coin: What is a TokenTokens often get called digital coins. However, this isn’t correct. There is a major difference! Tokens are created on existing blockchains. In fact, thanks to the creation and facilitation of smart contracts, the most common blockchain token platform is Ethereum. Tokens that are built on the Ethereum platform are known as ERC-20 tokens.
However, there are others such as NEO, Waves, Lisk, and Stratis. While, as mentioned above, tokens on the Ethereum platform are known as ERC-20 tokens, NEO uses tokens known as NEP-5 tokens.
Token vs Coin: How Tokens are CreatedIt takes surprisingly little technical ability, in fact. I wouldn’t recommend it to a complete newbie, but for someone with a bit of programming experience, it wouldn’t take as long as you might think. It does need the developer to spend some of the native coin to the blockchain the token is being created on, though. For example, if the token is being created on Ethereum, the creator will need to spend some Ether to get the network’s miners to validate the token transaction (creation). It’s important to remember that fees need to be paid for all token transactions on a blockchain, not just the creation of the token. Therefore, any application built on Ethereum must use Ether coins to transfer the application- specific tokens from one user to another or between the app and the user. This is the same as how coin transactions need fees be paid to those securing the network.
Token vs Coin: Their PurposeMost tokens exist to be used with decentralized applications, or dApps. When developers are creating their token, they can decide how many units they want to make and where these new tokens will be sent when they are created. They will pay some of the native cryptocurrency on the blockchain they are creating the token on at this point. Once created, tokens are often used to activate features of the application they were designed for. For example, Musicoin is a token that allows users to access different features of the Musicoin platform. This could be watching a music video or streaming a song.WePower (WPR) is a good example of a token that represents a physical thing — it represents electricity. The WePower project is a dApp that allows users to buy and sell electricity on the blockchain using smart contracts. Its token (WPR) represents a certain amount of energy.
Token vs Coin: A Huge Benefit of Creating a TokenSince the developer of a dApp and token doesn’t have to create their own blockchain, it saves them time and resources. They can use the features of cryptocurrency with their application while benefiting from the security of the native blockchain. Time isn’t the only thing it saves them — if they created their own blockchain and coin instead of a dApp and token, they would need to find miners to verify their transactions, too. It takes a lot of miners to create a strong blockchain that can’t be attacked. It makes much more sense for many computers to work on one shared blockchain that several applications can run on rather than there being thousands of weak, mostly-centralized blockchains.
Token vs Coin: A Further Look into How Tokens WorkTokens are used to interact with decentralized applications that are built on top of different blockchains. A good example is Civic. Civic uses a token called CVC. Their application keeps track of encrypted identities on the Ethereum blockchain. It aims to provide a cheaper, more reliable, and more efficient way to check identities. Let’s look at how it works. If you were going on a foreign holiday, you’d need to confirm your identity at lots of places on the way. The first might be the airline. If the airline was a partner of Civic, they’d send you a QR code to ask for information about you (the traveler). Using the Civic app, you’d send your details directly to the company from your mobile device. The information is stored on the device but is fully encrypted. This prevents it from being stolen. A fingerprint or iris scan can prove that you’re the owner of the data received. You can then use the same device to verify your identity at various points along the way (the airport, the hotel, etc.). Each company or organization that you use your digital identity with can validate the data using the blockchain. The more times the application is used, the more trust third parties have in the digital identity stored with Civic. The CVC token itself is used to transact in these identity-related services. It’s used to pay the verifiers of IDs (banks, governments, and other trusted sources) to do needed “know-your-customer” checks. Records of this are then stored on the blockchain/database. Some CVC is also sent to you, the user. This is to encourage using Civic because the companies needing verification of documents will eventually need to buy more tokens from users. This creates an economy where everyone is rewarded for taking part.
Token vs Coin: Security Token, Equity Token, or Utility TokenFinally, in our token definition, let’s look at a few different types of tokens. They’re known as Security or Asset Tokens, Payment Tokens, Equity Tokens, and Utility Tokens. In February 2018, Swiss Financial regulators FINMA published guidelines that defined what security or asset, utility, or payment tokens are. This was to help them work out how to treat different tokens when considering their legality:
Security Tokens – most tokens issued by ICO are security tokens. The person buying them is investing their money in the ICO with the expectation of profit. Under Swiss law, these are treated in the same way as traditional securities.
Equity Tokens – if a token represents some stock or equity in the company that issues it, it’s an equity token. However, few companies have attempted such an ICO because there isn’t much regulatory guidance about what is legal and what is not.
Utility Tokens – also called application tokens. They are used to provide people with access to either a product or service. They are also rare because most tokens are expected to gain in value based on their limited supply.
When they classified the types of tokens currently available, FINMA were careful to point out that each token could fall into more than one category. It’s likely that more financial regulators will offer slightly different definitions as the space becomes more established. ICOs and tokens are very new concepts still. It’s understandable that the law hasn’t quite caught up yet. For more on ICOs, see my What is an ICO guide.
Payment Tokens – payment tokens have no other purpose than to pay for goods and services.