Cryptocurrencies and blockchain have disrupted several industries over the last decade, and the craze on crypto innovations doesn’t seem to slow down. The blockchain revolution has a lot of potential use cases in the financial sector and several other areas. However, there are myths that are cropping up in the crypto market. It is important to debunk the myths and separate the truth from mere fiction. One of the misconceptions in the blockchain space is the assumption that coins are synonymous with tokens. Read on to understand the fundamental differences between the two terms.
Do coins and tokens mean the same thing?
Many people use the terms “coin” and “token” interchangeably, which a mistake. Coins like Bitcoin or Litecoin have a tangible value that often goes up or down, making them quite volatile in the markets. In a period of just six months, the price of Bitcoin rose from $2,500 to just about $20,000 in December 2017. That is an indication of how coins can wildly fluctuate in value. Tokens, on the other hand, can be designed as a utility or security, which gives users access to various online investment opportunities.
Coins are sometimes referred to as altcoins (alternative crypto coins). They are digital money created on a blockchain platform and designed to store value over time. In other words, it is a digital equivalence of money. Bitcoin is the most famous coin in existence. It runs on a blockchain technology, a public distributed ledger where all transactions are visible to everyone on the network. Data is stored on a decentralized platform and shared between users on the blockchain network.
The greatest advantage of blockchain technology is that it guarantees transparency and minimizes fraud. Many coins like Litecoin and Namecoin that are based on Bitcoin’s original protocol created by Satoshi Nakamoto. But others like Ripple and Monero made their own specific blockchains. Special types of tokens may be considered coins. For example, Labour Hour (LH) tokens from ChronoBank run on the Ethereum blockchain but are considered coins. The reason is that they are meant to solely act as money, which is to store value and enable businesses to transact on a blockchain network. For convenience, the coins are designed as ERC20 tokens, but they are not tokens as such.
In general, coins exhibit the same characteristics of money. They are divisible, portable, fungible, durable, acceptable, and limited in supply. Many crypto enthusiasts believe that coins could replace conventional money in the future.
Here are the unique characteristics of coins in relation to cryptocurrency:
- They are tied to public-open blockchains. So, anyone is free to join and participate in the network.
- Users can send, receive or mine coins
- Coins are not designed to execute any functions other than acting as money.
Tokens are typically digital assets that are issued by a blockchain project. They can be used as a method of payment within the project’s ecosystem and for performing similar functions as coins. However, the main difference is that tokens give holders the right to participate in the network. In most cases, it could act as a digital asset, offer access to the project’s functionalities, or represent company shares. When a new project is launched, unknown functional capabilities of tokens are discovered. For example, a token could act as a ticket to a concert, so you can use it at a certain time at a specific place, making it a real-life token. So, you cannot use the token to pay your bill in a restaurant. It is only valuable at the concert hall and not anywhere else. So, all digital tokens have specific use cases inside specific projects.
Blockchain tokens also have value, but they cannot be considered money. More often, tokens are hosted on another blockchain platform like Waves or Ethereum. Tokens offer more functionality over and above what digital cash offers. They deliver value to investors beyond speculative returns. Investors can gain though typical buybacks (since dividend disbursement brings regulatory problems). Additionally, tokens can be used to hold votes by the blockchain community on major business decisions or technical changes to the platform.
Moreover, tokens can represent an asset or a utility. Therefore, security and utility tokens are different. Security tokens represent company shares. Remember the notorious project DAO that was hacked soon after its launch? Utility tokens, on the other hand, have certain use cases within the project. A good example is the BON token.
How are coins and tokens created?
It is much easier to create a token than to create a coin. With tokens, you don’t have to create a new code or modify existing codes. You simply use an existing template from blockchain-based platforms like Ethereum. The platform allows anyone to create tokens in a few simple steps. The concept of creating tokens using standard templates provides smooth interoperability, meaning that users can store different kinds of tokens in a single wallet. Ethereum was the first blockchain platform to simplify the process of creating tokens, and that is why tokens have flooded the market over the last couple of years.
Such innovations are great for the crypto ecosystem, but the problem arises when regulations seem to lag behind technological advancements.
The blurred line between coins and tokens
In practice, the line between coins and tokens seems blurred. In most cases, both are used to transfer value or as a means of payment. It works the same way you would with a USD. It is possible to host coins as tokens on a 2.0 platform like Ethereum and LH. Again, the purpose of coins can go beyond ordinary payments. Crown coins (CRW), for instance, utilize batches of 10,000 coins tied to “Tron” master nodes.
Although the language continues to evolve in the crypto space, there is no doubt that coins are clearly different from tokens. Coins are digital cash while tokens can represent everything else.
Cryptocurrencies have revolutionized the way financial operations are carried out. More people and institutions are increasingly accepting digital currencies to enjoy the benefits that they have to offer. It is, however, important to separate the truth from myths to speed up the mainstream adoption of cryptocurrencies.