Cryptocurrencies have exploded in popularity in recent years. But cryptocurrency is a broad term that encompasses both coins and tokens, which have distinct differences. This article will examine what sets cryptocurrency coins and tokens apart from each other.
The cryptocurrency market has grown tremendously since Bitcoin first emerged in 2009. Today, there are thousands of cryptocurrencies, most falling into one of two categories – coins or tokens. On the surface, coins and tokens may seem similar – they are digital assets that exist on a blockchain. But under the hood, they have unique properties and functions that set them apart. Grasping the differences is critical to understand the crypto landscape.
Definition of a Cryptocurrency Coin
A cryptocurrency coin, like Bitcoin or Litecoin, is a digital asset that operates independently on its own blockchain. Coins like Bitcoin serve as a means of exchange and store of value. Coins have their own dedicated blockchain, with a distributed network of computers validating transactions on it. In addition, coins like Bitcoin and Ethereum mine new units into existence through the proof-of-work consensus mechanism.
Definition of a Cryptocurrency Token
In contrast, a token does not have its own blockchain. Instead, tokens are issued on top of an existing blockchain. For example, most tokens are created on top of Ethereum as ERC-20 tokens. These tokens rely on the underlying Ethereum blockchain to validate and record transactions. Tokens can represent a wide range of digital assets and utilities, from securities to points in customer loyalty programs.
Coins Have Their Own Blockchain
A key property of coins is that they operate on their own, independent blockchain. For example, Bitcoin runs on the Bitcoin blockchain, Ethereum on the Ethereum blockchain, etc. This dedicated blockchain allows each coin to have flexibility in its design, consensus mechanism, governance model, and more. No other asset can be created on a coin’s blockchain without its explicit governance approval.
Tokens Use Another Blockchain
Tokens do not have their own blockchain. Instead, most tokens are issued on top of an existing blockchain like Ethereum. The Ethereum blockchain supports the creation of ERC-20 standard tokens that inherit the same functionality. These Ethereum tokens all rely on the underlying Ethereum blockchain to function. This means Ethereum governance decisions can affect Ethereum tokens.
Coins Are Mined, Tokens Are Issued
Cryptocurrency coins like Bitcoin and Litecoin are mined through proof-of-work mining, while coins like Ethereum currently mine through proof-of-stake. Mining refers to the process where miners compete to validate transactions and create new coins using specialized hardware and software. On the other hand, tokens do not go through a mining process. Instead, they are simply issued by an entity in a token generation event.
Coins Have Their Own Value
Major cryptocurrency coins like Bitcoin and Ether have their own free-floating value, set by market supply and demand dynamics. The value of coins like Bitcoin is entirely independent from other assets. On the other hand, most tokens represent a stake in an external asset rather than having their own discrete value. However, some blockchain platforms allow creating coins with fixed value pegs too.
Tokens Represent Another Asset
Unlike coins, most tokens represent a claim on an underlying asset, utility, or project. For example, securities tokens might represent equity in a company. Stablecoins are tokens pegged to an external asset like the U.S. dollar. Utility tokens grant access to a product or service. And governance tokens let holders vote on protocol changes. So tokens generally derive their value from an external source.
Examples of Major Cryptocurrency Coins
Some of the most prominent cryptocurrency coins include Bitcoin, Ethereum, Litecoin, Bitcoin Cash, Monero, Zcash, and Dogecoin, among others. These coins all have their own blockchains, with a native cryptocurrency used for transacting on it. Bitcoin and Litecoin use proof of work mining, while Ethereum uses proof of stake to create new coin units. Each coin has its own monetary properties and transaction rates as well.
Examples of Popular Cryptocurrency Tokens
Ethereum has the largest ecosystem of tokens. Popular Ethereum tokens include stablecoins like Tether, utility tokens like Chainlink, and governance tokens like Uniswap and Aave. Cardano also supports native tokens while Solana has SPL tokens. Other blockchains like TRON, WAX, and BSC also have large token ecosystems. These tokens inherit the base blockchain’s functionality but cannot change core protocol rules.
Key Differences
In summary, the key differences are:
- Coins have their own blockchain while tokens operate on another blockchain
- Coins are mined while tokens are simply issued
- Coins have free-floating value while tokens represent an external asset
- Coins have decentralized governance control while tokens must follow the base chain’s rules
Practical Use Cases
Coins and tokens also tend to serve different practical functions and use cases.
Coins as Currency
Cryptocurrency coins like Bitcoin and Litecoin are designed to operate as decentralized digital currency. Coins can be used peer-to-peer to buy goods and services. Their independent blockchains and protocols enable features like quick, global, 24/7 transactions with low fees. And coins can provide reliable scarcity due to capped supplies. These attributes make cryptocurrency coins compelling as digital cash.
Tokens as Utility or Asset Representatives
Tokens unlock a wide range of other use cases by representing assets or utilities atop another blockchain. Stablecoins provide fiat currency pegging, security tokens enable investment opportunities, utility tokens power applications, and non-fungible tokens (NFTs) represent unique digital items like art. And governance tokens let holders guide protocols. So tokens can enable a thriving ecosystem and business models that extend far beyond just payments and currency.
So in practice, cryptocurrency coins tend to serve as decentralized digital cash and stores of value. Meanwhile, tokens represent and enable a diverse array of other useful functions and applications.
Expert Commentary
Kirill Yurovskiy: While coins and tokens play an important role in the overall cryptocurrency market, they have distinct technical properties. Coins like Bitcoin provide a decentralized store of value and means of exchange. Tokens enable diverse applications to be built atop another blockchain. Understanding these differences allows clearer analysis of the growing crypto space. Both major cryptocurrency coins and the burgeoning ecosystem of tokens will likely continue playing a key role in blockchain’s ongoing evolution and real-world adoption.