Coin vs token: What's the difference?

For those new to the world of cryptocurrency, the jargon can be overwhelming. One term that’s often misused is ‘coin’ and ‘token’. These two terms are often used interchangeably, but there are key differences in use-cases and how they work that make them distinct. Here’s how the terms are different as explained by Byron from Luno.

What is a cryptocurrency coin?

Cryptocurrency coins are encrypted digital currencies issued directly by the blockchain protocols they run on. A coin is primarily used as a form of payment. They are used to pay for goods and services much like traditional currency is used. Coins essentially represent a unit of value stored on its blockchain. Transactions are also recorded, stored and executed on the same blockchain they’re issued by.

For example, the native token of the Ethereum blockchain is ether (ETH), and Bitcoin’s is bitcoin (BTC). While Bitcoin (BTC) and Ethereum (ETH) are probably the best-known coins, there are many other alternative coins or ‘altcoins’ out there. Altcoins are the market alternatives to Bitcoin, such as Cardano (ADA) and Ripple (XRP).

Certain coins like Bitcoin have limitations regarding their circulation or supply. There are a finite number of Bitcoins, for example, which makes their value determined by the basic principles of supply and demand.

Supply and Demand: Because the supply of new bitcoins stays the same, demand determines the price. When demand goes up, the price will usually move up accordingly and vice versa.

To sum up, a coin is defined by several key features:

• It is native to its blockchain – operating on its own blockchain, where each transaction is processed and recorded. Transactions can also be viewed by any member of the blockchain
• It is decentralised – it relies on code to manage issuance and transactions instead of a central authority or institution
• It uses cryptography – data is protected by a secret key, securing the structure and network system

Related articles: How to buy Cryptocurrency in Australia

What is a cryptocurrency token?

Tokens, or crypto tokens, are developed on top of pre-existing blockchain networks. Their value is derived specifically from the blockchain ecosystem they are part of. This could be an economic value, a dividend, or really anything. While cryptocurrencies are native to their particular blockchain, tokens differ in that they are built on top of those blockchains, like Ethereum by third-party platforms. This means tokens are much easier and simpler to create than crypto coins.

On Ethereum, for example, the native token and cryptocurrency coin is ether (ETH), but a range of tokens like Chainlink (LINK),Tether (USDT) and Shiba Inu (SHIB) use its blockchain. Many tokens are designed to power decentralised applications (Dapps). These tokens provide platform-specific services, videogames and other apps to token holders. In this way they act in a similar way to real-world tokens. For instance, arcade machines often only accept tokens, which you have to buy using coins.

The transfer of tokens are based on smart contracts, which are software protocols that make tokens programmable, permission-less, trustless and transparent. This means once a contract is mutually agreed upon, the transfer is automated and ownership is moved over without any special credentials needed.

How are coins and tokens used and how does this differ?

The key differences here are in the crypto coins and crypto use-cases.

Like coins, tokens can be used as a means of exchange in finance. They can also be designed for a number of other functions on platforms they are built on, including:

• Digital assets – digital art, music and gaming items
• Governance mechanisms – holders can access voting rights for protocol upgrades and other decisions
• Physical assets – giving deeds to real estate and tangible commodities like art
• Dapps – accessing digital applications and services on a blockchain
• Digital user identifies – where the unique cryptographic codes of tokens can be used to verify access to age-restricted, health and government services
• The main purpose of tokens is to encourage engagement within a blockchain network’s community.

Coins, on the other hand, have many use-cases in finance, including:

• Store of value – offering alternatives to conventional banking through decentralised transactions; which help the movement of cash without the need of a centralised ledger
• Digital cash – exchanging money for digital credits that can be used in electronic purchases
• International transfers – where real-time international transactions are simplified as they do not need centralised counterparty approval or clearance

So, there you have it, while coins and tokens are similar they do differ when it comes to how they can be used.

Main image source: Chinnapong/Shutterstock.com

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