Introduction
We use the word crypto to cover a multitude of coins, but in reality, there is a difference between coins and tokens. In this article we will check everything in detail.
Entering the cryptocurrency market can be a complicated and daunting task. You may have heard of Bitcoin, but what about the other thousands of coins and projects on various blockchains out there? To gain a better understanding of the cryptocurrency markets, it is easier to classify cryptocurrencies into two separate categories, these are coins and tokens.
Coins
Coins refer to any cryptocurrency that has an autonomous and independent blockchain such as Bitcoin.
These cryptocurrencies have been around since the very beginning, and the wider network is designed solely to achieve a specific goal. For example, Bitcoin exists as a censorship-resistant “store of value” and medium of exchange that has a secure, stable monetary policy.
Bitcoin’s native token, BTC (i.e., bitcoins), is the most liquid cryptocurrency on the market and has both the highest market capitalization and realized market capitalization in the cryptocurrency sector.
Coin projects usually draw inspiration from previous technologies or other cryptocurrencies and merge them into an innovative network that serves a specific purpose.
Another example of a coin, Ethereum’s Ether (ETH) is the native currency of a smart contract platform for creating general-purpose computer programs running on a decentralized blockchain. Instead of focusing on financial data, Ethereum focuses on data of “arbitrary” programs that can cover anything from games to social media. Ether it is used to send-receive, manage assets, pay commissions (Gas fees) and interact with decentralized applications (dApps) on the network.
You may also have heard of Altcoins. Basically, we call Altcoins any currencies that are an alternative to Bitcoin.
Tokens
Tokens are a unique version of various smart contract platforms, such as Ethereum, that allow users to create, issue, and manage tokens that are derivatives of the main blockchain.
For example, the desire for a 2017 ICO (Initial Coin Offering) was fueled by Ethereum’s ERC-20 token standard, which is a protocol for creating tokens (other than ETH) on the Ethereum blockchain that can be exchanged for each other. Projects will announce or create an application on Ethereum using smart contracts and issue a native token for use in this application, raising funds directly from investors in ETH in view of the process.
Tokens occupy a unique corner of the cryptocurrency market where they act as “utility” tokens in an app’s ecosystem to incentivize specific behavior or pay commissions. For example, the popular ERC-20 Dai token is part of the MakerDAO app on Ethereum. MakerDAO is a way for users to access credit instruments such as borrowing/lending (to lend but also to borrow) using Dai, which is designed to be stable. ERC-20 tokens like Dai can be exchanged for any other ERC-20 token or other Ethereum-based standards (i.e., ERC-721), including ETH coin.
As a result, tokens exist for specific applications within the wider cryptocurrency network but also blockchain of a currency, such as Dai that exists in the Ethereum ecosystem.
Other tokens besides Dai are Maker (MKR), 0x, Augur (REP), Komodo (KMD), and Golem (GNT).
Coins must be exchanged for each other via cryptocurrency exchanges because they are built on different, non-standard code protocols. In contrast, tokens on Ethereum (e.g. ERC-20) can be exchanged through internal applications with each other with minimal friction because they are built on standard code protocols.
Approaching the cryptocurrency markets is a challenge, but understanding the key difference between the different types of cryptocurrencies can help you manage risk and make better decisions in an unstable (changing) ecosystem.