Crypto Coin Vs. Token
Coins and tokens. We hear these words used interchangeably all the time when talking about crypto. Whether it is on the news talking about FTX and their FTT token, or Elon Musk tweeting about DOGE coin, the words ‘token’ and ‘coins’ are used repeatedly. But are they the same thing? Short answer: no.
Let’s dig into the long answer which requires us to tackle coins and then move over to tokens. The first crypto coin was Bitcoin. Bitcoin’s purpose was to be an alternative form of payment to replace traditional money. Bitcoin operates on the Bitcoin blockchain, which keeps track of all transactions that involve its ‘native’ crypto coin aka Bitcoin. While the transaction itself is protected and encrypted, the ‘receipt’ is registered on the network for anyone to see. This is why it is both semi-anonymous yet transparent in nature. Lastly, Bitcoin can be mined through a Proof of Work (POW) system on the bitcoin blockchain. Other chains have other methods, such as Proof of Stake (POS), but these are all methods to earn the crypto coin. How Bitcoin works is a good template for what defines a crypto coin.
We can define coins with a few identifiers: it is used as payment, it operates on the blockchain, and it can be earned through POW or POS methods. Since the blockchain itself acts as the ledger of its native coin, it is similar to a bank in this way. For example, if person A has 10 Bitcoin and sends them to person B, this transaction gets ‘sent’ to the blockchain where it is stored and recorded, and person A and B’s account balances reflect the change. No actual movement of funds has occurred. This is just like how banks operate, where if person A sends person B 10 dollars, both of their account balances are updated and the bank keeps the relevant fees while no actual cash was moved across accounts. Each crypto coin is intended to be the native currency of its specific ‘financial ecosystem’ that is its native blockchain.
Popular crypto coins include Ether (ETH) for the Ethereum chain, AVAX for the Avalanche chain, BNB for the Binance chain, and of course, Bitcoin for the Bitcoin chain.
*TIP*: If its name is the same as a chain, it is most likely a coin.
The same cannot be said of tokens. You can reference our piece on DApps here for a refresher on how DApps are built, how they operate, and why they require the use of tokens. Tokens are created by platforms or DApps that are built on top of an existing blockchain. While coins are ‘run’ by their native blockchain, tokens are ‘run’ by the smart contracts that run their application.
These tokens can represent anything that their smart contract has programmed them to represent. Coins are meant to be digital cash, and while some tokens can be used as payment on their platforms, they can also represent a utility or an asset such as a contract, a service, a ticket, or even shares of a company. The most common use cases for tokens include security, utility and governance.
While a coin is mined, tokens are minted. The total number minted depends on the conditions of the project or application and what the purpose is. Tokens can be used by start-ups to raise capital, they can be used to vote on governance issues of projects, or they can be used to represent ownership of real-world assets. This also means that transactions with tokens are fundamentally different. When you transfer or pay with a token, it physically moves from place to place and then this transaction is recorded and recognized by the blockchain. This is why a dapps biggest decision is which blockchain they should build on because they are very dependent on the blockchain’s underlying infrastructure. Currently, Ethereum has the biggest market share of about 60% of all dapps.
Common tokens include UNI (Uniswap token), CAKE (Pancake Swap token), USDT (dollar-pegged stablecoin) and the popular Shiba Inu token.
