Almost everyone has confused a token with a coin at some point in their cryptocurrency journey.
On a fundamental level, a coin and a token are extremely similar. They both represent value and have the ability to accept payments. Coins can be exchanged for tokens and vice versa.
The fundamental distinction between these two is their utility. You can accomplish things with tokens that you can’t do with coins. Some marketplaces, on the other hand, will only accept coins rather than tokens.
It’s analogous to the distinction between traders and investors: all traders invest, but not all investors trade. It’s worth noting that the majority of cryptocurrency users possess both coins and tokens.
Let’s go over some of the key difference between crypto coin and token so you know what you’re talking about the next time you make a mention.
What is a Coin?
Bitcoin established the standard for what it means to be a coin when it first appeared. Cryptocurrencies are distinguished from tokens, which are akin to real-world money, by a number of distinct characteristics.
The following characteristics describe a coin
I. It is based on a blockchain. A blockchain records all transactions involving its native cryptocurrency.
The receipt for an Ethereum payment is stored on the Ethereum blockchain. The receipt is added to the Bitcoin blockchain if the same person pays you back with Bitcoin later. Each transaction is encrypted and can be accessed by any member of the network.
II. It performs the function of money. Bitcoin was designed with the sole intention of displacing existing currency. Other coins, including ETH, NEO, and Litecoin, were motivated by the dual appeal of transparency and anonymity.
Many large firms, such as Amazon, Microsoft, and Tesla, now accept cryptocurrencies as payment for goods and services. Along with the US dollar, Bitcoin has officially become an official currency in El Salvador.
III. It’s possible to mine it. There are two ways to earn cryptocurrencies. One method is to mine using the Proof of Work scheme. This approach is used by bitcoin hunters to increase their earnings. The issue is that there aren’t many Bitcoins left to mine, therefore the process is becoming more difficult by the day.
Proof of Stake, a more current technique of earning coins, is the second option. It uses less energy and is simpler to implement. Cardano is one of the most popular coins to use this technique.
What is a Token
Tokens, unlike coins, do not have a blockchain. Instead, they use the blockchains of another cryptocurrency, such as Ethereum. BAT, BNT, Tether, and numerous stable coins like the USDC are some of the most regularly encountered tokens on Ethereum.
Tokens rely on smart contracts if cryptocurrency transactions are managed by blockchain. They’re a set of codes that allow users to trade or pay one other. A smart contract is used by each blockchain. ERC-20 is used by Ethereum, and Nep-5 is used by NEO.
A token is physically moved from one location to another when it is spent. The trading of NFTs is a fantastic example of this (non-fungible tokens.) Because they are one-of-a-kind, any changes in ownership must be handled manually. NFTs are comparable to utility tokens in that they have emotive or artistic value, but you can’t obligate any services with them.
Cryptocurrencies differ from coins in that they do not move; only account balances change. Your money does not move anywhere when you transfer money from one bank to another. The bank altered both accounts’ balances while keeping the fees. The same thing happens with blockchain: your wallet balance fluctuates, and the transaction records it.
Another significant distinction between tokens and coins is the value they represent. Tokens can represent assets or deeds, but cryptocurrencies are essentially digital copies of money.
Tokens can be purchased with coins, however, some tokens may be worth more than any of them. Consider a company’s stock. However, because there are frequent constraints on where a token can be spent, it lacks the liquidity of a currency.
Simply put, a token symbolizes what you own, but a coin represents what you have the potential to acquire.
Tokens existed long before cryptocurrency was a phenomenon on a larger scale. Even now, it has nothing to do with cryptography.
At some point in their lives, everyone has used a token. A token is a dinner for two vouchers you received in the mail. Your car title is merely a symbol. When you sell your car, the value of the title is transferred to someone else. You can’t, however, go to Microsoft and buy a computer or a dinner coupon with that title.
Another intriguing aspect of tokens is how simple they are to make. Some networks, such as Ethereum, give templates for you to customize and trade your tokens. Anyone with little to no technical skills can become a market maker as a result of this. Decentralized exchanges, such as Uniswap, have a high density of this type of activity.
The difference between a token and a coin isn’t huge, but it can generate a lot of confusion if it’s misunderstood. Paying attention to what you’re buying is one simple way to figure out which one you should use. If it’s a product, you’ll almost always require coins. If it’s a service, utility tokens are frequently available.
Surprisingly, the way we spend tokens is very similar to how we spend dollars. Your money literally travels from your hand to someone else’s when you pay cash. However, we did state that only coins represent money and that they do not move. Is this how financial marketeers play with our minds?
That’s something to consider the next time you’re feeling reflective.