Almost everyone has confused a token with a coin at some point in their cryptocurrency journey.
The fact is that coin and token are very much alike on a fundamental level. They both represent value and can process payments. You can also swap coins for tokens and vice versa.
The main difference between these two comes down to utility. There are things you can do with tokens and not with coins. On the other hand, some marketplaces will accept coins and not tokens.
It's similar to comparing investors and traders - all traders invest, but not all investors trade. Note that most cryptocurrency users usually own both coins and tokens.
Let's go over some of the most significant distinctions between tokens and coins, so next time you're making a reference, you'll know exactly what you're saying.
What is a Coin?
When Bitcoin first came out, it set the standard for what it means to be a coin. There are clear-cut qualities that distinguish crypto coins from tokens, which are similar to real-world money.
A coin is defined by the following characteristics:
1. Operates on its blockchain. A blockchain keeps track of all transactions that involve its native crypto coin.
When you pay someone with Ethereum, the receipt goes to the Ethereum blockchain. If the same person pays you back later with Bitcoin, the receipt goes to the Bitcoin blockchain. Each transaction is protected by encryption and is accessible by any member of the network.
2. Acts as money. Bitcoin was created for the sole purpose of replacing traditional money. The paradoxical appeal of transparency and anonymity inspired the creation of other coins, including ETH, NEO, and Litecoin.
You can purchase merchandise and services from many major corporations today, such as Amazon, Microsoft, and Tesla, using crypto coins. Bitcoin has recently become an official currency of El Salvador alongside the US dollar.
3. Can be mined. You can earn crypto coins in two ways. One is through traditional mining on the Proof of Work system. Bitcoin hunters employ this method to boost their earnings. The problem with this is that there aren't that many Bitcoins left to mine, so the process becomes more arduous every day.
The other method is Proof of Stake, which is a more modern approach to earning coins. It's lighter on energy consumption and easier to do. Cardano is one of the biggest coins that adopt this system.
What is a Token?
Unlike coins, tokens do not have their blockchain. Instead, they operate on other crypto coins' blockchains, such as Ethereum. Some of the most commonly seen tokens on Ethereum include BAT, BNT, Tether, and various stablecoins like the USDC.
If crypto coin transactions are handled by blockchain, then tokens rely on smart contracts. They're an array of codes that facilitate trades or payments between users. Each blockchain uses its smart contract. For example, Ethereum uses ERC-20, and NEO uses Nep-5.
When a token is spent, it physically moves from one place to another. A great example of this is the trading of NFTs (non-fungible tokens.) They are one-of-a-kind items, so a change in ownership must be manually handled. NFTs often carry only sentimental or artistic value, so in a way, they're similar to utility tokens, except you can't oblige any services.
This is different from coins because crypto coins do not move around; only account balances change. When you transfer money from your bank to someone else's, your money doesn't go anywhere. The bank changed the balances of both accounts and kept the fees. The same thing happens with blockchain - the balance in your wallet changes, and the transaction notes that.
Another notable difference between tokens and coins is what they represent. While crypto coins are essentially digital versions of money, tokens can stand for assets or deeds.
You can buy tokens with coins, but some tokens can carry more value than any of them. For example, a company's share. However, since there are usually restrictions to where you can spend a token, it doesn't have the liquidity a coin offers.
Simply put, a token represents what you own, while a coin denotes what you're capable of owning.
On a broader scale of things, tokens existed long before cryptocurrency was a thing. Even today, it has very little to do with crypto at all.
Everyone has used a token at least once in their life. That dinner for two vouchers you got in the mail is a token. Your car title is a token. When you sell your car, you transfer the value of that title to someone else. However, you can't go to Microsoft and buy a computer with that title or dinner voucher.
Another interesting thing about tokens is how easy it is to create one. Some networks like Ethereum provide templates where you can brand your tokens and start trading. This makes it so anyone with little to no technical knowledge can become a market maker. You'll find a high density of this type of activity on decentralized exchanges, such as Uniswap.
To Sum up
The difference between token and coin isn't vast, but it can cause a major headache if frequently overlooked. One quick way to decide which one you should use is to pay attention to what you're buying. If it's a product, most often, you would need coins. If it's a service, there are usually utility tokens you can use.
Interestingly, the way we spend tokens is quite similar to cash. When you pay cash, your money physically moves from your hand to someone else's. But we did mention that only coins represent money, and they don't move at all. Is this a way the financial marketeers toy with our sanity?
That's something to think about the next time you're in a contemplative mood.
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