Coins vs Tokens: All you need to know
March 10, 2023
We frequently hear the terms “coins” and “tokens” used interchangeably. While there are many similarities between the two, they are not the same thing, and there are some big differences.
The key difference between coins and tokens is that coins are digital currencies with their own blockchain, whereas tokens are digital currencies without a blockchain of their own but exist on another blockchain.
What are Coins?
The term “coins” refers to cryptocurrencies like bitcoin, XRP, and Ether that have their own unique and stand-alone blockchain.
One crucial aspect of coins is that they serve as fuel for their own blockchain. This means that a certain amount of ether must be used as “gas” in order for a transaction to be completed on the Ethereum blockchain.
Another important aspect of coins to consider is how they circulate. Coins are mined either using a Proof of Work (PoW) mechanism or a Proof of Stake (PoS) mechanism.
These coins include bitcoin, XRP, ether, Ada, Sol, BNB, Luna, and others.
What are coins used for?
Coins are typically made to function similarly to paper money.
- Store of value
- Exchange to other currencies
- Paying for goods and services
What are Tokens?
While cryptocurrency tokens are created on the blockchain, they differ significantly from coins in that tokens do not have their own blockchain. Rather, they are formed on an already-existing blockchain and are used to provide a range of utilities.
Tokens are typically not intended to be used as a form of payment, though they can be purchased, sold, and traded like coins. Tokens are typically used to fulfill their own utility within a specific ecosystem. This implies that a DAO may issue a token that grants holders ownership rights in the DAO, a launchpad may issue a token that grants holders access to invest in projects, etc. (Read more on DAOs here). Tokens can be used for a variety of purposes and some examples are Shiba Inu, stablecoins like USDT and USDC, Cake, Uni, etc.
What purposes do tokens serve?
Tokens are used for a variety of purposes and can be divided into roughly four categories despite not being designed to be used for payments.
Security tokens: Typically sold during initial coin offerings (ICOs), security tokens lack specific uses and are frequently targets of regulations.
Equity tokens: are used to symbolize the ownership stake or stock in a company.
Utility tokens: are used to support a specific good or service.
Payment tokens: These are used to pay for goods and services.
A token may fit into more than one category, it’s important to remember that.
Tokens use the technology of the host blockchain and are deployed on existing blockchains, whereas coins exist on their own blockchain.
Both crypto novices and experts have occasionally been confused about the difference between coins and tokens. Even though it doesn’t do much harm, if ignored frequently, it can create significant confusion.
If you enjoyed reading this, then you might like this article on 6 benefits of asset tokenization for businesses