Powerful Guide to Understanding the Difference Between Tokens and Coins in Cryptocurrency.
In this post, I will explain the difference between Crypto tokens and coins.
What are Crypto tokens and coins?
Suppose you want to hang out around in the city, the way it can be possible is by car.
In a way either you own a car or rent a car.
If you own a car then you need to maintain it through regular service, fueling, insurance, and other things. It is your responsibility to keep it maintained as you own it.
The other way is you rent a car and use it and pay rent to the owner of the car for the time you have used it and you do not need to worry about another issue with the car.
Depending on the various factors that suit you better, you need to select an option from buying/owning a new car or getting one on rent.
This analogy is similar to the difference between Tokens and coins.
Watch Vidoe on the Difference between Crypto and Tokens.
Difference between Crypto tokens and Coins.
Lets us now find out the actual difference between crypto tokens and coins.
A coin uses its own blockchain, to keep track of the data, which is similar to owning a car. when it comes to tokens you are using someone else coins blockchain’s infrastructure and you pay rent for it.
You only need to create a token, not a blockchain, and no need to worry about how to code blockchain and how it needs to be validated, instead you need to focus on creating a token and its run on that blockchain. A unique use of Blockchain in Supply Chain Technolgy
For example, Ethereum has its own blockchain, that stores value and validates transactions. Its team is working hard to improve the functioning of the blockchain.
Ethereum token is an ERC20 token, that uses ethereum blockchain capability, as its backbone and infrastructure. For example BAT (basic attention Token) uses an ERC20 token, built on the Ethereum network.
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Basic Attention token (BAT) working
BAT is an ERC20 token that is built on the Ethereum blockchain network for its work. BAT is growing very speedy and needs a larger system.
Now the BAT team decided to create its own system, where users can be rewarded who follow them.
The BAT team focused on providing a great product that is a “Brave” browser. A browser that automatically replaces a website advertisement with an advertisement that rewards the creator with a Brave token.
By creating a token the Brave team would depend on the ethereum network to provide safety and stability and they focused on their product(Brave Browser).
Can a crypto token be converted into a Coin?
You should also know that a team of developers can migrate from a token to a coin if they decide their project is growing quickly enough. If we think about Crypto.com (Digital Asset Platform) they recently launch their own mainnet, which is a fancy way of saying that they launch their own coin (CRO).
That is validating their own transaction, they use to have a token but it got so popular that they decide to create their own blockchain and token (CRO)too.
So, here is an important thing, you can’t convert a token straight into a coin, you can create a coin that functions in the same way and then create a bridge that would allow users to swap out the previous token with new coins.
Crypto tokens and coins on Multiple Blockchain
There are so many tokens and coins that are available on multiple platforms, such as tokens and coins.
In some case, some coins like LEO (a token on multiple networks) is on ERC20, Binance Smart Chain, and Hive Network. Another thing to note is that some coins are represented as tokens on some networks.
For example Binance Pegged Ethereum token. If you buy it then it means that you don’t buy an actual Ethereum but bought a representation of Ethereum on the Binance network that mimics the price of the Ethereum.
You know, what is the use of doing this? Well, a regular transaction on the Ethereum network is $20, and the transaction on Binance smart chain is only 50 cents, which is more affordable to trade and representation of Ethereum on the Binance smart chain network.
You can think about it like this, you have a stock of Gold, you own the stock but all it does is represent Gold at any time you can cash out that stock for a piece of gold, so it’s basically gold at least for trading purposes. quite confusing, do not worry let’s move on.
There are different categories of Crypto tokens.
So let’s check some different types of tokens and coins available token.
Platform tokens and coins
They are created to support decentralized applications on the blockchain, for example, UNISWAP is a decentralized application that allows users to swap-out Ethereum tokens for other Ethereum tokens.
And they have their own Token, the UNI token which is given to those, who invest in the platform and it has a promise that it will eventually token holders can vote on changes in the future and even earn some of the profit from trades.
Next, we have Security tokens.
Security tokens and coins
They are minted to represent the ownership of other assets. For example, if you want to buy gold but you don’t want to hold the gold. Then someone could create a token that is attached to the price of gold. so instead of actually owning gold you only have representation of it.
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These technologies will be much safer because it is much more difficult to hack an Ethereum token than to break into someone’s house. Now the tricky part in it is that there should be a real asset behind the token. For example, I can create a gold token and ask you to invest in it and have no gold for security.
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Next, we have is Transactional tokens
Transactional tokens and coins
Transactional tokens are used as a fast and easy way, to transfer money. If we think of the coin xDAI, it is currently pegged to the United State Dollar, it is easy for people to pay for their shopping, you can use the same as cash, however, expenses are super low.
The transaction fee for XDAI is 0.000021 USD and that is very low, you can make over 47000 transactions and pay only a dollar fee for all. Whereas the transaction fee on PayPal or Bank wire is comparatively high.
Next, we have the Number 4 Utility token.
Utility tokens and Coins
Utility tokens are tokens that have a value tied to ownership. For example, the Basic attention token (BAT) is an Ethereum token that can be used to advertise on the Brave browser.
In another word, if I have to advertise this YouTube channel on Brave browser, I can do so very easily with my basic attention token.
In other words, a utility token can actually do something, security token doesn’t do anything, you just buy them and hold them but a utility token can actually be used for commercial intent.
Lastly, Number 5 is the Governance token.
Governance tokens and Coins
A governance token allows the token holders (Stakers) to vote on certain things, for example, UNISWAP could be a governance token, in the future version of the UNISWAP exchange. token holders could choose to vote, to raise the fee of UNISWAP trade.
And everyone with the token will be allowed a vote on the change, the decision with the most vote chooses the winner. So you actually have more voting power, by holding more token-overs. it is a pretty good reason to hold more tokens, by holding more you can actually control the platform more, but this comes with the problem of the authority being centralise.
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Now we were over the different types of tokens, hopefully, you understand, why we need them and how some of them work.
Conclusion about Crypto tokens and coins
In conclusion, it is important to understand the difference between crypto tokens and coins.
Coins are a form of cryptocurrency that is used to buy goods and services. Tokens, on the other hand, are a type of cryptocurrency that represents an asset or utility. Both have their own uses and benefits.
Coins are a type of cryptocurrency that represents ownership of a digital asset. Tokens are a representation of an asset or utility that is often found on a blockchain. While both can be traded, tokens are more likely to be used as a means of exchange, while coins are more likely to be used as a store of value.
FAQ on Crypto tokens and Coins
What does token mean?
In general, a token is an object that represents something else, such as another object (either physical or virtual), or an abstract concept as, for example, a gift is sometimes referred to as a token of the giver’s esteem for the recipient. In computers, there are a number of types of tokens.
Is Bitcoin a token or a coin?
You could also call a crypto coin a cryptocurrency or a “native token” (confusing, we know) – the underlying idea is that the asset has its own blockchain. The best-known example of a coin in the blockchain space is Bitcoin, the original crypto coin/cryptocurrency. Other examples include Ethereum, Litecoin, and Monero.
How do crypto tokens make money?
It usually involves holding cryptocurrency in an account and letting it collect interest and fees as those funds are committed to blockchain validators. When blockchain validators facilitate transactions, the fees generated go, in part, to stakeholders.
Why do Blockchains need tokens?
Security tokens use a blockchain system a decentralized database to do the tracking of who owns which assets. Using blockchain-based security tokens expands trading beyond regular bankers’ and stock-market hours, and may enable faster finalization of transactions