Coin vs. Token in Blockchain

Although we refer to a variety of currencies as “crypto,” there is a distinction between coins and tokens. Take a closer look.

Getting started in the bitcoin industry can be difficult and intimidating. Although you may be familiar with Bitcoin, are you aware of the thousands of other coins and blockchain initiatives that exist?

It’s simplest to divide cryptocurrencies into two distinct categories: coins and tokens, in order to gain a better understanding of the crypto markets.

The terms “coin” and “token” are frequently used interchangeably and as synonyms. But they make reference to two entirely different ideas. Here is an infographic that explains the distinction between a coin and a token.

Any cryptocurrency with a stand-alone, autonomous blockchain, such as Bitcoin, is referred to as a coin.

Some cryptocurrencies have been built from the ground up, and the overall network is specifically intended to accomplish a particular objective. For instance, Bitcoin functions as a secure, fixed-price medium of trade and censorship-resistant store of wealth. The most liquid cryptocurrency on the market is Bitcoin, or BTC (also known as bitcoins), which also has the greatest market cap and realized market cap in the cryptocurrency industry.

Coin projects frequently take cues from earlier technologies or other cryptocurrencies and combine them into a cutting-edge network tailored to a particular need.

Another example of a coin is Ethereum’s native coin, Ether (ETH), which is used to build general-purpose software applications that operate on a decentralized blockchain. Ethereum focuses on arbitrary program data, which can include anything from gaming to social media, as opposed to financial data. While communicating with decentralized applications (dApps) on the network, sending and receiving money, managing assets, and paying gas fees all require the use of ether.

The ability to develop, issue, and administer tokens that are derivatives of the main blockchain is one of the distinctive features of larger smart contracts platforms like Ethereum.

For instance, Ethereum’s ERC-20 token standard, which is essentially a framework for establishing tokens (other than ETH on the Ethereum blockchain) that can be exchanged with each other, fuelled the ICO mania of 2017. With smart contracts, projects would publish or develop an application on Ethereum, issue a native token for usage in that application, and raise money directly from ETH investors in the process.

In the ecosystem of an application, tokens serve as “utility” tokens to reward particular behaviors or cover fees, making them a special kind of cryptocurrency. For instance, the Ethereum-based MakerDAO dapp includes the well-known ERC-20 token Dai. Users can use MakerDAO to get stable Dai-based credit products such as lending and borrowing. The ETH coin as well as other Ethereum-based standards (i.e., ERC-721), including ERC-20 tokens like Dai, are all exchangeable.

As a result, within a coin’s larger cryptocurrency/blockchain network, tokens exist as application-specific tokens, much like Dai does within the Ethereum ecosystem.

Because cryptocurrencies are based on various, non-standard code protocols, coins must be traded between them through cryptocurrency exchanges. In contrast, because Ethereum tokens (like ERC-20) are based on established code protocols, they may be exchanged between users of inside applications with little difficulty.

Understanding the fundamental differences between the various types of cryptocurrencies will help you manage risk and make better decisions in a volatile ecosystem. Entering the cryptocurrency markets is a difficult undertaking.

References :

The Difference Between Coins and Tokens | Ledger