One of the topics and concepts that confuse newbies in the crypto space is the difference between coins and tokens. Many people are guilty of using these two terms interchangeably to refer to a single object.
However, there is a big difference between coins and tokens, and it is equally important to know this difference and how it affects the operations of coins and tokens. This article seeks to explain some differences and review some of the reasons for the misinterpretation of the two terms.
A digital asset is referred to as a coin, if it is built or native on its blockchain. For example, Bitcoin is a coin because it is native to the Bitcoin blockchain. The same thing goes for Ether, which is native to the Ethereum blockchain, Litecoin, and NEO.
This means that any operation involving the coin takes place within the blockchain. This operation includes sending or receiving the coin. It is important to know that the transfer of coins in the blockchain doesn’t result in the actual movement of a physical coin.
These coins are data stored on a database, which is also the blockchain. The transfer of coins involves the transfer of this data, an activity that is verified on the blockchain.
Functions of Coins
The main function of a coin is to serve as money. Whatever your physical money or coin does, is what the crypto coin also does. You can use coins to make purchases, as a means of storing value or to transfer value.
To put this into context, let's use one of the most popular crypto coins, Bitcoin. Bitcoin is an acceptable means of payment with many online and land-based stores. You can also hold on to your Bitcoin and store it. Finally, you can send Bitcoin or receive it as money.
However, the use of Bitcoin as an example is a bit peculiar. This is because Bitcoin has no other functions apart from being used as money. Other coins, such as Ether, NEO, and Litecoin do have other purposes apart from the monetary functions.
These other functions include:
- Coins like Ether are used as a gas fee. A gas fee is an amount paid as fuel for transactions on the ethereum blockchain.
- NEO is suitable for staking. With staking you deposit your coins in a wallet to earn dividends.
- Coins like DASH give governance and voting rights. What this means is that people who have the DASH coin can vote on development changes on the DASH network or ecosystem. The coin allows holders to be actively involved in running the network.
How to Identify a Coin
Truth be told, there is no one way of identifying coins. One of the easiest ways is that coins have large market capsizes. So all digital assets with a large market cap are a coin. However, there are coins with low market capitalization sizes. In total, there are about 900 different examples of coins.
One of the mistakes that people make is calling tokens digital coins. Tokens are digital assets built on other blockchains, and they do not have a native blockchain to function and operate with. For instance, many of the most popular tokens in the crypto space at the moment are built on the Ethereum Blockchain and are usually referred to as ERC-20 tokens.
There are lots of tokens built on other blockchains, all thanks to the innovation of smart contracts. Building a token requires some programming and technical ability. It also involves spending a considerable amount of the blockchain’s native coin to finance the mining or creation of the token and other transactions involving the token. For example, if you are creating a token on the Ethereum blockchain, you will need to spend a considerable amount of Ether to finance the creation process and other transactions that come with the use of the token.
Functions of Tokens
Just like coins, tokens have a wide range of uses and functions. To start with, many tokens exist as a part of a decentralized app, also known as DApps. These tokens are used to activate and operate some features on these apps and platforms.
For example, Musicoin. Musicoin is a token for a platform that allows users to play music videos, and Musicoin tokens allow holders to either view saved music videos on the platform or stream new ones. Another token used on a platform is the BNB token, which is used on the Binance CEX platform. The holders of the BNB token get a 50% discount on transactions made on Binance.
Some tokens are also used to represent physical entities meant for sale. If you intend to sell your car on a smart contract, it is impossible to physically place the car on the smart contract. What you can do instead, is represent the car with a token. Therefore, the transfer of the token represents the sale of the car.
One token that has perfected this use is WePower (WPR). The WPR token represents units of electricity as the WePower platform is a decentralized app that allows people to buy and sell units of electricity using blockchain technology. The buying and selling of these tokens constitute the sale of units of electricity.
The difference between coins and tokens is important to understand. A coin’s main function is money, while tokens can take on a number of functions. This difference is key to understanding how to use coins and tokens when buying, selling, swapping, or trading.
Tokens are not digital coins, but digital assets built on the blockchains. Coins operate on their native blockchain, such as Bitcoin is a coin because it is native to the Bitcoin blockchain. It is always wise to do your own research before investing or buy coins and tokens, and to understand how to use them on the blockchain.