Many people, perhaps including you, believe that crypto token & coin are two similar terms. It is indeed not sinful to use both terms interchangeably in regular crypto discussions because they do share some similarities. However, at the very core of their meaning, they are two distinct crypto entities.
Why Do People Use Token & Coin Interchangeably?
All financial affairs and investments focus on amassing valuable assets. Outside the crypto realm, these assets can be currencies, stock, real estate properties, and so on. In the world of cryptocurrencies, coins and tokens become the primary assets. Before people delve deeper into each term’s specific characteristics, types, and functions, they simply see them as assets, hence their interchangeable use in crypto-related discussions.
You can thus use both terms interchangeably insofar as you are discussing them as two general terms that refer to digital assets,
However, the similarity between token & coin stops right there. If you step further, you will find that each term is unique to one another. They have different qualities and sometimes they serve quite different purposes in every blockchain system.
Their Difference in a Nutshell
We will discuss all the details regarding the differences between token & coin; however, before we go to that part, you can use a simple analogy to distinguish a crypto token from a coin. In brief, the difference between a coin and a token is comparable with the difference between money and other financial assets outside the crypto world. If you understand this, it should not be difficult for you to understand how both terms differ.
What Is Crypto Coin?
A crypto coin refers to a native digital asset developed within its independent blockchain system. It is the primary asset that identifies the blockchain system associated with it. Examples of crypto coins are BTC for Bitcoin, LTC for Litecoin, and ETH for Ethereum. BTC, LTC, and ETH are all native to their respective blockchain systems without which the system itself does not exist.
Crypto Coin Characteristics
All crypto coins, regardless of the blockchain systems they belong to, share at least three unique characteristics.
Firstly, all crypto coins employ a decentralized control whereby their production, utilization, and management take place within a distributed ledger called the blockchain. This decentralized control is in contrast with the currency system that uses centralized control by banks and other financial organizations.
All crypto coins become popular mostly due to this characteristic. With the absence of centralized control, all transactions come about with guaranteed protection of privacy and anonymity. If you use your wallet properly and do all the transactions according to how a blockchain system works, no one can track your transactions.
The second characteristic shared by all crypto coins is that they work in a specific blockchain system. A blockchain is a publicly distributed ledger with records or blocks that grow perpetually and a certain cryptographic technique securing the linking of those blocks.
The use of cryptography to link all the blocks in the blockchain is the final characteristic found in all cryptocurrency systems. How does cryptography work? In simple terms, cryptography allows the encryption and decryption of messages that travel from one block to another. Using a specific algorithm, which can be either a hash function or an asymmetric-key algorithm, cryptography encrypts a message that a particular block sends, transmits the encrypted message to its destination, and finally decrypts it in the recipient’s block.
What Is Crypto Token?
Unlike a crypto coin that is native to its relevant blockchain, a token is something that is built later in the blockchain using its respective coin as the basis. Because a crypto token acts like a “tenant” for a blockchain, it must follow all the standards that apply in the blockchain for it to be usable. Examples of the crypto coin include Tether (USDT) that issues tokens on Ethereum and Bitcoin, among others); USD coin (USDC) that runs on Solana, Ethereum, Tron, Algorand, and Stellar; and Basic Attention Token (BAT), a decentralized ad exchange platform that runs on Ethereum.
Crypto Token Characteristics
Because a token works on an existing blockchain, it also has all the three core characteristics of crypto coins, hence the frequent swappable use of token & coin. However, in addition to those three characteristics, tokens generally also have the following extra qualities.
Firstly, a token is programmable, allowing it to run on a software protocol powered by smart contracts that come from its main blockchain.
Secondly, major blockchains like Bitcoin and Ethereum generally allow open and permissionless tokens whereby all participants can play many roles that may ultimately alter the blockchain structure. However, although this permissionless characteristic is the accepted norm for all blockchains, there are currently permissioned tokens that operate mostly within industrial and corporate ecosystems.
Thirdly, any activities that use tokens in a blockchain are transparent. Everyone in the blockchain can monitor and record it.
You can use crypto token & coin as two interchangeable terms because they are assets that keep the blockchain operational. When you dig deeper, you will start seeing many differences. In brief, every blockchain coin plays more or less a similar function relevant to the blockchain it belongs to whereas tokens generally have more variable functions that allow participants to play a more active role in the blockchain.
In terms of function, coins and tokens serve quite different purposes. Crypto coins function like money in the crypto world. They are the primary means of transactions in their respective blockchains. Tokens, on the other hand, have more variable functions. You can use them as tickets, voting rights, proof of ownership of certain types of digital art, and so on.
Because of their variable functions, tokens can have more varied characteristics and purposes. They can be either fungible or non-fungible whereas coins are always fungible. By understanding their difference and especially the tokens’ variable functions, you can start identifying whether the cryptocurrencies that you are using use tokens or coins. And based on this understanding, if your cryptocurrencies use tokens, you can learn more about their purposes and how to reap the most benefits and the biggest profits from their utilization.