It’s usual for people to think that cryptocurrency and tokens are the same things. However, they’re not.
While some believe they're synonyms, others straight up have no clue what they are.
We threw out a poll on Twitter and over 75% of people admitted they didn't know the difference between a coin and a token. So, we’re here to clear things up.
To put in simple terms:
A coin is used to pay for goods and is a replacement for traditional money. E.g. BTC, ETH, and ADA
A token offers utility through a service of some kind or represents an asset. E.g. USDT, MANA, and LINK**
Tokens still hold monetary value. They can be traded, swapped, or sold for their market price just as coins can. However, their sole purpose is not to replace traditional money.
Let's dive a little deeper…
What Is A Crypto Coin? 💰
As we've covered, a cryptocurrency coin is a direct competitor to traditional money like the US Dollar. However, they offer a lot more than just value.
Coins operate on their own blockchain; these projects are also known as Layer 1 cryptocurrency projects. This means that all transactions of a coin are logged on its native blockchain.
For example, all ETH transactions can be found on the Ethereum blockchain using tools like EtherScan.io.
This means that cryptocurrency coins are self-reliant, as they do not require someone else's blockchain to host their project.
Okay, so, we said coins and tokens are not the same. But… sometimes they are. All crypto coins are tokens but not all tokens are coins. Just like all poodles being dogs but not all dogs being poodles.
This is because coins are the native token of a Layer 1 blockchain (the base network), meaning that each blockchain will have its own crypto coin. For example, Cardano has ADA, Bitcoin has BTC, and Solana has SOL.
TL;DR: crypto coins are the native token of a blockchain.
What Is A Cryptocurrency Token? 🔧
Tokens don’t have their own blockchain. Instead, they are built upon a Layer 1 protocol that will have its own crypto coin. The token will offer a service or utility to the blockchain's ecosystem that the coin does not.
For example, the MANA token is built on the Ethereum blockchain. It offers the utility of interacting with the Decentraland metaverse — buying and selling in-game items, land, etc.
You cannot use ETH in Decentraland, despite being built on its blockchain. This is what makes MANA a token and not a coin.
Unlike coins, which simply use their blockchain to record transactions, tokens rely on smart contracts. The blockchain takes the code of a smart contract, reads it, and then completes the trade.
When a token is swapped, traded, or spent it moves digital location — from one wallet to another.
This is unlike coins, which don’t move; instead, the blockchain records how much of the coin people hold through a ledger. This is a decentralized digital file that records every transaction and everyone's "bank balance" on the blockchain.
QUICK TIP: If you're struggling to define if something is a coin or token, look it up on CoinMarketCap. CoinMarketCap will show whether it’s a coin or a token next to its rank.
Key Differences between a crypto coin and a toke Simplified
How about we put everything we've covered into a few bullet points:
Coins are:
- A medium of exchange
- A store of value
- Stored on their own blockchain
- Balances are recorded using a ledger
Tokens are:
- An asset, utility, or service
- Provide utility
- Stored on a blockchain that isn't it's own
- Moves location when traded, swapped or sold
How Does A Crypto Token Affect A Crypto Coin's Price?
A crypto token's price will fluctuate due to the demand for the token. If Decentraland increases in users and more people want to spend money on the game, its token (MANA) will increase in value.
Whereas, a crypto coin's price will move depending on the success of its entire ecosystem. For example, Ethereum's price will go up if its entire ecosystem is healthy and sought after — not just the ETH coin. This includes the success of projects like Decentraland.
A token's price is tied exclusively to the success of its individual project. On the other hand, a coin's price moves depending on its entire blockchain. In a way, by purchasing a coin you are also investing in the other projects in its ecosystem.
What Types of Tokens Exist? 🤔
We've covered the basics of what a token is, but there’s more than one type of token.
Utility Tokens
Utility tokens offer utility to the holder. The token(s) will be used to access a function within an ecosystem. Outside of its specific use case, it’s useless — other than price speculation.
For example, BAT is a popular utility token built on the Ethereum blockchain. It allows users to tip content creators through the Brave browser, but it’s useless otherwise. You can’t use BAT in Decentraland or pay for your groceries. Your BAT must stay in the Brave cave 🦇.
This type of token is much less like digital money and much more like a piece of software. Their main purpose is to fulfill a function.
That being said, a utility token can go up or down in value. This will usually be a result of the function of the token becoming more popular. However, being used to transfer value isn't its main cause.
Security Tokens
Security tokens, on the other hand, are more like a stock. According to Investopedia, in traditional finance, a security is:
A fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation via stock.
In the crypto world, it isn't much different. A security token is a digital representation of an asset. This could be a tokenized stock, such as the ones found on FTX, that follows the price of traditional securities like Tesla. It could also be a token that represents a share in an investment fund or tokenized real estate.
This is a fairly new type of token, and we are only just starting to see the benefits and possibilities that they possess.
Governance Tokens
Ever heard of a DAO? To vote in one, you need governance tokens.
Simply put, they grant you access to voting in a DAO, allowing you to influence the future of the project.
We've covered DAOs in a previous article, covering the most popular projects, how they work and why they're so powerful. Read more about DAOs [here](link to hashnode dao article please)
NFTs
NFT stands for non-fungible token.
NFTs are tokens that prove you are the owner of something. You own the token that authenticates your ownership, not the image itself.
They’re usually closest to a utility token, as they often provide additional benefits other than owning an asset. However, in cases where an NFT is just a piece of art you own, they’re closer to being a security token.
There is no single rule of thumb when deciding whether NFTs are a security or utility token. It goes on a case-by-case basis. This is why regulatory bodies are having such a nightmare deciding how to regulate them.
Taxing Tokens
Due to utility, security, governance, and NFTs being so vastly different, taxes are complicated.
If we're honest, giving out crypto tax advice is not something we have the qualifications for. However, Koinly has some great crypto tax guides so give them a look if you're concerned.
What Is an ERC-20 Token?
An ERC-20 token is a technical standard for tokens on the Ethereum blockchain. Using the model to create a token makes it easier for exchanges and wallet providers to import them to their platforms. If you don't follow the ERC-20 standard, however, it'll only make it harder to import your token as platforms will have to manually adjust their site for your needs.
The tokens have six essential functions and three optional functions.
The essential functions are:
totalSupply: The maximum amount of tokensbalanceOf: How many tokens an address holdstransfer: Taking tokens from the total supply and giving them to an addresstransferFrom: (Sending tokens from one address to another addressapprove: Verifies that a contract can give a specified number of tokens to an address
allowance: Verifies that an address can give a specified number of tokens to an address
And, the optional functions are:
NameSymbolDecimals(default is 18)
ERC-20 isn't the only standard for tokens. For example, the ERC-621 standard builds upon ERC-20, adding an option to increase or decrease the total token supply. Or, BEP-20 which is the same as ERC-20, but on the Binance Smart Chain.
Examples of Coins and Tokens
We've covered all the bases of coins, tokens, and their subsections. Now, we'll take a look at some of the biggest examples of coins, tokens, and everything in between.
Bitcoin
Bitcoin was made to replace traditional money. The creator, Satoshi Nakamoto, even said,
Bitcoin would be convenient for people who don't have a credit card or don't want to use the cards,
Confirming that Bitcoin can/should/will replace traditional money.
Outside of that, Bitcoin has its own blockchain and native token. It has also been recognized across the world as a store of value, a currency, and, in some countries, even legal tender.
Chainlink
Chainlink is one of the most interesting tokens, as it provides real world utility.
Smart contracts are great, but they are isolated on the blockchain. Meaning, they can't interact with real world events — like the weather.
This issue is fixed through an oracle network. An oracle network is software that acts as a middle man between the real world and smart contracts. Chainlink uses a decentralized network of nodes to provide this data.
The LINK token is used to promote good service from node operators. They are rewarded for providing correct data and punished if they’re dishonest.
A key feature of this project is that it works on multiple Layer 1 blockchains like Cardano, despite being originally built on Ethereum.
It’s clear that Chainlink isn't a coin, as it isn't attempting to replace money, nor does it have its own blockchain. And, we can safely assume that LINK is a utility token because it’s used to promote good node operation within the project.
Tokenized Stock
Tokenized stocks are when a traditional stock (e.g. Airbnb) is represented by a crypto token.
Why would this benefit anyone?
Some countries don’t allow you to trade on exchanges that offer these traditional stocks. Tokenized stocks are a way for these groups of people to trade with them. Or, if you just want to trade these stocks, but have most of your money in crypto, it might just be easier.
Again, it's clear that this is not a coin. They aren't challenging traditional money in any way. So, they must be a token. This time, they’re representing equity in a company. Therefore, they must be a security token.
This article is a part of the Hashnode Web3 blog, where a team of curated writers are bringing out new resources to help you discover the universe of web3. Check us out for more on NFTs, blockchains, and the decentralized future.