One of the concept that got me confused when I first came across the cryptosphere was why some cryptocurrency are regarded as a coin while some are refers to as a token.
Interestingly, the difference between these two terms lie in the way they function and the purpose they serve.
Taking Bitcoin for example, bitcoin is a cryptocurrency coin that function independently on its own blockchain, which primary role is to serve as a payment means. Whereas a crypto token like the Binance coin is built on another blockchain (Ethereum) to enable it’s holder to participate in it ecosystem functions.
The main difference is that a Crypto coin has it own blockchain while a Crypto token is built on another blockchain.
Other coins apart from Bitcoin – like litecoin, ethereum, ripple and steem are known as alternative coin (alt coin) as they create an alternative option to bitcoin.
Coin primary function is to take the role of a currency, which can act as a means of payment, a store of value or in settlement of debt.
Token in a similar light can perform the primary role of a coin as a payment method but with an added function of giving it’s holder the right to participate on it’s network.
One of the primary blockchain that encourage the onboarding of tokens is the Ethereum blockchain through it’s ERC-20 standards and others.
A token can also be regarded as a utility or a security.
Utility token refers to the type of tokens that enable it’s participant to perform certain functions within its ecosystem.
Security token act like a proportionate claim to a digital or physical asset.
More will be discussed about utility token and security token in a future post.
Creating a coin demands huge efforts and time, it requires every bit of the system to be built from scratch, the source code, node formation, mining and other needed related requirements. Meanwhile, a token need just the deployment of it’s contract on a blockchain standard template to be created – a process which requires far less time and energy than a coin.
Using a template for creating tokens provides smooth interoperability, so users can store different types of tokens in one wallet. Ethereum was the first to simplify the process of creating a token through it’s ERC-20 standard and we have other Blockchain like Neo that adopted the idea.
These two terms are mostly used interchangeably due to how many people especially the newbies are not familiar with them and of course the not-so-easy to comprehend technical jargons involved with the blockchain space. Nevertheless, the two terms have a completely different meaning and usage.
Some of their differences and similarities includes.
• A coin operate independently on it’s blockchain whereas, a token rely on the existence of a blockchain to function.
• A coin may serve as a protocol or as an incentive means to sustain the network through node distribution reward and others, a token in the other way allow it’s system participant the right to participate in the network and may also be used as an incentive through a feature like staking.
• A coin may be mined continuously with a steady distribution which total amount may be or may not be predetermined as seen with bitcoin; which is predetermined, and with steem; which is not predetermined. A token as with the current standard must be predetermined in other to be entered into a contract on a blockchain as generally all terms of a contract must be known before it can be regarded as a contract.
• Established infrastructure like nodes, consensus and other advance software and hardware components are needed to build a blockchain of a coin. A token need just the input of software codes to construct a contract and come alive.
• Both are durable, divisible and fungible and so can serve as a means of payment or represent a store and unit of value.
• Both exist in an electronic form which is generally termed as “cryptocurrency” and as thus lay the foundation of a true Internet money.
To simply put – a cryptocurrency is regarded as a coin if it has it’s own independent blockchain, intended with the primary role of a means of payment or the ability to function as a currency. The existence of a token depends on an existing blockchain, created for the purpose of being utilized or serve a role within it’s own ecosystem.
Images credit : featured image modified from pixabay. other images taken directly from pixabay.com