Tokenization 101: Coins vs. Tokens

Cryptocurrency Mar 1, 2022

Introduction

A lot of users get into crypto without knowing if they are buying crypto tokens or crypto coins. Indeed, these terms are often used interchangeably, but they are different in a number of ways. At the basic level, the key difference between the two is that coins have their own blockchains, whereas tokens are built on an existing blockchain.

What is a coin?

A coin or a cryptocurrency is the native asset of a blockchain network that can be traded, used as a medium of exchange, and utilized as a store of value. A coin is directly issued by the blockchain on which it runs. For that reason, a coin is often referred to as the native token.

Besides the above-mentioned use cases of coins, they are often used to incentivize users to keep the blockchains on which the coins run secure. For example, Bitcoin blockchain is based on Proof of Work consensus algorithms and rewards its miners with BTC to keep the network honest and secure.

For a crypto coin, all transactions involved are done on and tracked by the blockchain. For instance, all BTC transactions are directly done on the Bitcoin blockchain and are tracked directly by the distributed ledger system that is native to the Bitcoin network. When a coin transaction happens, there is no physical or actual asset movement but instead, just the transaction is noted in the blockchain and agreed upon.

Well-known coins include BTC, ETH, BNB, MATIC, SOLANA, FTM, among others.

What is a token?

Crypto tokens are units of value that blockchain-based organizations or projects develop on top of existing blockchain networks. Unlike coins, the transaction of which is handled by blockchain, the transaction of tokens relies on smart contracts.

In Ethereum and many other blockchains that support smart contracts, the information being signed is about one account transferring units of coins from itself to another account. Smart contracts, which are autonomously executing codes and data stored on the blockchain, are a special type of account. With a smart contract, to transfer units of tokens, an account signs a transaction telling the smart contract to debit a number of units of token from one account and credit the same amount to the other account.

For instance, while ETH is the crypto coin native to the Ethereum blockchain, there are many other different tokens that also utilize the Ethereum blockchain, such as DAI, Sushi and Curve, among others. These tokens can serve a multitude of functions on the platforms for which they are built, including participating in decentralized finance (DeFi) mechanisms, accessing platform-specific services, and even playing games.

There are several widely used token standards for creating crypto tokens, the majority of which have been built on top of Ethereum. Check out here for more on the crypto token standards.

Another difference between coins and tokens is their utility. Tokens can be designed to represent physical assets, traditional digital assets, or services. There are crypto tokens that represent tangible assets such as real estate or art, as well as intangible assets such as processing power or storage space. Tokens can also be frequently used as a governance mechanism in decentralized autonomous organizations (DAOs).

Closing

Crypto coins and tokens are often used interchangeably. However, there are key differences between the two. While a crypto coin is native to the blockchain network and uses the built-in logic of a blockchain, a crypto token is built on existing blockchains by projects, companies, or even individuals.

Read more on Tokenizations series.

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