Crypto Coin vs. Token: Where is the difference?
When you’re new to the world of cryptocurrency and NFTs, it doesn’t take long before you stumble across an array of terms. Many of these, you’ve probably never heard of before. Terms such as crypto token, crypto coins, and proof of stake are banded around with the expectation that you’ll just know what they mean.
Perhaps one of the most confusing aspects comes when looking at the differences between coins and tokens. When you consider these, on a basic level, they appear to be pretty much the same. After all, they both represent a level of value and they both have the ability to process payments. The fact that a crypto token can also be exchanged for crypto coins (and vice versa), just adds to the terms becoming interchangeable.
The truth, however, is that are some subtle (and not so subtle) differences between the two. When you start to consider the Ethereum blockchain, other existing blockchains, and smart contracts, these differences become more apparent. Still sound a little confusing? Well, read on and we’ll break it down further so that, the next time you see these terms, you know exactly what the differences are.
Crypto Coin vs. Token: Where is the difference? - an overview
When looking at blockchain, it will have a native coin. This native crypto coin is used to either store value or trade currency. Utility tokens are very similar, but they are not native to any particular blockchain.
The best example here is to look at Ethereum. Ethereum is a blockchain. This blockchain has a native coin - Ether. However, other digital assets use the Ethereum blockchain. These assets are all tokens as they operate on the back of existing blockchains. Examples include the likes of Shiba Inu and Loopring.
What they represent
Crypto coins are easy to understand in that they represent a proposed medium of exchange. However, security tokens represent an asset. A crypto token may be held to allow the value to increase, staked in an attempt to earn interest, or traded.
When you look at crypto coins, and how transactions are dealt with, this is all done on the relevant blockchain. A crypto token, on the other hand, needs the existence of smart contracts to be able to trade.
Crypto coins don’t have to move from one place to another as the transaction exists on the blockchain. Sending a crypto token, however, does see it move to another place. NFTs (non-fungible tokens), for example, are one-off items where a change in ownership is dealt with manually.
With our overview complete, let’s get into the real details now.
What are crypto coins?
There’s probably little doubt that you’ve heard of Bitcoin. As what is seen as the original and, arguably, the best, this is what introduced us all to crypto coins and what they are. It is by looking at Bitcoin, that you can gain a better understanding of both coins and tokens and where the differences come in.
When looking at crypto coins, these are the characteristics that you will notice:
Operate, and are native to, their own blockchain
A blockchain will have a native coin. Bitcoin blockchain has Bitcoin, Whereas Ethererum blockchain has Ether. The relevant blockchain keeps records of every single transaction that involves its native coin.
If you look to transfer money, and you want to pay someone in crypto, you may choose to use Ether. If you do this, a receipt is then created on the Ethereum blockchain. It could be that this person needs to pay you back, but they choose to do this with Bitcoin. This being the case, the receipt will appear on the Bitcoin blockchain. Regardless of the blockchain used, every transaction is encrypted and offers the highest levels of protection to its users.
There to be used as money
Whether upper looking at security tokens or utility tokens, these have value but they do not act as money. Coins are different in this respect. You just need to consider the original purpose of bitcoin - to replace traditional money and to allow us all to move away from the use of fiat currency.
This means that crypto coins can be used to make purchases in the same way that traditional money can. It was once the case that you’d find it tricky to find somewhere to spend crypto coins, but this has certainly changed in recent times. The likes of Microsoft and Amazon accept Bitcoin, and it has even become the official currency of one country - El Salvador.
Unlike a crypto token, a crypto coin can be mined. You’ve probably heard of crypto mining as this was the original way of getting hold of Bitcoin. using a proof of work system, miners would set about solving complex mathematical equations on their hunt for more bitcoin. This was very profitable, although as the number of new Bitcoins reduces, the process gets that much harder, and more intensive.
A more modern approach to mining exists in proof of stake. The most common coin to use this method is Cardona. It has been adopted as it’s seen as easier to carry out and uses much less energy than the proof of work system.
A closer look at crypto tokens
By understanding a little about Bitcoin, and how it can be used, it becomes much easier to understand what is meant by a crypto coin. Looking at a crypto token is a little different. Rather than focusing on Bitcoin for an explanation, in this instance, we need to use Ethereum as an example (or at least the Ethereum blockchain).
Let’s take a look at just what is meant by a crypto token:
If you’ve taken a look at our overview, where we listed the key differences between coins and tokens, you may remember that we mentioned blockchain. Whereas you’ll find a native coin on its own blockchain, a token takes advantage of existing blockchains. This means that they don’t have their own. It is most common to see tokens using the Ethereum blockchain.
With crypto coins, all transactions are dealt with by the blockchain. Tokens, however, rely on smart contracts instead. Every blockchain will use its own smart contracts when it comes to the use of tokens.
The spending process
As we have seen, when you spend crypto coins they don’t actually move anywhere. Instead, the transaction is just recorded on the relevant blockchain. However, when a crypto token is spent it has to change its location. It physically moves from one place to another. The best example of this can be seen by looking at NFTs. When these are traded, you are changing ownership and are not just changing balance. This means that there needs to be a physical move.
Perhaps an easier way to explain this is to look at a traditional bank and what happens when you transfer money. If you transfer money from one account to another, the actual money doesn’t move or go anywhere. All that happens is that the relevant balances change. This is exactly what happens with crypto coins too. With a token, there needs to be a sign that ownership has changed hands. Perhaps look at it like a car. you have a logbook as proof of ownership. When you sell the car, the logbook physically changes hands.
When looking at coins and tokens, they both represent different digital assets. Whereas crypto coins are a digital form of money, a crypto token is more like a deed or an asset. These assets can be created by almost anyone. You can even find templates that allow you to do this and start making money from your own digital asset creations.