Know your cryptocurrency lingo — Crypto coins and tokens are not the same thing

Know your cryptocurrency lingo — Crypto coins and tokens are not the same thing
Cryptocurrencies - What's the difference between coins and tokens?Canva/BI India
  • Decentralised blockchains are the foundation of almost all cryptocurrency, coins and tokens.
  • Coins are meant to be used directly for transactions, similar to conventional money.
  • Tokens make use of the same foundations laid by coins, but represent digital files and function as tradable assets.
For an investor choosing between hundreds of different cryptocurrencies to invest in, the difference between each of them is not immediately visible — but it exists nonetheless.

Cryptocurrencies use a decentralised ledger for security of transactions, called a blockchain. This sets them apart from centralised databases used in traditional financial institutions, to keep track of transactions. Instead of central authority having all the power to authorise transactions, the approval of transactions is distributed between many different nodes. Even if one node goes bad, the rest will keep the transaction going.

However, even though most cryptocurrencies are decentralised, it is generally easier and more secure to buy or trade on an exchange than to make ‘peer to peer’ transfers.

Many currencies can be seen at an exchange, with some more popular and trading at a higher volume and value, than others. These currencies can be sorted into two major types — coins and tokens.

Coins have to stay in their lane

Cryptocurrency coins were created to be used as money. Coins help with paying for goods and services, can be held for use later, and can be divided into fractions of the whole – for example, 0.000067 Bitcoin. Some commonly seen coins are Bitcoin, Ether, Dogecoin, Litecoin and Monero.

Coins usually build an independant infrastructure – they get to choose how they come into existence, how secure they are from attacks, how their supply is managed, how their transactions are processed or recorded, and whom they reward.

Simply put, a coin is a digital asset which is ‘native’ to its blockchain. Bitcoin, for instance, operates on its own blockchain and Ether operates on its Ethereum blockchain and so on.

Within the network, one user can send their coins to another — Bitcoin to Bitcoin, Litecoin to Litecoin — but it does not allow for direct transfers between the two coin networks. This means a user can’t sell one Bitcoin and buy 200 Litecoin from the Bitcoin network blockchain network itself.

And, that’s where exchanges come in. They match buyers and sellers on each coin’s own network. So while one user is exchanging Bitcoin for Litecoin, the transactions are being recorded on the respective blockchains.

The exchange is just the middleman to keep accounts. This is a crucial trait of coins, keeping their records ‘bound’ to their native blockchain infrastructure.

Tokens represent assets payable with coins

Unlike coins, which directly represent a proposed medium of exchange, crypto tokens are a representation of an asset. These ‘tokens’ can be held for value, traded, and ‘staked’ to earn interest. Some commonly seen tokens are Tether, Uniswap, Chainlink and Polygon.

Tokens are used with decentralised applications (DApps) and usually built on top of an existing blockchain. While tokens get to share the benefits of an existing blockchain, they do so without an independent infrastructure.

Polygon, an Indian cryptocurrency platform, aims to provide faster and cheaper transactions on the Ethereum blockchain. And, Polygon isn’t the only one using it. As of 2021, a large number of DApps run on the Ethereum blockchain which enables ‘smart contracts’, so their tokens make use of the Ether coin internally.

Some tokens like Tether — a stablecoin backed by commercial paper, which is the promise to repay short term debt by companies — make use of more than one blockchain to gain speed and reduce user costs. So, unlike coins, tokens can choose to not be ‘bound’ to a single blockchain, gaining flexibility and becoming easier to trade.

Notably, DApps that use tokens are said to be easier to develop than coins. This has led to some exciting applications, such as decentralised Finance (DeFi) and non-fungible tokens (NFTs).

Tokens in the burgeoning DeFi and collectible NFT markets

DeFi is a way of bringing financial services to cryptocurrency. For example, users can buy and lend AAVE tokens to earn higher interest than banks have to offer, or borrow DAI tokens from MakerDAO by putting up collateral in Bitcoin.

An NFT, on the other hand, is used to represent ownership of an asset, which may not already be in physical possession of the buyer and may not confer copyrights to the buyer. The ownership history of a digital asset such as a photo,video or audio file can be recorded as a token on a blockchain, to then be owned by any single person at a time. NFTs currently operate on top of the Ethereum, Solana or Tezos blockchain within Cardano’s entry into the space just around the corner.

The hype around NFTs has drummed down but not before hitting $2.5 billion in the first half of the year — more than the combined sales volume of 2020.

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