The Difference Between a Coin and a Token

by | Sep 28, 2020 | Industry | 0 comments

Cryptocurrency newcomers often get confused about the difference between a coin and a token. These two words are commonly used when talking about cryptocurrencies, and many people either mix them up or refer to them as the same. However, they have different meanings and uses. This article will unearth the difference between coins and tokens and their applications.

What is a coin?

A coin is an encrypted digital currency designed to be used as a form of payment. It is a unit of value that operates on its own blockchain network, independently, or on another platform. A coin can be used to store value and pay for goods and services online, just like how fiat money is used.

Bitcoin (BTC) is the first and most popular coin globally, but it is not the only coin available. Currently, there are more than 1500 coins in the market. Most of them are called altcoins, an abbreviation for alternative coins, simply because they act as alternatives to bitcoin.

Most altcoins were forked from bitcoin and were developed using bitcoin’s open-source protocol. They include Litecoin (LTC), Bitcoin Cash (BCH), and Namecoin (NMC). However, other altcoins are not bitcoin forks, such as Ethereum (ETH), Ripple (XRP), and Cardano (ADA).

Use cases of coins

Ethereum: It is a platform that was used to launch almost 90% of the 2017 ICOs (Initial Coin Offerings). Its native coin, Ether (ETH), is used to fuel all transactions carried out on the network and pay miners who validate the Ethereum transactions.

Ripple: It is used for real-time settlement, remittance, and currency exchange using the decentralized native currency known as XRP.

NEO: commonly known as the “Ethereum” of China. It has several tokens built on it. NEO holders receive GAS as dividends, which is also regarded as payment when transactions are carried on the network.

What is a token?

Tokens are digital representations of real-world assets, like real estate, commodities, bonds, private equity, a piece of art, voting rights, and many more. Instead of running on their own blockchains, tokens are hosted on other platforms, like the Ethereum blockchain.

Although tokens act as mediums of exchange, they provide functionality above and beyond that of coins. Tokens give their holders the ability to participate in some activity. For instance, if you want to wager on the outcome of a future happening via decentralized prediction Augur, you have to use REP, the Augur platform’s native currency. Tokens also provide value to investors, for example, via buybacks.

Tokens are created and issued to investors through Initial Coin Offerings (ICOs) and Security Token Offerings (STOs). Examples of popular tokens include EOS (EOS), Tron (TRX), and Omiisego (OMG).

Use cases of tokens

There are three classes of tokens with distinct uses cases:

1. Utility tokens

Access tokens: They are used to make API requests on behalf of users. Such tokens represent the authorization of a specific application to access certain parts of a user’s data.

Work tokens: They depend on the service provider staking the native token of the network to earn the right to perform work. Increased use of the network leads to an increase in the value of the token.

Governance tokens: They enable holders to vote on changes in the blockchain that they support. Generally, the number of tokens a user holds is equivalent to the number of votes/influence they have.

2. Non-fungible tokens

Utility tokens are typically fungible, implying that one ZRX token is the same as another. Nevertheless, there are also non-fungible tokens (NFTs), which can be endowed with several attributes. Enabling tokens to bear several features offers a myriad of possibilities, such as the buying of items in video games, ticketing, and transportation.

3. Security tokens

Security tokens function like securities and mostly include projects where dividends or equity are given to token holders. STOs can be broken down into ETOs (Equity Token Offerings) and DTOs (Debt Token Offerings). Both facilitate the tokenization of almost any element of the traditional financial system.

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