Cryptocurrencies, coins and tokens are used in the blockchain infrastructure. Bitcoin is a cryptocurrency, not a token. But, what differentiates them?
Read more to learn about the difference between cryptocurrencies, coins and tokens.
As of January 2021, there are more than 4,000 cryptocurrencies in circulation and hundreds more are being made each day. The introduction of blockchain and low barrier entry of creating cryptocurrencies has been the driving force for the explosion of crypto projects.
All cryptocurrencies, coins and tokens interact with blockchain with a slight difference between their function.
What is cryptocurrency?
Cryptocurrency is a digital currency that is secured using cryptographics and only exists in the blockchain network. Blockchain tech makes it impossible to counterfeit and double-spend. Decentralization of blockchain also makes the currency to be free from central authority and any governmental policies.
The first cryptocurrency is Bitcoin, proposed by Satoshi Nakamoto, a pseudonym name that was said to represent the creator or creators of Bitcoin. Nobody knows who Satoshi Nakamoto is since the day he published the bitcoin whitepaper in 2008.
Bitcoin’s only purpose was to be a store of value and can be used as a form of currency for buying and selling practices. It is not backed by any other assets, banks, or even governments and derived its value purely by supply and demand.
Since bitcoin is an open source project, many cryptocurrencies were then made or forked from their code and gave rise to a plethora of cryptocurrencies such as Litecoin, Ethereum, and Bitcoin Cash. These new cryptocurrencies are often called ‘AltCoins’ which means cryptocurrencies that are not bitcoin.
What are Coins and Tokens?
Coins and tokens are under the umbrella of cryptocurrencies as both of them are technically currencies and utilize blockchain tech.
Coins are generally referred to cryptocurrencies that are built natively from the blockchain network that it is issued from. Examples of coins would be Bitcoin from Bitcoin blockchain, Ether from Ethereum blockchain, and Litecoin from Litecoin blockchain. These cryptocurrencies are built together with the blockchain network, that is why you will see most coins are named after the name of the blockchain network.
These coins mostly have the same purpose, which is censorship-resistant store of value and medium of exchange. Beside those two, they will also have their own twist of its utility. For example, Ether (ETH) is used to fund the execution of smart contracts.
These coins usually are built to incentivise the miners and validators (nodes that maintain the blockchain network) where they will be rewarded with coins of the network for validating transactions in the network. We can see coins are basically just “cash” in the crypto world.
Tokens are cryptocurrencies that are created on top of another blockchain network, usually through smart contracts. Ethereum blockchain has smart contracts, a self executing program that runs on a blockchain network, that allows people to create new cryptocurrencies, automate transactions, and record customized parameters for the issued tokens.
Smart contracts also have the ability to receive, send, and store funds. So far, the most widely used blockchains that have smart contracts are Ethereum and Binance Smart Chain (BSC).
With this, many people created new types of cryptocurrencies that serve different purposes that have led to a colorful ecosystem with thousands more utilities in the crypto space. Examples of tokens are UNI from Uniswap, Link from Chainlink, and USDT from Tether. In simpler words, tokens are everything else than just cash.
Popular Types of Tokens
Tokens serve different purposes in the crypto world and this leads to certain categories of tokens. Here are the popular type of tokens
Tokens that are pegged by reserve assets that could be made of a bundle of different crypto assets or pegged to US dollars, in an attempt to offer a price stability to the said token. Stablecoins usually mirror their price value to fiat currency such as the US dollar. This helps to onboard new users and retailers to adopt crypto as it tackles price fluctuations.
Tokens that are issued from the projects that allow the token holders to use it as a vote on the decisions that influence the direction of the projects it was issued from. This kind of token allows the project to move forward with the support of the community as every proposals are vetted and voted through a decentralized voting mechanism that only allows developers to move forward with a certain threshold of voting support.
Tokens that have wider functionality than just means of exchange. This token allows the token holders access of goods and services of the ecosystem and projects it was issued from. During the ICO, most of the projects issued their own tokens to fund their project development and in return those tokens can be used to buy the services and products of the project. One of the most notable utility tokens is LINK from ChainLink, where they created a decentralized oracle provider ecosystem and the only way to buy their services would be through LINK.
This token is completely unique on its own. Different from all of the other cryptocurrencies, which are interchangeable, NFT is designed not to be interchangeable and holds its value on its own based on the data it’s being put into. Simplest analogy to see is an artwork. You can tokenize an artwork and that token will be an NFT because it is unique and has its own characteristics (which is the characteristics of the artwork) the value will be based on the supply and demand of that artwork only.
- Both coins and tokens are under the umbrella of cryptocurrencies.
- Cryptocurrency is a digital currency that is secured using cryptographics and only exists in the blockchain network
- Coins are generally referred to cryptocurrencies that are built natively from the blockchain network that it is issued from. Eg Bitcoin, Litecoin
- Tokens are cryptocurrencies that are created on top of another blockchain network, usually through smart contracts. Eg UNI, LINK
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