While the terms tokens and coins are often used interchangeably in the world of crypto, they refer to distinct concepts. Both are digital assets that can represent value and be traded on centralized or decentralized exchanges. However, the fundamental distinction between the two assets lies in their relationship to the blockchain. Coins (for example, Bitcoin or Ethereum) operate on their own native blockchains, whereas tokens (for example, DAI or ARB) are created using smart contracts on existing blockchains, which allows for more specific features and functionalities to be programmed.
By understanding the differences between tokens and coins, users can feel more confident while swapping assets, forming their crypto portfolios, or reading about technologies related to the crypto industry.
Coins or cryptocurrencies are a type of digital asset that is native to a particular chain. It can be traded, used to store value, and utilized as an exchange medium. Since a coin is issued directly by the blockchain protocol and is essential for its operation, it is often called a native coin.
Cryptocurrencies are used to pay transaction fees on the corresponding networks, simultaneously encouraging their users to participate in the development of the said networks and ensuring their security and sustainability.
You can learn more about cryptocurrencies in the dedicated post.
As was mentioned above, while coins have their blockchain, tokens operate on existing blockchain networks. Ethereum is an example of a network that hosts hundreds of tokens, including such well-known ones as USDC, DAI, and ARB.
Tokens depend on protocols that outline their features, functions, and the rules of the networks they operate on. Each blockchain uses its token standard. Ethereum has designed one of the most commonly used token standards, the ERC-20 standard, which establishes the specific requirements that any Ethereum token must meet to operate effectively and compatibly on the Ethereum blockchain with all Ethereum-based decentralized apps.
Another crucial characteristic of tokens is their ease of creation. Some networks provide templates that allow companies to create their tokens quickly, thereby allowing businesses to integrate their products and services into blockchain ecosystems. This way, a broader business audience can take their companies to a new global level.
Lastly, while coins primarily serve as currency or utility for their native blockchains, tokens can represent a wider range of assets and functionalities. They may represent physical or digital assets, services, or utilities (for example, art, data storage space, or processing power). Tokens can also serve as a governance mechanism for voting on protocol upgrades and other project decisions that determine the future direction of blockchain projects. Moreover, they often provide access to a wider range of DeFi services, allowing holders to explore various staking and restaking options (although some DeFi apps provide such options for native coins, too).
Tokens are commonly categorized into the following types: utility, governance, and security. Utility tokens are used to grant holders access to specific features within decentralized applications, platforms, or ecosystems. They can be used to power these economies and facilitate user interaction. Utility tokens are usually issued during fundraising events such as ICOs (Initial Coin Offerings), IDOs (Initial DEX Offerings), or IEOs (Initial Exchange Offerings) to attract new users and ensure the project's smooth performance. Holders of utility tokens may receive certain benefits, such as access to additional services or lower fees. It is important to note that utility tokens do not represent any ownership rights.
The second type is a governance token. Though utility tokens can function as governance tokens, some companies prefer to separate purposes and have two tokens instead. Governance tokens are essential in decentralized projects as they provide voting rights to their holders in dedicated projects or autonomous decentralized organizations (DAOs). Token owners can express their opinions on various proposals and changes through voting. These proposals might include budget spending, new features, partnerships, incentive programs, etc. Development teams can share their decision-making power with their communities, ensuring that only those who are truly passionate about the projects can influence their development.
Security tokens are similar to traditional securities, as they represent ownership rights or claims, such as equity, debt, or revenue-sharing in the issuing entity. As a result, the value of these tokens is closely tied to the value of their issuing companies. If a company's valuation increases, the price of its corresponding token increases as well. Conversely, if the valuation decreases, the token price goes down, too. Due to their investment nature, security tokens are often subject to regulation (unlike utility or governance tokens). Regulations help to prevent companies from manipulating the market, thereby safeguarding token holders. However, this also means that government bodies can exert influence on companies that issue security tokens, potentially compromising the decentralization of the projects.
Stablecoins are a type of token that is specifically designed to maintain a stable value by being pegged to traditional and valuable assets, such as the U.S. dollar or gold, to fight high volatility that hinders the mass adoption of crypto. Therefore, stablecoins act as a bridge between traditional and crypto finance, making it easier for users new to DeFi to take their first steps in the crypto world without high risks.
In addition, stablecoins may be a better-suited option for e-commerce and payment for various services due to their relatively consistent prices. They combine the stability of fiat currencies with the flexibility of cryptocurrencies, quickly gaining popularity among experienced crypto enthusiasts and first-time users.
Understanding the difference between coins and tokens is critical to grasp the intricacies of DeFi processes and products. It is also essential for building diverse and profitable crypto portfolios.
