The phrase “cryptocurrency” has a certain mystique about it. While the terms “coin” and “token” may not be as attractive at first glance, they instantly convey information to the reader about an asset and its purpose. You may find that these terms are often used interchangeably, but the fact is that they are both distinct and important in their classification. This begs the question, what is the difference between coins and tokens?
Putting it Simply:
In simple terms, a coin is a cryptocurrency that has its own native blockchain. A token is created on another network, like Ethereum’s erc20 tokens, and is often used for decentralized applications (dApps) instead of transactions.
The First Coin and Some Notable Ones
It’s important that all newcomers recognize that Bitcoin was the first cryptocurrency (coin) in existence. It set the parameters for what a coin must be, and from there, the world has built on top of this concept. Coins are important to their respective blockchains (digital ledgers) because they help to incentivize the upkeep of the network.
In the case of Bitcoin’s proof of work (PoW) protocol, miners secure the network, process all Bitcoin transactions, and are paid in BTC for their effort. Generally speaking, coins have mainly had limited (but important) use as a means of making payments and transactions.
Some of the Biggest Coins:
Bitcoin is the most recognizable cryptocurrency in existence today, and it has remained the largest by market capitalization. BTC is the native currency of Bitcoin, and is only used for payments and transactions.
Litecoin was often heralded as the “silver to Bitcoin’s gold”. This blockchain was designed with speed and efficiency in mind, as it processes blocks and transactions at a faster rate than Bitcoin and many other competitors. In the case of LTC, it is also only used for payments and transactions.
Ripple differs from other payment services in that it focuses primarily on financial institutions and intra-bank applications. In this sense, Ripple is the digital currency equivalent of S.W.I.F.T., and uses XRP to facilitate the exchanges.
Ethereum may have spawned thousands of tokens, but its native currency ETH is, in fact, a coin. The platform itself has smart contract capabilities, and is a launchpad for dApps. ETH is used to fund services in the ecosystem, as well as general payments.
What Classifies a Token?
When new cryptocurrencies are created on an existing blockchain, they are considered tokens. It’s important to understand this distinction, because tokens rely on the continued upkeep of another network that is out of their control. Tokens also have objectives that differ from coins’.
While all cryptocurrencies can be used as a speculative asset, they often have another main objective. In the case of coins, we’ve already seen that they are mainly payment and financial-based. Tokens, on the other hand, are primarily used to power dApps that can be as simple as a music database, or as extravagant as a massive online game that runs on a blockchain.
The Token Creation Process
When a new cryptocurrency is being created, the developers have to design their own blockchain and decide what protocol and features they want this blockchain to have. For dApp developers, they can instead generate a token on another platform. Many developers find this to be very advantageous for a few reasons.
Immediately, they skip a massive step in the process by eliminating the need for their own blockchain, saving time and costs. The associated task of building a collaboration of miners or staking validators is crossed off as well. They also reap the benefits of the host network that they are creating their token on including features, transaction speed, reliability and security.
Deploying a New Token
To deploy a new token, the interested party will have to spend some of the host blockchain’s native currency to fuel the initial generation of the token, Users, in turn, will also need the native currency for all future transfers of the created token that occur. As with all things in the crypto space, it begins with the code.
A prospective development team decides what parameters they want their new token to have. This can include a number of factors, including the total number of tokens, and the address that the created tokens will be sent to. After testing the contract on a testnet, the actual fees to deploy the contract will be determined by the host network.
It’s instantly clear how cryptocurrencies like Ethereum have grown so rapidly over the last few years. With a basic understanding of coding, anyone can generate their own tokens and construct a dApp that can bring a certain change or service into the world.
Token Creation Platforms
As previously mentioned, Ethereum is the biggest blockchain for token generation services. To date, Ethereum has launched over 500,000 erc20 tokens. These include some of the biggest projects by market capitalization such as Cronos (CRO), Uniswap (UNI), and Decentraland (MANA). Some developers may prefer another blockchain due to lower costs, or other factors, but it remains arguable that Ethereum has the most dependable network to date and has the most potential.
Solana is a newer blockchain that was launched in 2020. In no time at all, it has become one of Ethereum’s main competitors and it certainly deserves attention. On Solana, smart contracts are called “programs” and instead of a protocol such as PoS, Solana relies on Proof of History (PoH). Some of the recognizable tokens that Solana has been the host for include Serum (SRM), Mango (MNGO), and Raydium (RAY).
Of all the other Ethereum competitors, Cardano is amongst the most interesting ones because of its similar origins. Cardano was designed by Charles Hoskinson who is credited with being one of the earliest developers of Ethereum alongside Vitalik Buterin and Gavin Wood. It has many prospective functions and aims to be a major cryptocurrency for the foreseeable future.
To date, Cardano has been the birthplace of dApps such as AdaLite, a cross-platform wallet, Ray Network, a decentralized finance ecosystem, and JPG Store, an NFT marketplace. These and many others are in various stages of completion. However, as development continues on Cardano, we may potentially see more projects interested in using it as a host.
Coins and tokens both play a vital role in the crypto space. While cryptocurrency may have begun with the promise of decentralized peer-to-peer transactions, we have since seen an evolution of exceptional magnitude. As more enthusiasts and developers envision how we can move this space forward, we will need even more functionality out of these tokens and dApps. It is likely that tokens as we know them will be changed considerably over time, and it is always exciting to see what the future will bring.
Disclaimer: For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.