Coin vs. Token: This is a topic that can be quite confusing to individuals new to cryptocurrency. These two terms are often used as synonyms, thought by many people to be interchangeable. And that’s not all. There are also security tokens, utility tokens, altcoins and stablecoins.
In the world of crypto, things are developing extremely fast. Thus, some terms might overlap a bit. Anyway, the following paragraphs should help and bring in more clarity.
What Is Cryptocurrency?
Cryptocurrency is probably the broadest term that includes “coins” and “tokens.” It is an internet-based means to carry out transactions. By utilizing blockchain technology, cryptocurrencies can be decentralized, transparent, and immutable. Cryptographic and encryption technologies regulate how many units of cryptocurrency will be available and how transactions will be performed. The transactions are carried out directly peer-to-peer, with no need for any bank, institution, third party or central authority.
The primary example is Bitcoin, which is based on blockchain – a public digital ledger, where the transactions can be checked by anybody. Data is kept collectively and shared between individuals using the blockchain network. Blockchain ensures openness and decreases fraud.
What Are Coins?
A coin is typically a cryptocurrency with its own blockchain. The coins are the digital equivalent of cash; they have the same characteristics as money: they are fungible, divisible, acceptable, portable, resilient and have a limited supply. The coins might be sent, received or mined. The foremost example is Bitcoin with the very first blockchain that was unleashed in 2009.
More examples of coins are: Litecoin (LTC) is a peer-to-peer payment cryptocurrency with faster transaction time than BTC. Monero (XMR) has several privacy-enhancing features that improve upon Bitcoin to be secure, private, and untraceable. Zcash (ZEC) is a privacy coin for absolutely private and anonymous payments. Some more coins: Bitcoin Cash (BCH), Cardano (ADA), NEO (NEO), Stellar (XLM), NEM (XEM), Ripple (XRP). The term “coin” does not necessarily mean a large market capitalisation. Some coins have a relatively big market cap (e.g. BTC, XRP, BCH), some coins lag behind.
Although coins are primarily used as cash for payments, some digital coins (such as Dash) have more functions than simply working as a form of money.
What Are Tokens?
While a coin is generally a cryptocurrency with its own standalone blockchain (e.g. Bitcoin, Litecoin), a token is usually a cryptoasset that uses and is built on an already existing blockchain, for example DEXFIN Token (DXF), which is built on the Ethereum platform. A token can also represent a share in ownership, a share in a company, etc. That’s why tokens can be used very well to tokenize a business.
Ethereum was the first platform to streamline the procedure of producing a token. The most common are ERC-20 (or ERC20) tokens which are created on the Ethereum platform. Nevertheless, there are other platforms that simplify the process of making new tokens, for example Lisk, NEO, Stratis, Waves, etc. NEO platform utilizes NEP-5 tokens. Customized tokens can be created by anybody on one of these platforms, following a process that’s not as difficult as you might think.
There are two main types of tokens: security tokens and utility tokens.
What Are Security Tokens?
Security tokens represent “securities” – a kind of crypto world stock. Security tokens are issued and function on top of some third-party blockchain network (e.g. Ethereum) and typically represent real material assets, for example, square feet or meters of real estate or ounces or grams of silver or gold or other precious metal, and non-material assets, such as companies’ shares. Security tokens are generated in a process called security token offering (STO) – a type of fundraising that is executed by a company offering tokenized securities. Securities and Exchange Commission (SEC) would prefer to put all ICOs (Initial Coin Offering) into one bag and consider all of them as security. This is mainly because securities are subject to very strict laws. Hence, if it were officially decided that ICOs could only be understood as securities, then such undertakings would have to be highly regulated.
In other words, security tokens are developed to be the business’ share (token of the infamous DAO project, that was hacked right after launching, was acknowledged as a security token), while utility tokens have a certain use case inside the project (e.g. CVC Token).
What Are Utility Tokens?
Utility is the quality of being of practical use. Thus, utility tokens are tokens of practical use, allowing access to a service or product. Therefore, they should not be seen as investments, and they should not be confused with security tokens. Some examples of utility tokens: Civic Token (CVC) furnishes access to identity verification-related services in a decentralized ecosystem. Storj (STORJ) aims to provide unlimited cloud storage at a fraction of the cost of traditional data-centers. Siacoin (SC) is a utility token (it is a token, although “coin” appears in its name) to enable smart storage contracts on the decentralized network. DEXFIN Token (DXF) is a hybrid utility token with many practical uses: instant payments with NFC payment card or contactless NFC ring, saving of 50% on fees, receiving up to 11% annual interest for staking (holding) DXF, etc.
Some tokens are created with a specific purpose, for example, to represent a tangible, physical asset. If you decide to sell your property (e.g. a house) utilizing a smart contract, you can use a digital token that represents your physical asset. Other tokens can serve to gain access to watch videos, listen to streamed music, and serve for all kinds of fees, including trading fees at an exchange or utility bills.
What Are Altcoins and Stablecoins?
To round this part up, two more terms should be explained.
Altcoins: There is only one original blockchain; the very first cryptocurrency: Bitcoin. Naturally, Bitcoin enjoys supremacy and a special status. All the other virtual currencies came after Bitcoin. That’s why any other cryptocurrency is taken as an alternative cryptocurrency coin, alternative coin, or altcoin. As of May 2020, there are over 5,000 altcoins. Please, note that most altcoins are not coins but tokens (these altcoins do not function on their own blockchain).
Stablecoins: Stablecoin is a cryptocurrency designed to maintain a stable value and to minimize the volatility of its price, relative to some “stable” asset or basket of assets. Stablecoins attempt to peg their market value to some external reference such as the U.S. dollar or to a commodity’s price such as gold. Two examples of stablecoins are USDT (Tether) and USDC (USD Coin); their price is set to stay at 1 USD.
A Simplified Summary
As we have seen, not everything is clear-cut or black-and-white in the crypto world since some terms are overlapping a little bit. Anyway, let’s try to describe things as briefly as possible, bearing in mind that we will simplify it:
- Coins usually belong to their own blockchain, and have similar characteristics as money.
- Altcoins are alternative coins without their own blockchain – most are tokens built on the Ethereum or some other platform.
- Tokens are usually crypto assets that are built on and use an already existing blockchain (e.g. Ethereum).
- Utility tokens are tokens of practical use; they allow access to a service or product.
- Security tokens represent “securities” – a kind of crypto world stock.
- Stablecoin is a cryptocurrency designed to maintain a stable value relative to some “stable” asset, e.g. to USD.
All these crypto assets can appreciate or depreciate, depending on the market, their use cases and many other factors. Some of them introduce exciting, advanced technology and can present interesting opportunities in this new, fastly developing field.