What is the Difference Between a Coin and a Token?
Table of contents:
- What is a coin?
- What coins are used for?
- What is a token?
- How are tokens made?
- What are tokens used for?
- How do tokens benefit companies?
If you are new to the cryptocurrency scene, then there must be a lot of terms that leave you in a confused and anxious state. Don’t worry; the OPOLO wallets team has you covered. One of the most common confusion among new crypto users is spotting the difference between a coin and a token.
You must be thinking, coins and tokens; they are all just cryptocurrencies? Well, the answer is yes, but there are differences in both.
Today, through this guide, you will learn the differences between coins and tokens. You will also be able to distinguish between the two of them with ease easily. I will provide you with the definition, the key differences, and give you examples.
So let’s begin!
What is a coin?
A digital currency coin is a cryptocurrency asset that has its own blockchain. It does not require someone else’s blockchain to function. For example, Bitcoin, Ethereum, and Litecoin.
Each of the examples mentioned above works on their own blockchain. Their entire network is made from scratch, using the same framework of past technologies that were availed first by Bitcoin.
To make the statement above simpler:
- Bitcoin works and is mined on the Bitcoin blockchain network
- Ethereum works and is mined on the Ethereum blockchain network
- Litecoin works and is mined on the Litecoin blockchain network
Transfers of these digital assets can be made from one individual to another individual. But, no form of physical currency is transferred. Each and every coin exists on its own blockchain, which is a global database. This database is accessible worldwide to anyone with a computer. Moreover, each transaction that occurs needs to be verified on the blockchain as well.
What coins are used for?
Digital currency or coins are used in the same way as regular coins are used, just like money. You can imagine that each coin is just like the currency in your wallet. Just like normal currency, these coins are a store of value, a medium of exchange, and a unit of account.
For example, you can use bitcoin to buy goods on the internet, such as things from an online store. You can keep your bitcoins safe for use on a rainy day. These days’ things are also priced according to BTC.
Some digital currencies do provide additional benefits to the ones mentioned above. For example, people who have acquired dash as their digital currency can vote on important decisions that occur within the company, such as software updates and investment planning.
Tokens are paid for and transferred through the use of digital currencies. For example, Ether is paid for Ethereum based token transfers.
What is a token?
Tokens are somewhat the opposite of coins. While coins use their own blockchain to make transactions. A token uses an already made blockchain and are created through the very same blockchain that they use.
Tokens made from NEO blockchain can only use the NEO blockchain, and tokens made from Ethereum blockchain can only use the Ethereum blockchain. The most widely and commonly used blockchain for this purpose is Ethereum. Tokens that are made from Ethereum, are known as ERC-20 tokens. While tokens made from NEO are called as NEP-5 tokens.
How are tokens made?
Anyone with programming experience can make a token. All it needs is a little bit of technical abilities and some of the native coin on which the token is being made. A token is like a piece of code running on the blockchain. And anyone can put that immutable (non changeable) code on the blockchain.
For example, if the token is made on a NEO network then the developer will need to spend some NEO to confirm the creation of his or her token.
A thing to note is that a fee needs to be made for each token transaction on the particular blockchain. Which means that any NEO token transfer will require you to spend some NEO coin. This is just like how fees are paid for the transaction of each coin on the network.
What are tokens used for?
Tokens are made so they can be used by dApps, which is an abbreviation for Decentralized apps. Developers have the option to create as many tokens as they want and then where these tokens will be sent. They will pay for this service using the digital coins they hold of the blockchain they are using to create these tokens.
When these tokens are created, they are used to access a variety of features of the application they were made for.
These features can either be discounts, paying bills, and using different services such as music or navigation. Often, tokens are also made to represent a physical asset such as a house. People sell houses using smart contracts, and physical properties are represented using a token.
For example, WePower (WPR) allows its users to buy and sell electricity units on its dApp. Each token is a representation of a certain amount of electricity.
How do tokens benefit companies?
Companies and developers do not have to create a blockchain for themselves nor find users to mine them. This saves them a lot of money and time. Moreover, they get a secure system to get all their transactions done from.
Another important factor is that for a blockchain to be secure, you need a lot of miners. This would be a near impossible task for companies if they weren’t using digital currency blockchains.
The process of creating tokens from these blockchains is also quite simple and requires minimum coding experience. Moreover, companies such as Ethereum and Dashcoin offer good incentives.
Digital currency blockchains are also a more trusted system for users, and it is not hard to attract them to the prospect of using tokens for dApps.