Coin and token are very much alike on a fundamental level. They both represent value and can process payments. You can also swap coins for tokens and vice versa.
The main difference between these two comes down to utility. There are things you can do with tokens and not with coins. On the other hand, some marketplaces will accept coins and not tokens.
What is a Coin?
Coins are generally used in the same way as a real-life coin is – as money. A coin is defined by the following characteristics:
1. Operates on its blockchain: A blockchain keeps track of all transactions that involve its native crypto coin.
2. Acts as money: Bitcoin was created for the sole purpose of replacing traditional money. You can purchase merchandise and services from many major corporations today, such as Amazon, Microsoft, and Tesla, using crypto coins. Bitcoin has recently become an official currency of El Salvador alongside the US dollar.
3. Can be mined: You can earn crypto coins in two ways. One is through traditional mining on the Proof of Work system. The other method is Proof of Stake, which is a more modern approach to earning coins.
What is a Token?
Unlike coins, tokens do not have their blockchain. Instead, they are created on existing crypto coins' blockchains, such as Ethereum, Solana, BSC. If crypto coin transactions are handled by blockchain, then tokens rely on smart contracts. They're an array of codes that facilitate trades or payments between users.
Each blockchain uses its smart contract. For example, Ethereum uses ERC-20, and Binance Smart Chain uses BEP-20. Most tokens exist to be used with decentralized applications, or dApps. When developers are creating their token, they can decide how many units they want to make and where these new tokens will be sent when they are created.
There are a lot of tokens classifications:
1. Security tokens: Security tokens are digital assets that represent traditional “securities.” For instance, some security tokens represent company shares or bonds which they issue to raise funds from investors.
2. Asset-backed tokens: These are tokens that represent assets that exist in the real world, for instance, a piece of real estate or tokenized versions of gold stored in a repository. Such issuance allows for these assets to be traded without any physical transfer of the underlying commodity.
3. Non-Fungible Tokens (NFTs): NFTs are tokens that primarily work as collectibles. Users can create NFTs for almost anything, including art, baseball, virtual real estate, event tickets, etc.
4. Tokenized Money (Stablecoins): These are crypto tokens that represent digital versions of a fiat currency. They are usually pegged 1:1 against the underlying currency, and thus always redeemable for the same value. Popular examples include USD Coin (USDC) and Tether (USDT).
The difference between token and coin isn't vast, but you need to pay attention to what you’re buying. If it's a product, most often, you would need coins. If it's a service, there are usually utility tokens you can use.
An easy way to tell the difference between crypto coins vs tokens is to find out whether a cryptocurrency has a blockchain or not. If it has a blockchain, then it’s a coin, and if it doesn’t, then it’s a token.
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