What is The Difference Between Cryptocurrencies, Coins and Tokens?
When discussing blockchain technology and cryptocurrency the terms “cryptocurrencies”, “coins” and “tokens” are often used so interchangeably that it would seem as if they in fact all share the same meaning. The reality is that they do not; and for anyone who wants to properly understand this space, it is very important to understand the difference. So, what is the difference between cryptocurrencies, coins and tokens?
UNDERSTANDING THE DIFFERENT CURRENCIES:
By general acceptance a currency is an accepted form of money or something that can act as a medium of exchange, a unit of account or store of value. When thinking of currencies, it is most common to think of those in the physical form but, three examples of currencies in non-physical forms are virtual currencies, digital currencies and cryptocurrencies.
A Virtual Currency is a digital representation of something of value that can be digitally traded and also functions as a medium of exchange and/or store of value. Unlike fiat currencies such as the United States Dollar, the Japanese Yen, the Indian Rupee, and so on, that are created by and tied to specific countries, virtual currencies have no legal tender status in any jurisdiction.
An example of a virtual currency would be the Simoleon that is used in the Sims virtual world games.
A Digital Currency can be either a digital representation of virtual currency or electronic money that is tied to a fiat currency. An online payment or online bank transfers such as wires are considered digital currency transactions. The digital currency in this example is the fiat (ex: U.S. Dollar) currency you are transacting with electronically.
Cryptocurrencies are virtual or digital currencies that are not legal tender or a fiat, are secured using cryptography, and transacted on a blockchain. All cryptocurrencies are Blockchain Built. Although the term ‘cryptocurrency’ includes the word “currency”, it is not a perfect term. Almost all cryptocurrencies can be used as a medium of exchange, but most do not act as a store of value or unit of account. Nevertheless, even though cryptocurrencies differ, they all fall into one of two categories; they are either coins or tokens. Coins and tokens have different traits however, their commonality is that they are both types of cryptocurrencies.
Cryptocurrencies in the form of coins (also known as “crypto coins” or “cryptocurrency coins”) are cryptographically secured digital currencies with two main characteristics. Their first characteristic is that they are built on their own blockchain platform and operate independently of any other blockchain platform with the coin created acting as that blockchain’s native asset. The second characteristic is that as a native coin they are designed and intended to be used as a store of value and form of payment or medium of exchange in a way similar to the way that physical money can be used. Bitcoin (BTC) is the most popular example of a crypto coin. Bitcoin also possesses the most traits common to a fiat currency, in which it can act as a medium of exchange, store of value and unit of account. How well Bitcoin provides these three functions will be saved for a different discussion.
Bitcoin was created using an open-source protocol. Many other coins were developed using Bitcoin’s open-source protocol. However, the creators of those coins would make their own changes to its underlying codes sufficient enough to produce an entire new independent blockchain and native coin with its own unique set of features. All of these non-Bitcoins are commonly known as altcoins (alternatives to Bitcoin). Some examples of coins originally developed based on Bitcoin’s open-source protocol are: Litecoin (LTC), Dash (Dash) and Dogecoin (DOGE), to name a few.
Not all altcoins are derived from the original Bitcoin protocol. However, like all other crypto coins, they have created their own blockchain platform and protocol that operates independently of any other blockchain platform, while also supporting their native coin. Ether (ETH), Ripple (XRP), and Iota (MIOTA) are all examples of coins that were not created as a derivative of Bitcoin’s open-source protocol.
While crypto coins are built on their own independent blockchains and meant to primarily be used as a form of payment or medium of exchange, tokens (also known as “crypto tokens” or “cryptocurrency tokens”) which are also cryptographically secured digital currencies, differ in those two primary traits. First, instead of tokens being built on their own independent blockchains, they are built off of an existing blockchain. In fact, according to Etherscan over 800 tokens have been built off of the Ethereum blockchain that created Ether. Eos (EOS), Tron (TRX) and Tether (USDT) are examples of tokens built on the Ethereum blockchain. Second, tokens may also be used as a form of payment and medium of exchange but, they are designed and intended to provide functionalities well beyond that.
Some tokens are designed with the following additional functionalities:
- Allowing access to different products and services within that blockchain platform’s ecosystem.
- Providing its holders with voting rights.
- Providing its holders with equity ownership rights in the underlying company.
- Representing digital assets that are fungible and tradable.
- Representing non-fungible physical assets.
In conclusion, coins and tokens are both types of cryptocurrencies. Coins are built on their own blockchain while tokens are built off of an existing blockchain. Coins are most commonly created and intended to be used in the more traditional definition of a currency. Some coins do have a larger purpose than being used for payments; like validating transactions or fueling applications on its blockchain platform. However, those are usually secondary purposes. Meanwhile, tokens are issued to provide utility to its owners that go well beyond use as a method of payment or store of value. The multiple applications and functions of tokens is why they are prevalent in the many emerging decentralized applications coming to market. If and how coins and tokens will continue to distinguish themselves will remain to be seen.