Coins vs. tokens | CoinGecko

Key takeaways:

• Coins are native to their blockchains and fees charged for using the blockchain are in their denominations. They can act as a store of value, or have chain-specific use cases.

• Tokens are built on existing blockchains, and can be used for asset tokenization, utility or project management.

Cryptocurrency enthusiasts use many sets of words interchangeably. Arguably the most used set of words are ‘coin’ and ‘token’. Both coins and tokens share so many similarities that the average cryptocurrency investor is likely to use them interchangeably.

However, all coins are tokens, but not all tokens are considered coins. But what does this mean?

Let’s look at what they are and how they differ.

What are coins?

The original design of decentralized payment solutions is a distributed ledger system that stores information about transactions performed using a native cryptographic resource. This asset is referred to as a coin and is the only asset backed by the blockchain. Bitcoin blockchain, Dogechain and Litecoin blockchain only support bitcoin, DOGE and Litecoin (LTC) respectively. The main purpose of these blockchains is to enable the delivery and distribution of their associated “coins”.

These “coins” are the only recognized medium of exchange for anyone using these blockchains. They embody the technological capabilities and economic structure of their parent blockchain.

Some features specific to “Coins” include:

Blockchain specifically

Coins are designed to work together with your blockchain and are representative of the financial and technological system of your blockchain. The tax and reward programs on their blockchain are both priced at their face value.

For example, miners on the Bitcoin blockchain earn bitcoin as a reward, while gas fees on Ethereum are paid in ETH.

The blockchain is a decentralized system, where data is protected by the many computers that connect to the network and run a node. The computers connected to the network secure the blockchain by validating blocks.

The mechanism through which they validate these blocks is known as a consensus mechanism. Blockchains running a Proof-of-Work (PoW) consensus mechanism reward “miners” for solving tough mathematical problems using brute force. Validators in a Proof-of-Stake (PoS) blockchain are also similarly rewarded.

New blockchains develop newer consensus mechanisms. Some of them run consensus mechanisms that are completely different from these two earliest consensus mechanisms (PoW and PoS). For most of them, the new mechanisms work together with Proof-of-Work or Proof-of-Stake to give blockchain an edge.

In most cases, validators are rewarded with the chain’s native coins for their work, although there are exceptions such as Ripple, where the total supply is pre-mined with a supply limit of 100 billion tokens. The validation process is completely governed by protocols and not by a centralized entity. If there is a need for changes to the blockchain, the community is involved in deciding the process, where a vote can be called by the DAO (Decentralized Autonomous Organization).

Great value

Some coins are perceived as a store of value, as in the case of bitcoin, offering an alternative to traditional banking. Bitcoin acts as a store of value because only 21 million coins can ever be in circulation, and the demonstrable scarcity of BTC makes it a reliable store of value in the crypto space.

May have chain-specific use cases

XRP by Ripple is used to solve cross-border payment problems by harnessing the power of the blockchain. It acts as the underlying medium of exchange between banks, payment providers and digital asset exchanges to enable real-time settlement and lower transaction fees. For example, international money transfers in the traditional remittance market take up to 48 hours, but the average transaction time using XRP is four seconds, with a typical transaction fee of 0.00001 XRP before load scaling.

What are tokens?

Tokens exist on existing blockchains. For example, let’s look at the relationship between Uniswap and Ethereum. Uniswap’s original digital token is UNI, and since UNI is built on Ethereum, a pre-existing blockchain, it qualifies as a token.

Creating a coin is obviously more difficult than creating a token, so a blockchain can only have one coin, but hundreds and thousands of tokens built on it.

The digital asset feature of blockchains allows the creation of unique digital assets that use the blockchain infrastructure to function, as seen in Ethereum’s ERC-20 token standard. These assets can also be transferred between users. However, fees for these transactions are paid in the blockchain’s native coin and not these digital assets.

Tokens can serve a variety of purposes including;

Asset Tokenization

Tokens can represent assets through a process known as tokenization, giving anyone the ability to represent anything on the blockchain. Cryptocurrency tokens have been used to represent rare metals, real estate, and more.

For example, assets can be created on the blockchain to represent an entire company’s equity. Companies can issue tokens just like they issue stocks and bonds (securities). Tokens work in exactly the same way as they are subject to price variations influenced by the company’s technological and marketing progress.

The token creator can also include a dividend system in the smart contract. This will allow the tokens to earn additional financial privileges according to the profit made by the project. Smart contract token projects such as VeChain (VET), NEO and Kucoin Shares (KCS) distribute dividends to their token holders. Dividends can be distributed in the form of the original token, other cryptocurrencies or even fiat.

Utility Tokens

The invention of the Ethereum Virtual Machine (EVM) made it possible to build new applications on the blockchain. These include decentralized finance (DeFi) platforms, gaming applications, AI (artificial intelligence) systems and more.

Decentralized applications also take advantage of the smart contract technology to issue tokens that grant their holders more privileges while using the application.

For some projects, the application is useless to anyone who does not own the tokens, since the core functions of the application require the token. These are the tool icons of the application. Decentralized applications such as some metaverse platforms require land and NFTs to be purchased only with a designated token, where the tokens reflect the value of the application and not the blockchain they run on.

Governance Tokens

Cryptocurrency projects that want to properly decentralize management use a Decentralized Autonomous Organization (DAO) approach to governance. Decentralized Autonomous Organizations (DAOs) are a loosely organized collective with a “flat” hierarchical structure centered around a shared cause or mission.

In cryptocurrency DAOs, the rights to this participation are tokenized, and each token holder is considered a member of the DAO. Through voting portals, members of the DAO can vote on proposals and also submit improvement proposals to be voted on by the rest of the holders.

Some projects use a dual-token work-through; they issue governance and utility tokens, separating the governance system from the rest of the project. Holders of the governance tokens have a primary duty to vote on improvement proposals to shape the project, while the other token serves as the tool for users to interact with the application.

Wagering of rewards

In addition to accessing the platforms’ tools and voting on proposals, cryptocurrency projects are exploring new ways to reward investors who buy and hold their tokens, such as stakes.

Staking programs allow investors to earn by simply locking tokens into a smart contract. Through staking programs, holders benefit from the token distribution process.

Note that staking programs for tokens work quite differently from what is seen in Proof of Stake (PoS) coins.

In single-side staking programs, investors can unlock an asset in the staking pool and earn rewards according to specified terms. In addition to this, DeFi platforms also offer liquidity mining and yield farming programs. For liquidity mining programs, holders are required to stake their liquidity pool (LP) tokens. Staking programs are a good earning opportunity for token holders.

Coins vs. tokens

The biggest similarity between coins and tokens is that both run on the blockchain and can be transferred between peers. Coins can also be used for tokenization, and they can also serve as utility or governance tokens, or even have blockchain-specific use cases.

Tokens do not have their own blockchain and are not yet advanced enough to use the consensus mechanism of their parent blockchain for token generation. Instead, the terms of token issuance are defined by the project teams, and can be changed by the project’s DAO.

Ultimately, coins and tokens have their individual use cases and their success ultimately depends on the project. Before investing in any of them, remember to do your own research and check up on the project’s tokenomics to find out if the project makes sense and is sustainable in the long term.

Joel Agbo

Joel loves to discuss cryptocurrency and blockchain technology. He is the founder of CryptocurrencyScripts. Follow the author on Twitter @agboifesinachi