Now, we’ll look at a problem that frequently perplexes newcomers to cryptocurrencies.
Some individuals use the term “coin” to refer to what others refer to as “tokens,” and the term “token” to refer to what others refer to as “coins.” Some individuals will refer to all digital assets now available under either moniker.
However, there are significant variations between crypto coins and crypto tokens, therefore it’s critical to understand the distinctions.
This Token vs Coin guide will begin by examining why the two phrases are so widely misunderstood. It will then explain what coins and tokens are, show you samples of coins and tokens, and explain how to use them.
You’ll be able to tell whether a digital asset is a token or a coin by the end of this guide. Isn’t that why you’ve come here?
So, let’s get this party started!
What is a Coin?
A digital coin is defined as an asset that is unique to its own blockchain. Consider the cryptocurrencies Bitcoin, Litecoin, and Ether. Every one of these coins has its own blockchain.
So, to clarify things a little more:
- Bitcoin operates and functions on the Bitcoin blockchain
- Ether operates and functions on the Ethereum blockchain
- NEO operates and functions on the NEO blockchain
Digital coin can be transferred from one person to another. When you transmit and receive actual coins, however, they do not move. All of the “coins” are stored as data in a massive worldwide database. This database (also known as a blockchain) records all transactions and is examined and validated by computers all around the world.
What is the Purpose of a Coin?
Digital coins are commonly used as money in the same way that physical coins are. Coins like Bitcoin, Litecoin, and Monero can be compared to the coins in your wallet or piggy bank. They are frequently utilized just for the goal of making money. These “cash only” coins are used in the following situations:
- Transferring funds (you can give and receive value using them)
- As a form of value storage (they can be saved and later swapped for something useful)
- As a monetary unit (you can price goods or services in them)
To ensure that you comprehend the above statements, let’s use Bitcoin as an example.
- BTC can be used to pay for goods and services on the internet as well as in many physical locations.
- You can keep it for a long time and nothing will happen to it. You can later exchange it for something of comparable worth.
- The items you purchase can also be priced in BTC.
Apart from these monetary applications, Bitcoin has no other uses. It cannot be staked in order to earn more Bitcoins, nor does it have to be utilized to run a certain application. It is only used as a means of exchange.
However, certain digital currency (such as Ether, NEO, and DASH) offer more than just monetary functionality. These are the applications I’ve listed below:
- On the Ethereum network, Ether (ETH) is utilized to power transactions. Tokens can be built on Ethereum, but sending a token still requires Ether. It pays for the mining costs (it pays the computers that verify transactions on the Ethereum network).
- To earn a dividend, NEO (NEO) is staked in a wallet. GAS is the name given to this dividend. Tokens can be created on NEO in the same way that they can on Ethereum. You must pay GAS as a transaction fee (Gas Fee) when transmitting a token on the NEO network, in the same manner that Ether is required to pay Ethereum costs.
- Finally, having a sufficient amount of Dash (DASH) lets users to vote on crucial Dash network decisions. If a concept for upgrading the DASH network is proposed, users with enough Dash can vote on whether the upgrade should take place. These voting rights provide DASH holders a say in how the project progresses.
What is a Token?
Tokens are frequently referred to as digital coins. This, however, is incorrect. There is a significant difference!
Existing blockchains are used to create tokens. In fact, Ethereum is the most popular blockchain token platform, thanks to the creation and facilitation of smart contracts. ERC-20 tokens are those that are built on the Ethereum network.
Other cryptocurrencies include NEO, Waves, Lisk, and Stratis. While tokens on the Ethereum network are known as ERC-20 tokens, NEO employs NEP-5 tokens, as previously indicated.
On one of these systems, anyone can create their own personalized token.
How Do Tokens Get Made?
In truth, it requires remarkably little technical knowledge. I wouldn’t recommend it to a total beginner, but it wouldn’t take as long as you might imagine for someone with some programming expertise. However, the developer will need to spend some of the native currency on the blockchain where the token is being produced.
If the token is generated on Ethereum, for example, the creator will need to pay some Ether to have the network’s miners validate the token transaction (creation).
It’s vital to understand that all token transactions on a blockchain, not simply the creation of the token, need payment of fees. As a result, any Ethereum-based application must employ Ether coins to transmit application-specific tokens between users or between the app and the user.
Fees must be paid to those who secure the network in the same way as currency transactions require fees to be paid to those who secure the network.
What is the Function of a Token?
The majority of tokens are designed to work with decentralized applications, or dApps. Developers can choose how many units they want to manufacture and where these new tokens will be transferred when they are created when they create their token. At this stage, they will pay some of the native coin on the blockchain on which the token is being created.
Tokens are frequently used to enable functionality of the program for which they were built.
Neftipedia, for example, is a token that build by community-centric NFT marketplace, where artists and art collectors can easily find each other while simultaneously managing the limitless potential of their own marketplace.
Binance (the exchange) has a token of its own. Users that trade with the BNB (Binance token) pay 50% less in fees.
Some tokens are made for a completely different reason: to represent a tangible object. Let’s imagine you wanted to use a smart contract to sell your house. Isn’t it true that you can’t literally place your house into a smart contract? No.
As a result, you can use a token to represent your house instead.
WePower (WPR) is an excellent example of a token that represents an actual thing – electricity. The WePower project is a decentralized application that allows users to purchase and sell electricity using smart contracts on the blockchain. Its token (WPR) stands for a specific amount of energy.
Look at How Tokens Work
Tokens are used to communicate with decentralized applications developed on top of various blockchains. The Civic is a nice example. Civic makes use of the CVC token.
On the Ethereum blockchain, their program keeps track of encrypted identities. Its goal is to make identity verification more affordable, reliable, and efficient. Let’s take a look at how it functions.
If you were traveling on a foreign vacation, you’d have to prove your identification at a number of locations along the way. The airline might be the first. If the airline was a Civic partner, they would give you a QR code requesting information about you (the traveler).
You would send your information to the corporation immediately from your mobile device via the Civic app. The data is stored on the device, but it is completely encrypted. This makes it impossible for it to be taken. A fingerprint or iris scan might be used to establish that you are the rightful owner of the information you’ve been given.
The same gadget can then be used to confirm your identity at numerous stages along the trip (the airport, the hotel, etc.). The blockchain can be used by any firm or organization that uses your digital identity to validate the data. Third parties have more faith in the digital identity saved with Civic the more times the App is utilized.
You, the user, will also receive some CVC. This is to encourage users to utilize Civic since organizations that require document verification will eventually need to purchase more tokens from users. This creates an economy in which everyone benefits from participating.
As you can see, the Civic token serves a purpose that goes beyond money. Also, the Civic platform does not take BTC, ETH, or NEO as payment for its services; only the CVC token is accepted. Each transaction, however, necessitates some Ether because it is established on the Ethereum blockchain, and miners must be compensated.