While the terms cryptocurrency coin and crypto token are often used interchangeably, these two types of digital assets differ in a number of ways.
They represent the most common blockchain-based crypto assets but while coins are native to their own blockchains, tokens are built on an existing blockchain like Ethereum.
We further break down what they are, how they function and examples of each.
Defining digital assets
Broadly speaking, digital assets are intangible assets. Creation, trading and storing all happens in a digital format.
In the case of cryptocurrency, these digital assets utilise the technology behind cryptocurrency, which is called blockchain technology.
Other forms of digital assets exist, for example, any media with rights to use in binary source form. It’s important then to note that ‘digital asset’ does not always necessarily relate to cryptocurrency, though this is a common misconception.
What are cryptocurrency coins?
The common recurring theme amongst any crypto coin is that their purpose is to be a store of value.
Cryptocurrency coins are native to their blockchain network. Like fiat currency, they can be used in exchange for goods and services.
More specifically, cryptocurrency coins can be used not only as a store of value but to transfer money, and as a medium of exchange. Items can be priced in bitcoin or other cryptocurrencies.
What is the purpose of coins?
The blockchain protocol on which a specific cryptocurrency runs issues its own coins. This is why they are often referred to as native currency.
These coins are created through mining. A more detailed breakdown of the process can be found in our article ‘How to Mine Bitcoin in Australia in 2021.’
Examples of crypto coins
The most well-known example is Bitcoin (BTC), but it’s far from the only example. As of January 2021, there were over 4,000 cryptocurrencies.
These alternatives to Bitcoin are typically referred to as altcoins, and while many are derived from Bitcoin’s open-source protocol, several have created their own protocols. These include popular coins Ripple (XRP), Litecoin (LTC) and Cardano (ADA).
Another notable example is Ethereum. Though its native currency Ether (ETH) is a coin, many of the top tokens are built on top of the Ethereum blockchain. More on that later.
What are crypto tokens?
So now you have an understanding of crypto coins, where and how do tokens come into the picture?
Tokens still utilise a blockchain, but unlike coins, they are not native to that blockchain.
What is the purpose of tokens
Blockchain tokens are developed by block-chain based organisations, using existing blockchain networks.
The most common network is Ethereum, thanks to the establishment of smart contracts. Any tokens built on this platform are referred to as ERC-20 tokens.
Developers pay in the native cryptocurrency of a blockchain to create new tokens. Once these have been created, these developers can decide the total units to create and where they will send these tokens.
Often, tokens are created for ICOs, or initial coin offerings. Think of these like initial public offerings for stocks investors, but instead of shares you’re getting tokens. This is a particularly popular form of fundraising for blockchain-based businesses.
How do tokens function?
Most tokens are created for use in dApps, or decentralised applications. Tokens work within the dApp to unlock or activate certain features or functionalities.
One such example is Basic Attention Token (BAT).
This blockchain-based digital advertising platform utilises BAT to reward users for their attention and also provides advertisers with an improved return on their ad spend.
Unlike coins, crypto tokens can not be used to purchase goods and services outside of the dApp they’re created to function with. They can however be traded through exchanges, and like cryptocurrencies, their value may rise or fall over time.
Types of cryptocurrency tokens
There are various categories for cryptocurrency tokens and they all exist for different purposes. Some of the common types of tokens include
- Security tokens are essentially digital contracts that work as proof of investment for real-world assets like real-estate or corporate stocks.
- Utility tokens are issued to fund the development of a particular product or service and are designed to provide access to that product of service.
- Non-fungible tokens (NFTs) are digital assets that represent real-world objects or assets like music, art and videos.
- Governance tokens are digital currencies that represent voting power on a blockchain-based project.
- Rewards tokens are given out as appreciation for providing a service on a blockchain-based platform.
Examples of cryptocurrency tokens
Like coins, thousands of crypto tokens exist.
Some of the biggest biggest tokens by market cap are Tether (USDT), Binance Coin (BNB) and VeChain (VET).
A goal of many dApps is to provide a solution to issues both in the crypto space and the real world. Some examples of this in action include:
- Bancor (BNT) allows users to create their own cryptocurrencies.
- Civic (CVC) offers instant and secure ID verification.
- Status (SNT) is a decentralised messaging app similar to China’s WeChat.
- Augur (REP) allows anyone to create their own predictions on different markets.
- Uniswap (UNI) allows people to exchange and swap ERC-20 tokens
How to get coins and tokens
One way, as discussed, is to purchase crypto tokens through their ICO.
There are more straightforward ways, however. Many exchanges allow their users to trade both crypto coins and tokens through their platforms.
There’s no answer as to whether investing in coins or tokens is “better”, but an understanding of the functions of each should help you make a more informed decision when building out your digital portfolio.