Is there a difference between cryptocurrencies and tokens? What you should know
If in 2009, anyone would have asked you about crypto assets, there is a high probability that you would be clueless. However, a lot has changed since then. Cryptocurrencies particularly have taken over the financial market. At times when other currencies were tumbling, cryptocurrencies continued to grow. Currently, Bitcoin alone has a massive market capitalization of over $113 billion.
It is easy to forget that cryptocurrency coins like Bitcoin and Ethereum are just one type of crypto asset. A lot of people tend to confuse tokens with cryptocurrency coins with tokens. It is essential to understand the difference between the two.
What is cryptocurrency?
Cryptocurrencies refer to digital assets which can be used to carry out transactions. These assets make use of blockchain technology to secure the given data. Since data is encrypted, you don’t need an intermediary to carry out operations. Hence, auditing and purchasing currencies are easy since all of it is stored in the database.
Broadly speaking, there are two types of cryptocurrencies. This includes tokens and coins. It is easy to get confused between the two. You might even be guilty of using the wrong term when referring to a given asset. For instance, the AutoCoin used by The Autoblock is a cryptocurrency coin that is sometimes thought to be a token.
Simply put, coins and tokens differ because they operate on different principles. While a coin is equipped with its blockchain technology and is independent of platforms, tokens are dependent on given platforms for its existence. For instance, Bytom requires the Ethereum platform.
Key Differences between tokens and cryptocurrencies
We are here to ensure you never confuse the two again, here are the fundamental differences you need to know about.
Whenever you hear cryptocurrencies being used as financial assets, understand that the conversation is referring to coins. This is because only coins can be used like other financial assets. Crypto trading and exchange is done with currencies like Bitcoin and Ethereum.
Even though tokens are also financial assets by definition, they cannot be used for trading purposes. This is because they are not financial assets but are a mere representation of an object which is a financial asset. All they do is represent the value of the asset in the world of the blockchain.
Coins are independent of the platform they operate in. Each type of cryptocurrency coin is accompanied by its unique blockchain technology. However, tokens are not only dependent on the platform they work in, but you can have multiple tokens using the same blockchain technology. It is common to find an array of tokens that are built on the same blockchain technology.
- Ease of creation
Creating a coin is not an easy task. The process is long and full of various protocols. You can’t build a coin over a prototype. Instead, every time you create a coin, you need to begin from scratch. This is because different coins need to be equipped with unique features.
However, as far as tokens are concerned, you can get done with creating them in no time. Rather than building blockchain from the beginning, you can use the same codes that were previously used for other tokens. All you need to do is modify a few codes and protocols, and voila you are done.
To sum it up, coins are comparatively more difficult to create than tokens.
- The role of platforms
In coins, the purpose of platforms is secondary. This is because coins have the power to operate on their own, without needing assistance from any platform. This is why many find coins to be the closest to tangible currencies.
Tokens cannot operate without the assistance of a platform. This is why tokens are not considered to be financial assets themselves. In the case of tokens, platforms take center stage for their existence.
Cryptocurrency coins are used like you will use physical coins. Just like you store your money in a bank, digital coins are stored in a wallet. They can be used for transactions and for being a store of value. For instance, you can use AutoCoin to purchase cars. At the same time, you can hold onto bitcoins and sell them when their value increases. Some coins offer functions other than monetary use. For instance, NEO can be used to earn dividends. Ether can be used to pay for mining costs and DASH allows you to have to say when a decision is being made in the DASH network. Here, the coin serves as a right to vote on the issue.
On the contrary, tokens are used for activating different features of the app that it was created for. Tokens are always used with decentralized apps and hence serve a purpose only with the app or platform. For example, if you have the BNB token, you can avail a 50% transaction fee discount in Binance.
Types of tokens
Now that you know the significant differences between cryptocurrency coins and tokens, you must also learn about the different types of tokens. Here are some of the tokens you will come across.
- Security Tokens
These are one of the most issued tokens out there. You can view them as just another financial security.
- Equity tokens
These tokens are a representation of given equity. It is hard to find such tokens because the legality surrounding it hasn’t been well-defined yet,
- Utility tokens
These tokens are mostly used by applications. Their sole purpose is to offer access to given features of a product.
- Payment tokens
These are special kind of tokens that can be used to carry out transactions.
In some ways, cryptocurrency coins and tokens may seem similar to you. However, know when you are dealing with a coin and token respectively. Be well-versed on the differences.
While it is essential to distinguish between the two, these differences don’t boil down to much as the functionality of either of them is not hampered because of it. The fact remains that blockchain is the primary technology fueling them both.