Crypto Coins and Tokens – The fundamental differences

Key Takeaways

• A crypto coin is a form of digital currency that’s native to its blockchain 
• Coins can be mined through Proof of Work (PoW) or earned through Proof of Stake (PoS).
• Coins store value and act as a medium of exchange. 
• A crypto token is built for a decentralised project on an existing blockchain 
• Tokens offer functions, including utility, security, and governance.

What are coins?

The initial concept of decentralised payment solutions is a distributed ledger system that records transactions’ details using a native cryptographic asset. This asset is referred to as coin and is the only one supported by the blockchain. They are the only recognised means of exchange for those who use these blockchains. For example, Bitcoin blockchain only supports BTC, and Ethereum only endorses ETH. 

Consequently, each coin resembles and embodies the technological abilities and the financial structure of their parent blockchain. 

The blockchain protocol creates and issues new coins each time that miners in proof-of-work (PoW) networks or validator nodes on proof-of-stake (PoS) networks validate new blocks and add them to the chain.

New blockchains are also developing novel consensus mechanisms. Some of them can be completely different from PoW and PoS or can co-work efficiently with Proof-of-Work or Proof-of-Stake to give the blockchain an edge. 

Most cryptocurrency coins have a limited maximum supply, which aims to create scarcity that might lead to value appreciation over time. For instance, Bitcoin (BTC) – the first and largest cryptocurrency by market capitalisation – has a maximum supply of 21 million coins. Once it reaches that cap, no more BTC will be mined.

What are coins used for?

When Bitcoin was created, its purpose was to serve as an alternative to conventional fiat currencies. Like other cryptocurrencies, it was designed to work in the same ways as paper money and metal coins. This means that these coins can be used for several “daily purposes” similar to US dollars or euros. Some use cases are: 

• Store of value: 

Coins could be considered as a means of preserving wealth over time. Unlike fiat currencies which are subject to inflation and often lose purchasing power over time, many cryptocurrencies have a capped supply, which means that they might resist inflationary pressures. 

For instance, Bitcoin works as a store of value because only 21 million coins can be in circulation. The provable scarcity of BTC makes it a reliable store of value and is the reason why Bitcoin is often referred to as digital gold. 

• Medium of exchange: 

Coins offer a simplified and cost-effective way of transferring money across borders. This can be particularly beneficial to migrant workers sending remittance back to their families. Companies like Circle and other P2P payments technology companies support blockchain-based remittances by developing applications that enable people everywhere to receive cryptocurrency and convert that crypto into local money.

Coins can also facilitate microtransactions, which are typically impossible in traditional payment systems. 

• Paying for goods and services:

Online shopping and e-commerce platforms are steadily exploring cryptocurrencies. Coins can now be used for e-commerce through digital wallets. Merchants may choose to accept cryptocurrencies either directly or indirectly through a service provider. 

One big benefit of this practice is that coins can add an extra layer of security for both customers and merchants. They protect customers from identity theft since transactions do not ask for personal information. On the other hand, merchants are safeguarded from fraudulent chargebacks. 

The use of smart contracts of many cryptocurrencies can automate all e-commerce processes, including payment, refunds, and dispute resolution without the need for intermediaries. 

Additionally, certain cryptocurrencies leverage smart contract technology to offer additional capabilities. For instance, DASH, an altcoin, functions as a cryptocurrency while also granting holders the ability to participate in voting within a decentralised autonomous organisation (DAO).

Popular crypto coins

Bitcoin (BTC)

Bitcoin (BTC) was launched in early 2009 by the mysterious ‘Satoshi Nakamoto’ and is now the biggest crypto coin by market cap in the world. 

Bitcoin operates on its own blockchain and has a maximum supply of 21 million BTC. This cryptocurrency is often referred to as “digital gold” and has become an asset class for investors looking to diversify their portfolios beyond stocks and bonds. 

Bitcoin is also used by individuals and businesses as a form of payment. An increasing number of merchants and service providers have begun to accept Bitcoin, including AMC, Gamestop, Microsoft, NewEgg, Overstock, PayPal, Shopify, and Twitch.

Ether (ETH)

Ether (ETH) is one of the most popular crypto coins around and more than just a cryptocurrency. Ether’s value is appreciated thanks to its Ethereum blockchain, which has become home to thousands of blockchain projects and non-fungible tokens (NFTs). In some ways, it’s the backbone of the blockchain revolution. 

Ethereum is accepted as a form of payment by companies including AMC, Microsoft, NewEgg, Overstock, PayPal, and Twitch.  

Cardano (ADA)

Cardano (ADA) is an open-source and decentralised blockchain platform that was one of the first to run on a PoS consensus, gaining a rep as a green crypto coin. Cardano was founded in 2015 by Ethereum co-founder Charles Hoskinson and facilitates peer-to-peer (P2P) transactions with its coin ADA.

What are tokens?

Tokens are built on pre-existing blockchains. Take the relationship between Uniswap and Ethereum as an example. Uniswap’s native digital token is UNI, and since UNI is built on Ethereum, a pre-existing blockchain, it qualifies as a token. 

Crypto tokens are more like a kind of digital asset. The digital asset feature of blockchains enables the creation of unique digital assets that utilise the blockchain’s infrastructure to function, as seen in Ethereum’s ERC-20 token standard. These assets can represent a share of ownership in a DAO, a digital product or NFT, or even a physical object. They can be bought, sold, and traded between users. However, fees for these transactions are paid in the blockchain’s native coin and not these digital assets. 

What can tokens be used for?

Most tokens are designed to be circulated within a blockchain project or a decentralised app (Dapp). They are, however, not mined, but are created and distributed by the project developers. Once tokens are in circulation, they can serve several purposes. 

• Asset Tokenisation:

Tokens have been used to represent rare metals, real estate properties, and more through a process called tokenisation. 

Let’s take a real-life example: assets can be created on the blockchain to represent a whole company’s equity. Companies then can issue tokens similarly to issuing securities. The token creators can also design a dividend system using the smart contract. Dividends can be distributed in forms of the native token, other cryptocurrencies, or even fiat currency. 

• Utility Tokens:

The development of Ethereum Virtual Machine (EVM) has opened the door to a range of new blockchain-based applications. Dapps such as decentralised finance (DeFi) platforms, gaming systems, and artificial intelligence (AI) applications leverage smart contracts to issue tokens which give their holders privileges while using these apps. 

In some cases, the core functionalities of an app are accessible only to token holders. These tokens are known as utility tokens. For example, some metaverse platforms and NFTs can only be purchased using a designated token only. 

• Governance Tokens:

Decentralised Autonomous Organisation (DAO) are an organised collective with a ‘flat’ hierarchical structure centred around a shared cause or mission. Crypto projects which aim for true decentralisation often embrace the DAO model for governance. 

In DAOs, participation rights are tokenised, and every token holder is considered a member of the DAO. Through voting portals, DAO members can vote on proposals and submit their suggestions to be considered by the rest of the collective. 

Some projects implement a dual-token system. They issue governance tokens and utility ones separately. Holders of the governance tokens hold the right and duty of voting on improvement proposals, while the second token serves as a means for interacting with the app. 

• Staking rewards:

Staking is a program that lets investors earn by simply locking up their tokens in a smart contract. Holders then can benefit from the token distribution process.

This is quite different from the practice seen in Proof-of-Stake coins. 

In single-side staking programs, investors lock up a specific asset in a staking pool and earn rewards accordingly. Additionally, DeFi platforms offer liquidity mining and yield farming programs. In liquidity mining, holders stake their liquidity pool (LP) tokens to earn rewards. 

Popular crypto tokens

Filecoin (FIL) and Arweave (AR) allow users to use their utility tokens to access decentralised storage services.

Axie Infinity, a prominent play-to-earn (P2E) game, features a utility token known as Smooth Love Potions (SLP). Players can earn or purchase SLP to engage in exclusive in-game activities and tasks, enhancing their gaming experience within the Axie Infinity ecosystem.

Shiba Inu (SHIB): Shiba Inu is one of the most popular “meme coins” – cryptocurrencies based on fun Internet memes that have been adopted by online communities. SHIB is a token that runs on the Ethereum blockchain. It acts as a utility token within the ShibaSwap ecosystem. Token holders can use their SHIB for various functions within the ecosystem, such as providing liquidity, staking, or voting on proposals.

Polygon (MATIC): MATIC is an ERC-20 token native to the Polygon blockchain, which operates as a Layer 2 scaling solution alongside Ethereum. The primary purpose of MATIC is to pay transaction fees for interacting with decentralised applications (dApps) and smart contracts. MATIC holders can stake their tokens to become validators on the Polygon network and receive rewards or participate in governance decisions. MATIC is also used as a bridge currency on the Polygon Bridge, facilitating seamless asset transfers between Ethereum and Polygon blockchains.

Uniswap (UNI): UNI is an ERC-20 token powering the Uniswap decentralised exchange (DEX) on Ethereum. UNI serves dual roles as a utility and governance token within the Uniswap ecosystem. Token holders can vote on proposals impacting the platform and earn rewards by contributing their tokens to liquidity pools.

On the Uniswap DEX, UNI tokens are used in trading pairs and as an intermediary currency for decentralised token swaps. 

The key differences between coins and tokens

The primary similarity between coins and tokens is that both operate on the blockchain and can be transferred between users. Coins can be used for the tokenisation process, and they may also serve as utility or governance tokens. Tokens, however, don’t have their own blockchain and are not able to use the consensus mechanism for token generation. 

For a comprehensive comparison, let’s look at our table:

What about stablecoins? Are they coins or tokens?

Stablecoins are cryptocurrencies tied to specific assets. Most of them are actually ERC-20 tokens and do not have their own chains. However, they are still called coins as their primary function is a medium of exchange.

Let’s take USD Coin (USDC) as an example. It is backed by US dollars, held by the issuer company to maintain the value of every USDC at $1 USD.