Understanding cryptocurrencies: Coins and Tokens — what is the difference?

Question

If you are interested in cryptocurrencies, you have probably come across the terms "coins" and "tokens". Both refer to digital assets, but there are significant differences between them. In this article, we will take a detailed look at these concepts and their role in the Web3 ecosystem. 🚀

Coins: Digital coins on their own blockchain 🪙

Coins ( or "tokens" ) are cryptocurrencies that operate on their own blockchains. They are fundamental elements of the crypto ecosystem, having their own infrastructure, consensus protocol, and a network of validators or miners.

Main functions of coins:

Medium of exchange for transactions
Value preservation tool
The unit of account in its ecosystem
Ensuring the operation and security of the blockchain

Examples of Native Coins

Bitcoin (BTC) — the first and most capitalized cryptocurrency. It functions as a digital analog of gold and a means of preserving value. Bitcoin has its own blockchain with a PoW consensus mechanism and a limited supply of 21 million coins.

Ethereum (ETH) is not only a digital currency but also "fuel" (gas) for the ecosystem of smart contracts and decentralized applications. After transitioning to PoS consensus, Ethereum has become more energy-efficient and scalable.

Litecoin (LTC) — a technological fork of Bitcoin with faster block confirmation times and an optimized mining algorithm. It is positioned as a payment method with low fees for daily transactions.

Coins: Digital assets on existing blockchains 🎟️

Tokens differ from coins in that they are created and function on existing blockchain platforms. Most tokens operate on the Ethereum blockchain ( according to the ERC-20) standard, although there are other platforms for creating tokens, such as BSC or Solana.

Coins serve a variety of functions depending on their purpose and design. They can represent access rights to services, a share in a project, or voting rights in the governance of the protocol.

Main Types of Coins

Utility Tokens (Utility Tokens): Provide access to certain functions or services of the platform. For example, Basic Attention Token (BAT) is used to pay for advertising in the Brave browser ecosystem.

Security Tokens (Security Tokens): Represent a digital form of traditional financial instruments, such as stocks or bonds. Ownership of such tokens grants the right to a share in the company or to receive dividends.

Stablecoins (Stablecoins): Coins whose value is pegged to stable assets, usually fiat currencies. For example, USDT and USDC are pegged to the US dollar at a 1:1 ratio, which ensures low volatility and makes them convenient for trading and storing value.

Governance coins (Governance Tokens): Provide voting rights in decision-making regarding project development. Holders of such coins can influence protocol parameters, fund distribution, and other key aspects of governance.

Key Differences Between Coins and Tokens 🔍

| Feature | Coins | Tokens | |----------------|-------|--------| | Blockchain | Have their own blockchain | Operate on an existing blockchain | | Main Function | Means of payment and store of value | Various functions (utilitarian, investment, management) | | Autonomy | Fully autonomous | Dependent on the platform on which they are created | | Standardization | Unique protocol | Follows the standards (ERC-20, BEP-20, etc.) | | Examples | BTC, ETH, LTC | USDT, UNI, BAT, AAVE |

Practical Application in Trading 📊

Understanding the difference between coins and tokens is practically important for traders:

Risk profile: Native coins often have a more stable market history, while coins can be more volatile.
Liquidity: Major coins usually have high liquidity across all trading platforms, while some coins may only be available on certain exchanges.
Diversification Strategies: An optimal investment portfolio often includes both coins ( for stability) and promising coins ( for potential growth).
Technological Risks: Coins depend on the underlying blockchain, which adds an additional layer of risk — issues with the main platform can affect all coins on it.

Conclusion

Coins and tokens are two fundamental classes of digital assets in the crypto ecosystem, having different nature and purpose. Coins are native currencies of blockchains, while tokens are digital assets created on existing blockchain platforms to perform specific functions.

Understanding these differences not only enriches your knowledge in the field of cryptocurrencies but also helps you make more informed decisions when forming an investment portfolio and conducting trading operations on cryptocurrency platforms.

🌐 Now you are ready to navigate the diversity of digital assets in the modern crypto market with more confidence!