I just talked to a friend who just entered crypto, and he’s confused about tokens and coins. The same question you might have asked before. So this time I want to explain it in a more relaxed way.

So here’s the deal, a token is a digital asset that lives on top of an existing blockchain. Unlike coins that have their own blockchain. Bitcoin has the Bitcoin blockchain, ETH has the Ethereum blockchain. But tokens? Tokens are like passengers on someone else’s blockchain. For example, UNI from Uniswap runs on Ethereum, CAKE from PancakeSwap runs on BNB Chain, GMT from StepN runs on Solana. They all need a host blockchain to survive.

Why do I say tokens are application layer assets? Because they totally depend on the infrastructure, security, and consensus mechanism of the underlying network. That’s why launching a token is much faster and cheaper than building a blockchain from scratch. Developers can deploy smart contracts and boom, the token is live within minutes.

Now about the types. There are utility tokens that give access to products or features on a platform. Governance tokens that give voting rights to holders on protocol upgrades, often seen in DAO projects. Then there are security tokens that represent ownership in real-world assets. And don’t forget NFTs, non-fungible tokens that are unique and used to prove ownership of digital art or collectibles.

But the most important thing you need to understand: tokens are different from coins at a technical level, not just in name. First, they must follow certain technical standards. On Ethereum, for example, there’s ERC-20 for regular tokens, ERC-721 for NFTs, ERC-1155 for assets that can be fungible or non-fungible. These standards make tokens easily integrated into wallets, DEXs, and DeFi protocols.

Second, about gas fees. When you transfer tokens, the fee is still paid in the native coin of that blockchain, not the token itself. Want to transfer UNI? You need ETH for gas, not UNI. Small detail but often overlooked by beginners.

Third, about wallets. All tokens on the same blockchain share the same address structure as the native coin. One Ethereum wallet can hold ETH and thousands of ERC-20 tokens at the same time, without needing separate addresses. Very practical.

Now, why are there so many tokens? Because it’s super easy to issue them and immediately benefit from the security, infrastructure, and user base of the host blockchain. But that’s also a weakness. If the host blockchain gets congested or expensive, all tokens on it are affected. Plus, liquidity becomes an issue, since thousands of new tokens keep coming out, many of which never attract real users or trading volume. The low barrier to creating tokens also makes scams easier, especially for investors looking for quick profits.

From an investment perspective, choosing between coins and tokens depends on your risk tolerance. Long-term investors usually prefer Layer-1 and Layer-2 coins because they’re more resilient. Tokens are more for those willing to take higher risks for potentially bigger returns. DeFi, GameFi, metaverse projects are mostly driven by tokens and can experience dramatic price swings.

A balanced portfolio usually mixes both. Coins provide relative stability, while tokens are carefully selected for growth potential.

So the main point: tokens are digital assets that operate on top of existing blockchains, different from coins that have their own blockchain. Once you understand this, the crypto landscape makes more sense. From technical basics to smarter investment decisions.

Although this concept is basic, even experienced players often review it as the market continues to evolve. Anyway, this is just information, not investment advice. If you’re interested in learning more or tracking various tokens and coins, you can check out Gate to see market and project details.