What’s the Difference between Coins and Tokens?

Where is the difference between tokens and coins?

Most people who are not familiar with cryptocurrencies usually don’t have any idea what coins or tokens are, they just know the term „crypto“ or „cryptocurrencies“. Makes sense, since most people only use the term „money“ outside of the crypto space. However, there is a clear difference: The money most people are referring to when using this term is „FIAT“ money. The word “fiat” can be roughly translated from Latin into „let there be“. This meaning really applies, because without the backing of a physical value like gold, central banks can still print money as often as they like – „Let there be money“.

Besides this form of money, mainly three other forms of money exist: Commodity, Fiduciary & Commercial Bank money. But there are still many other forms, like the coins we all know and pay with in real life. Or paper money, which everyone withdraws from the ATM. Just like there are different forms of money out there, different types of cryptocurrencies also exist. This article will take a look at the difference between the terms „coin“ and „token“.

What is a coin?

First of all, coins primarily only fulfill the role of money or value transfer. Also, a coin operates on its own Blockchain and works independently, while a token represents a cryptocurrency, which in turn requires another cryptocurrency as a platform in order to function. Also, tokens mostly offer more use cases, but we will get to that shortly.

Some of the most famous coins out there are Bitcoin (BTC), Dogecoin (DOGE) & Litecoin (LTC). As time progressed, most new cryptocurrencies were created as tokens, since they are easier to create than coins. Most coins out there can be mined with hardware (if the Blockchain operates on the so-called „Proof of Work“ consensus mechanism) or can be earned by staking them in the native wallet (if the network has the „Proof of Stake“ consensus mechanism).

What is a token?

As it was already mentioned, tokens are being built on an existing Blockchain. Most of them are so-called „ERC-20“ tokens, which are being created on the Ethereum Blockchain. Taking a look at tokens in general, there are major types of tokens in the crypto space: NFT, DeFi, utility, security, payment or asset-backed tokens are all one of the more famous ones which are used by millions of people daily. Most tokens are actually utility tokens. To make it short: Most tokens are not really money or currencies, rather they represent things or functions. Tokens usually represent assets, while coins stand for digital versions of money.

—> „Tokenizing“ and the creation of tokens: There is also the term „Tokenizing“, which refers to things being brought onto the Blockchain as NFTs (Non Fungible Tokens). They turn into a unique digital asset that way, for which other people might pay good money for. 

This is not possible with coins! The creation of coins is very expensive and requires programmers, & machinery. It is a complex process that needs to be organized well.

Creating tokens however is very easy, they can get created by everyone with a computer. The software that is necessary for this process is widely available on the internet.

Practical example of the difference

The Russian programmer Vitalik Buterin, founder of the well-known decentralized platform “Ethereum”, launched the decentralized payment network “OmiseGO” together with the startup “Omise”, which, with a market capitalization of currently 328 million US dollars, has caused enough excitement and interest. The token “OmiseGO ($OMG)” runs on the “Ethereum” platform (which offers the so-called “Ether” as a cryptocurrency) and is therefore also dependent on it. Buterin therefore launched his own coin (ETH) and token (OMG), just to name two examples. To be precise, he launched the decentralized computer „Ethereum“ (Blockchain), which has its own native coin „ETH“ that is used for payments in the network, while also enabling the option for others to create their own tokens on the Ethereum Blockchain (thanks to the ERC-20 token standard).

ERC-20 Tokens (and creating your own)

Most people have already bought or traded tokens, where most of them were probably ERC-20 tokens. Although there are now many applications on the ETH blockchain, the main area of ​​application is the so-called ERC-20 token. The ERC-20 tokens are digital assets or (service) programs on the Ethereum Blockchain, which should not be confused with Ether (ETH). ERC stands for “Ethereum Request for Comments”, the number 20 stands for an identification number which was assigned to this standard to distinguish it from other tokens. Many well-known altcoins are based on this ETH standard, such as EOS, VeChain, OmiseGO or Binance Coin. Just as Bitcoin has so far been unbeaten at the top of all cryptocurrencies, no competitor has been able to beat Ethereum as a decentralized platform. The project or technology is far from perfect, but despite recurring problems and many updates, it was able to prove itself to be suitable for the masses and thus establish itself on the crypto market. If you want to program a program yourself on a decentralized platform, it doesn’t even take as much as you think. In the case of an ERC-20 token, you first have to think about the name, the icon or logo, the price and the amount of money and decimal places. The price is set in ETH while the decimals (points of the decimal point) are used to allow the currency to be used in small amounts (for example bitcoin can be divided into 100 million satoshi). Once everything is carefully worked out, you need to connect to the ethereum network. The token then has to be created. There are various providers for this process. For this step, make sure that you are connected to the test network. If all conditions are met, the token is launched in the blockchain. If this step is also completed, you start looking for buyers and investors for your project or make the token tradable on exchanges.

What is an altcoin?

Another simple, but nevertheless important and well-established term is the so-called “altcoin”. This is a short word for the two words “alternative coin”, it is widespread and often used in the crypto space. The alternative here also only refers to bitcoin, which has been at the top since the beginning of cryptocurrencies and has not yet been knocked off the throne (in regards of market capitalization). In addition, this does not mean all the coins themselves, because a token is nothing more than an altcoin.

In the community, regardless of whether it is a coin or token, the term altcoin is usually used, as this term has become established over time.

What should I buy?

There is no best option here, many factors pay tribute to what you should allocate into your portfolio. Normally, if you use/buy a service or digital asset, you buy a token. If it’s a product, chances are that you are buying a coin.

Conclusion

A cryptocurrency can be either a coin or a token, neither of which is worse or better, and if it is not bitcoin, but a (different) alternative cryptocurrency, an altcoin. Tokens are cryptocurrencies which operate on an existing, different Blockchain. They serve a specific purpose and are not just used as digital money (They are actually mostly digital assets). Coins are operating on their own blockchain, their main purpose is the transfer of money.