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Token vs. Coin: The Difference Explained

Blog • 5min read
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Zinchuk Dmytro

Writen by Dmytro Zinchuk

@DmytroZinchuk
Published on 30 May 2018

Token vs. Coin - What's the Difference?

Cryptocurrency is an umbrella term applying to the whole of the crypto space. In this article, I look at the difference between coins meant to be used as currencies and crypto tokens created with a much wider array of applications in mind.

What is a coin?

A coin, or cryptocurrency, runs on its own blockchain. Many coins are forks of Bitcoin, but some have been developed from scratch and are quite different from the original cryptocurrency. A coin may differ in the way it processes and records transactions. Some are a lot faster than Bitcoin, examples being EOS and Stellar. Typically, coins use either Proof-of-Work (e.g. Bitcoin) or Proof-of-Stake (e.g. Ethereum) to keep the network secure.

One type is privacy-based coins which aim to hide transactions. The challenge is that transactions are usually carried out on a public blockchain. Monero attempts obfuscation by creating multiple pretend transactions, which makes it much harder for an observer to follow the money. Zcash uses a method where evidence of the transaction is provided without the node actually seeing it.

What is a crypto token?

Crypto tokens do not have their own blockchain. They run on platforms that have their own blockchain and a native coin. Tokens represent an underlying tradable asset. Major platforms include Ethereum and Ripple. The most common use of a token is for raising money in an ICO. Once the funds have been raised, the token will often migrate onto its own blockchain and become a coin in its own right.

Glossy Ethereum physical coin in blurred closeup.

Ethereum is a decentralised platform, and Ether (ETH) is its native coin. Most tokens that run on the Ethereum network are called ERC20 tokens. Currently, the top ERC20 tokens are EOS and Tronix, both of which have their mainnets coming up soon. This means they will transform from tokens on the Ethereum network to full-fledged coins with their own blockchain.

What are the main differences?

Coins are designed to be digital cash, which means their main purpose is to be exchanged for goods and services or traded between people. The rise in Bitcoin’s fees sparked a controversy, and there was a tendency for it to be called a store of value instead of a currency. This also relates to the disagreement between the Bitcoin and the Bitcoin Cash communities, the latter arguing that their coin is a better replacement for cash.

Tokens have a much wider range of functions. There are different types, such as utility tokens, reward tokens, and asset-backed tokens. Utility tokens are designed to be used on platforms to pay for in-DApp services. Reward tokens are provided on the basis of reputation often and their main purpose is to prove that an entity is trustworthy. Asset-backed tokens are pegged to an underlying asset (gold, for example) in a similar way to how currencies were originally created.

How do tokens work?

Tokens work through the use of smart contracts, which represent automatically executing scripts that run over decentralised networks. This means there is no downtime and no need for a trusted party to ensure the contract gets executed. Some cryptocurrencies use smart contracts to connect blockchains to external data in order to guarantee execution on the basis of data that has been gathered without the involvement of a trusted party.

How can decentralised applications (DApps) be used?

There are countless possible use cases for DApps. The main limitation for them is network latency, which is the speed at which networks work. EOS recently announced that users can play Space Invaders live on its blockchain due to the fast block times of 500 milliseconds. In contrast, Bitcoin blocks take about ten minutes to be produced.

Bitcoin physical coin on the black circuit board.

One way to picture DApps it to imagine the underlying network as a flat LEGO board and DApps as bricks being placed onto the board. They need to be compatible in order to fit but can be of different shapes and sizes. Crypto tokens are the fuel these use to work and pay for everything to happen. Like Bitcoin, they can also run on blockchains that aren’t platforms, but they are much more limited.

One example of a use case is Ethlance, which is similar to centralised freelancing websites but instead of a business taking a cut from the users, the only fees are minimal transaction prices.

Conclusion

The language used in the crypto space does need updating as ‘currency’ is a severe limitation for the variety of projects being created. Bitcoin has paved the way and is the best-known one, but it would be like limiting the whole internet to the ability to send emails. Crypto tokens use smart contracts to enable DApps to run on other blockchains, and this is an example of the innovation in the sector. Meanwhile, coins are competing to see which are the fastest or most secure.

Published on 30 May 2018
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