You’ve probably heard terms like cryptocurrencies, tokens, coins, altcoins, or digital/virtual currencies. But what do all these terms actually mean? Most of the time, they’re used interchangeably without being incorrect, but there is a useful difference between them. In today’s article, we’ll discuss the differences between coins and tokens.
What are cryptocurrencies?
Cryptocurrencies are digital or virtual currencies with cryptographic algorithms to secure and verify the transfer of transactions. These transactions are executed on a ledger block called blockchain, which records and validates the transactions.
All coins or tokens are considered cryptocurrencies, even though most coins are not used as currency or a form of exchange.
The term cryptocurrency is a misleading term, as a currency technically denotes a unit of account, a store of value, and a medium of exchange. All of these features are characteristic of Bitcoin, and since the cryptocurrency space was created when Bitcoin appeared, any other currency developed after Bitcoin is typically seen as a cryptocurrency, even though most do not meet the aforementioned criteria of a true currency.
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Coins/ Altcoins
Alternative currencies, also called altcoins, are a type of cryptocurrency that operates independently of any other platform. Each currency has its own native blockchain platform, where transactions with said currency are carried out. Most existing altcoins are a version of Bitcoin (a fork), which was created using the original Bitcoin protocol with some modifications made to its underlying code, resulting in a new, distinct currency with different characteristics. Examples of forked altcoins are Litecoin, Dogecoin, Namecoin, Bitcoin Cash, and many others.
There are also altcoins that were not created through a fork of Bitcoin. Altcoins like Ethereum, Monero and Ripple, run on their own blockchain and code that is designed to support their internal currency. This category of currencies is quite confusing, although they have some properties of currencies, they also have other functions besides being used as money.
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Tokens
A token is a type of cryptocurrency (without a currency use case), which is usually built on top of another blockchain. Tokens usually represent a certain type of utility or asset, or sometimes both.
Tokens are created and issued to the public through an Initial Coin Offering (ICO), which is a way to raise funds by releasing a new cryptocurrency or token to fund the development of the project.
Tokens are much easier to issue than coins, as the source code of the original protocol does not need to be modified and there is no need to create a blockchain. Most tokens (40 and counting) are hosted on the Ethereum blockchain, and Ether is the primary currency used on the distributed ledger. So, basically, tokens are a means of access or an asset of a specific application, built on a blockchain system, that also has a market value, but is not yet technically a currency.
Another difference would be that coins can exist independently, but tokens require other blockchain platforms to exist and operate.
Conclusion
The terms coins and tokens still cause a lot of confusion among cryptocurrency enthusiasts and financial regulators. However, one main difference is their structure, as coins can be used as currencies and have their own blockchain, while tokens reside on a blockchain to be used in decentralized applications.