When people talk about cryptocurrency, the terms “coin” and “token” seem almost interchangeable. In reality, there’s a big – and very important – difference.
A crypto coin is a currency that is native to a certain blockchain. Bitcoin is a difficult example to use because the blockchain and the coin have the same name, so instead we’ll use Ethereum and Ether.
Ethereum is a blockchain that is designed specifically for smart contracts – complicated algorithmic deals that execute themselves automatically when their conditions are met, taking out the need for a third party.
Making transactions on the Ethereum network comes with fees, and those fees are paid in Ether. Ether is baked into the Ethereum network, and was born alongside it.
A token, on the other hand, can be created on top of an existing blockchain.They tend to have additional functions and properties other than being purely digital currency.
NFTs, for example, are tokens (that is, after all, what the T stands for). They are created and attached to certain assets like art or video clips and traded on existing blockchains like Ethereum. When they’re traded, a fee is paid in Ether.
Banknotes and Bungee Jumps
We have a great analogy when it comes to the difference between the two.
Think of coins on blockchains like a traditional currency native to its own country. If you have a £10 note, you can go and use it to buy whatever you’d like in the UK (up to the value of £10, of course). If you want to go and buy things in the US, you will first have to exchange your £10 note for US dollars.
Think of tokens, however, like a voucher for 50% off a bungee jump. This voucher has a monetary value and can do things that your £10 note can’t; it might even have a password printed on it that grants you access to the premier bungee lounge. You’d probably be able to trade it with a person in exchange for goods or services, but you can’t exactly use it in your local supermarket or deposit it in your bank account.
Then, there’s the matter of how easy they are to create. A bungee jumping company just needs a couple of hours on PhotoShop to create a good voucher (and someone could forge one pretty easily, too). You cannot, however, just create a new system of traditional currency.
Why Does It Matter?
It’s good to know the difference between a coin and a token because of their volatility and the different levels of effort it takes to create them.
The value of any given cryptocurrency is unstable (apart from those designed to attach their value to traditional currencies). Coins, however, are far more stable than tokens. As long as something is established as a true crypto coin with a blockchain behind it, it is difficult for it to suddenly become worthless.
Tokens, on the other hand, are subject to much more change. Every week there’ll be a new token on the block, heralded to be the next best thing. The week after it’ll be revealed to be a scam, or to be breaking some sort of regulation, or will be made obsolete by the next big token.
Therefore, when investing in a cryptocurrency it is wise to see whether it is a coin or a token. If it turns out to be a token marketed as a coin… run.
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