New Delhi: Crypto assets or the cryptocurrencies are not new terms for the masses nowadays. However, one common mistake often made by investors is calling a crypto coin a crypto token or vice-versa.
At a fundamental level, both crypto coins and tokens are alike but they are two different things – all coins are tokens, but not all tokens are considered coins.
Interestingly, a lot of users do not know even if they are buying crypto tokens or crypto coins. At the basic level, the key difference between the two is merely based on their utility.
There are certain things that tokens allow the holder to do, whereas the coins do not give the same freedom to the holder. On the contrary, some platforms may accept coins but may refuse to entertain tokens.
Vikram Subburaj, Co-Founder and CEO Giottus Cryptocurrency Exchange, said that for an investor, both crypto coins and tokens behave the same way. “They represent a utility whose growth and adoption will drive the price of the coin or token in future.”
Market experts said that if an investor wants to buy a product, coins are best and if it’s a service then utility tokens can be used.
Edul Patel, CEO and Co-founder of Mudrex said that crypto coins have their own blockchains, but tokens are built on already existing blockchains. “Both are digital assets, and both have their uses,” he added.
WHAT IS A CRYPTO COIN?
Bitcoin was the first ever crypto coin as it has clear features that define a crypto coin and separate it from crypto token. These are:
Crypto coins operate on blockchains: It means that a blockchain keeps track of all transactions that involve its native crypto coin.
For example, all Ether transactions are done on the Ethereum blockchain. Ether is the native token of the Ethereum blockchain. Every transaction is encrypted and is accessible by the network members only.
When you make a transaction with Ether, it is done on Ethereum blockchain, whereas Bitcoin transactions are done on its own blockchain.
All transactions of the coin are recorded in the blockchain and there are generally ways to mine coins based on the consensus algorithm. Each blockchain will have one associated coin and hence coins in general are a few, Subburaj said.
Crypto coins were a money replica: The sole purpose to launch Bitcoin was to replace fiat currency, which neither have been possible so far, nor the future is bright for this purpose. All other use cases of token evolved with time.
The paradoxical appeal of transparency and anonymity inspired the creation of other altcoins, including Ethereum, Solana, Cardano and many more.
In 2021, Bitcoin became the official currency of a small Latin American nation El Salvador, along with the US Dollar, but not every nation or organisation allows it as a legal tender.
Crypto coins can be mined: Crypto coins can be mined and it is possible in two ways. First is through traditional mining on the Proof of Work system.
Bitcoin experts use this to earn extra Bitcoins but the key problem is that there can be only 21 million Bitcoins in the world and 90 per cent of them are already in supply. It makes Bitcoin mining highly arduous every day.
Another method of this is proof of stake, which is the new age approach to earn crypto coins. It consumes lesser energy and is a comparatively easier method.
Proof-of-stake is a crypto consensus mechanism for processing transactions and creating new blocks in a blockchain. There are a number of coins that have adopted this system.
WHAT IS A CRYPTO TOKEN?
Unlike crypto coins, tokens do not have their own blockchain. They operate on blockchains of crypto coins. For example, many tokens run on Ethereum. Stablecoins, whose value is usually pegged with US Dollar, is also a part of this category.
The transactions of crypto coins are handled by blockchain, whereas tokens rely on smart contracts. They are an array of codes that facilitate trades between two users. Each blockchain uses its multiple number smart contracts.
Tokens are easier to create with smart contracts on top of an existing blockchain. One blockchain can host thousands of tokens. Tokens on Ethereum include Maker, BAT, Tether and more, Subburaj said.
When a token is exchanged, it is physically moved from one place to another. Non-fungible tokens or NFTs are the best examples to understand this. They are proof of ownership. So the change of ownership is transferred manually.
NFTs carry only sentimental or artistic value which can have only a single owner. In other ways, they are similar to utility tokens, except you can not oblige any services.
On the contrary, crypto coins do not move as only account balance changes. It is very similar to bank transfers, where the real money is not moved as only the value is transferred. Both the banks acknowledge the change in balance.
The same thing happens when the crypto coins are transferred on a blockchain. The balance of the user’s crypto wallet changes and the transaction is noted in the blockchain.
Another difference between the two is their representation. A crypto coin is the digital version of underlying value, which might be debatable, whereas tokens carry the asset or deeds.
One can buy tokens with coins, but some tokens can carry more value than any of them. For example, equity shares of a company. However, tokens have some restrictions and they may not have the liquidity a coin offers.
“Looking from an investment point of view, tokens are better than coins as they have a specific purpose and will never go out of demand so easily unless the application in the real world becomes extinct,” Patel of Mudrex said.
A token represents what the beholder owns, while a coin represents what the beholder is capable of owning or can own. Tokens had a longer history even before cryptos came into existence.
As an investor, coins represent the technology that blockchain aims to solve whereas tokens have varied use cases that must be individually studied.
The difference between the coin and token is not very vast but one must know that the two are not the same.