GS Preschool Games is a free app designed for kids in the age range 3-6,…
Cryptocurrencies can definitely be considered one of the most important inventions of the early 21st century. Although they have already become an integral part of the current reality, today someone is taking their first steps in the crypto world and seeking to understand the fundamental concepts. To begin with, it would be nice to understand whether there is a difference between coins and tokens or whether these terms are absolute synonyms.
What is a digital coin?
A digital coin is a cryptocurrency that has its own independent blockchain and plays a key role in ensuring the functioning of the blockchain network. It performs a number of important functions, including charging fees for transactions on the network, rewarding miners and stakers.
Additionally, digital coins also function as:
- A tool for measuring the value of goods and services within the cryptocurrency ecosystem.
- A means of exchanging exchange for other digital assets or fiat currencies.
- A means of preservation and investment.
Today, the most famous digital coins include the following: Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Litecoin (LTC), Cardano (ADA).
Another important aspect of digital coins is the way they are created. They are usually mined using the Proof of Work (PoW) consensus mechanism or earned through the use of the Proof of Stake (PoS) protocol. However, there are also several other popular consensus algorithms, including Proof of Authority (PoA).
Coins are usually decentralized and many have a limited supply.
Crypto tokens and their areas of application
Tokens represent a special element in the cryptocurrency market. The main difference between these assets and coins is that tokens do not have their own blockchain. They operate within the digital networks of other cryptocurrencies. Interestingly, not all blockchains have the ability to create tokens.
At the same time, creating tokens on a blockchain that supports this feature is actually accessible to almost anyone. It is also a simpler and more cost-effective process than creating your own coin, as there is no need to develop a new blockchain protocol. Tokens are created using smart contracts.
The modern idea of crypto tokens began to take shape in the cryptosphere in 2015, with the advent of the Ethereum blockchain. Here, the standard for creating smart contracts on the second most popular blockchain in the world, known as ERC-20, played a key role. Thanks to this tool, the process of creating tokens has been greatly simplified.
The main task of creating these assets is to solve specific problems within a crypto project. Depending on their functionality and intended use, the following types of tokens are distinguished:
- Utility tokens that are used to access services and functions within the project.
- Security tokens are digital analogues of securities that provide rights to own a certain part of a crypto project’s assets and a share in its income.
- Governance tokens are created for owners to participate in the formation of the future protocol. These tokens give owners a say in decisions about the project and its functionality.
Key differences between coins and tokens
The main difference between these types of assets is the presence of their own blockchain. For coins this is a mandatory requirement.
Coin mining occurs in a decentralized manner, but it is worth adding that at the initial stage of a new project, a pre-mining function can be used – creating a reserve of coins for a limited group of internal users. In fact, it represents an independent type of asset that is stored in a special cryptocurrency wallet. Moreover, digital coins tend to have a higher level of security since their transactions do not involve smart contracts, which can introduce errors and vulnerabilities.
Tokens do not require their own blockchain network. They are based on existing protocols and follow certain standards. While cryptocoins serve as digital money, tokens are used to provide services or confirm ownership of various assets within the network. Coins are limited to use only on their original network, and tokens can be supported by different blockchains, such as USDT. At the same time, USDT-TRC20 price does not differ from the price of USDT in all its technical variants.Changing the status of crypto assets
It is important to emphasize that all of these differences do not make coins and tokens mutually exclusive assets. In fact, they can complement each other in the cryptocurrency environment. Virtual coins can be used to purchase tokens, and both types of assets are suitable for staking and the USDT to EUR exchange is technically no different from a similar transaction with Bitcoin.
A token can “grow up” and become a coin, and there are already quite a few such examples in the crypto industry. For example, the Binance cryptocurrency exchange initially operated on the Ethereum (ETH) blockchain. This blockchain provided the functioning of the Binance Coin (BNB) token, which was issued on the ERC-20 standard. Binance later launched its own blockchain known as Binance Chain and migrated from ERC-20 BNB tokens to its own blockchain. Binance Chain has become the basis for trading on the Binance exchange and provides higher performance and lower fees.