Coins and tokens are often misunderstood and thought to be the exact same thing. This may be partly because terminology in the crypto universe is not always as straightforward as would be desired. And while they are both units of cryptocurrency, coins and tokens do have different functionalities. At least to some extent.
There is an ongoing debate concerning the differentiation between coins and tokens. As a result, there are at least two main contrasting theories on their functionalities and applications. By explaining their features, this article aims to resolve the confusion on these two types of digital assets. Additionally, it provides examples of coins and tokens. By the time you finish reading this article, you will be able to make the distinction between a token and a coin.
COIN VS TOKEN ESSENTIALS
- Coins and tokens are often misinterpreted as the same thing.
- There are two approaches to differentiating between coins and tokens.
- Coins are native to their blockchains.
- Tokens are created on existing blockchains.
- The functionalities of coins and tokens often overlap.
Differentiation dilemma
As mentioned in the introduction, there are two approaches to explaining coins and tokens.
Basic distinction
The basic distinction is based on purpose and function. Here, a coin is deemed a financial asset with the sole function of making payments. As such, it displays most of the following characteristics:
- Fungibility, meaning that one unit is equal to another
- Divisibility, meaning that each unit can be divided into smaller units
- Acceptability, meaning that the cryptocurrency is widely accepted as a medium of exchange
- Limited supply, meaning that the total number of units is capped and constant
- Uniformity, meaning that all versions of a given denomination share the same value
- Portability, meaning that units can be transferred and exchanged
- Durability, meaning that units can be used multiple times without losing value
A token, by contrast, has extended functionality that goes beyond money, as we examine below.
Alternative distinction
This brings us to the next differentiation approach. This one is a bit broader and more inclusive, but also makes the boundaries between coins and token somewhat fuzzier. Here, the main distinction between the two types of digital assets is that coins are native to their blockchains, meaning that they were created at a given blockchain's launch, to be used specifically on said blockchain. Tokens, by contrast, are created on top of existing blockchains that already have a native currency.
Think about bitcoin and ether, for example: they were created on their own native blockchains, Bitcoin and Ethereum, respectively. Tokens have a different story. Many tokens have been created on an existing blockchain with its own cryptocurrency, such as Ethereum, whose native cryptocurrency is ether. As a result, ether is required to fuel transactions involving these tokens.
The tricky part with the alternative distinction is distinguishing between coins and tokens in terms of functionality. This is because the methods of using coins and tokens often overlap, which is partly due to the extensive versatility of tokens.
Versatility of tokens
Though their functionality is not limited to payments alone, coins have no further categorization that would distinguish one type of coin from another. This is not the case with tokens, as four different types of tokens are known:
1- Security tokens
Most tokens that are issued in initial coin offerings (ICOs) fall into the category of security tokens. They do not have a particular utility and are subsequently better candidates for regulation.
2- Equity tokens
If a token represents an amount of stock or equity in a given company, it is referred to as an equity token. Few companies have opted for an ICO of this kind due to the lack of regulatory guidance on the matter.
3- Utility tokens
Utility tokens or application tokens grant access to products or services to the users.
4- Payment tokens
The sole purpose of payment tokens is to pay for goods and services.A token may fall into more than one of the above-listed categories. A security token, for instance, may also have the functionality of a utility token, accounting – once again – for fuzzy boundaries. It remains to be seen how the consensus forms and how the cryptocurrency market evolves in the future.