Crypto news: Crypto class: Difference between crypto coin and token

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New Delhi: Crypto assets or cryptocurrencies are no longer new terms for the masses these days. However, a common mistake often made by investors is to call a cryptocurrency a crypto token or vice versa.

At a fundamental level, crypto coins and tokens look alike, but they are two different things – all coins are tokens, but not all tokens are considered coins.

Interestingly, many users do not even know if they are buying crypto tokens or crypto coins. At the basic level, the main difference between the two is simply based on their usefulness.

There are some things that tokens allow the holder to do, whereas coins don’t give the holder the same freedom. On the contrary, some platforms may accept coins but may refuse to receive tokens.

Vikram Subburaj, co-founder and CEO of Giottos Cryptocurrency Exchange, said that for an investor, cryptocurrencies and tokens behave the same way. “They represent a utility whose growth and adoption will determine the price of the coin or token in the future.”

Market experts have said that if an investor wants to buy a product, coins are preferable and if it is a service, utility tokens can be used.

Edul Patel, CEO and co-founder of Mudrex, said that cryptocurrencies have their own blockchains, but tokens are built on top of already existing blockchains. “Both are digital assets, and both have their uses,” he added.

WHAT IS A CRYPTO CURRENCY? Bitcoin was the very first crypto coin because it has clear characteristics that define a crypto coin and separate it from the crypto token. These are:

Cryptocurrencies run on blockchains: this means that a blockchain keeps track of all transactions involving its native cryptocurrency.

For example, all Ether transactions are performed on the Ethereum blockchain. Ether is the native token of the Ethereum blockchain. Each transaction is encrypted and is only accessible to members of the network.

When you make a transaction with Ether, it is done on the Ethereum blockchain, while Bitcoin transactions are done on its own blockchain.

All transactions of the coin are recorded in the blockchain and there are usually ways to mine coins based on the consensus algorithm. Each blockchain will have an associated coin and so coins in general are few, Subburaj said.

Crypto coins were a monetary replica: the sole purpose of Bitcoin’s launch was to replace fiat currency, which has not been possible so far, and the future does not look bright for that purpose. All other use cases for the token have evolved over time.

The paradoxical appeal of transparency and anonymity has inspired the creation of other altcoins, including Ethereum, Solana, Cardano and many others.

In 2021, bitcoin became the official currency of a small Latin American country, El Salvador, along with the US dollar, but not all nations or organizations allow it as legal tender.

Cryptocurrencies can be mined: Cryptocurrencies can be mined and this is possible in two ways. The first is to use traditional mining on the proof-of-work system.

Bitcoin experts use it to earn extra Bitcoins, but the key issue is that there can only be 21 million Bitcoins in the world and 90% of them are already in storage. This makes bitcoin mining very difficult on a day-to-day basis.

Another method is proof of stake, which is the new age approach to earning crypto coins. It consumes less power and is a relatively easier method.

Proof of Stake is a cryptographic 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 cryptocurrency blockchains. For example, many tokens run on Ethereum. Stablecoins, whose value is usually pegged to the US dollar, also fall into this category.

Crypto coin transactions are handled by the blockchain, while tokens rely on smart contracts. This is a set of codes that facilitate exchanges between two users. Each blockchain uses its multi-number smart contracts.

Tokens are easier to create with smart contracts on top of an existing blockchain. A blockchain can host thousands of tokens. Tokens on Ethereum include Maker, BAT, Tether and more, Subburaj said.

When a token is traded, 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. Thus, the change of ownership is transferred manually.

NFTs have only sentimental or artistic value that can only have one owner. In other ways, they’re similar to utility tokens, except you can’t compel any service.

On the contrary, cryptocurrencies do not move because only the account balance changes. It is very similar to bank transfers, where real money is not moved as only value is transferred. Both banks acknowledge the balance change.

The same thing happens when cryptocurrencies are transferred on a blockchain. The user’s crypto wallet balance changes and the transaction is noted in the blockchain.

Another difference between the two is their representation. A cryptocurrency is the digital version of the underlying value, which can be moot, while tokens carry the asset or deeds.

Tokens can be purchased with coins, but some tokens may be worth more than any of them. For example, shares of a company. However, tokens have certain restrictions and they may not have the liquidity that a coin offers.

“From an investment perspective, tokens are better than coins because they serve a specific purpose and will never run out so easily unless the real-world application dies out,” said Patel of Mudrex.

A token represents what the spectator owns, while a coin represents what the spectator is able or may possess. Tokens had a longer history even before cryptos existed.

As an investor, coins represent the technology that blockchain aims to solve, while tokens have various use cases that need to be researched individually.

The difference between the coin and the token is not very big but you should know that the two are not identical.

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