Coins and Tokens - Similarities and Differences

Coin and token cause confusion because their meanings and usage often overlap. However, coin and tokens have significant differences.

All coins and tokens on the blockchain are called cryptocurrency. However, the term cryptocurrency is not always correct.

Currency is:

  • A calculation unit;
  • A cost storage;
  • An exchange medium.

Bitcoin and other coins have all these characteristics, but some tokens do not have the features mentioned above of the present currency. For example, tokens-utilities are services or units of services that you need to purchase. We can compare these tokens with the API keys that are used to access the service. A token is a representation of value. It is a kind of digital asset.

Bitcoin

Bitcoin is the first decentralized cryptocurrency. Public ledger (blockchain) is a base of Bitcoin. Blockchain records and verifies all transactions in chronological order.

Altcoins (alternative coins)

Namecoin is the first altcoin. It was created in April 2011. It is a decentralized system of registration that transfers information with open source.

Most altcoins is a variation (fork) of Bitcoin. They are based on bitcoin source code. But there are some changes in the underlying code because creators conceived altcoins as a brand new coin, with a different set of functions. Altcoins derive from bitcoin: Namecoin, Peercoin, Litecoin, Dogecoin, Bitcoin Cash.

A fork occurs when there is a change in the underlying programming protocol. It leads to “branching” of the original blockchain. There is a new coin after the fork.

Other altcoins

Some altcoins have not been obtained in consequence of the modification of the bitcoin source code. In this case, the developers created the blockchain and the protocol that supports their coin. For example, Ethereum, Ripple, Omni, Nxt, Counterparty, and Waves.

The main similarity of all altcoins - each of them has independent blockchain for transactions.

Tokens

Creating tokens is a more straightforward process because there is no need to borrow codes from a specific protocol or create a blockchain from scratch. All you need to do is follow the standard blockchain patterns. For example, Ethereum platform allows you to create your own tokens.

The tokens often do not have their own blockchain and are hosted on third-party (Ethereum or Waves), and do not have their own wallet.

A template for creating tokens has a standard interface for interaction between tokens. It simplifies the ability to store various coins types in one purse. A good example is the standard ERC-20 on the Ethereum blockchain that works with more than 40 tokens.

Tokens is more than a currency

A token is a representation of value. It is a kind of digital asset. Developers created Token Standard ERC-20 for Ethereum. It has many functions allowing to produce, distribute and control the assets. The tokens do not provide any specific rights to the holder. Nevertheless, they let these users/investors get access to the platforms created by developers using this token, and even in some cases to obtain the project profits.

Tokens are created and distributed to the public through the ICO to financing the project development.

Tokens versatility

If the coin is used only for payment processing, then the token can carry smart contracts that can be used in the corresponding DApp to accomplish a specific goal.

Imagine, if you can pay for a drink in any pub in the world, but only with a token PubToken. Everyone will have to buy PubToken, which will carry the user's age, and minors cannot purchase alcohol at the bar.

Token as the currency

Token is a representation of a particular asset or utility, but also tokens can be a means of settlement within the project. For example, the Golem Project pays application developers a Golem coin, and BAT tokens will be used as a cryptocurrency for the calculation of the advertising service project.

The token can perform one or more of the following functions:

  • To prove the right to asset ownership;
  • To confirm the shares in the startup;
  • To be an accounting medium;
  • To be a means of settlement between parties;
  • To be a way of rewarding players;
  • To be a tool for preventing attacks;
  • To be a payment way of using the system.

Often the token is a hybrid – it can perform several functions: to be a promotion, internal currency, and an accounting unit.

Conclusion

The main difference between coins and tokens are in their structure: a coin is a separate currency with its blockchain, while token works over the blockchain that facilitates the creation of decentralized applications. The primary purpose of the coin is to fulfill the money role: to be an accounting unit, value store and transmission means. Tokens offer the functionality that exceeds the digital money. The voting community on key business decisions or even technical changes to the platform can use them.

Cryptocurrency helps to carry the value by accepted method (as ordinary money), while tokens can be used to solve problems in the blockchain.