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Fundament of the week: Token vs Coin – what are the main differences?

There are several key differences between Cryptocurrency coins and tokens. Today, we will go through all of them.

What is a coin?

A digital coin (BTC, LTC, etc.) is an asset that originates in its own blockchain. Digital coin transactions can take place from one person to another. However, no physical coins are involved during sending and receiving. All coins exist as data in a huge global database. This database (blockchain) tracks all transactions and is checked and verified by computers around the world.

How are coins used?

Digital coins are generally used in the same manner as real coins. You can imagine coins like Bitcoin, Litecoin, or Monero as well as coins in your wallet. They often serve no other purpose than to be used as money. These "cash" coins are used for:

  • Money transfer (using them to give and receive value)
  • Preserving value (can be saved and exchanged later on)
  • Price unit (they can be used to evaluate goods or services)
  • To make sure you really understand the statements above, we will use Bitcoin for example. It can be used to pay for goods and services all over the internet and in many places in the real world. It can be preserved for a long time and nothing will happen to it. You can later exchange it for an item at a similar price level. The things you buy can also be priced in BTC.

    Examples of coins

    At present, all digital assets with the largest market capitalization are defined as coins. However, not all coins do have a large market capitalization. The Coinmarketcap pricing website contains several hundred or thousands of different examples of coins.

    Of course, we will not list individual digital coins here. You can find their complete list on the Coinmarketcap page. For starters, we will mention some of the most famous: Bitcoin (BTC), Bitcoin Cash (BCH), Litecoin (LTC), Ripple (XRP), Monero (XMR).

    Cryptocurrency coins Bitcoin, Ethereum, and Ripple Figure 1: The most prominent cryptocurrencies of today usually have their own coin

    What is a token?

    Tokens are often called digital coins. However, this is not entirely correct. There is one fundamental difference. Tokens are created on existing blockchains. Thanks to the creation and facilitation of intelligent contracts, Ethereum is the most common blockchain token platform. The tokens that are built on the Ethereum platform are called ERC-20 tokens.

    There are also others, such as NEO, Waves, Lisk, and Stratis. For example, NEO uses tokens known as NEP-5 tokens. Anyone can create their own token on each of these platforms.

    How are tokens made?

    In fact, it does not require a high level of technical skill. Although I would not recommend it to a complete beginner, it would not take as long as it might seem to someone with basic programming experience. However, the developer must spend some of the initial coins on the blockchain on which the token is created. For example, if a token is created on an Ethereum server, the creator will need to spend some ETH to make the miners on the network validate the token transaction.

    It is important to keep in mind that fees must be paid for all token transactions on the blockchain, not just for creating a token. Therefore, each application built on the Ethereum server must use ETH coins to transfer application-specific tokens from one user to another or between the application and the user. This is the same as paying fees to network operators for coin transactions.

    The purpose of tokens

    Most tokens exist to be used with decentralized applications or dApps for short. If developers create their tokens, they can decide how many units they want to create and where these new tokens are sent when they are created. At this point, they pay with part of the original cryptocurrency on the blockchain on which they want to create the token. Once created, tokens are often used to activate the features of the application for which they were designed.

    For example, Musicoin is a token that allows users to access various features of the Musicoin platform. Such as watching a music video or streaming a song.

    Binance (crypto exchange) also has its own token. If users trade with a BNB (Binance token), their fees are 50% lower.

    Some tokens are created for a completely different purpose: to represent a physical object . Let's say you wanted to sell your house through a smart contract. You cannot physically enter your house into a smart contract, but instead, you can use a token that represents your house.

    WePower (WPR) is a good example of a token that represents a physical entity - electricity. The WePower project is a dApp that allows users to buy and sell electricity on a blockchain using smart contracts. Its token (WPR) represents a certain amount of energy.

    The main advantage of creating a token

    Because the dApp and token developers do not have to create their own blockchain, it saves them time and resources. It can thus use the cryptocurrency features of its application while taking advantage of the security of the native blockchain.

    If the developer creates his own blockchain and coins instead of dApp and token, he will also have to find miners to verify his transactions.

    Creating a strong blockchain requires many miners. For many computers, it makes sense to work on a single shared blockchain on which several applications can run, rather than work on thousands of weak and mostly centralized blockchains. It is a much more tedious and expensive process.

    Another look at how tokens work

    Tokens are used to interact with decentralized applications that are built on a variety of blockchains. A good example is Civic, which uses a token called CVC.

    Their application monitors encrypted identities on the Ethereum blockchain. Its goal is to provide a cheaper, more reliable, and more effective way to verify identity. Let's see how it works in practice.

    If you are going abroad, you have to confirm your identity in many places along the way. The first identity verification being, for example, an airline company. If the airline company you buy plane tickets from was a partner of Civic company, they would send you a QR code with information about you (the passenger). Using the Civic app, you then send your data directly to the company from your mobile device. The information is stored on the device and is fully encrypted. This prevents their theft. You can really prove that you are the owner of the received data by taking fingerprints or providing them with an eye scan.

    Then you can use the same device to verify your identity at different points of travel (airport, hotel, etc.). Any company or organization that uses your digital identity can verify the data using a blockchain. The more the application is used, the higher is the level of trust of third parties in digital identity stored in the Civic application.

    The CVC token itself is used for transactions in these identity-related services. It is used to pay identity verifiers (banks, governments, and other trusted sources) to issue the necessary checks to "known customers." These records are then stored in the blockchain.

    Some CVCs are also sent to users. This should encourage the use of Civic, as companies that need to verify documents will eventually have to buy more tokens from users. This creates an environment in which everyone is rewarded for participating.

    Conclusion

    You should now be able to understand what is meant by digital coin or digital token.

    Let’s repeat the basic definition of both coin and token: coins originate in their own blockchain, while tokens were created on another blockchain, such as Ethereum, NEO, or Waves.

    Coins are most often used simply as money. However, some coins have other uses. These include the use of coins to support applications, use as a deposit to verify a network transaction, or use to support intelligent transactions with contracts and tokens.

    Tokens serve a different purpose. If they were created for use in dApp, their purpose will depend on the application itself. In some cases, they involve functions such as voting rights. In other cases, they are used for transactions in dApp (such as Civic) or to reward users for things such as discounted fees (Binance).

    Jakub is a crypto trader and founder of Trader 2.0 project, which helps hundreds of traders from central Europe to understand cryptocurrency trading and its challenges. Jakub not o...

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