What Is The Difference Between Tokens And Coins?Feb 26, 2021
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One concept in the world of blockchain that commonly causes confusion is that of coins and tokens.
What’s the difference between a coin and a token? The terms often seem to be used interchangeably, and this can be a major source of confusion for newcomers to the space. In this article, we’ll take a look at the differences and what they mean for ordinary users of this technology.
Tokens vs. coins
Let’s start by breaking down the main differences between tokens and coins. Understanding this distinction can help us get more value out of blockchain services and access more of the benefits.
What is a coin?
A coin in the world of blockchain is primarily used as money. Examples include Bitcoin, Litecoin, and Dogecoin. While these three have major differences, they share one thing in common: they exist to be a store of value.
What are coins used for?
There is no added functionality for these coins — they exist only to be stored or traded as a form of currency. You can mine them, store them in your wallet, and use them to buy and sell things, but that’s pretty much it.
What is a token?
Tokens, on the other hand, are usually built on the Ethereum blockchain, because it offers much more in terms of functionality and feature building.
What are tokens used for?
Tokens have a much wider range of possible use cases compared to coins. Tokens can represent lots of things, like prepaid credit for an API, a piece of artwork, or an education certificate.
However, tokens, unlike coins, are not money, and they are not an integral part of blockchain’s security model (they’re not used to reward miners). That’s why blockchains like Ethereum also have their own coins, separate from tokens.
How do tokens and coins derive value?
A token’s value is usually based on how useful it is. Tokens with more applications and more valuable use cases will typically be worth more, and there is usually some degree of speculation on top of that, based on the future potential for blockchain to become a dominant technology.
What is a stablecoin — and is it a coin or a token?
Stablecoins are an important concept in the world of decentralized currency. They’re essentially tokens built on top of smart contract blockchains — usually Ethereum — and their value is tied to a stable currency, like the U.S. Dollar.
Some examples of stablecoins are Tether and USDC. Their value is always exactly equal to 1 U.S. Dollar, which makes them as stable as a fiat currency and avoids the crazy volatility of some other coins like Bitcoin.
What is the point of stablecoins?
The main benefit of stablecoins is more utility for crypto users. Because of their stability, they’re a better option for earning interest on your money — you can simply deposit them on a blockchain protocol and start earning money without worrying about volatility, as you would with other coins.
What are the different types of stablecoins?
There are three main types of stablecoins:
- Coins like Gemini and USDC allow users to buy a certain amount, and then they store the corresponding amount of fiat money paid in the bank, where it collects interest for them.
- Commodity-backed stablecoins — like MakerDAO — are more risky. Here, you deposit your cryptocurrency into an account and borrow a corresponding amount against it.
- The final group is algorithm stablecoins — these automatically reduce the token supply if their price remains lower than the fiat currency they are tied to (usually USD). This is the most risky type of stablecoin.
Are stablecoins better than Bitcoin?
It depends on what you want to use them for. As a speculative asset, Bitcoin has much more potential to gain value over time and yield massive returns on your initial investment.
Stablecoins won’t explode in value that way, since stable fiat currencies don’t do that. However, they’re a much safer and more reliable long-term investment and can be used for a range of things without having to worry about major price fluctuations.
Both coins and tokens play an important role in the world of crypto and blockchain. As the technology evolves and becomes more mainstream, both categories will be an integral part of that growth.
Anyone looking to enter the space should spend some time getting to know the differences between the two and how these impact their activities.
To listen to more discussions about tokens, coins, crypto, blockchain, and all things decentralization, tune into The Unstoppable Podcast. We talk to a wide range of guests and our content is aimed at listeners of every experience level.