What Is The Difference Between Tokens And Coins?Feb 22, 2021
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HOST: Hey everybody, welcome back to another episode of The Unstoppable Podcast. I’m Diana Chen, your host and I’m here today with my co-host, Matthew Gould co-founder and CEO of Unstoppable domains. Hey Matt, how’s it going?
MATTHEW GOULD: I’m doing just fine got my afternoon coffee here so I’m ready to go.
HOST: Great. So one of the questions that we’ve gotten a lot from users is, what’s the difference between coins and tokens? There’s all this talk about digital tokens about coins, cryptocurrencies. We’re going to dissect all of that for you guys today and break it down so that by the end of this episode, you know, exactly what a coin is, you know, exactly what a token is, you know, how they’re different. And you’re in on the lingo so that when people are talking about these things, you know exactly what they’re saying.
So to start off why don’t we just, you know, go, go right into it. the difference between a digital token and a coin maybe define both terms first, before we get into what the differences are?
MATTHEW GOULD: So to start off I would blame Bitcoin for making all of this very confusing for people ‘cause they chose a really good name like Bitcoin is a fantastic name and it sounds like a coin and if you tell your grandmother about Bitcoin, she probably try to go buy one on Amazon, right. They have little Bitcoin tokens or whatever. So, but coin is just a word that they used in order to describe a database entry that’s all that is.
And, and they could’ve called it like biddollars or something. Maybe that would make more sense to people because your dollars and your wallet or, you know, your bank or whatever, you know, that’s just an entry in a database. So that’s, that’s all that is. And so Bitcoin was the first cryptocurrency and, you know, you think about how many bitcoins you have. So you kind of think about it as a coin and just a representation of, of, of the amount, like the number, like the number the physical number itself.
On the Bitcoin Blockchain they corresponds to your wallet. So that was the very first use of coin. And then what happened is a bunch of different cryptocurrencies launched after bitcoin ‘cause everyone saw what Bitcoin did and some of my favorites because they fun, Litecoin just because that was the silver to bitcoins gold. And then Dogecoin which is just one of my favorites that came out because it’s this funny meme with this, if you don’t know this adorable dog on the front of the coin and I’m a huge dog fan.
So some people made a lot of these and the—when they refer to the cryptocurrency coins, they were generally talking about a blockchain that was—had its own set of computers, peer to peer network, right. But just set of people running computer at their own that were validating the software, saying how much, you know, what the number was in each person’s account.
And so when they’re referring to coins, what they’re talking about where these entries on all these different like Bitcoin clone blockchains that said, hey, you have 10 or you have 20 or you have 30 or whatever, of those various different cryptocurrencies, so those were all the different crypto coins. All right. So already kind of complex, out the gate, and that just kind of happened for the first several years. And then we had Ethereum come along with its smart contracts blockchain and there’s plenty of stuff out there you should go and learn about smart contract blockchains we definitely can’t cover it all here.
But Ethereum just said, hey, we’re going to make it even more complicated. So what Ethereum did was that they made the first system where you could on the same blockchain, you could actually track a whole bunch of different types of assets. And from a theoretical perspective, they actually made it so you could track, you know, any asset, like they tried to make it as general as possible. Now they didn’t, you know, obviously, there’s limitations but they tried to make it really hard to be general so they could represent as many different things that you, you could want.
All right. So as soon as that happened, you had this whole new world of things that you could track and people needed to come up with a name for it. And so, they use the word token, right. And so I would say like the biggest difference between something that’s referred to as a coin and something that’s referred to as a token is a coin is like a Bitcoin. It is the only thing that’s tracked on that blockchain.
Bitcoin only tracks—the Bitcoin blockchain only tracks Bitcoin amounts. But for all intents and purposes, we’ll just keep that for simplification. And that’s what’s being tracked on the blockchain. So if you have a bitcoin, it’s on the Bitcoin Blockchain. If you haven’t dogecoin, it’s on the Dogecoin Blockchain. If you have a lite coin, it’s on the Litecoin Blockchain.
Okay. So then—so then Ethereum came out and now you could have these tokens. And what happens is you have a bunch of different tokens and there’s a lot of them and if you go to coin market cap or anyone of these others, coin gecko is another one. There’s a lot of different sites you can go to, to just look at all the different tokens that exist and Ethereum there’s thousands, okay. And then these tokens are all on the Ethereum blockchain.
So unlike Bitcoin, which is in the Bitcoin blockchain, you can have a token on Ethereum and it can—that token for that network can actually live on Ethereum. It doesn’t have its own blockchain network. I’ll pause there for a second to see if that made sense.
HOST: Yeah. I’m trying to digest all of that. And so tell me more about the practical uses of coins versus tokens. And also side note, when we use the term cryptocurrency, is that like an overarching term that includes both coins and tokens or does that refer to just coins?
MATTHEW GOULD: Yeah. So I would argue that cryptocurrency refers to any of the—any, any different coins or tokens that someone would use to like transact with, to, to represent some sort of—some sort value like a counter basically and so yeah, I would say cryptocurrency is kind of general. And coins, their practical use is basically to function like money, right, or a commodity product. So coins are great. Like Bitcoins are great for storing value and this is what people buy them for, and that’s the only thing that they do. They’re really supposed to be dead simple on purpose. So Bitcoin is just a stored value. And then Dogecoin is doing the exact same thing, except it’s a lot funnier.
So, so, you know, like it’s a—it’s a little bit more—they obviously don’t have the development resources or any of these other things as Bitcoin, but that’s all they do. They’re just stores the value for that particular blockchain. And when you’re buying one coin versus another coin, you’re basically saying I think this blockchain is a good one or this one, you know, this one that I think will be more used in the future or something. So you’re actually just differentiating between the blockchain themselves.
Tokens can be a lot of different things and we can get into that in a second. But the difference between a token and a coin is the token is living on top of—built on top of another blockchain. So and the tokens like, most of them live on Ethereum. And so there’s also an Ethereum coin, right, for the Ethereum blockchain and that is the coin that has to do with the Ethereum blockchain. And that’s what you use for the security model for the Ethereum blockchain. And that’s what miners get rewarded with. Just like Bitcoin miners get rewarded with Bitcoin, Ethereum miners get rewarded with Ethereum, Dogecoin miners get rewarded with Doge.
If you have these tokens they, they, they are on top of Ethereum, but if you—some of them actually have mining, like proof-of-stake mining or whatever. And they’ll pay you out in their token. But their token is not the security model for the blockchain Ethereum cause the Ethereum—the Ethereum coin is what does that.
So the biggest difference between a token and a coin is the coin is typically an integral part of the security model of the blockchain itself and the token can be a representation of a lot of things. They may be like a prepaid credit for an API, like, so you can redeem the token for, like, a gift voucher or something, a token could be a piece of artwork, it can represent—then when we have a previous episode where we were talking about artwork on the blockchain. And a token could be like a certificate for your education, so like they say that you completed this computer science course, something like that.
So that would be the difference. And these tokens are representing all sorts of things and they are resting on top of another blockchain and then that blockchain will have a security model where it pays out the miners to make sure everything’s secure in the coin of that—of that blockchain.
HOST: Got it. So coins are the money. So when, when somebody says “I, I have Bitcoin or Ethereum”, they’re talking about the coin itself which is, you know, the monetary value. And then tokens on the other hand are more just vouchers, but they’re not money, right?
MATTHEW GOULD: That’s an okay approximation. There would be some people who would argue that, that their token is functioning as some form of money. You know, just like you can have a—you could have—there’s all sorts like Amazon credits are basically like money to developers because they’re going to use those amazon credits 100% of the time. So, you know, there’s a little bit of crossover there. I would just say like—and sometimes the tokens can also function on security models. So for those systems that, that have—that are doing some sort of operation, maybe like an oracle network or something like that.
So the distinction is really not as great as you would think it is, but that’s, that’s what I think people mean when they’re talking about the difference between coins and tokens. And generally, like if I was to draw a line, I’d say you’re a coin if you’re running your own blockchain and you’re a token if you’re running on top of somebody else’s blockchain infrastructure.
HOST: Got it. Okay. So then when we’re thinking about the value of—so obviously there are so many different coins and so many different tokens out there and they’re all worth different amounts. So when we’re—like who determines—well I guess the market determines what the value is, but then if you’re a user, you know, if you were me and you want to buy Bitcoin or Dogecoin, you know, like how, how do I know which one to go after? Like you would think, I mean I would think there’s, there’s a big enough community of people out there that who love dogs, so maybe Dogecoin can really be something.
MATTHEW GOULD: Well, I don’t like speculating on investing in the cryptocurrency world. That’s not my area. So I’m sure there are plenty of YouTube podcasts where you can go out there and listen to people speculate on their favorite coin and how much it’s going to go up or something like that. Not my area of expertise, so can’t help you there. The way that I look at technologies are, what are the things that I want to use to build the applications that I want to build.
So when I look out there and, you know, I want to build a blockchain domain system, you know, we build on a couple of these smart contract blockchains because they had the technology I needed to use. And so as a technologist, when I’m looking at these, I’m just looking for what’s most useful. And then there’s all sort of crazy speculation that happens on top of that. And I understand why because if the—if the blockchain that you’re using becomes a global standard for something that it’s doing, then yeah, that could be—that could be something that everyone is going to be very interested in a lot—in, you know, 10 years or something. But that’s a game best played by people who are spending a 100% of their time on that and not me, I don’t have enough time for that, I have—I have other things I have to work on.
HOST: Fair enough. Fair enough. All right. Another big question, something that everybody has heard of, stablecoins. Can you break that down for us? What’s a stablecoins?
MATTHEW GOULD: So these guys just totally broke my, my previous discussion about the difference between coins and tokens. So what stablecoins are is, they are tokens, right, on top of in the most—on top of a smart contract blockchain. In most cases they are either on—the most case they on Ethereum and they are a representation of a US dollar. And so that may be why, you know, stablecoin is a good name, just like bitcoin was a good name, but doesn’t mean it makes a lot of sense for how the thing is being explained. But they’re trying to communicate that this value on a stablecoin is tied to a traditional currency and the most common one right now is USD.
So there is a Tether is a stablecoin, it’s one for one tied to USD, USDC is another one and that’s like—I think its coin based in Circle, they have some kind of consortium to make that one. And each of these things Gemini has one as well, Tether is, is a stablecoin that’s tied back. And the whole purpose of these is that when you pick up a Gemini stablecoin or you pick up a coin based USDC stablecoin or you pick up a Tether stablecoin is that when you get it it’s $1, and when you sell it’s also worth a dollar. So their whole job is to make sure that the value stays the same.
And the reason why people are so excited about this is, you just take one look at the Bitcoin chart and you just—the thing is all over the place. Bitcoin started at 50 bucks, went to 1,200, drop to 200, went to 20,000, drop, drop to 4,000, now we’re back to 30,000, it’s extremely volatile. And so technologists from the very beginning of Bitcoin launch, they’re like, “This thing is crazy volatile, they are like how can we make a currency on top that would be not as volatile so that people would actually use it”. And, and there were two camps and there was one camp who said, “Who cares if it’s volatile it’s going up in value, right?” And they’re like “It’ll eventually become not volatile.” And there was another camp who was like, “We should really work harder to try to come up with a solution”, and that’s how we ended up with stablecoins.
And I’m definitely in the work harder camp. And I think it’s a good thing that they came up with something that was didn’t change its value so much cause it’s really terrible have an invoice and I owe you, you know, $2,000 and I pay you on Wednesday night, and you wake up Thursday morning, and it’s only worth $1,900 or maybe it’s worth $2,100 ‘cause I’ve either paid too much or you’ve been paid too little.
And the, the only difference is when you’re sleeping before you got it and that’s not a great place to do—to do—to do business. So stablecoins were invented to hold their value and the way that they do it is they—when you buy one they put a dollar in the bank and they just leave it in the bank account. And when you want to redeem one out, they take that dollar out of the bank account and they send it back to your bank account or at least that would be a way that a much regulated stablecoin would function. We can talk about how different stablecoins work, but that’s, that’s maybe the regulated stablecoin route.
HOST: Got it. I just went through like so many different thought processes in while listening to you speak. At first, I was like, “Well if it’s not volatile then where is the excitement in all of this” and then by the end, I was like, “Okay well, stablecoin sounds a lot more practical, so let’s go with that.”
MATTHEW GOULD: One of the reasons why I think stablecoins are so interesting is they increase utility for crypto users. So it’s like people are like “Why would I want to own a stablecoin or whatever because it’s not volatile and I don’t have the ability to, you know, make money, like, just by holding it or something?” And I would counter with you can now take the stablecoins and use them in various decentralize finance protocols. You can base—you can lend them out, just to be really simple and you can earn an interest rate on this. And of course, it’s all risky, so this is not financial advice, but I’m just saying there is a whole new opportunity right now, where, let’s say, you don’t want to own Bitcoin because it’s too volatile, but you do have, you know, 5K or 10K in the bank and you’re earning 0% interest.
You can take that 5K or 10K, you can turn it into a stablecoin and then you can deposit that stablecoin onto a—one of these protocols on the blockchain and then you can start earning interest, now. You know, everyone should go into the wrong looking and, and make their own decisions. But this is a whole new set of ways to earn money with blockchain, so that’s why I think it’s really cool, like, I am really a crypto-person, I love cryptocurrency, I’ve owned it for a long time, like, I’ve been in this space for a while. And the more places we open up opportunities, that’s for people who interact with this technology, the better is for, for everybody.
So there is a lot of interesting things you can do with stablecoins, I would just point out, they sound boring, but they’re actually quite cool.
HOST: Yeah, that’s really interesting to know, so, let’s dive in a little bit more into stablecoins, now that we know the general concept of what they are. Talk a little bit more about what, what are the different types of stablecoins out there?
MATTHEW GOULD: And there is a few emerging types of stablecoins and there’s a lot of innovation here, so there could be even more in, in the next year too, but I’m going to try to put it in broad classes. So one is kind of what I would consider like a regulated stable coin, now, we don’t have an official like government stable coin yet, but there are some stablecoins like the Gemini dollar or USDC, where they have a bank account and they guarantee, like, like you have to put in 100$ and they will give you 100$ in stablecoin back. And that money just sits in the bank and I would say it is super safe and there’s going to be more regulation around that because, you know, they want to make sure that there is a match dollar-dollar, because otherwise someone could defraud you by pretending there is not enough there.
So that’s the fully regulated stablecoin and you’re like, well, why would I commonly do that? Well, they earn an interest, right? So like if you—if you buy $1,000 in stablecoins you put $1,000 into, you know, their bank account in New York and then they just go buy bonds and earn 0.5% interest on that or whatever. And then you go and you play with the stablecoins in the blockchain ‘cause you are interacting with a bunch of things. And then when you cash out they, they let you withdraw, but they’ve been earning that interest the whole time you’ve been using it on the blockchain.
So that’s, that’s the business followed there, does make a lot of sense, relatively safe points, check. The next one is commodity backed stablecoins, these are a little bit wonkier, and the most famous one is MakerDAO, and they were one of the first people to issue stablecoins. So they are super innovative, super early and they have Dai and Sai, so I don’t want to give the details too much, but basically, you deposit crypto and so let’s say—let’s say you want to have $1,000.
And so they say, “well, you need to deposit cryptos,” you deposit cryptos into the account and you can borrow $1,000 against it and you are like, “how do they do that?”, well, they say that if you put crypto in, because crypto is so volatile, you have to put $3,000 in cryptos in order to get $1,000 out, now, that number changes, like how much you have to put in, but that’s a collateralized stablecoin.
And so there has not been a lot of regulation around those yet, although they are looking into it and I think that those likely are going to get regulated as well in the future. But currently, I would say, MakerDAO has been around for three years or so and or maybe five now - - it’s been a while. And they are quite conservative on how they manage their pool, I don’t think they ever—they’ve only had like a couple of minor burgs in the protocol which they fixed.
So overall that team is pretty responsible, that’s a collateralized one and they’re much more risky than the fully regulated ones, so I think if we are talking about the spectrum. So we started with the safest one that is the regulated, where there’s a dollar in a bank sitting for you and then you have the collateralized ones. And then the problem is if Bitcoin price goes down a whole bunch of the DeFi price goes down, a whole bunch, there may not be enough money to redeem one for one, and so that’s why this is a little bit risky, and those go in the second basket.
And then you—then you have this third basket, which is they’re trying to create undercut algorithmic stablecoins, and this, I would say, is all the way on the edge of extreme in terms of the, the risk level. It’s theoretically possible, I think there’s been a lot of interesting like research around it and there are a several of this like they issued a lot of them, it’s been tried because is decentralized finance. Just think about it, like, I would say think about it like you would think about complex Wall Street instruments ‘cause that’s what those are and so proceed with caution.
HOST: Well, certainly hide to that warning on that, thanks for that. And well, thanks Matt for this discussion about coins and thanks for breaking all of this down for us. Thanks for us for tuning in. We are going to come back another time and talk more about tokens, do a deeper dive into non-fungible tokens (NFTs), fungible tokens, all the different types of tokens. Thanks so much for listening, we will be back again soon with another episode of The Unstoppable Podcast.