Crypto Coin vs. Token: Key Differences

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Introduction

There is no shortage of trading options when it comes to the cryptocurrency sector. There are thousands of different coins and tokens that are minted in the DeFi market every day.

Cryptocurrency investors who are only getting started have no way of ascertaining which options to pick to get the best returns. One way to tackle this issue is to classify these digital assets concerning their functions and origin.

In this article, the reader will learn in detail about the distinction between crypto coins and tokens to improve their trading skills.

What is a Crypto Coin?

Whether it is a crypto coin or a token, it comes from a blockchain network. The basic understanding of a blockchain network is that it is a system that allows investors to send or receive payments in the form of encrypted currencies in a decentralized manner.

The Bitcoin blockchain is the first ever DeFi network that allows investors to send or receive funds using its native token called Bitcoin. Bitcoin, or BTC, is the only cryptocurrency that is issued by the Bitcoin network.

Therefore, Bitcoin is the main medium of exchange for the Bitcoin network. There are no other tokens or coins that are associated with the Bitcoin blockchain. All the transactions that are recorded on the Bitcoin network are centred on Bitcoin. Investors cannot send or receive any other token on the Bitcoin blockchain.

On the other hand, Bitcoin miners only mine Bitcoin transactions on the Bitcoin blocks. Additionally, Bitcoin’s blockchain does not host any other tokens on the main network. In that way, Bitcoin is a crypto coin.

How does a Crypto Coin Work?

The objective of a crypto coin is to represent the value of the functions that are offered by the blockchain network. For example, the Bitcoin network was designed to send and receive money alternative digitally.

Therefore, its main coin, Bitcoin, represents the medium of exchange for users to send or receive their money. In the same manner, some DEXs allow the users to stake their tokens.

These tokens can issue a specified amount of their native coins to represent the value of staking or as staking rewards for their users.

Another important working mechanism of a cryptocurrency is that it can use PoW or PoS consensus model. The blockchain needs to verify the authenticity of transactions without the presence of a central authority.

Therefore, PoW is a system where miners compete with each other to solve the encryption puzzle first and earn the mining rewards.

A newer consensus model is PoS or Proof of Work, where the miners are automatically awarded the puzzle for a solution using a randomizer protocol. PoS is considered a faster and more cost-effective form of the transaction verification process.

Utility of Crypto Coins

It is important to keep in mind that crypto coins are used to support or represent the main utility of a blockchain protocol. Take, for example, the Ethereum network, which is known for its decentralized application hosting networks.

The native token of ETH is often used for conducting transactions across its dApps projects by the users. The possession of ETH can also allow the users to become node validators or get voting rights regarding major issues on the Ethereum network.

Today, crypto coins are used as an investment option. Investors tend to purchase and hold different crypto coins in their portfolio based on their use case and demand in the marketplace. In this manner, they intend to make profits and multiply their savings.

Furthermore, crypto coins have made remittance cheaper, faster, and more autonomous than before. At the same time, several crypto coins address the issue of online privacy in terms of financial transactions.

Top 5 Crypto Coins in 2022

Bitcoin and Ethereum are the most popular cryptocurrencies that everyone knows about. Here are some of the remaining top crypto coins that every investor should know about in 2022:

EOS

EOS is another blockchain ecosystem that provides hosting options for decentralized applications. Some of its main features are permissioned projects, dApps communication protocols, user management, hosting for data bytes, and secure internet access.

EOS is the native token of the EOS blockchain. It is often seen as a contemporary Ethereum network.

The most important utility of EOS blockchain is that it allows businesses and retail investors to create blockchain-based applications, much like web-based applications using a comprehensive toolkit for developers.

XRP

XRP is the coin issue of Ripple Labs. After the SEC lawsuit hit, the company transferred the governance rights of the cryptocurrency to XRPLedger. When XRP was first introduced, it was thought to be a replacement for the SWIFT banking network.

XRP is used as the main coin to facilitate international and corporate transactions. XRP case has recently amassed support from major cryptocurrency enterprises such as Coinbase and others in its lawsuit.

XTZ

XTZ is the main coin issued by the Tezos network. The blockchain offers IT services for developers who can use it as a custom-run programming logic simulator. At the same time, developers can also use the Tezos network for creating new decentralized applications, and it is divided into two main parts shell and Protocol.

The shell part is a voting system that also serves as a transaction interpreter and performs administrative functions. Meanwhile, the protocol part of Tezos is used for sending proposals to shell for review and approval. Tezos blockchain also uses the liquid proof of stake or LPoS system of verification.

BNB

Binance is the largest cryptocurrency exchange in the world. It has also launched a native blockchain called Binance Smart Chain. The central coin of Binance is the BNB token. There are also other issuances of the BSC network, such as BUSD.

Binance is used for performing different functions on the Binance exchange. The value of the BNB token is tethered to the utility and functionality of the Binance exchange and all its related protocols.

ADA

ADA is native to the Cardano network. The Cardano blockchain is pioneered by Ethereum co-founder Charles Hoskinson. Cardano is known for sharing detailed plans of action for the development of the network.

At the same time, Cardano also undertakes new DEX projects very often while working on updates to improve the security, scalability, and speed of the blockchain.

What is a Crypto Token?

Now that it is established that the main currency of every blockchain is called a crypto coin the reminder is also clear. As mentioned before, a blockchain can issue more than one cryptocurrency.

Therefore, it is not wrong to say that the primary currency of a blockchain is a coin, while all the secondary currencies can be termed as tokens. Take, for example, the Ethereum network. Ethereum hosts several dApps projects on its network.

If the Ethereum network issues another stablecoin or any of the decentralized projects it is hosting issues a cryptocurrency, it would be termed as a token. A good example of an Ethereum token is USDT stablecoin. The tether stablecoin project is built on the Ethereum network using the ERC-2 token standard.

However, it is distinct from the Ethereum blockchain and offers a completely different set of use cases. To understand the need and utility of crypto tokens, it is important to learn about all their types.

Types of Crypto Tokens

Here are some of the most important types of crypto tokens:

Utility Token

A utility token is a type of cryptocurrency that users can employ to unlock the main features offered by a blockchain project. BAT, or Basic Attention Token, is a token that is used by advertisers present on the Brave browser as a payment method for their publishers.

The users can earn BAT by viewing ads and gaining these tokens for trading or investing purposes.

Transaction Token

There are some tokens like USD, BUSD, and DAI. These tokens are usually referred to as stablecoins. They work as collateral, and many investors use them as a store of value. The stablecoins are pegged with a 1:1 ratio with fiat currency such as USD or any other cryptocurrency.

Stablecoin does not have volatility as other tokens, and they maintain a stable spot price.  Therefore, they are ideal for use as a swap option, and they are very popular as a medium for purchasing cryptocurrencies.

Security Token

Security tokens can operate very much like stocks and equity. It means that the possession of security token not only offer financial profits based on market changes but it also grants the users’ governance rights.

Therefore, they are quite distinct from the DeFi currencies. In most cases, the security tokens need to be registered and regulated; therefore, they are not necessarily decentralized, open-sourced, permissioned, or trusted networks.

NFTs

Non-fungible tokens are irreplaceable currencies that can secure digital ownership rights. If an artist creates digital artwork such as painting, music, or video, they can mint it as NFT. As long as the artwork keeps getting circulated, it would also share a portion of the selling price with the artist.

Therefore, there is considerable hype around NFTs. On the other hand, there is an idea that NFTs could be used for academic certificates and gaming software and play an important role in Web 3.0 development.

Governance Tokens

Governance tokens grant voting and decision makes rights to their holders.  Blockchain networks are mostly decentralized networks. However, the network might need to take a vote for adding a new feature or upgrading to a new version.

To make the process of decision-making democratic, blockchains can issue governance tokens to qualified users so that they can have a say in important decisions about the DeFi network.

Top 5 Crypto Tokens in 2022

Here are some of the biggest tokens issued by the Ethereum network that investors should know about:

Uniswap

UniSwap is a DEX project based on the Ethereum network. It provides swapping services for users on a decentralized basis. For the most part, investors have to purchase cryptocurrencies from exchanges such as Coinbase and Binance.

However, there are DEX platforms like Uniswap where the investors can exchange one token for outside of the regulated networks.

These DEXs allow the users to perform peer-to-peer trading based on agreed-upon prices and the number of their tokens without taking any reference from the market prices or regulated price lists.

0x

0x is also a P2P trading network hosted on the Ethereum network. This is another decentralized exchange that has issued a native token called ZRX. The underlying protocol of 0x has combined two protocols, namely automated market makers and state channels.

In this manner, 0x can process transactions offline, which reduces its operating costs. Meanwhile, AMM grants it the ability to act as a third-party facility liquidity provider.

Chainlink

Chainlink is a decentralized Oracle network operating on top of the Ethereum blockchain. It is used to feed real-world data to the blockchain network while remaining offline.

The use cases for the Chainlink network are quite vast, considering that it can help the smart contract evolve and carry out automated functions based on the live data forecast. The token issued by Chainlink is called LINK, and it is also hosted on Ethereum.

Tether

Tether is a stablecoin project called USDT that is hosted on the Ethereum network. The USDT tokens are said to be backed by a 1:1 ratio with USD. However, there are some reservations about the authentication of the Tether reserves.

The currency has been used as a stablecoin that is a store of value, and it is also popular among investors for swapping and exchanging tradeoffs with other cryptocurrencies.

AAVE

AAVE is an automated cryptocurrency lending platform.  The governance of the network does not require any centralized authority. Investors can safely lend their cryptocurrencies using the principle of collateral currencies. It uses the Loan-to-value or LTV method for lending. The protocol is built on the Ethereum network, and it has issued a native token called AAVE.

Differences Between Tokens and Coins

To differentiate between coins and tokens, investors must make take a look at the main utility and functionality:

Storing Value

It is important to note that most coins act directly as a mode of payment. The Bitcoin whitepaper describes it as a medium of exchange and an alternative to fiat currencies.

However, the total supply of Bitcoin is limited to only 21 million coins. The currency has already gained considerable traction in the marketplace. On the other hand, in most cases, tokens are used for performing internal functions, and they are not used as a medium of exchange, just like the main coin.

However, if a token has enough use cases, it can eventually climb up or decline in price and can be acquired in exchange for the coin native to the blockchain.

Currency Exchange

Coins are often used for exchanging with other currencies. The first and direct use of a crypto coin is that it holds some monetary value in the marketplace. However, the same currency can also be used to purchase the tokens that are present in the decentralized hosted Defi projects.

In most cases, the users can’t purchase these DeFi tokens directly from the exchange markets. However, they have the option to swap them using the coins in their cryptocurrency portfolios in case they are not yet listed on an exchange or awaiting a listing.

Payment Options

There are several big companies, such as Tesla, Shopify, Walmart, and others, that have decided to offer cryptocurrency payment options. It can be seen as a marketing technique for the promotion of the products of these companies.

On the other hand, it is also seen as a test run by these corporations to introduce crypto payment systems in their organizations ahead of time. In most cases, only crypto coins are used as a payment method for online shopping.

The role of the crypto tokens is often reserved for operating as governance and management options for the secondary blockchain protocols.

Transfers

When a person is present in a country where they are unable to access a common banking setup, they cannot make financial transactions. However, under these circumstances, they can use Bitcoin and other crypto coins to make payments anywhere in the world.

On the other hand, the users who wish to access a particular DeFi protocol on any blockchain can also purchase these tokens using crypto coins.

There are also facilities like Bitcoin ATMs available in the world that allows the masses to send and receive the coin as a payment method across the world outside the purview of the regulated banking networks.

Management Participation

Most crypto coins are used as a substitute for money, and they have now evolved into cryptocurrency trading options. In comparison, the crypto tokens are mostly useful for performing management and administrative task within a decentralized protocol.

Therefore, both coins and tokens are quite distinct from each other in terms of their origin and functionalities.

Conclusion

Crypto tokens and crypto coins are two important parts of the blockchain sector. Investors must learn how they work to increase their trading skills. Coins and tokens are ever-evolving entities, and the cryptocurrency market is filled with distinctions, such as many people debating if stablecoins and NFTs are tokens or separate entities.

The post Crypto Coin vs. Token: Key Differences appeared first on Herald Sheets.

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