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A Beginner Guide to Everything Blockchain, Crypto and NFT Related

Difference Between Coins and Tokens

Did you know Dogecoin and Ether are coins while shiba inu and DAI are tokens? A lot of people use coins and tokens interchangeably without knowing they are not the same. In this article, we will explain the Difference Between Crypto Coins and Tokens.

Let’s say you need a place to stay. You can either buy a house. and pay for the renovation of the house, rewire the electricals, fix the AC and so on.

Or you can rent a house, pay the monthly rent and do not have to worry about all those issues that come with buying a house.

Choosing either to buy or rent depends on your current situation and purpose. Perhaps buying a house will save you money in the long run. Or renting may be the best option because you don’t have enough for the down payment. Or maybe you are a busy person who doesn’t have time to maintain a house.

This housing example is how we can explain the major difference between a coin and a token. The coin has its own blockchain which keeps track of all transactions, in our case, buying the house.

The token, however, uses the infrastructure of the blockchain of another coin. The token just pays the rent to the blockchain of another coin to operate on it.

Just to sidetrack a little.

Coins do not need other cryptocurrencies to exist as they have their own blockchains. Tokens are built on top of other blockchains and it’s easy enough for anyone who can follow instructions to create a token.

Why we are highlighting this is because we want to educate you not to jump into a new token just because someone said it will be the next big thing. Always do your due diligence before buying a token.

So, the first and major difference is coins have their own blockchain while tokens run on another coins’ blockchain.

The second difference is coins act as money which is a medium of exchange, while tokens represent an asset, like NFTs.
The 3rd difference is that coins do not move, only account balance changes. Think of how you are transferring Bob $5 for a burger he bought for you via bank transfer. The real  $5 note is not moved but only the value is transferred and both your bank and Bob’s bank acknowledge the transfer.

When a token is spent, it is moved from one place to another. NFT is a good example that demonstrates this. When you buy an NFT from someone. The change of ownership is transferred manually to you.

Finally, the 4th difference is cost. Coins are more expensive to create because the project needs to develop its own blockchain. This process is more complicated than creating a token.

Examples of Tokens Using Ethereum Blockchain.

If you have been watching our other videos on YouTube, you would know Ethereum blockchain can record and validate transactions. Great examples of tokens created on top of the Ethereum network using the ERC-20 standard are Basic Attention Token, BNT, Tether and other stablecoins like USDC. These tokens are called  ERC-20 tokens.

How a Token Can Become a Coin

It is good to know that a token can actually become a coin. But you cannot just convert the token into a coin. You need to build the blockchain first. Then create a coin that functions the same way as its token, followed by creating a bridge to allow users to swap their tokens for the new coin.

Take for example BNB token issued by Binance Exchange. It was launched as an ERC-20 token in 2017 but the token got popular and Binance created its own blockchain, the Binance chain in 2018. The token migrated to the blockchain and it is now called Binance Coin.

Different Types of Tokens

  1. Asset-backed tokens or Commodity Tokens
    Assets that exist in the real world are represented with these tokens, like tokenized versions of gold stored in a repository. These assets can be traded without any physical transfer of the underlying commodity.
  2. DeFi Tokens
    As the name suggests, these tokens are used in the DeFi space. Every DeFi App will have its own native token to do transactions.
    Examples are Aave, Chainlink, Solana.
  3. Exchange Tokens or Platform Tokens
    These tokens are tokens used on crypto exchanges. They are usually used to facilitate token trades or cheaper payment on transaction fees. In some cases, providing free discounts for trading and voting rights.
    Examples are KuCoin Token, Sushi, CRO, BNB token, Uni etc.
  4. Governance Tokens
    Holders of these tokens are able to vote on proposed changes and new proposals of a protocol. One such example is the Maker Protocol and the governance token is MKR.
  5. Non-Fungible Tokens (NFTs)
    NFTs are digital certificates of ownership to non-fungible items on the blockchain.
    Examples are digital Art, in-game assets, virtual real estate, event tickets, etc. You can create NFTs for almost anything. Check out our video where we explain what NFT is, in detail.
  6. Payment Tokens
    These tokens have only 1 purpose which is to serve as a medium of exchange. Simply put, to pay for goods and services.
  7. Security tokens
    Security tokens are traditional securities converted into a token on the blockchain.
  8. Security tokens represent company shares, bonds or real estate shares which they issue to raise funds from investors.
  9. Tokenized Money (Stablecoins)
    These tokens represent digital versions of fiat currencies. They are usually pegged 1 to 1 against an underlying or a currency, hence always redeemable for the same value. Examples are USD Coin (USDC) and Tether (USDT).
  10. Utility Tokens
    They are also called application tokens. These tokens are integrated with a platform to provide access to a blockchain-based product or service. An example is DAI. DAI is integrated into Axie Infinity to provide an in-game currency.

Cryptocurrencies are always evolving and there are so many types of tokens right now. With that said, there are different types of tokens and some tokens can be classified under a few types. For example, Dai can be classified as a stablecoin and also a utility token.