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Cryptocurrency FAQ - What's the difference between a coin and a token?

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Written by   67
2 months ago

Many people use the terms "coin" and "token" interchangeably when they discuss cryptocurrencies, or blockchain projects. But is there a real difference between those two terms? The answer is YES! There is one subtle, but important difference between them, and it's important to understand it if you are starting to learn about cryptocurrencies.

What's a simple way to describe a coin?

coin will have its own unique blockchain code. Some examples include:

The principle use case for cryptocurrency coins is payment.

How is a token different from a coin in simple terms?

token, on the other hand, can be thought of as a cryptocurrency that does not have its own unique blockchain. In fact, it is built on top of another blockchain.

Another way to look at tokens is to compare them with an experience many people have when they visit an arcade. If you want to play the arcade games, you need to buy the metal coins from the token dispensers. It's the arcade tokens that provide access to the games, not fiat money.

Some examples blockchain tokens include:

  • Compound (COMP)

  • SAND (SAND)

  • Stellar Lumens (XLM)

  • Maker (MKR)

All of the above examples of tokens were designed to be used on top of the Ethereum blockchain, and intended to operate within the Ethereum ecosystem. As such, any transaction associated with these types of tokens (checking balances, moving tokens to another wallet address, execution of smart contracts, etc.) requires ETH to process it.

It's important to understand that the Ethereum ecosystem contains both its own coin (ETH), and its own blockchain which tokens are designed with.

A few other notable differences

I picked up a few more distinguishing features of tokens from my research.

  1. Because tokens are built on top of another blockchain, most tokens cannot be mined. Most are created when they are minted.

  2. According to Binance, we should not referring to tokens as cryptocurrencies.

Strictly speaking, tokens are not cryptocurrencies like Bitcoin or ether, but [sic] transferable units of value issued on top of a blockchain, - Binance Academy

Please stay tuned for future articles that explain the different use cases for various tokens.

Thanks for reading, and stay safe!

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Last edited on November 3, 2020

Cover image by loufre (modified by the author) from Pixabay 


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Resources:

  1. https://blog.makerdao.com/the-different-types-of-cryptocurrency-tokens-explained/

  2. https://www.exodus.io/blog/token-vs-coin/#:~:text=token%20is%20that%20a%20coin,a%20coin%20or%20cryptocurrency%20vs.

  3. https://www.ledger.com/academy/crypto/what-is-the-difference-between-coins-and-tokens

  4. https://academy.binance.com/en/articles/a-beginners-guide-to-security-tokens

  5. https://medium.com/sandbox-game/what-is-sand-afe596792632


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Comments

Very nice. I had the misconception in my head that fungibility was the difference. Now I know better. 👍

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2 months ago

fungibility is coming in a future post! thanks for visiting my friend!

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2 months ago

I'm already looking forward to it. 😊👍

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2 months ago

Good article 👍

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2 months ago

thanks for visiting my friend!

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2 months ago