There are a lot of confusing terms in the cryptocurrency market. For example, some people confuse the words "tokens", "coins" and "altcoins". We will tell you what is the difference between them and why it is important.
When it comes to coins and tokens, the main difference between them lies in the way they are created. Cryptocurrency tokens are created on the basis of their own blockchain . The blockchain that underlies the coin functions on its own. That is, it is he who confirms all transactions, it is he who ensures the reliability of the coin, it is he who gives the coin value.
Tokens are not created on the basis of their own independent blockchain. Rather, they arise on an already existing platform.
Sometimes a token transforms over time into an independent coin. When this happens, the creator of the token launches a new blockchain. But until that moment, the token functions on the basis of an already existing blockchain.
Think of it as a building. Blockchain is always the foundation. It is he who supports the cryptocurrency - just like the foundation of a building supports its entire structure.
If you follow this metaphor, the cryptocurrency coin is a new building. It needs its own foundation and does not rely on any other structures.
On the other hand, a token is an add-on to an existing building. To add a new floor to your home, you don't have to re-fill the foundation. You can build on top of what already exists. Basically, this is exactly how a cryptocurrency token works.
Coins, altcoins and tokens
With this construction in mind, you can divide the cryptocurrency space into two main parts.
Firstly, these are cryptocurrency coins, each of which has its own independent blockchain. The main one, which everyone knows about, is Bitcoin . In particular, it was the creators of bitcoin who wrote the reliable code, thanks to which there is a decentralized registry that allows this cryptocurrency to function.
Since the launch of Bitcoin, several more coins have emerged, in fact, branched off from the original Bitcoin code. These coins have slightly changed the bitcoin blockchain.
These are such coins as Namecoin, Peercoin, Litecoin and others. Since this type of coin originated from the bitcoin code, they are often referred to as "alternative coins" or altcoins for short. Altcoins make up a large class of cryptocurrency coins.
Secondly, these are tokens. They don't use their own new blockchains. They are also not variations of the original bitcoin code. Rather, they are being launched based on pre-existing blockchains.
One of the main platforms for creating tokens is Ethereum . It is incredibly easy to do it there, and the goal of Ethereum is precisely for developers and companies to create and launch their tokens on the basis of this blockchain.
Coins and Tokens: What They Are Used For
Another important difference between coins and tokens is that they have different uses. The value of coins is usually based on their own blockchain. This means that they are interchangeable and can be traded. Cryptocurrency coins can be divided into smaller monetary units, but their value remains constant.
As a result, it is relatively easy to trade coins. They can also be exchanged for fiat currencies at an understandable rate.
Simply put, cryptocurrency coins are primarily used as currencies. Coin owners can buy goods and services with them. Coins can also be traded.
Tokens are mainly used in initial offerings (ICOs). This is an increasingly popular way to raise funding for new startups.
It is arranged like this: the company uses a blockchain, for example, Ethereum in order to create and launch its own token. Investors can buy these tokens and keep them for future profit or for trading.
The company uses the funds received during the ICO in order to start work on the project. For token holders, they are, in fact, shares in this company. Sometimes a company can transform a token into a coin. When this happens, the token holders exchange their tokens for coins, which can then be used as digital money.
Conclusion
Basically, coins and tokens are similar to each other, since they are all varieties of cryptocurrencies. Both are blockchain-based.
The difference lies in the way they are created. Coins have their own independent blockchains. Tokens are created on the basis of an already existing blockchain.
This technical difference may seem insignificant to you. However, in most cases, people are not interested in the technical side of cryptocurrencies, but in how they can make money on them. And here it is important to understand what is the difference between coins and tokens in terms of their use in the real world and their potential.
Coins are essentially independent currencies. Some users like to use them to pay for purchases. Others, "hodlers," invest in coins and wait for them to rise sharply in value.
Tokens, on the other hand, are usually used to raise start-up capital. Therefore, people who buy and store tokens usually perceive them as an investment in a startup. Only instead of an IPO, this happens in the form of an ICO. For many, it has become much easier and more accessible to invest in startups precisely through tokens.
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