How Crypto coins differ from tokens?

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Cryptocurencies have become one of the most discussed topics in the today’s business world. However one common mistake the investors make is calling Crypto coins a token and vice - versa. Although these crypto coins and the tokens look alike on the surface, they are two different assets. As such this article will be discussing on key differences between crypto coins and tokens. 

What are Crypto coins?

Bitcoin is identified to be the first ever Crypto coin which set out standards for what is meant to be a coin.  A coin has distinct features which from tokens as depicted below, 

01   Crypto coins operate on its own blockchain

This simply means that a blockchain keeps a track of all transactions which involves its native crypto coin. For instance when a particular transaction is done with Ether, it is done on Ethereum blockchain whereas all transactions with regards to Bitcoin are done on its own blockchain. As such every transaction is encrypted and accessible by the members of the particular network only.

02  Crypto coins act as a replica of money

Bitcoin was first launched with the purpose of replacing traditional currency. The other altcoins such as Ethereum, Solana,Cardano etc were created through the inspiration of anonymity and paradoxical appeal of transparency.

Today, many reputed corporates such as Amazon & Microsoft have allowed payments for purchases and services through crypto coins. Further Bitcoin has become the official currency of EI Salvador in 2021 along with US Dollar, but no every nation or an organization has allowed it as a legal tender.

03 Crypto coins can be mined

Crypto coins can be earned in two different ways namely, ‘Proof of Work system’ and ‘Proof of stake’. The first one is identified as the traditional way of mining crypto currencies where the latter is known the modern way of earning crypto coins. Experts in Bitcoins use ‘Proof of Work system’ in order to earn extra Bitcoins, however the key problem is approximately 90% of the total Bitcoins are already in supply which makes it difficult to mine Bitcoins every day.

‘Proof of stake’ consumes less energy in mining crypto currencies. Cardano could be depicted as one of the main coins which adopts this modern system.

What is a Crypto Token?

Unlike crypto coins, tokens do not operate on their own blockchains. Instead, they operate on blockchains of other crypto coins. For example many tokens operate on Ethereum. While the transactions of crypto coins are being handled by blockchains, the tokens rely on smart contracts which facilitate trade between two parties using array of codes. Further each blockchain uses multiple numbers of smart contracts.

It is reported that tokens are easier to create using smart contracts on top of an existing blockchain where one blockchain has the capacity to host thousands of tokens. A physical movement from one place to another takes place when it is exchanged. Therefore the change of ownership is transferred manually.

Another major difference between the coins and the tokens is their representation. A crypto coin is the digital version of underlying value whereas tokens carry the assets or deeds. The interesting part is one can buy tokens with coins but still some tokens could carry a higher value than any of them. Example, shares of a company. However the liquidity of tokens is less compared to the coins owing to some restrictions on expenditure of tokens. 

Simply a token represents what you own whereas a coin denotes what you are capable of owning. Although the difference between coins and the tokens is not vast, it is import to learn that they are two different instruments and not the exact same.

References 

Nahar, P., 2022. Crypto class: Difference between crypto coin & token. [online] economictimes.indiatimes.com. Available at: <https://economictimes.indiatimes.com/markets/cryptocurrency/crypto-class-difference-between-crypto-coin-token/articleshow/88947666.cms> [Accessed 2 July 2022].

blog.liquid.com. n.d. Crypto Coin vs. Token: Understanding the Difference. [online] Available at: <https://blog.liquid.com/coin-vs-tokenhttps://blog.liquid.com/coin-vs-token> [Accessed 2 July 2022].


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