Cryptonomics: What Is The Difference Between A Token And A Coin In Decentralized Finance?

The words token and coin have become so commonly used that many people mistake one for the other, but they are separate assets.

By
Ahamdi Abarikwu
on
July 14, 2021
Category:
Cryptonomics

The Blockchain Boom Brings New Terms

The recent boom of Decentralized Finance (DeFi) has created a couple of buzzwords. Some of such words are so commonly used that people could use 'A' when they mean to use 'B', and vice versa. 

For example, the words 'Token' and 'Coin' are frequently used in the DeFi-space. Many people use them interchangeably, thinking that they represent the same thing, but they're actually pretty different. In this article, BSCNews breaks down their meanings to the simplest terms and distinguishes their differences.


What Is A Coin, And What Is A Token?

Coins and tokens have their meanings in the physical world, but let's describe them in terms of the digital world of cryptocurrencies.

Coins: A coin is a cryptocurrency that has its independent blockchain. Coins do not rely on any blockchain except their own for their native function.

In the ideal sense, coin use is limited to 'money-functions'. That is to say that coins enable us to do what we usually do with physical cash, such as payment for the settlement of transactions and as a store of value for future use.

Notable examples of coins are Bitcoin (BTC), Ethereum (ETH), BNB, Solana (SOL), and Algorand (Algo).

Tokens: On the other hand, a token is a crypto-asset that doesn't have a blockchain of its own. Tokens are built on another blockchain and depend on that blockchain to function.

Tokens are utility-assets. Though they are used in their specific niches as digital money like coins, they can have other use-cases like accessing particular services/features of decentralized Applications (dApps). 

All ERC-20 and BEP-20 are tokens. Some examples include USDT, CAKE, and BAKE.


How To Spot The Difference

As the blockchain community continues to innovate more and more cryptocurrencies with overlapping functions, users should know if an asset is a coin or a token. The fundamental question that puts a crypto-asset in its correct category is: does it have its own blockchain? If yes, it's a coin; if no, it's undoubtedly a token. 


Comparing The Two

Having stated the main characteristic that defines if a crypto-asset is a coin or token, let us look at some of their differences, 

  • Coins like ETH have their own native blockchain; tokens like USDT are built through smart contracts on an existing blockchain. 
  • Coins are the cryptocurrencies used in paying gas fees on a blockchain. Tokens are never used for settling gas fees on the blockchain they're built on.
  • Coins are generally designed to have money utility; tokens may have money utility, but they usually have broader use-cases.


Should A Developer Create A Coin Or Token?

Building a blockchain requires time, resources, miners to verify transactions, a large community for adoption, among other things. The path to creating a coin is a more resource-intensive task as it involves a full-scale project with moving parts. 

On the other hand, creating a token is much simpler to do. Developers only need minimal technical ability to create one using smart contracts.

That being said, the common disposition in today's blockchain industry is the development of blockchain solutions and services. As such, we are more likely to see developers creating tokens rather than coins.


Conclusion

Coins and tokens are not the same, even though their functions may sometimes overlap. Creating a coin will require much more resources than what is needed to create a token.

A developer's intent will dictate whether to choose to create a coin or a token. However, the current focus of the blockchain industry on services makes tokens more in abundance than coins. 

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Ahamdi Abarikwu

Ahamdi Abarikwu is an Electrical Engineer and a lover of anything crypto. He is also an avid writer, proofreader and editor. He loves to play Scrabble in his spare time.

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