For many crypt users, the terms surrounding cryptocurrencies can be difficult and confusing. The world of cryptocurrencies is full of computer jargon and terminology that can be difficult to wrap for beginners and experienced users. Often you will hear people use the words "money" and "token" interchangeably. But are they the same? This article aims to highlight the fundamental differences between coins and tokens. So, the next time you explain cryptocurrencies or plan to invest in one of them you are more informed about exactly what they are.
What are cryptocurrencies?
Coins and tokens are generally referred to as cryptocurrencies. You're probably wondering what the cryptocurrencies are? So we start by defining cryptocurrencies. The term itself is an amalgam of two terms cryptography and currency. Cryptography refers to the use of cryptographic techniques (encoding and decryption) to decode messages, on the other hand, currency refers to a widely accepted medium of exchange in a particular jurisdiction. Therefore, cryptocurrencies can be defined as digital / virtual currencies that have been protected using cryptography.
Coins or rather cryptographic coins are digital coins that accumulate value over time and can be used as a medium of exchange. In order for a cryptocurrency to be considered as a currency, it must operate on its own blockchain independently of any other platform. Thus, a blockchain is a public and distributed digital ledger that records the transactions of a particular cryptocurrency. Blockchains help increase transparency by storing and sharing data collectively among network participants. Ideally, a currency is the equivalent of a digital dollar bill that can be used to buy, sell and invest.
Bitcoins are the most common and popular cryptographic coins. Their creation and their eventual success have ushered in the creation of even more coins. Today there are over 880 cryptographic coins circulating worldwide. Developments in the economy of cryptocurrency have seen the development of alternative currencies (popularly known as altcoin), built by Bitcoin's original open source platform. Examples of altcoins are Litecoin, Namecoin, Dogecoin, Auroracoins, Peercoin, among others. There are also other cryptographic coins such as Ripple, Ethereum, Omni and Cardano that are created using their own distinct blockchain platforms.
Tokens are a digital representation of resources that can be transferred and exchanged. Tokens, unlike coins, allow a holder to participate in a network. Another fundamental distinction between coins and tokens is that tokens do not necessarily operate on their blockchains but are hosted on another platform like Ethereum. While they are used for exchange tokens, they take on a wider functionality than coins. Tokens are mainly used for the execution of specific functions, such as the holding of a company. A stock token can not be used to buy a ticket for a concert.
Tokens are typically generated and distributed through an ICO that is similar to an IPO for stocks. In the ICO (Initial Coin Offering) the public is offered the opportunity to buy tokens that go on to finance a particular project. The most popular and common tokens are Tron (TRX), EOS and OMG. Most tokens are developed under the Ethereum blockchain platform, other tokens like Omni, NEO, Qtum and Waves are gaining importance over time. Today there are over 590 tokens in use all over the world.
From the above definition, we can deduce the subtle differences between cryptographic coins and tokens. While cryptocurrencies are built on separate and distinct structures, they also offer different functionalities and applications. The next time you are asked to distinguish between a coin and a token, I hope you are able to give a more informed answer.