Cryptocurrencies are commonly referred to as “coins” and “tokens.” But what is the distinction? In a nutshell, a coin is a cryptocurrency with its own blockchain. A token is a type of cryptocurrency that operates as a smart contract on an existing blockchain. Our featured blog post defines these two terms and provides examples of each.
In cryptocurrency, there isn’t much of a rivalry between coins and tokens. Both play distinct roles and collaborate to support the development and adoption of blockchains.
Blockchains in the Absence of Coins and Tokens
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The existence of a blockchain does not necessitate the existence of a coin or token. There are several blockchains that have nothing to do with cryptocurrency. These are mostly private blockchains operated by institutions or conglomerates.
Coins are required for public blockchains and are regarded as the network’s fuel. Security is maintained collectively by miners or stakers. They are then compensated in the blockchain coin. Tokens enable blockchain-based applications such as gaming, finance, and prediction markets.
Cryptocurrency
Any cryptocurrency with its own blockchain is referred to as a coin. Coins like Bitcoin (BTC) and Ethereum (ETH) are good examples. The Bitcoin blockchain’s native currency is BTC. The Ethereum blockchain’s native currency is ETH. The two methods for creating new coins are to launch a new blockchain or fork an existing blockchain.
Blockchain Development
Launching an entirely new blockchain is typically a time-consuming process because it necessitates extensive development and infrastructure support. Another complex issue is that blockchains and their coins may be incompatible with other existing blockchain infrastructures.
For example, integrating the coin’s codebase into wallets and exchanges may be more difficult. This makes launching a mainnet (network capable of supporting real assets) and building a network of active users a more time-consuming endeavour for projects.
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Coin projects can face challenges because blockchain developers typically specialize in only a few programming languages or technology stacks. However, there are immediate ways to reduce the time it takes to launch and reach new users. In 2014, for example, Litecoin copied Bitcoin’s open-source code.
Binance Smart Chain imitated many aspects of Ethereum when it launched in 2020. The main benefit of creating a new blockchain and using a coin is the ability for developers to improve or make changes that affect how the blockchain works.
LTC was created with the goal of supporting more transactions per second than Bitcoin. It now handles 56 transactions per second, whereas Bitcoin can only handle 7.
The motivation for Binance Smart Chain was to lower on-chain transaction costs for users who want to send and receive funds or use applications built on top of the network. Although Binance Smart Chain has achieved greater scalability than Ethereum, it has the disadvantage of having more network centralization.
Hard Fork Coins are a type of cryptocurrency.
A hard fork is a second, and more contentious, method of creating a new coin. Bitcoin Cash (BCH) was created as a result of a Bitcoin blockchain hard fork.
This coin was created after a group of developers and miners objected to the implementation of a new protocol change. In 2017, a large group of miners decided to dedicate their hash power to Bitcoin Cash, resulting in a network split.
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BTC and BCH now exist as separate coins on separate blockchains. Despite the fact that many other Bitcoin forks have occurred since Bitcoin’s inception in 2009, most consider Bitcoin Cash to be the most successful due to its strong developer network and sustained high market cap.
Tokenized Cryptocurrency
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A token is any cryptocurrency that is based on an existing blockchain. Tokens include the USD Coin (USDC) and Chainlink (LINK). Although USDC does not have its own blockchain, it is present on several others, including Ethereum, Algorand, Solana, Stellar, and Tron.
LINK can also be found on Ethereum, Binance Smart Chain, Solana, Huobi ECO Chain, Xdai, Fantom, Polygon, and Avalanche. Both tokens have the potential to expand their compatibility to other blockchains in the future.
Contracts for Tokens
On blockchains that support tokens, a token can be created with a simple smart contract. To ensure uniformity and compatibility, blockchains have token standards. ERC-20 tokens, for example, are used on Ethereum, BEP-20 tokens on Binance Smart Chain, and SPL tokens on Solana.
On these specific blockchains, standards make it simple to integrate tokens into applications such as crypto wallets and DeFi protocols.
Multi-Chain Support Flexibility
In 2021, Ethereum is the clear leader in blockchains that support token contracts. Many of the top 100 cryptocurrencies in terms of market capitalization are ERC-20 tokens. It’s worth noting that Ethereum is just one of many blockchains that accept tokens.
Tokens are being launched on other blockchains by an increasing number of projects. Some blockchain networks that previously did not support smart contracts are now incorporating this technology as a means of expanding their ecosystems.
A token can be used on multiple blockchains at the same time, as demonstrated by the USDC and LINK examples above. Many cryptocurrency projects now have cross-chain bridges that make it simple to move a token from one blockchain to another. Token projects, in this sense, may have even more flexibility than coin projects in terms of development and the ability to reach new users.
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