2023 Best Crypto Difference Explained Coins vs Tokens

Key Takeaways: Coins vs Tokens

• The two most common forms that cryptocurrencies may take are coins vs tokens.
• Coins are native to their blockchains, and the fees for using the Blockchain are paid in coins of the same value. They can store value or be used in ways that are unique to a chain.
• Tokens are built on top of existing blockchains, and they can be used to tokenize assets, make them more useful, or run a project.

People who are interested in cryptocurrencies use many different sets of words interchangeably. The most common set is coins vs tokens

All coins, though, are tokens, but not all tokens are coins. What does this mean, though?

Let’s have a look at the similarities and differences between the two.

What are Coins?

The first idea for decentralized payment solutions was a system called a “distributed ledger” that keeps track of transactions made with a native cryptographic asset. This asset is called a “coin,” and it is the only asset that the blockchain can handle. The Bitcoin blockchain, the Dogechain, and the Litecoin blockchain can only handle Bitcoin, DOGE, and Litecoin (LTC), respectively. The main reason for these blockchains is to make it possible to supply and distribute the “coins” that go with them.

For people who use these blockchains, these “coins” are the only way to trade. They have the same technology and financial structure as the blockchain they came from.

Some things about “Coins” that make it unique are:

Blockchain Specific

In this article crypto differences explained coins vs tokens, Coins are made to work with their blockchain, and they show how their blockchain’s financial and technological system works. On their blockchain, both the tax and reward programs are priced in their currency.

For example, miners on the Bitcoin blockchain get paid in Bitcoin, while Ethereum pays gas fees in ETH.

The blockchain is a decentralized system in which the many computers that connect to its network and run a node protect the data. Validating blocks is what computers on the network do to keep the blockchain safe.

A consensus mechanism is what they use to check that these blocks are correct. Blockchains that use a Proof-of-Work (PoW) consensus mechanism reward “miners” who use brute force to solve hard math problems. In a Proof-of-Stake (PoS) blockchain, validators are also paid in the same way.

More advanced consensus mechanisms are being made for new blockchains. Some of them use consensus mechanisms that are very different from these two (PoW and PoS). For most of them, the new mechanisms work with Proof-of-Work or Proof-of-Stake to give the blockchain an edge.

Most of the time, validators are given the chain’s native coins as a reward for their work. However, there are exceptions, such as Ripple, where the total supply has already been mined and there is a limit of 100 billion tokens. Protocols, not a single entity, are in charge of the whole validation process. If changes need to be made to the blockchain, the community decides how to do it. The DAO may hold a vote on the matter (Decentralized Autonomous Organization).

Store of Value

Some coins, like bitcoin, are seen as a way to save money. This is because they can be used as an alternative to traditional banking. Bitcoin works as a store of value because there can only ever be 21 million coins in circulation. BTC is a reliable store of value in the crypto space because its scarcity can be shown.

May Have Unique Chain-Specific Use Cases

Ripple’s XRP is a cryptocurrency that is being put to use on the blockchain to help ease friction in international money transfers. Banks, payment processors, and digital asset exchanges all use it as the underlying medium of exchange. This allows for quick settlement of transactions with little associated costs. In contrast to the 48 hours it may take to send money abroad through the conventional remittance market, sending money abroad using XRP takes an average of four seconds and costs only 0.00001 XRP (before load balancing).

What are Tokens?

Tokens exist on blockchains that already exist. Let’s look at the link between Uniswap and Ethereum as an example. The native digital token of Uniswap is called UNI. Since UNI is built on Ethereum, a blockchain that already existed, it counts as a token.

Since making a coin is more complicated than making a token, a blockchain can only hold one coin, but it can hold hundreds of thousands of tokens.

Blockchains have a feature called “digital assets,” which lets you make unique digital assets that use the blockchain’s infrastructure to work, like Ethereum’s ERC-20 token standard. Users can also trade these assets with each other. But the blockchain’s native coin, not these digital assets, is used to pay the fees for these transactions.

Tokens have a variety of applications, including the following:

Asset Tokenization

Through a process called “tokenization,” tokens can be used to represent assets. This means that anyone can use tokens to represent anything on the blockchain. People have used cryptocurrency tokens to represent rare metals, real estate properties, and other things.

For example, on the blockchain, assets can be made that represent the entire equity of a company. Tokens can be issued by companies just like shares and bonds (securities). The tokens work the same way, and their prices can change based on the company’s marketing and technological progress.

The person who makes the token can also add a system for paying dividends to the smart contract. This will let tokens get extra financial benefits based on how much money the project makes. Smart contract tokens projects like VeChain (VET), NEO, and Kucoin Shares (KCS) give their token holders dividends. Dividends can be given out in the form of a native token, other cryptocurrencies, or even cash.

Utility Tokens

When Ethereum Virtual Machine (EVM) was made, it made it possible to build new apps on the blockchain. These include platforms for decentralized finance (DeFi), games, AI (artificial intelligence) systems, and more.

Smart contract technology is also used by decentralized apps to issue tokens that give their owners special rights while using the app.

For some projects, the app can’t be used by anyone who doesn’t have the tokens, because the token is needed for the app’s core functions. These are the application’s utility tokens. Some decentralized applications, like some metaverse platforms, only let you buy lands and NFTs with a special token. The value of the tokens is based on the value of the application, not the blockchain they run on.

Governance Tokens

When cryptocurrency projects want to decentralize their management in the right way, they use a method called Decentralized Autonomous Organization (DAO). Decentralized Autonomous Organizations, or DAOs, are loosely organized groups with a “flat” hierarchical structure that work toward a common goal.

In cryptocurrency DAOs, the right to participate is represented by tokens, and anyone who owns a token is considered a member of the DAO. Members of the DAO can vote on proposals and submit their ideas for making things better so that the rest of the holders can vote on them.

Some projects use two kinds of tokens: governance tokens and utility tokens. This way, the governance system is kept separate from the rest of the project. The main job of people who own governance tokens is to vote on proposals for making the project better, while the second token is used by users to interact with the application.

Staking Rewards

In addition to using the features of platforms and voting on proposals, cryptocurrency projects are looking into new ways to reward investors who buy and hold their tokens, such as staking.

Investors can make money with staking programs by putting their tokens in a smart contract. Holders benefit from the process of giving out tokens through staking programs.

Do keep in mind that staking programs for tokens and Proof of Stake (PoS) coins work very differently.

In single-side staking programs, investors can lock up one asset in the staking pool and earn rewards based on certain rules. DeFi platforms also have programs for liquidity mining and yield farming. For liquidity mining programs, people who own liquidity pool (LP) tokens must stake them. Staking programs are a good way for token holders to make money.

Coins vs Tokens

The main thing that coins vs tokens have in common is that they both run on the blockchain and can be moved between peers. Coins can also be used to create tokens, and they can be used as utility tokens, governance tokens, or even for things that only work on the blockchain.

Tokens don’t have their blockchain, and they aren’t advanced enough yet to use the consensus mechanism of their parent blockchain to make new tokens. Instead, the project teams set the rules for issuing tokens, which can be changed by the project’s DAO.

In the end, there are different ways to use coins vs tokens, and their success depends on the project. Before investing in either, make sure to do your research and look into the tokenomics of the project to see if it makes sense and can last for a long time.

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