Crypto Coin vs Token (Differences + Examples)
Imagine you're in need of a way to get to places quicker and you are left with options on whether to buy your own personal car (meaning, you'll have to oversee its needs – change the oil, fuel it, proper maintenance, etc.) or rent one alternatively.
As for the rental, you'll only have access to the car on a monthly payment and as such, you would only have to pay for borrowing the car and leave the owner to worry about any issues the car develops afterwards.
Whichever way you opt for, you have to measure the different factors with your life and decide which fits your needs best and is wiser based on your financial capability. Although, you might not have enough money at hand to purchase a new car outright, or you're always busy and don't want to be in charge of the car's maintenance. This scenario is pretty much similar to the differences between a crypto coin and a token.
Hello there and welcome to HotNaija, your one-stop destination for latest entertainment news, celebrity gossips and stories, lifestyle content and cryptocurrency news. Today we'll be sharing with you all you need to know about the differences between a crypto coin and a token. So without any further ado, let's get started.
A crypto coin operates by using its own unique blockchain to keep track of all the data, which in our car analogy, would be owning the car.
A token on the other hand, is when you're using a coin's blockchain as your infrastructure, which leaves you to paying just “rental fees”. You're not required to create a blockchain, write the full code, stress about how it should be validated, etc., instead, you simply create a token that runs on that blockchain.
A very good example of this is Ethereum. ETH is its own blockchain that stores both value and validates transactions. Ethereum's developers and team has been working consistently in this past few years, on ways vulnerabilities can be patched, the system can be further improved and its work procedure can be updated for the benefit of all. An ERC20 Token makes use of Ethereum's blockchain capabilities as a back and infrastructure.
An example is the ERC20, which is the ‘Basic Attention Token (BAT)’ built on the Ethereum network. According to the team, they jointly agreed the network isn't large enough to build its own mainframe, but needed to create a system whereby users are privileged to reward the creators they follow in a simple manner.
Without going in too deep, the BAT team focus mainly on providing a great product – which is the Brave browser. It's a special type of web browser that automatically replaces a website's advertisements with ads that reward the creator with Brave. This way, the Brave team could rely on Ethereum's network to provide safety and stability while they're focused on their own product.
Note: A team of developers can migrate from a token to a coin if they cooperatively decide their project is growing fast enough.
Crypto.com which launched their own “mainnet” (a fancy way of saying they launched their own coin) earlier this year, have began to validate their own transactions. Initially, they had a token, but it got so popular that the developers had to decide to create their own blockchain technology and branch off.
Note: It's impossible to convert a token to a coin straight away. You have to first create a coin that have same functions, then create a “bridge” that allows users to swap out their previous tokens for the new coins. Coins like “Leo” are tokens on numerous networks, such as the HIVE network, Binance Smart Chain network, Ethereum network, etc.
It's also important to know that, some coins are represented as a token on other networks. For instance, a month ago I bought the “Binance-Peg Ethereum Token” on the Binance Smart Chain. I didn't buy an actual Ethereum, but a representation of the Ethereum coin on the Binance Smart Chain network (that mimics the price of Ethereum).
You just have to think about it like you bought a stock of Dangote Cement PLC (DANGCEM). You just own the stock, but it represents DANGCEM. You can cash in the stock for its current price at anytime. So it's basically DANGCEM – at least for trading purposes.
Hopefully this isn't too confusing.
While this is just a simplified version of it, there are a few different types of tokens that can be used to categorize the purpose of each token. Let's go over a few examples and maybe you’ll get the hang of it if you haven’t already.
★ Platform tokens:
Platforms tokens are distinctively created to support a decentralized application on the blockchain.
Uniswap for example – is a decentralized application that permits users to swap out Ethereum tokens for other Ethereum tokens, and even though they are a decentralized app, they also have their own token called – the Uniswap Token. This token is given out to those who invest in their platform, and has the promise that token holders can vote on changes in the future, and probably even earn some of the profits from traders.
★ Security tokens:
Security tokens are specially minted to represent ownership of another asset.
Let's say for example you wanted to buy gold, but didn’t want to actually hold the gold. A random person could create a token that is tracked to the price of gold, so instead of you actually owning it, you own a representation of it. The tricky part here is that – there should be a real asset behind it. For example, I could create a gold token, ask you to invest in it, and not actually have any gold. So you might end up getting scammed here if not careful.
★ Transactional tokens:
Transactional tokens are particularly used as a fast and easy way to transfer money.
When we take a look at the xDai coin on the Ethereum network, it is pegged to the US dollar but it is easy to pay people for maybe coffee, or buying that shirt you like at your local store…but the expenses of it are super low. Currently, the transaction fee is 0.000021 USD, which is very low. To give you an idea of how cheap this fee is – a total of 47,000 transactions is possible with a one-time fee of $1 and that's all. Try doing that on Paypal or through a bank wire transfer and watch your account balance disappear into thin air.
★ Utility tokens:
Utility tokens are tokens that have a value tied to their ownership.
For example, Basic Attention Token is an ethereum token that can be used to advertise on the Brave browser. In other words, if I wanted to share this article on the Brave web browser, I could easily do that with my Basic Attention Token. This shows that utility tokens can actually do something. Unlike security tokens that don’t do anything, you just buy and hold them, while a utility token can actually be used for a commercial intent.
★ Governance tokens:
Governance tokens are unsual tokens that allows holders to vote on certain noteworthy things.
For example, In a future version of the Uniswap Exchange, Uniswap could be a governance token. Token holders could easily choose to vote to raise the fee of a uniswap trade from 3% to 6%, and everyone with a token could vote on the change. The decision with the highest votes wins. You have more voting power by holding more tokens as a matter of fact. Obviously, by holding more tokens, you can actually control the platform more (main reason why you it's advised to hold more).
Hopefully, now that we've gone through the different types of tokens there is, you now understand why we need them and how some of them work. If you’ve enjoyed this article, we highly recommend you check out our other blog posts for more information about the crypto market and trending entertainment headlines. Thanks for reading!