A token is a general term in cryptocurrencies, and you may hear it repeatedly. They are value units based on blockchain organisations or initiatives built on top of existing blockchain networks, and they are also known as crypto tokens. While they frequently have extensive compatibility with the network’s cryptocurrencies, they are a whole new digital asset class. In general, Bitcoin can be regarded as a crypto token in the same way that other crypto assets can be represented as tokens.
Tokens would be used for two specific purposes:
Unlike Bitcoin and Ethereum, the term “token” is frequently used to refer to any cryptocurrency (even though they are technically tokens). It is conceivable that Bitcoin and Ethereum, the two largest and most recognised cryptocurrencies, will be used to coin a new term to describe the whole cryptocurrency world. (Although the name “altcoin” may also be used with the same meaning.)
Token’s assortment:
Tokens can be used in several ways, for example, as currency for particular ecosystems or to represent unique data. Aside from that, specific tokens may be redeemable for off-chain assets (i.e., gold, property, stocks).
They are often issued by firms utilising existing third-party blockchains, such as the Ethereum blockchain, as seen by the large number of ERC-20 tokens issued and sold during ICOs in 2017. Tokens are not, strictly speaking, cryptocurrencies like Bitcoin or ether, but rather transferrable units of value issued on top of a blockchain.
There are multiple token classes depending on the tokens’ various features. The basic categorisation divides utility tokens and security tokens based on functionality. Utility tokens often represent access to a service or might act as a medium of exchange in the centre of an ecosystem.
BNB is an example of a utility cryptocurrency that primarily functions as a discount token to pay for trading fees on the Binance exchange. It can, however, be used to pay for products and services as well.
What is a coin?
A cryptocurrency coin is one of the assets of a digital native blockchain network that serves as both a means of exchange and a form of asset storage. It would function on its own blockchain network rather than on the blockchain network of another asset. More specifically, it suggests that these currencies do not leave the blockchain but that changes in their account balances may only be reflected in the accounts of individuals who control them. If Tom transfers money to John, for example, the changes are only reflected on the balances of both of their accounts, and a fee is charged for this service.
Mining is a technique that uses either proof of work (PoW) or proof of stake (PoS) verification to generate cryptocurrencies or coins. PoW involves employing vast amounts of computer power to solve mathematical problems and rewards miners with coins in exchange for their efforts. Similarly, transactions based on currency holding can also be validated using the Proof of Stake (PoS) approaches.
Cryptocurrencies are decentralised because they do not rely on any central authority to function, as computer nodes handle all transactions and activities. Although the code grants users permissionless and “trustless” access to the network to automatically operate through the rules — trust is not required per se because transactions are enforced by smart contracts that execute only when mutually agreed-upon terms are met.
The difference between token and coin :
Coins were enhanced to be utilised as cash and a store of value simultaneously. Holders may use them to pay for goods and services. To put it another way, while tokens may be used to make payments, they also have other uses and play essential roles in DeFi, gaming, and DEXs.
AAVE, for example, is the Aave native token. Aave is a DeFi system that allows crypto lending and borrowing without a centralised intermediary. It is based on the Ethereum network, and all transactions are made with AAVE tokens.
Cryptocurrency coins have been generated on the blockchain technology platform. All projects must define security protocols and incentive systems and specify how a coin will be developed, how the coin supply will be managed, and how transactions will be recorded and processed.
On the other hand, Tokens build on the existing protocols of their operative blockchains. A token can run on many blockchains in a way that captivates attention. This provides tokens with the benefit of speed and flexibility, as they can be easily traded with other digital assets. Tether, for example, releases tokens on many blockchains, including Ethereum, Tron, Bitcoin, Algorand, SLP, etc.
Token’s importance:
DeFi tokens are defined as a new world of cryptocurrency-based protocols that aim to replicate traditional financial-system functions (lending and saving, insurance, and trading) that have emerged in recent years. These protocols generate tokens that perform a wide range of services and may be exchanged or retained in the same way any other coin can.
Governance Tokens: These are specific DeFi tokens that provide holders with a stake in the future of a protocol or technology that, since it is decentralised, does not have boards of directors or any other central authority. Consider, for example, the popular savings protocol compound, which provides all of its users with a token called COMP and lets them have a vote in how Compound is updated continuously. The greater the number of COMP tokens you hold, the greater the number of votes you will be eligible to cast.
Non-Fungible Tokens: A non-fungible token (NFT) represents the right to acquire ownership of a unique digital or real-world asset. They can be used to prevent digital products from being duplicated and shared (an issue anyone who has ever visited a Torrent site full of the latest movies and video games understands). They’ve also been used to distribute a limited quantity of digital artworks or sell one-of-a-kind virtual goods, such as rare items in a video game.
Read more : NFT Virtual Land in the Metaverse
Security tokens: Security tokens are a new asset class that aims to be the cryptocurrency counterpart of traditional securities such as stocks and bonds. Their primary application is to sell shares in a corporation (similar to the shares or fractional shares offered in conventional markets) or other enterprises (for example, real estate) without the requirement for a broker. Security tokens have been proposed as a viable replacement to current ways of financing by significant corporations and start-ups.
To summarise, if we want to differentiate between a token and a coin, we can look at whether the cryptocurrency has its own blockchain or not as an easy way to discern the difference between the two. It is a coin if it has a blockchain; else, it is a token. Knowing this puts you in a better position to utilise the terminology correctly.