*obligatory not financial advice*
Hi,
In this series I want to explain some terms that are relevant to the amazing world of cryptocurrencies to help newcomers understand it better. Today I want to talk about the difference between tokens and coins.
Previous Parts:
Crypto Basics #1: What even is a Blockchain?
Crypto Basics #2: What are Smart Contracts?
Crypto Basics #3: What is a Cryptocurrency Wallet?
Crypto Basics #4: What is Mining and Proof of Work?
Crypto Basics #5: What is Staking and Proof of Stake?
Crypto Basics #6: What is Decentralized Exchange? And how do they work?
Crypto Basics #7: What are Stablecoins? And How do they work?
What are coins and what are tokens?
Coins and Tokens are often treated as synonyms for cryptocurrency, but they are two different kinds of cryptocurrencies.
Coins are basically the main cryptocurrency of a blockchain that is used to pay for transaction fees or for staking to run a node. Each blockchain has its own coin and has only one coin. BTC, LTC, ETH, XMR, XRP, ALGO and many more fall in this category of cryptocurrencies.
Tokens are all other kinds of cryptocurrencies. They can be created on smart contract blockchains and are not used to pay for transaction fees or for staking to run the blockchain and there is no limit on how many tokens a blockchain can have. They can be used to represent anything you what on the blockchain.
For example, you can create tokens that are backed by real life US dollars so that the users can have an US dollar equivalent that they can use in DeFi applications. You can also "tokenize" real life gold or shares, or even voting and governance rights which is often used to create governance tokens for dApps to let its community vote on changes. Any cryptocurrency that belongs to a dApp or is backed by real life assets falls into this category, like UNI, AAVE, COMP, CAKE, PAXG and any stablecoin like USDT or USDC.
You can even tokenize tokens and coins from other blockchains to make them available on other chains too, this is called wrapping. It works by creating a new token on the wanted blockchain that is backed by a cryptocurrency of another blockchain that can be redeemed by burning the new token. This can work with centralized services but also with smart contracts or protocols that automatically create the new token or redeem the underlying crypto if you send the cryptocurrency that you want to wrap or unwrap to a special address. If you wrap a coin, then the wrapped version will be a token on the new chain. BTC for example is the coin of the Bitcoin blockchain, but Wrapped BTC is a token on the Ethereum blockchain that has the same value as BTC.
Most coins and tokens are fungible, which means that 1 UNI token can be replaced by any other 1 UNI token, but there are also special tokens that exist only once called Non-fungible Tokens, or NFTs, that can be used to represent anything that is unique or not replaceable, but I will write more about them in their own post.
I hope that short explanation was helpful for some newcomers. I will keep writing more such short articles about various crypto terms. Feel free to follow me if you are interested.
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