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Cryptocurrency Tokens vs Coins - Crypto Whiteboard 101


In the cryptocurrency world, the terms "coin" and "token" are sometimes used interchangeably. In reality, however, there is a significant difference between a cryptocurrency coin and a cryptocurrency token. In this article, I will explain the differences between a cryptocurrency coin and a cryptocurrency token using the example of the Ethereum blockchain.


In the beginning, there was just Bitcoin and things were simple. When a transaction is processed on the blockchain, it is grouped with other transactions in a unit known as a "block." I won't go into all of the details about how a block is mined and confirmed, but the most important thing for our purposes is that once the block has been mined, BTC is created and distributed to the computers that succeeded in mining the block. In the early days, Bitcoin was both the reward for creating blocks as well as the actual coin that was traded on the Bitcoin blockchain, so there was no need to differentiate between a coin and a token as BTC (a coin) was all that existed. 

Coins vs Tokens

As things progressed, people began to create cryptocurrencies that ran on top of already existing blockchains. For example, the Ethereum blockchain currently works like Bitcoin in the sense that computers validate transactions and receive ETH (Ether) as a reward for mining those blocks. However, Ether (ETH) is not the only cryptocurrency that runs on top of the Ethereum blockchain. If we were to look inside a block that was created on the Ethereum blockchain we would probably see some transactions of ETH, but we would also see some transactions of the Basic Attention token or the Dai stablecoin.

While many tokens can run “on top of” the Ethereum blockchain, the transaction fees for any coin/token on the Ethereum blockchain must be paid in ETH. Therefore we could say that ETH/Ether is the native currency of the Ethereum blockchain because it is 1) given as the mining reward and 2) needed to send all other forms of transactions. This leads us to the observation that a cryptocurrency coin has its own blockchain, whereas at a token simply runs on top of an existing blockchain. Although ETH is given as a mining reward and used to pay transaction fees, the Basic Attention Token, as well as the variety of other ERC-20 type tokens such as 1UP, Dai, etc that run on top of the Ethereum blockchain, simply run "on top" of the Ethereum blockchain.  ETH/Ether (the native currency) fuels the transactions on the underlying Ethereum blockchain. Neither mining rewards nor transaction fees are paid in BAT, 1UP, Dai, or any of those tokens.

Stable"coins" Really Aren't Coins

Although there is a difference between a cryptocurrency coin and a cryptocurrency token, it's easy to blur the lines, and I would advise beginners not to worry too much if they occasionally confuse the two. Even the well known "stable coin" category of cryptocurrencies is something of a misnomer as "stable coins" are actually a form of token because they don't have their own blockchain and rather run on top of existing blockchains like Ethereum, Tron, or Bitcoin Cash. Looking at the official website for the USD coin reveals how blurry the line between tokens and coins is as Circle readily points out that the USD Coin is actually a token. Like I said, there is a difference between a token and a coin, but it really isn't something to stress, and it isn't uncommon to hear the terms used interchangeably.

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In summary, a cryptocurrency coin has its own blockchain whereas a cryptocurrency token runs on top of another blockchain. I hope you found the article and video useful. Thanks for reading!

 

References: 


https://www.centre.io/usdc


 

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The Part Time Economist
The Part Time Economist

Hi everyone. I'm just a simple man trying to make my way in the universe. I am passionate about cryptocurrency and hope that I can make at least some small contribution towards promoting wider crypto adoption and understanding.


The Part Time Economist
The Part Time Economist

Hi everyone. This is just a place for me to post some of my thoughts and analysis. I hope that someone finds them useful.

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