Coins and tokens have different origins, use cases, and technological underpinnings. This distinction is an important one for anyone hoping to understand cryptocurrency on a deeper level. At first glance, it may seem as though all cryptocurrencies pros and cons of token economy are essentially the same. Most well known blockchains charge a fee (known as a transaction fee or “gas” fee) to interact with the network. These fees prevent spam, and provide a way to compensate those who keep the network up and running.
Crypto coins are also used to pay transaction fees and reward validators on their respective networks. For example, computers on Bitcoin’s blockchain compete to solve an algorithm every 10 minutes. The first computer to correctly complete this algorithm will post the next block and receive BTC fees and rewards. Bitcoin’s block rewards will reduce by half every four years until the network reaches 21 million coins. While most coins serve as decentralized peer-to-peer payment systems, some have become alternative long-term investments.
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Smart contracts are basic protocols for automating transactions according to mutually agreed conditions in contracts. The use of smart contract-based crypto tokens can introduce many value advantages in different industries, such as real estate sector. For example, crypto tokens can serve a crucial role in automation and decentralization of property sales procedures.
The basic understanding of cryptocurrencies and crypto tokens offers a basic ground to start uncovering the differences between them. You must have predicted some of the differences from a fundamental overview of cryptocurrencies and tokens. Here are some of the notable differences you can find in cryptocurrencies vs. token debate. Cryptocurrencies and digital assets are the biggest trends in the tech landscape right now.
Back when Bitcoin (BTC) was the only cryptocurrency, there was no need to distinguish digital assets. However, when Ethereum (ETH) launched in 2015, it introduced a new class of cryptocurrencies known as digital tokens. Unlike “coins” built on their native blockchains, tokens exist on top of a pre-existing smart contract blockchain. Unfortunately, the terminology is confusing because these crypto tokens (similar to crypto coins) are blockchain-based assets (like coins) that have value and can be sent and received. In simple terms, you can think of cryptocurrencies as limited-use entities and crypto tokens as the flag bearers of opportunities in decentralization.
Native vs. non-native cryptocurrencies
Crypto coins are designed to be used as currency, while crypto tokens are intended to represent an interest in an asset and facilitate transactions on a blockchain. The main difference between cryptocurrency coins and tokens is that coins are their own blockchain, while tokens rely on other blockchains. Another important use case of cryptocurrencies is the facility for international payments. The example of XRP cryptocurrency of Ripple blockchain network facilitates real-time international transactions with better speed and ease. Without any complicated and centralized counterparty approval and clearance processes, XRP can serve efficient international remittances without any complexities.
ICOs are a way for startups to raise money by selling tokens that will be used on their platform. There are also non-native layer-2 blockchains that derive their security from a native protocol. Examples of Ethereum layer-2 blockchains include Polygon, Arbitrum, and Optimism. Since the difference between native and non-native blockchains is crucial to the coin and token distinction, it’s worth reviewing these terms in greater detail. Transaction fees on the network are paid in bitcoins, which are used to incentivize the validators of the network.
In other words, you can create your own cryptocurrency or digital asset without launching a whole blockchain yourself. Cryptocurrency coins are what led to first cryptocurrency investment boom. This is because they allow for a more convenient peer-to-peer payment system outside of using cash. At the same time, they have attracted https://www.xcritical.com/ many investors worldwide due to their prospects of delivering high-returns and more user-friendly. Demand for blockchain usage will lead to more demand for cryptocurrency coins and tokens. Cryptocurrency coins and tokens have many applications when it comes to the crypto-economy, decentralized finance, and the metaverse.
What is a crypto coin?
The basic definition of cryptocurrencies is a major highlight of crypto vs. token comparisons. You can notice how the blockchain network protocol itself issues cryptocurrencies, which serve as the native currency of the blockchain network. Cryptocurrencies also serve another crucial purpose in blockchain networks other than serving as the preferred means of payment for transaction fees on the blockchain.
This native coin is what network participants receive in return for keeping that network secure. This key use-case has built the base of the cryptocurrency market as we see it today. The core tenets of blockchain technology, transparency, provenance and immutability, have the power to change the financial market as we know it. Mastercoin was one of the first projects to describe using layers to enhance a cryptocurrency’s functionality. Second, cryptocurrency coins have a more established infrastructure than tokens.
Some tokens also give users the right to vote on proposed changes to the protocol and are therefore called governance tokens. The future of finance is decentralized, and using each of these important digital assets, and understanding how they work, will give you the edge when holding or trading cryptocurrencies. Some utility tokens may act as in-game currencies, whereas others may be awarded as part of a loyalty scheme when using a specific company.
- However, there are other differences such as what coins and tokens are used for.
- Unlike coins, tokens are not mined in the process of transaction validation.
- The applications of crypto tokens extend beyond the usual medium of transfer and store of value functionalities.
- The basic objective of crypto tokens also serves as a critical highlight in answering “Is cryptocurrency same as token?
Bitcoin is used as a store of monetary value often dubbed “digital gold”, since it is secure and extremely decentralized. Without getting too technical, coins are the native currencies of specific blockchains. On the other hand, tokens are currencies (or digital assets) supported by a specific blockchain, rather than powering their own. They can hold onto them to represent a stake in the cryptocurrency company or for an economic reason—to trade or make purchases of goods and services. As a practical example, decentralized storage provider Bluzelle allows you to stake your tokensto help secure its network while earning transaction fees and rewards. A crypto token is a representation of an asset or interest that has been tokenized on an existing cryptocurrency’s blockchain.
Operate on their own blockchain
For instance, the Basic Attention Token (BAT) is an ERC-20 token built on Ethereum, but used for specific utility related to Brave and Brave Rewards. Cryptocurrencies belong to their own native network; crypto tokens do not. Each blockchain has only one cryptocurrency, but may have hundreds or thousands of crypto tokens.
Put simply, they are both currencies using blockchain technology at their base. A cryptocurrency is used for making or receiving payments using a blockchain, with the most popular cryptocurrency being Bitcoin (BTCUSD). Altcoins are alternative cryptocurrencies that were launched after the massive success achieved by Bitcoin. The term means alternative coins—that is—cryptocurrency other than Bitcoin. They were launched as enhanced Bitcoin substitutes that have claimed to overcome some of Bitcoin’s pain points. Litecoin (LTCUSD), Bitcoin Cash (BCHUSD), Namecoin, and Dogecoin (DOGEUSD) are typical examples of altcoins.
Other examples of crypto coins include Litecoin, Dogecoin, and Ethereum. All the bitcoins that miners create are recorded on Bitcoin’s blockchain. The fact that BTC is on its native blockchain is the reason it’s a coin rather than a token. But underneath the hood, there are differences like those between coins vs tokens that dedicated investors tend to know about in-depth. Utility tokens can provide a way for users to do things like play games, access decentralized services, or, in the case of the Brave browser, avoid ads and tip content creators.
Tokens, on the other hand, have opened up many additional avenues that will increase the execution and practical use of decentralized applications (DApps), Web3, and smart contracts. Tokens are what are primarily used to interact with these decentralized applications and to facilitate transactions. Cryptocurrencies and crypto tokens may appear similar but serve very different purposes in the blockchain ecosystem. Cryptocurrencies incentivize people to run nodes and validate transactions, while tokens harness the power of smart contracts to unlock the potential of Web3 and DeFi. First of all, you need to note that cryptocurrencies can serve only as a medium of exchange and store of value. Blockchain networks can incentivize users with cryptocurrencies for securing the network.