The transactions in the Cryptocurrency world usually occur in Coins and Tokens. But people often use these words interchangeably. But there is a vast difference between them. Moreover, the terms Coin and Token confuses every novice Crypto-investor.
So today, you are going to read a detailed explanation of coins and tokens. The difference is vast and often misunderstanding which might lead to significant losses in your Crypto world.
For a better understanding, let us correlate these terms with real-world examples.
- 1 Money and its derivatives
- 2 What are coins in Cryptocurrency?
- 3 What are tokens?
- 4 Token Vs. Coin
- 5 Conclusion
Money and its derivatives
Money is available in various forms. I mean to say that you can give or take money in multiple formats.
Format 1: Notes and coins
For example, if I want to give 20 dollars to a person, I can provide it in the form of a single 20 dollar note.
Or I can give two, 10 dollar notes or 20 coins which value one Dollar each. Whichever format I choose, the value is the same.
Format 2: Gift cards or Gift coupons
A second format of giving money is by providing a gift card or Gift coupon.
I can give a single Gift card worth 20 dollars, or I can even offer 2 Gift cards worth 10 dollars each.
One classic example of Gift cards is the Amazon gift card.
So a card will devive its value from the underlying asset, which is 20 Dollars. As the card’s value is 20 Dollars, I can get 20 dollars in return when I give the card.
Here, I can provide a single gift card worth 20 dollars, or I may even offer two gift cards worth 10 dollars each.
Format 3: Debit card
A debit card derives its value from the underlying balance in my bank account. Hence if I have 20 dollars in my bank account, I can use those 20 dollars.
But, unlike, Gift card, you cannot multiply the debit cards like the gift card. You will have only one debit card for one bank account.
Format 4: House legal papers
The legal papers of a house are derived from its underlying asses, the home. If my friend wants to buy my house, he has to pay the necessary amount and take my house papers. Only when the house papers are transferred, we can consider it to be a complete transaction.
What are coins in Cryptocurrency?
From the previous examples, we can consider Coins similar to Fiat currency circulating in the real world. One Dollar can be divided into 10 Cents. Similarly, one Bitcoin can be subdivided into 100000000 Satoshi units.
Coins are the central monetary units that are into circulation. Every transaction will be again charged in coins. For example, if I want to send Bitcoins from one person to another person, the transaction charges are collected in Bitcoins.
Similarly, suppose I want to transfer Ether from one person to another. In that case, the transaction charges are collected in Gwei, the subunit of Ether.
Hence a Coin correlates to the Fiat currency in the real world.
What are tokens?
Tokens are the derivates of Coins. The value of a token is derived from its underlying asset. It can be Currency or a thing. Even the charges for each Token are collected in the form of coins.
It is almost similar to the processing fee for a Gift card or Debit card. Tokens are two types: fungible tokens and Non-fungible tokens.
Fungible items are replaceable by other identical items. They are interchangeable.
Similarly Fungible tokens are multiple and are interchangeable.
A platform token is a fungible token.
An excellent example in the real world is Amazon Gift cards. I can exchange two 10 dollar gift cards for one 20 dollar gift card with my friend.
Dai is a stable coin, which is also considered a Platform Token. Like a Gift card, a Dai is pegged with a dollar, where one Dai is equal to one Dollar.
Dai is a stable coin built on the Ethereum platform. For minting a Dai coin, you need the main Currency of Ethereum, which is Ether. It is almost similar to printing a Gift card which requires dollars as manufacturing charges.
Non Fungible Tokens (NFT)
I would recommend reading this article to know more about NFT and its link with the Ethereum network.
A debit card is a form of a security token. Let me explain. I can use the card for various transactions only when I have money in my bank account. It means I should have a security deposit in my store, on which the bank issues a Debit card. Here the security deposit is money.
Similarly, I can mint tokens in the Crypto world by keeping my shares and bonds as security deposits. These tokens are used to gain voting rights in the Crypto world. They are also used for investment purposes.
NFT (Non-Fungible Tokens)
On the other hand, NFTs are a bit different from security tokens.
All NFTs can be security tokens, but all security tokens are not NFTs. Non-fungible tokens are mainly introduced to protect the intellectual rights of the underlying assets.
For example, if I have a unique painting, I can set a price for that painting and sell the image in the Crypto world. For this to happen, I have to convert this digital painting into an NFT.
The value of this Token will be equal to the cost of the painting but in terms of Cryptocurrency. Only one such Token can be printed and preserve the intellectual rights of the picture. The number of tokens to mint is in the hands of the owner of the intellectual property.
Another type of NFT is the Token derived from Real estate assets. I can mint a token by pegging it to my house. Now the price of this Token will be equal to the cost of the house. Whoever owns the Token will have the right to be the owner of the house.
I can pledge my Token with any of the DiFi DAPPs and get a loan, or when the price of my house increases, I can sell the Token in the Crypto world and get a decent profit.
Token Vs. Coin
Now, I think you have a good idea of what is a Coin and a Token. Let’s find out few major differences between them.
The first difference: The medium of transaction
A coin is built into the Cryptocurrency system. They are the primary medium of exchange in the Crypto world (Similar to Fiat currency). But a Token is created on the Coins. Without Coins, there are no Tokens. The value of Tokens is measured and exchanged in terms of Coins (Just like Gift cards).
Brave browser is a decentralized browser similar to Chrome, built using Ethereum blockchain technology. The specialty of this browser is that your data is secured and is not stored in the browser.
By default, no Ads will be shown while browsing Brave browser. But, you have an option where you can choose to see Ads, and the browser will pay you for viewing their Ads. Isn’t it awesome?
But here comes the problem, the brave browser pays you in Tokens, that is, in BAT. To convert these tokens into money, you must first convert BAT into Ether in the crypto exchange and withdraw them into Fiat money.
Similarly, if you want to show ads in Brave browser, you have to buy Ether, convert them into BAT, and then pay the browser in BAT.
Hence, whatever me the Token, if there is no underlying coin to it, then the Token loses its value.
The second difference: Blockchain technology
Every crypto coin has its Blockchain. But Tokens run over other Blockchains. For example, Ether has its own Ethereum blockchain. But BAT is a token that runs on Ethereum and doesn’t have its Blockchain.
The third difference: Created and minted
If a person develops a blockchain technology, he creates a Coin for it. Hence the creation of coins is restricted to people who start a separate Blockchain technology. But Anyone can mint a Token.
I think this article has provided you with enough information regarding the Coin and Token. But remember, many Tokens are traded along with the Coins in the Exchanges. Hence do not get confused between them. In simple words, Coins are Created, but Tokens are minted.