Cryptocurrency Coins Vs. Tokens
If you’re knew to cryptocurrency and looking at lists on sites such as CoinMarketCap.com, you might find yourself getting lost in confusion. Specifically, confusion concerning what constitutes a true cryptocurrency coin, and what constitutes a cryptocurrency token.
What is the Difference Between a Coin and a Token in Cryptocurrency?
In simple terms, a cryptocurrency coin is a coin which exists on its own blockchain. Bitcoin is, therefore, a coin as Bitcoin exists as a digital asset on the Bitcoin blockchain. The same is true for homegrown New Zealand cryptocurrencies like NAV Coin.
Conversely, a cryptocurrency token does not exist on its own blockchain. To demonstrate, if we look at initial coin offerings by the likes of Christchurch-based startup Coingrid, Coingrid tokens can be bought and stored in a similar way to coins like Bitcoin. However, tokens themselves do not exist on an independent Coingrid blockchain.
In the case of Coingrid (and other ICO coins) tokens exist as tokens on the Ethereum blockchain. All transactions, therefore, take place on the Ethereum network.
Understanding Different Types of Crypto Tokens
Cryptocurrency coin vs. token confusion can be easily countered by remembering that:
- Only cryptocurrency coins exist on their own, independent blockchains.
- Tokens are like cryptocurrency coins but are created on third-party blockchains like Ethereum
However, cryptocurrency tokens also fall into several different subgroups.
Security tokens are the most common form of ICO token. Primarily, security tokens are used by new businesses like the aforementioned CoinGrid project, to raise startup capital.
Utility tokens are tokens which are necessary for the provision of different kinds of blockchain based services. Binance Coin (BNB) is an excellent example of a utility token. This is thanks to the fact that traders who use Binance, can benefit from 25% reduced fees when using BNB tokens to pay trading fees.
As their name suggests, asset-backed tokens are cryptocurrency tokens which are backed by real-world assets. While still quite rare, many predict that the future will see tokenized commodities like crude oil traded on exchanges using asset-backed tokens.
Why do Developers Create Tokens and Not New Cryptocurrency Coins?
Contrary to what you might think, creating new cryptocurrency coins isn’t easy. Software required to develop new blockchains is easily accessible. However, building a network of miners and node operators to facilitate transaction processing is much more difficult. Launching tokens on existing blockchains, therefore, circumvents this problem.
Unlike cryptocurrency coins, tokens do not require their own blockchain infrastructure. This saves time and money bringing new tokens to market. Moreover, in the case of security tokens like EOS, funds raised by initial coin offerings, are commonly used to migrate tokens to their own blockchains. (At which point tokens become true cryptocurrency coins.)