Token vs Coin: What’s the Difference?

Token vs Coin: What is a Token

Tokens often get called digital coins. However, this isn’t correct. There is a major difference!

Tokens are created on existing blockchains. In fact, thanks to the creation and facilitation of smart contracts, the most common blockchain token platform are Ethereum. Tokens that are built on the Ethereum platform are known as ERC-20 tokens.

However, there are others such as NEO, Waves, Lisk, and Stratis. While, as mentioned above, tokens on the Ethereum platform are known as ERC-20 tokens, NEO uses tokens known as NEP-5 tokens.

Anyone can make their own custom token on one of these platforms.

Token vs Coin: How Tokens are Created

It takes surprisingly little technical ability, in fact. I wouldn’t recommend it to a complete newbie, but for someone with a bit of programming experience, it wouldn’t take as long as you might think. It does need the developer to spend some of the native coins to the blockchain the token is being created on, though.

For example, if the token is being created on Ethereum, the creator will need to spend some Ether to get the network’s miners to validate the token transaction (creation).

It’s important to remember that fees need to be paid for all token transactions on a blockchain, not just the creation of the token. Therefore, any application built on Ethereum must use Ether coins to transfer the application- specific tokens from one user to another or between the app and the user.

This is the same as how coin transactions need fees to be paid to those securing the network.

Token vs Coin: Their Purpose

Most tokens exist to be used with decentralized applications, or dApps. When developers are creating their token, they can decide how many units they want to make and where these new tokens will be sent when they are created. They will pay some of the native cryptocurrency on the blockchain they are creating the token on at this point.

Once created, tokens are often used to activate features of the application they were designed for.

For example, Musicoin is a token that allows users to access different features of the Musicoin platform. This could be watching a music video or streaming a song.

Binance also has its own token. When users trade with BNB (Binance coin), their fees are 50% less.

Some tokens are created for a whole different kind of purpose: to represent a physical thing. Let’s say you wanted to sell your house using a smart contract. You can’t physically put your house into the smart contract, can you? No.

So, instead, you can use a token that represents your house.

WePower (WPR) is a good example of a token that represents a physical thing — it represents electricity. The WePower project is a dApp that allows users to buy and sell electricity on the blockchain using smart contracts. Its token (WPR) represents a certain amount of energy.

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Token vs Coin: A Huge Benefit of Creating a Token

Since the developer of a dApp and token doesn’t have to create their own blockchain, it saves them time and resources. They can use the features of cryptocurrency with their application while benefiting from the security of the native blockchain.

Time isn’t the only thing it saves them — if they created their own blockchain and coin instead of a dApp and token, they would need to find miners to verify their transactions, too.

It takes a lot of miners to create a strong blockchain that can’t be attacked. It makes much more sense for many computers to work on one shared blockchain that several applications can run on rather than there being thousands of weak, mostly-centralized blockchains.

It’s just a much longer, much more expensive process.

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Token vs Coin: A Further Look into How Tokens Work

Tokens are used to interact with decentralized applications that are built on top of different blockchains. A good example is the Civic. Civic uses a token called CVC.

Their application keeps track of encrypted identities on the Ethereum blockchain. It aims to provide a cheaper, more reliable, and more efficient way to check identities. Let’s look at how it works.

If you were going on a foreign holiday, you’d need to confirm your identity at lots of places on the way. The first might be the airline. If the airline was a partner of Civic, they’d send you a QR code to ask for information about you (the traveler).

Using the Civic app, you’d send your details directly to the company from your mobile device. The information is stored on the device but is fully encrypted. This prevents it from being stolen. A fingerprint or iris scan can prove that you’re the owner of the data received.

You can then use the same device to verify your identity at various points along the way (the airport, the hotel, etc.). Each company or organization that you use your digital identity can validate the data using the blockchain. The more times the application is used, the more trust third parties have in the digital identity stored with Civic.

The CVC token itself is used to transact in these identity-related services. It’s used to pay the verifiers of IDs (banks, governments, and other trusted sources) to do needed “know-your-customer” checks. Records of this are then stored on the blockchain/database.

Some CVC is also sent to you, the user. This is to encourage using Civic because the companies needing verification of documents will eventually need to buy more tokens from users. This creates an economy where everyone is rewarded for taking part.

As you can see, the Civic token works in a way that is more than just monetary. Also, the Civic platform would not accept BTC, ETH, or NEO to use their services — it is just the CVC token. But each transaction requires some Ether too, of course, because it is built on the Ethereum blockchain and the miners need to be paid.

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Token vs Coin: Security Token, Equity Token, or Utility Token

Finally, in our token definition, let’s look at a few different types of tokens. They’re known as Security or Asset Tokens, Payment Tokens, Equity Tokens, and Utility Tokens.

In February 2018, Swiss Financial regulators FINMA published guidelines that defined what security or asset, utility, or payment tokens are. This was to help them work out how to treat different tokens when considering their legality:

Security Tokens - most tokens issued by ICO are security tokens. The person buying them is investing their money in the ICO with the expectation of profit. Under Swiss law, these are treated in the same way as traditional securities.

Equity Tokens - if a token represents some stock or equity in the company that issues it, it’s an equity token. However, few companies have attempted such an ICO because there isn’t much regulatory guidance about what is legal and what is not.

Utility Tokens - also called application tokens. They are used to provide people with access to either a product or service. They are also rare because most tokens are expected to gain in value based on their limited supply.

Payment Tokens - payment tokens have no other purpose than to pay for goods and services.

When they classified the types of tokens currently available, FINMA was careful to point out that each token could fall into more than one category.

It’s likely that more financial regulators will offer slightly different definitions as space becomes more established. ICOs and tokens are very new concepts still. It’s understandable that the law hasn’t quite caught up yet.

For more on ICOs, see our "What is an ICO" guide.

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Token vs Coin: Conclusion

You should now understand what is meant when someone says digital “coin” and digital “token”. It wasn’t that confusing after all, was it?

You should now know the simple definition of both a coin and a token: coins are native to their own blockchain. Whilst tokens have been built on top of another blockchain, like Ethereum, NEO, or Waves.

You should also know the most common uses for both coins and tokens. Coins are most often used simply as money; however, some coins do have other uses. These include being used to fuel applications, being used as a stake to validate a transaction on a network, or being used to fuel smart contract and token transactions.

Meanwhile, tokens serve a different purpose. If they were created to be used on a dApp, then their purpose will depend on the application itself. In some cases, they are for features such as voting rights. In other cases, they are used for transactions on the dApp (like Civic) or to reward the users with things like discounted fees, etc. (like Binance, Coinbase, or Kraken).

You’ve been given lots of examples of both coins and tokens to help you develop a clear understanding of what we mean by each term.

So, now that you know the coin definition and token definition, think about your favorite cryptos… are they coins or tokens? Ask me if you’re unsure, and I’ll confirm which they are!