If you’ve been reading about crypto and blockchain lately, you may have come across people talking about “cryptocurrencies.” What exactly are these tokens, and how do they differ from cryptocurrencies like Bitcoin? Read on to find out.
Before we get into the differences between tokens and coins, you may need a quick update on what cryptocurrencies are. They are digital currencies that people can exchange with goods and services, similar to common currencies like dollars and euros. To learn more about cryptocurrency, read our cryptocurrency explainer.
Unlike traditional money, cryptocurrencies are not managed by public institutions. All transactions involving specific cryptocurrencies are logged in a centralized blockchain, a ledger that facilitates movements between secure addresses. Coins and tokens are both digital assets used to trade on blockchain.
Coins vs. tokens
While the words “coin” and “token” are often used interchangeably, they are different types of assets. The most significant difference between a coin and a token is where they work. Coins are devices that are native to the blockchain on which they are built. For example, Ethereum is a resident of the Ethereum blockchain, whereas Bitcoin was made into the Bitcoin blockchain. These coins use “keys” to denote ownership of a certain amount of cryptocurrency.
Coins are often used in everyday transactions, e.g. Online shopping or sending any cash. If someone sends you bitcoin, blockchain facilitates an entry to increase your wallet and reduce the other person’s balance and complete the transaction.
On the other hand, tokens are not resident in the blockchain on which they operate. For example, many of today’s most widely used cryptocurrencies are run and exchanged on the Ethereum blockchain. Examples include Tether, which is intended to reflect the value of the US dollar, and Uniswap, a protocol used to trade various cryptocurrencies.
How do cryptocurrencies work?
Cryptocurrencies can be compared to the money you have in a bank account. While you own this amount, the money is not tied to a particular dollar bill or coin. It is when you withdraw from your account that you get a tangible representation of this value. On the other hand, the tokens are “owned” and each is an individual asset that you own. For example, game tags in arcades each represent a requirement to play a game.
If you send someone a character, it leaves your account and moves to another person’s account. This is why tokens can also denote ownership or facilitate the exchange of properties, e.g. With “non-fungible” tokens. With NFTs, each token is like an “act” that represents your claim to a particular work of art or digital artifact.
Unlike coins that use a system of public and private keys to facilitate transactions, exchanges with tokens use a system called “smart contracts”. These blockchain applications can be programmed to perform trades or transfers when certain conditions are met. Each blockchain that acts as a platform for tokens has a technical standard for defining a smart contract. For example, Ethereum uses one called ERC-20.
Where can you get them?
A common way to get the cryptocurrency is through cryptocurrency exchanges. These are great platforms that facilitate trading across a wide variety of coins and tokens. These allow you to trade between different cryptocurrencies and common currencies, manage different wallets, control the value of each crypto and facilitate the process of sending and receiving currency.
Some tokens are issued through other applications. Some newer mobile apps provide e.g. Cryptotokens for people who actively use their service. These often facilitate transactions between users and make in-app purchases.
Sometimes tokens represent something else you paid for. An example of this is a “security token”. These are assets that denote your ownership of a part of a business. A security token essentially replaces stock or stock certificates, an official document that shows how large a stake in a company one owns.
What is a “non-fungal” symbol?
Some of the most popular types of tokens are “non-fungible tokens” or NFTs. They are “non-spongy” because they cannot be replaced. Each token represents ownership of a particular asset, e.g. Art, digital property or the rights to a particular physical element.
During its peak in popularity, many strange things were sold as an NFT. For example, in March 2021, Twitter founder Jack Dorsey sold his first tweet as an NFT in a digital auction. Other people have sold JPEG image files, game items, and paintings.