In the world of crypto, various terms can sometimes confuse. One of the most common misunderstandings is the difference between tokens and coins. Although both of them are used in the context of cryptocurrencies, they signify different concepts and have unique characteristics. In this article, we will show the difference between tokens and coins to help you gain a better understanding of this topic.
Firstly, the coin runs on its blockchain. The blockchain keeps track of all transactions associated with that coin. Example: if you make a transaction using Ethereum, it is logged in the Ethereum blockchain. Similarly, information about transactions is stored in the Bitcoin blockchain if someone sends you Bitcoins. Virtual transactions are encrypted and accessible to everyone on the network.
Secondly, coins function as a form of currency. For instance, Bitcoin was developed as a replacement for traditional money. Utilizing cryptocurrency coins, individuals can purchase a wide range of goods and services, including those offered by major corporations such as Amazon, Microsoft, and Tesla. Additionally, coins are used for acquiring assets like real estate, antiques, yachts, and even gold.
Thirdly, coins can be mined. Cryptocurrencies can be obtained in several ways. One of them is the traditional Proof-of-Work (PoW) algorithm. Miners use this method to make a profit. However, the number of bitcoins that can still be mined is limited. Therefore, the process becomes more and more complex every day. In addition, mining is extremely not environmentally friendly.
There is another way of earning cryptocurrencies. We are talking about the Proof-of-Stake (PoS) algorithm, which is more modern and energy efficient. This method requires much less electricity and has a smaller footprint on the environment. For example, Ethereum and Cardano use staking as a consensus algorithm for their coins.
Tokens distinguish themselves from coins by lacking their blockchain and instead operating within existing cryptocurrency networks. Among the most prevalent tokens are Stablecoins, exemplified by USDT.
Unlike coins, which use a blockchain to process transactions, tokens rely on smart contracts. Smart contracts are a set of codes that facilitates transactions and payments between users. Each blockchain has its smart contract. Ethereum, for example, uses the ERC-20 standard.
Another notable difference between tokens and coins is their purpose. While cryptocurrency is a digital form of money, tokens can be linked to external services or products. They can grant rights to participate in crypto project activities, vote, access to certain services, or even own certain assets.
Tokens and coins vary primarily in their operational principles and functionalities. Tokens are generated on the blockchain of a specific cryptocurrency and serve as digital assets with distinct features. They rely on the blockchain and utilize its infrastructure for their operations.
Coins, on the other hand, are independent cryptocurrencies with their blockchain network. They function independently of other cryptocurrencies and have their own rules and protocols. Coins serve as a means of exchange and storage of value.