There are a lot of confusing terms in the cryptocurrency market. For example, some people mix up the words "tokens" and "coins". We are going to tell you about the difference between them and why it is important.
Development
If we talk about coins and tokens, the main difference between them lies in the way they are created. Cryptocurrency tokens are made on the basis of their own blockchain. The blockchain that underlies the coin functions by itself. That is, it confirms all transactions, ensures the reliability of the coin, and gives the coin value.
Tokens are not created on the basis of their own independent blockchain. Rather, they arise on the platform that already exists. Sometimes the token eventually transforms into an independent coin. When it happens, the creator of the token launches a new blockchain, but until then the token functions on the basis of an existing blockchain.
Imagine it as a building. Blockchain is always the foundation. It maintains cryptocurrency - just as the foundation of a building maintains its entire structure. If we follow this metaphor, then the cryptocurrency coin is a new building. It needs its own foundation, and it does not rely on any other structures.
On the other hand, a token is an add-on to an existing building. To add a new floor to the house, you do not need to refill the foundation. You can build on top of what already exists. In principle, this is exactly how a cryptocurrency token works.
Application
Another important difference between coins and tokens is that they have different fields of application. The value of coins is usually based on their own blockchain. It means that they are interchangeable and they can be traded. Cryptocurrency coins can be divided into smaller monetary units, but their value remains unchanged. Simply put, cryptocurrency coins are mainly used as currencies. Coin owners can use them to buy goods and services. It is also possible to trade coins.
Tokens are mainly used in initial coin offerings (ICOs). This is an increasingly popular way to attract funding for new startups. It works like this: the company uses blockchain, for example, Ethereum in order to create and launch its own token. Investors can buy these tokens and keep them for future profit or for trading.
The company uses the funds received during the ICO in order to start working on the project. For token holders, they are, in fact, shares in this company. Sometimes a company can transform a token into a coin. When it happens, token holders exchange their tokens for coins, which can then be used as digital money.
Conclusion
In principle, coins and tokens are similar to each other, since they are all varieties of cryptocurrencies. Both are based on blockchain. The difference lies in the way they are created. Coins have their own independent blockchains. Tokens are created on the basis of an existing blockchain.
This technical difference may seem insignificant to you. However, in most cases, people are not interested in the technical side of cryptocurrencies, but in how they can be earned. And here it is important to understand what is the difference between coins and tokens in terms of their use in the real world and potential.
Coins, in fact, are independent currencies. Some users like to pay with them for purchases. Others invest in coins and wait until they rise sharply in price. Tokens, on the other hand, are usually used to attract seed capital. Therefore, people who buy and store tokens usually perceive them as investments in a startup. Only instead of an IPO, it happens in the form of an ICO. For many people, it has become much easier and more accessible to invest in startups through tokens.
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