Hello, In this post let us talk about how cryptocurrency coins are different from tokens since they both run on the blockchain technologies and are traded quite similarly but they are actually quite different.
Some points on Blockchain Technology to start with
- The blockchain is like a digital ledger, each block is a periods of time where transactions occur.
- Entries are recorded by all the people who possess the blockchain, the transactions are locked on when a block is finalized.
- The next block begins building on top of the previous one plus all the others that came before it.
- Users of the specific cryptocurrency actually don't hold their coins or tokens but they hold the keys that allow them to make an entry on the blockchain that states the coins or tokens are being sent somewhere else out of their control
- This is how blockchains that power cryptocurrencies work.
Their Goal is to enhance trust and system integrity by achieving:
- Efficient transaction verification & easy tracking of ownership.
- High data integrity & tamper resistance
- Flexible data ownership & visibility
Coins Vs Tokens...
First of all if we actually look what a cryptocurrency coin is then the difference gets pretty obvious.
So we know that coins run on their own blockchain, many are alterations of the Bitcoin blockchain and many others are completely unique, but they are all completely self-sufficient. Additionally their value is derived solely from their existence. They are a currency meant to be used to facilitate payments.
Cryptocurrencies like Ethereum are considered coins, but we are unlikely to see ETH widely accepted as currency for purchasing goods. Ether is meant to be the currency of Ethereum network, this network allows other cryptocurrency projects to operate on top of it.
Creating and maintaining our own blockchain can be quite difficult or smaller projects with more niche purposes, Instead many operate on top of the Ethereum network and users of their currency have to pay small fees in Ether. In short, Ether is a a coin because it runs on its own blockchain and only gain value simply through its existence, it is not pegged to any other thing. People want it, people want to use it, therefore it has value.
Those cryptocurrencies that run on the Ethereum network are not coins, they are tokens. Not operating on our own blockchain is enough to be considered a token in the wider crypto community.
Let's talk about what's the advantage in a token
Many of these projects running on the Ethereum network gain value from their specific purpose. This goes beyond the intrinsic value that coins rely on, Many token cryptocurrencies are actually backed by something. When you trade the token you are also trading what is backing that token, There is a wide range of what this can be.
What tokens can do?
Since we can record ownership of anything on the blockchain, you can make token for the trade of anything.
One use-case would be the tokenization of gold. A company could buy 1,000 ounces of Gold and create 1,000 Gold bucks. They could then sell those Gold bucks to people for the price that they choose, similar to what an ounce of gold would cost, with the guarantee that one Gold buck is worth one ounce of gold. A person would only need to trade them a Gold buck to get ounce of Gold back. This allows people efficiently trade GOLD around instantly without having to physically move the gold. Then any person wants to physically claim the gold can by turning in the token. All transactions with this token would have their fees paid for with Ether and not the token itself.
Tokens don't necessarily have to be backed by something physical though. They can simply be the currency for a specific service or purpose. This can be a lot o things.
For instance we could have a site where there's a token that gives us the ability to listen to music. Kind of like an alternative to Spotify. Instead of paying a monthly fee for access to and entire library stuff we may like, we could instead buy a bunch of these tokens, and cash them in to your favorite songs. Like quarters on a jukebox.
This has two benefits, you are not paying for things you don't care about. and two, musicians can more directly benefit from sales. we can at least support our favorite musicians at a fair price.
There are a lot use cases for crypto, that almost no one could have imagined, Also the Ethereum network is not the only tokens utilize. There are several cryptocurrency projects that operate network similar to the Ethereum network. Like any market there is a lot of competition.
Lets check the difference :
- Primarily, coins runs on their own blockchain but their value is almost always intrinsic. Meaning that their value is dependent on people's belief in that currency.
- The primary decider for what tokens are is that they run on top of a blockchain that they don't control. Additionally many derive value from their use-case. This can be access to specific services, the trade of certain resources, or many other unforeseen opportunities.
As in the investment point of view tokens are better than coins. The reason is that tokens are based backed by applications that are designed to perform specific tasks. The tokens has a specific purpose and will never go out of demand as long as the application has real-world uses. On the other hand, coins are only used as money and for making payments and money transfers, The demand is very likely to rise in case of some coins.
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THANK YOU.
