What Is a Cryptocurrency Token vs. Coin?
If you have been following the MintDice.com blog for a long time, you know that we frequently interchange the words token and coin. While we try our best to stay true to the vastly different definitions of this word, we occasionally switch it up solely to increase readability, which can create some confusion.
So, what is the difference between a cryptocurrency coin and a cryptocurrency token, and are they interchangeable? Keep reading to learn more.
What is a Cryptocurrency Coin?
A cryptocurrency coin is the word used to describe the native asset of a blockchain protocol. Crypto coins are used for transactions or smart contract executions on said blockchain. Typically, these coins exist at the base layer of a blockchain, even if dApps built on the blockchain have their own cryptocurrencies.
In most cases, a cryptocurrency coin bears the same name (or a similar name) as the blockchain. For example, you transact on the Bitcoin blockchain with Bitcoin, and on the Cardano blockchain, you transact in Cardano, even though it is sometimes called by its ticker symbol ADA.
What is a Cryptocurrency Token?
A cryptocurrency token, on the other hand, is an asset of a dApp that is built on top of another blockchain that has a native asset. This means that almost all cryptocurrency tokens exist on layer 1 of the blockchain, and some even exist on layer two.
The major examples of this are Ethereum and Solana, both of which are base layer blockchains with their own cryptocurrency coins; however, both allow for the development of dApps, which can have their own tokens. Major examples include The Graph (GRT), which is built on Solana, and AXIE (Axie Infinity), which is built on the Ethereum blockchain.
Unlike coins, tokens tend to have a broader range of functions, yet a more restricted use. For example, a token can be both a utility and governance token of a dApp, but it typically can only be used within the application layer, meaning if you take yours out of that layer, it is useless unless you trade it for something else.
How Do You Know if Your Crypto is a Token?
The easiest way to know whether the crypto you purchased is a coin or is a token is by looking at what it is built on. You don’t need a lot of technological knowledge, but if you see the words “built on ____ token standards,” you have a major hint that you are holding a token and not a coin.
Tokens, because they are built on the application layer, must be built to adhere to a token standard. The most famous is ERC-20, which is the base token standard on the Ethereum blockchain, though more specific token standards do exist.
Similarities of Cryptocurrency Coins and Tokens
Though these terms are used to describe different aspects of blockchain technology, we want to mention that they are similar in some ways. One of those ways is that both can typically be traded on exchanges, and in a lot of cases, leveraged as an investment. Investing in a cryptocurrency token doesn’t make you less than someone who invests in a coin, it’s just important to know what you are investing in so you understand your own earning potential.
Keep in mind that this is not official investment advice and is intended for educational purposes only.
When Should You Use Token vs. Coin?
In informal settings, when discussing blockchains, the words token and coin are often used interchangeably, especially when discussing a token. In formal settings, this shouldn’t be the case, however, because cryptocurrency is still an industry in its infancy, it does happen, especially when an individual doesn’t realize that a certain app is built on top of a more prominent blockchain. An example of this is Uniswap, which is built on top of the Ethereum blockchain, though many individuals mistake it for having its own blockchain.
Does It Really Matter?
In our opinion, other than knowing what you are investing in, it isn’t that important to use the correct terminology, especially if you are just discussing with a friend. However, if you are in the investment or banking industry, there are very specific regulations governing what you can and cannot say to a potential customer. This means that you may need to use the correct terminology or face the legal repercussions.
So, if you are in banking, ensure you know the difference and know when to use each word; otherwise, you can probably use either and be understood.
Which Should You Invest In?
Investing in a cryptocurrency coin versus a cryptocurrency token isn’t a simple question to answer, because both categories hold a vast number of assets. There are cryptocurrency coins that are strong, and there are some that are scams, and the same goes for tokens.
That being said, we recommend investing only in cryptocurrency coins until you have a better understanding of cryptocurrency. This is solely because cryptocurrency coins can have numerous tokens built on top of them—meaning you are investing more broadly and will likely have less risk.
This doesn’t mean that investing in cryptocurrency tokens is risk-free; it just tends to be less risky. For example, if you have an option to choose between Ethereum (coin) and Uniswap(token), we recommend choosing Ethereum because while Uniswap can go under and not affect Ethereum, if Ethereum goes under, a whole lot of tokens are screwed. Therefore, we find it less likely for Ethereum to go under. Additionally, some of the tokens on the market are too narrow to truly take off in the same way.
Again, we aren’t saying one option is safer than the other; we are simply recommending broader investing whenever you have the option to do so. So basically, if you are ever presented with an option between investing in a cryptocurrency coin versus a token, research both, but if they are equally viable, choose the coin.
