In this rapidly evolving world of digital finance, understanding the distinctions between various terminology for digital assets can be quite confusing. Three terms that often cause confusion are "cryptocurrency," “coin,” and "token." In this article, we will explore the differences between these terms and shed light on their unique characteristics and use cases.
What is Cryptocurrency?
In his 2020 book titled ‘Move Over Brokers Here Comes the Blockchain,’ Kier Finlow Bates explains:
“Blockchain comprises a time-stamped hash-linked list distributed over a peer-to-peer network with a consensus algorithm for incentivizing data consistency and utilizing asymmetric key cryptography for identity and access management.”
That’s a lot to take in. Not to worry - our deep dive on blockchain is coming very soon to a screen near you.
For now, what you need to know is:
|The application of the technology “blockchain” to the concept of “currency” results in “cryptocurrency.”|
Cryptocurrency refers to digital forms of currency that use cryptography for secure financial transactions. Unlike traditional fiat currencies regulated by governments, cryptocurrencies operate on these decentralized networks known as blockchains. These blockchains facilitate peer-to-peer transactions and ensure transparency, security, and immutability.
Popular examples of cryptocurrencies include Bitcoin and Ethereum. Cryptocurrencies are designed to serve as mediums of exchange, stores of value, and units of account. Their primary purpose is to enable secure and efficient digital transactions while eliminating the need for intermediaries such as banks.
What is a Coin?
While the term "coin" is often used interchangeably with "cryptocurrency," there is a subtle difference between the two. Coins are specific types of cryptocurrencies that operate on their own independent blockchains. They are usually created from scratch and have their own unique protocols and functionalities.
For example, Bitcoin (BTC) is a cryptocurrency that operates on its own blockchain and is considered a coin. Similarly, Litecoin (LTC) and Ripple (XRP) are also coins that have their distinct blockchains. Coins primarily function as digital currencies and aim to provide alternatives to traditional monetary systems.
What is a Token?
Tokens represent a broader category of digital assets. They are created and hosted on existing blockchains, they don’t have their own, and leverage the infrastructure deployed on these blockchains (e.g. smart contracts or other platforms).
Tokens serve various purposes. They can represent ownership in a particular project, grant access to services or products, or function as utility tokens within decentralized applications (DApps). Tokens can be created and distributed through processes like Initial Coin Offerings (ICOs) or Token Generation Events (TGEs).
Tokens can further be categorized into utility tokens, security tokens, and governance tokens. Utility tokens provide access to specific features or services within a blockchain-based ecosystem. Security tokens represent ownership in a tangible or intangible asset and are subject to regulatory compliance. Governance tokens enable holders to participate in decision-making processes related to a blockchain project.
Understanding the differences between cryptocurrencies, coins, and tokens is essential for navigating the complex world of digital assets. Cryptocurrencies serve as digital currencies on decentralized networks, while coins specifically refer to cryptocurrencies operating on independent blockchains. Tokens, on the other hand, are digital assets created on existing blockchains and have various use cases within decentralized ecosystems.
By staying informed about these digital assets' characteristics, you can make informed decisions and actively participate in this transformative industry.