The digital world contains several elements that are often confused with each other. We are talking about coins or cryptocurrencies and tokens. These are different things, although the blockchain is at the core.
The main difference is one:
- The coin is based on its own blockchain.
- The token is implemented on a foreign distributed network.
The purpose and capabilities also differ, but the main difference is precisely the blockchain.
What is cryptocurrency
Cryptocurrency in the broadest sense of the word is a monetary unit in a decentralized system. In other words, it is digital money. They are often referred to as coins or coins. Cryptocurrency has no physical basis, it is an entry in the register that denotes the number of digital assets.
All coin transactions are encrypted using cryptographic methods. Transactions are confirmed by miners who solve a certain mathematical problem in order to create another block of information and write it to the register. This happens in the distributed network of Bitcoin and other coins with the PoW algorithm. There are also other ways to reach consensus, such as PoS – proof of stake.
The main task of the cryptocurrency is to serve as the settlement unit of the project. Coins have value, you can buy or sell them, pay for goods and services.
The main criteria for the coin:
- Own blockchain.
- Cryptographic encryption methods.
- Payment instrument.
- For mining, mining, staking is used (depending on the confirmation algorithm used).
What is a token
A token is a unit of account, a financial instrument. It relates to the identification of the owner on the network, security. Tokens are received by investors during the initial coin offering. They are in circulation within the framework of a specific project.
Compared to the real world, the token is analogous to tokens or coupons. For example, subway tokens. They have value, value, circulation. With their help, you can get a service – travel on the metro. However, they cannot be used to pay in a store for another product. Also, an example would be a gift coupon. With its help, you can get a discount on services in a certain retail network, it has value. However, coupons cannot be used to purchase items.
The main criteria for the token:
- Based on someone else’s blockchain – the main variant of Ethereum, there are other networks (Solana, Polkadot, and so on).
- Does not always serve as a means of payment.
- Emission occurs immediately at the launch of the project, this is the responsibility of the developer.
The main purpose of tokens
Tokens are used to solve various problems, the main ones:
- Act as a digital key – serve as a means of identifying users, an access key to information.
- They are a financial instrument – this is the main function of tokens. You can use them to pay (within the project). Tokens act as a guarantee for ICO investors. Used by exchanges for internal settlements. Used in DeFi projects.
In connection with the purpose, several types of tokens are divided:
- Exchange tokens – issued by cryptocurrency exchanges, used for settlements between users of the site, receiving discounts, and limits on transactions. They also provide the owners with the right to participate in the development of the project, to make a profit.
- Service tokens – provide the implementation of smart contracts.
- DeFi tokens – used by applications and projects in the field of decentralized finance (lending services, deposits, and so on).
- Non-fungible tokens (NFT) – are used to secure copyright, ownership of a digital object.
- Stablecoins are a separate type of token, it is a cryptocurrency backed by tangible assets, fiat currency.
There are also app tokens and other options. An example of a non-fungible token is LAND, a token from the Decentraland metaverse. This is virtual reality in which you can create your own world. LAND tokens are plots of land that you can buy, sell, build objects. The project uses its own cryptocurrency – MANA. It serves for settlements within the system, purchase, and sale of virtual objects.
As for cryptocurrencies, there are over 7,300 coins in the world. Not all of them are in demand and have a high level of capitalization. Top 5 cryptocurrencies by volume: Bitcoin, Ethereum, Ripple, Solana, Binance Coin. Moreover, Bitcoin exceeds Ethereum by more than 2 times in terms of capitalization.