Day 20 of 100 | Crypto Basics | 5 min read
The Difference Between Coins and Tokens
Master the difference between coins and tokens in this comprehensive lesson. Build your cryptocurrency knowledge step by step.
### Understanding the Fundamental Difference Between Native Assets and Built-On Assets
The terms coin and token are frequently used interchangeably in casual cryptocurrency discussions, but they actually refer to fundamentally different types of digital assets with distinct technical properties and characteristics. Understanding this distinction is essential for evaluating cryptocurrency projects accurately, understanding how different digital assets function, and making informed investment decisions.
### What Makes Something a Cryptocurrency Coin
A coin is a cryptocurrency that operates on its own independent blockchain infrastructure. It is the native asset of that blockchain, essential for the network's operation, security, and economic incentives. Without the native coin, the blockchain would not be able to function as designed because there would be no mechanism to pay for transactions or incentivize the validators who secure the network.
Bitcoin is the original and quintessential cryptocurrency coin. It runs on its own dedicated blockchain that was specifically designed to support Bitcoin and only Bitcoin. Bitcoin is used to pay transaction fees on the network, and it serves as the reward that incentivizes miners to contribute their computational resources to secure the network. Without Bitcoin, the Bitcoin network simply could not exist or operate.
[EXAMPLE] Other prominent examples of cryptocurrency coins include Ethereum's Ether (ETH), Solana's SOL, Cardano's ADA, Avalanche's AVAX, and Polkadot's DOT. Each of these is the native asset of its respective blockchain platform. They are necessary for paying transaction fees, participating in consensus mechanisms like staking, and powering all other activity that occurs on their networks. These coins form the economic backbone of their entire ecosystems.
Coins typically serve multiple essential functions as the economic foundation of their networks. They provide incentives to validators or miners who secure the network. They are required to pay for transaction processing, which helps prevent spam and denial-of-service attacks. They often serve as the base trading pair for other assets on the network. And they frequently grant governance rights to participate in protocol decisions.
[TIP] When evaluating a cryptocurrency coin, you are fundamentally evaluating both the asset itself and the entire blockchain platform it powers. The coin's value is inextricably tied to the network's utility, security model, development activity, and real-world adoption. A successful coin requires a successful, actively-used blockchain with genuine utility.
### What Makes Something a Cryptocurrency Token
A token is a cryptocurrency created on top of an existing blockchain platform using that blockchain's smart contract functionality. Unlike coins, tokens do not have their own dedicated blockchain infrastructure. Instead, they rely on a host platform for transaction processing, security, and the underlying technical capabilities that make the token possible.
The vast majority of cryptocurrencies in existence are actually tokens rather than coins. Thousands upon thousands of tokens have been created on Ethereum alone, utilizing standards like ERC-20 for fungible tokens and ERC-721 for non-fungible tokens or NFTs. Other platforms like Solana, Avalanche, BNB Chain, and Polygon also host many tokens within their ecosystems.
[KEY] A crucial practical distinction is that when you transact with a token, you must pay fees in the native coin of the host blockchain rather than in the token itself. Sending an ERC-20 token on Ethereum requires paying gas fees in Ether, not in the token being transferred. This is an important consideration for managing your holdings and ensuring you can access your tokens when needed.
Tokens can represent virtually anything, from utility within specific applications to governance rights over protocols to fractional ownership of real-world assets. Their flexibility and relative ease of creation explains why so many have been launched. Tokens power everything from decentralized finance protocols to gaming economies to digital art ownership.
### The Practical Implications for Users and Investors
The distinction between coins and tokens has significant practical implications for how you interact with and evaluate these different types of assets.
When you hold tokens, you must also hold some amount of the native coin to interact with them. If you have ERC-20 tokens in an Ethereum wallet but have no Ether, you cannot transfer those tokens anywhere because you cannot pay the transaction fees that the Ethereum network requires. This catches many cryptocurrency newcomers off guard.
[WARNING] New cryptocurrency users frequently acquire tokens without realizing they simultaneously need the native coin of the host blockchain for any transactions. Always ensure you have sufficient native coins like ETH, SOL, or AVAX to cover transaction fees when dealing with tokens on those respective platforms.
Security models differ meaningfully between coins and tokens. Coins inherit the full security properties of their entire blockchain consensus mechanism. Tokens inherit some of that underlying security but also introduce additional risk through their own smart contract code, which could potentially contain bugs or vulnerabilities entirely separate from the host platform.
From an investment perspective, coins and tokens present different risk profiles that should inform your evaluation. A successful token depends on multiple factors: the underlying project succeeding in its specific use case AND the host blockchain remaining viable, secure, and actively used. A coin's success is more directly and solely tied to its own blockchain's development and adoption.
### Creating Coins Versus Creating Tokens
The technical and resource requirements for creating new coins versus new tokens differ dramatically, which explains the relative abundance of each.
Creating a new cryptocurrency coin requires building an entire blockchain from scratch or forking and modifying an existing blockchain codebase. This is an enormous technical undertaking requiring deep expertise in cryptography, distributed systems, and networking. It also demands ongoing maintenance, security auditing, and significant community building efforts to attract enough validators or miners to adequately secure the new network.
Creating a token is comparatively simple and accessible. Anyone with basic programming knowledge can deploy a token smart contract on an existing blockchain platform like Ethereum within minutes. Some tools allow token creation with no coding at all. This very low barrier to entry explains why there are so many thousands of tokens in existence.
[KEY] The ease of token creation unfortunately means that many tokens have little genuine value, utility, or development activity behind them. Many are outright scams specifically designed to steal money from unsuspecting investors. Always research any token thoroughly before investing. The mere fact that something exists as a token provides absolutely no indication of its legitimacy or value.
Understanding the fundamental distinction between cryptocurrency coins and tokens helps you navigate the complex cryptocurrency ecosystem more effectively and make better-informed decisions about the digital assets you choose to hold and interact with.
Knowledge Check
What is a key aspect of the difference between coins and tokens?
- It's only for advanced users
- Understanding the fundamentals is essential for making informed decisions (Correct)
- It doesn't apply to cryptocurrency
- It requires expensive equipment
Explanation: Understanding the fundamentals of the difference between coins and tokens is essential for anyone participating in the cryptocurrency ecosystem. This knowledge helps you make better decisions and avoid common mistakes.