The essential difference between tokens and coins important for understanding cryptocurrencies

When dealing with cryptocurrencies, you often come across the words “token” and “coin.” Many beginners assume these two are the same, but in reality, they are digital assets with different mechanisms and roles. Understanding this fundamental difference is crucial before making investment decisions or selecting projects.

Coins Built on Independent Blockchains

Coins function as “currencies,” as the name suggests, and operate directly on their own blockchain networks. In other words, coins are the native currency of their respective blockchains and serve the same role as traditional fiat currencies.

Bitcoin (BTC) operates on the Bitcoin blockchain as the first cryptocurrency. Similarly, Ethereum (ETH) is the native currency of the Ethereum network, and Litecoin (LTC) runs on its own Litecoin blockchain.

A common characteristic of these coins is that they are used to pay transaction fees on the blockchain and to maintain the network (through mining or staking).

Tokens Dependent on Existing Blockchains

On the other hand, tokens adopt a completely different approach. They are built on existing blockchains and depend on the infrastructure of other networks to function. In other words, tokens do not have their own blockchain; they exist as “passengers” on another chain.

Most tokens built on the Ethereum platform adopt the ERC-20 standard, with Uniswap (UNI) and Chainlink (LINK) being typical examples. There are also tokens like USDT (Tether) that are deployed across multiple blockchains such as Ethereum and Tron.

Diverse Functions of Tokens

An important point is that while coins are mainly limited to currency functions, tokens are designed for a broader range of purposes.

Utility tokens provide access to platforms or services, security tokens represent real assets or company ownership, and governance tokens grant voting rights for project decision-making. Many tokens possess functions beyond just serving as a currency, adding significant value.

Technical Background and Implementation Differences

Creating a coin requires building a new blockchain from scratch, which demands extensive development resources and technical expertise. Conversely, tokens can be relatively easily issued on existing blockchains via smart contracts.

As a result, most new projects are launched in token format, continuously creating tokens with various uses and functions.

Practical Significance of Understanding Coins and Tokens

To accurately understand the cryptocurrency market, this distinction is essential. Holding coins generally reflects trust in the blockchain network and its potential as a currency, whereas purchasing tokens depends on the success potential of the project itself and the utility it offers.

When making investment decisions or assessing risks, it is important to carefully consider whether the digital asset in question is a coin or a token, and what role it is designed to play.