There are a lot of terms in the cryptocurrency market that are rather confusing. For example, some mix up the words ‘tokens’, ‘coins’ and ‘altcoins’. We tell what the difference between them is and why it’s important to distinguish between them.
If we talk about coins and tokens, the main difference lies in the way they are created. Cryptocurrency tokens are created on the basis of their own blockchain. The blockchain, which is the basis of the coin, functions by itself, confirming all the transactions, ensures the reliability of the coin and gives it value.
Tokens are not created on the basis of their own, independent blockchain. Rather, they are built on an existing platform. Sometimes the token eventually transforms into a separate coin. When this happens, the token creator launches a new blockchain. But until then, the token functions on the basis of an already existing one.
Think of it as if it’s a building. The blockchain is always the foundation that supports the cryptocurrency — just as the foundation of a building supports its entire structure. If you follow this metaphor, the cryptocurrency coin is a new building that needs its own foundation, and cannot rely on any other structure.
On the other hand, a token is an addition to the existing building. To raise a new floor, you do not need to rebuild the foundation. You can just add on top of what is already there. In principle, this is exactly how a cryptocurrency token works.
Coins, altcoins and tokens
Hold on to that picture in your head, you can divide cryptocurrency space into two main parts. First, these are the cryptocurrency coins, each of which has its own independent blockchain. The main one, which everyone knows about, is bitcoin. For the most part, it was the creators of bitcoin who wrote a reliable code in the first place thanks to which there is a decentralized registry that allows this cryptocurrency to function.
From the moment bitcoin was launched, several more coins have appeared, or branched off from the original it's code. These coins slightly changed the core bitcoin blockchain. These are coins like namecoin, peercoin, litecoin, and others. Since the coins of this type originated on the basis of the bitcoin code, they are often called the ‘alternative coin’ or as it more commonly abbreviated as - altcoin.
Altcoins make up a large class of cryptocurrency coins. Secondly, they are tokens. They do not use their own new blockchains. Also, they aren’t variations of the original bitcoin code. Rather, they are launched on the basis of already existing blockchains. One of the main platforms for creating tokens is ethereum. It is incredibly easy to do, and the purpose of ethereum is that developers and companies create and launch their tokens based on this blockchain.
Coins and tokens
What they are used for — yet another important difference between coins and tokens is that they have different uses. The value of the coin is usually based on their own blockchain. This means that they are interchangeable and can be traded and exchanged.
Crypto coins can be divided into smaller monetary units, but their value remains constant. As a result, it’s relatively easy to trade coins. They can also be exchanged for fiat currencies at a fairly understandable rate. Simply put it, cryptocurrency coins can be used as proper currencies. Coin owners can buy goods and services with them. Such coins can also be traded.
Tokens are mainly used in initial coin offerings (ICO). This is an increasingly popular way to raise funding for new startups. It’s arranged the following way: the company uses a blockchain, for example it's to create and launch its own token. Investors can buy these tokens and keep them for future profits. The company uses the funds received during the ICO to start the work on the project.
For owners of tokens they are, in fact, shareholders in this company. Sometimes a company can transform a token into a coin. When this happens, token owners swap their tokens for coins, which can then be used as digital money.
In theory, coins and tokens are very much alike as they are all types of cryptocurrencies. Both are based on a blockchain and so the only difference is the way in which they are created.
Coins have their own independent blockchains while tokens are created based on an already existing blockchain. This technical distinction may seem insignificant to you since most people are not interested in the technical side of cryptocurrency, but rather in how they can be earned. And it's important to understand the core difference between the coin and a token in terms of their use in the real world.
Coins are essentially independent currencies. Some users like to pay with them for their purchases while others, the hodlers, invest and wait until they grow in price. Tokens, on the other hand, are usually used to attract startup capitals. Therefore, people who buy and store tokens usually perceive them as an investment in a startup. Only instead of an IPO, this happens as an ICO. For many, it has become much easier and more accessible to invest in startups through tokens.