Often people use the words ‘coin’ and ‘tokens’ interchangeably, however, they do have subtle differences that are worth understanding. In addition to coins and tokens, there are also “stable coins”. Let’s look at these three main types of cryptocurrency to understand more about the differences and what they are used for.
Coins are native to their own blockchain. Whereas tokens have been built on top of another blockchain, like Ethereum.
WHAT ARE COINS
In the world of blockchain, coins are basically digital money, or a digital storage of value. The most famous examples of coins are Bitcoin, Ethereum, Litcoin, and the recently controversial Dogecoin (more on that in a future article). They are meant to be used as a form of payment and their value comes strictly from offer and demand. Or put differently; from how much people are willing to pay to own any of these coins.
Altcoins or Alts
You may also hear the term Altcoins (or ‘Alts’). This stands for “alternative coins” and represents any other coins than Bitcoin. This comes from the fact that Bitcoin is currently worth, by itself, more than 50% of the total market capitalization of all cryptocurrencies. (Poss Ref Other Article). Because of this, some people view other coins as merely an alternative to Bitcoin. Often when talking about Altcoins, people include what should be called Alttokens.
For clarity, when we refer to cryptocurrencies or cryptos that encompasses the entire asset classes including both coins and tokens.
Last but not least you may also hear about Shitcoins. They are essentially coins with a very small market capitalization (or value), that have extremely high volatility due to the uncertainty of their future. Shitcoins also include what are essentially “shittokens”.
WHAT ARE TOKENS
Tokens or, more specifically, cryptocurrency tokens, are fungible and tradeable assets. But instead of operating on their own blockchain, they are hosted on other platforms like Ethereum, Neo and more. It allows projects to focus on the service they offer, without having to create and maintain their own blockchain. Read our article on the Ethereum Iceberg Illusion to understand this better.
There are also different types of tokens depending on the type of service they are used for. The most important are:
As the name suggests, they allow the owner to have equity in a project or company. They allow blockchain start-ups to finance themselves through ‘ICO’ (Initial Coin Offering) and are, most of the time, based on Ethereum. They should therefore, technically, be called Initial Token Offerings. Essentially, equity token holders are the same as traditional shareholders in a business sense. They have the responsibility, along with other shareholders, of voting on various business or project decisions, and they can vote through the blockchain making it safe and secured.
These tokens should be perceived as an investment contract. At its base, a security token is an investment contract that represents legal ownership of a physical or digital asset like real estate, ETFs, etc. Its ownership is verified within the blockchain.
These can be perceived as ‘app coins’ as they allow owners to purchase services within the decentralized app they belong to. Imagine a blockchain project that offers a decentralized storage service. To use that service, you would pay with a Currency Token.
NFTs or Non-Fungible Tokens
These are a class of cryptocurrency assets in which each item is entirely unique. This makes them useless as a currency, but useful for other things—such as the crypto art, which has been all over the press lately. There is an excellent interview between Lucy Clark and Patrick Lum from The Guardian, which discusses what Crypto Art is, that can be viewed here.
WHAT ARE STABLECOINS
Stablecoins are coins that attach their market value to an external reference. For example, USDC (the USD Coin) is attached to the US Dollar. For each USDC created, a USD is stored. In the case of USDC this is also regularly audited. Other stablecoins like Tether or USDT are backed by more than only fiat currencies. This explains why USDT has made the headlines a lot lately as there are some controversies as to what exactly is behind USDT. There are four main categories of stablecoins:
Pegged one-to-one, with one or several fiat currencies, as the above example of USDC.
They are tied to tangible assets like gold or other precious metals, for example PAXG (Paxos Gold) is pegged to gold.
These are generally backed by fiat currencies, but collateral comes in the form of other digital currencies. For example, USDT.
They do hold any form of collateral but instead rely on algorithms, or smart contact, to adjust their supply based on market demand. They could be compared to central banks that print or destroy money. For example, AlgoRand.
Stablecoins serve different purposes. First, they allow traders to quickly move to them (at lower fees than fiat) when the market gets unstable. They can be used for daily transactions like buying coffee while removing the volatility of other cryptocurrencies and for the same reason can be used for periodic payments. Last but certainly not least, they allow some crypto exchanges that do not have the right to hold fiat currencies (most often due to regulations) to have Crypto-Fiat trading pairs (BTC – USDT for example).
While it can get confusing to understand the different types of cryptocurrencies that exist, the most important takeaway is that some are native to their own blockchain (Coins) and others are derived from an existing blockchains (Tokens). This is an important point to remember when investing into cryptos and should be part of your due-diligence, as tokens also bring value to the blockchain they are derived from, since they will have to use its coin to pay fees. The biggest example is Ethereum that has thousands of tokens based on its blockchain and they need to pay Ethereum usage fees. If you’re looking to invest at the moment, but are unsure where to start, please get in touch, and we can discuss a bespoke training program, specific to your needs.