Demystifying the Difference: Coins Vs Tokens in Cryptocurrency and Blockchain
INTRODUCTION
I know you all are facing problems with the difference between coins and tokens. I promise to all of you that after reading this article your all doubts are cleared regarding the coins and tokens difference. So let's get started.
STORY CHARACTERS DETAILS
I am going to explain the topic(the difference between coins and tokens ) with a story of two friends. Both of them are working in a big tech company. One friend's name is Anmol and another friend's name is Anubhav.
STORY
Anmol and Anubhav decided to buy a MotorBike for their office traveling work. Anmol decides to buy a brand new motorbike suppose which cost him one lakh rupees(INR). Anubhav decides to rent a motorbike from his friend Pursottam because Pursottam has two motorbikes one for his personal use and the other one for rent purposes. Now the main point comes to suppose Anmol motorbike starts generating problems like some parts are not working properly and Anmol needs to do services and costs around five thousand per month to maintain the motorbike. Now my question to you all that tell me "Who will pay all the expenses that Anmol motorbike charges?" Anmol will pay all the motorbike expenses. Now in Anubhav's case suppose the motorbike starts generating the same problems as in Anmol's case now the second question to you all tell "Who will pay all the expenses that Anubhav's motorbike charges?" The answer to this question is Pursottam will pay all the expenses because the owner of the motorbike is Pursottam, not Anubhav. So Anubhav will pay only the fuel and the rent cost of the motorbike( keep in mind this point ).
CONNECTION OF THIS STORY WITH COIN AND TOKEN
Just like the above story of Anmol and Anubhav same here in the coins and tokens cases if you want to create your coin then just like Anmol you also need to pay all the costs that the creation of the coin wants, you need to hire developers, you need to decide all the working of your coin and all the properties of the coin like Choose a consensus mechanism, Design your blockchain architecture, Audit your new blockchain and its code and Verify legal compliance. All these things cost you a lot of money. If you create tokens you just need to select the existing blockchain like Ethereum, Solana, polygon, etc and code your token and deploy it over the blockchain that you like.
WHY DO WE NEED TO CREATE COINS AND TOKENS?
Everything has a purpose that we use in our daily life as same as coins and tokens also have some use cases and purposes. The purpose of Bitcoin is to eliminate the central authority/centralized system and use the decentralized network for transactions. As same as Ethereum also have its purpose of running a program on a decentralized network instead of a centralized network. Just like that if you have your purpose and some feature that the existing blockchain lack off then you can create your coin or token to fulfill your need as well as the other's needs. Suppose you have your platform and you want to use your own currency instead of existing currencies for payment-related work or something then you can create your coin or token that runs on your platform like Brave web browser using its own token "Basic Attention Token" (BAT). It is used for tracking media consumers' time and attention on websites using the Brave web browser and its goal is to efficiently distribute advertising money between advertisers, publishers, and readers of online marketing content and ads.
PROS & CONS OF CREATING COINS
Pros:
No intermediaries - Since cryptocurrency transactions don't involve banks or other financial institutions, you can avoid their fees and commissions. This can lead to lower transaction fees.
Security - Cryptocurrency transactions are secured by cryptography, making them resistant to fraud and manipulation. This can provide a more secure payment option for your business.
Fast transactions - Cryptocurrency transactions are processed much faster than traditional payments, often in minutes instead of days.
Global reach - Cryptocurrencies can be used internationally without the need for currency exchange or high fees. This provides global payment capabilities.
Anonymity - Cryptocurrency transactions provide a degree of anonymity, which some businesses and customers value.
Immutability - Once recorded on the blockchain, cryptocurrency transactions cannot be reversed or altered, providing a high degree of transparency.
Expanded customer base - More customers are open to using cryptocurrency, so creating your own coin can potentially expand your target market.
Cons:
Regulations - Many governments have not fully regulated cryptocurrencies yet, introducing some legal uncertainty.
Volatility - The value of cryptocurrencies tends to fluctuate greatly, making them a risky investment for both businesses and customers.
Security risks - Cryptocurrency users are responsible for securing their own wallets and keys, introducing the risk of loss due to hacking or human error.
Limited adoption - Cryptocurrencies have not yet achieved widespread adoption, limiting their real-world use and acceptance.
High costs - Creating a new cryptocurrency from scratch requires significant technical expertise, resources and ongoing maintenance costs.
Technical challenges: Creating a new blockchain or coin requires technical expertise in coding, cryptography, and blockchain architecture. You may need to hire developers.
Cost: Depending on the complexity, creating your own coin can be an expensive endeavor requiring financial resources for development, auditing, legal advice, and marketing.
PROS & CONS OF CREATING TOKENS
Pros:
Customization: You have complete freedom to customize the token however you want in terms of supply, transaction fees, consensus mechanism, etc. This allows you to create a token that is tailored to your specific needs and vision.
Control: You have full control over the token and its development roadmap. You decide when and how to implement new features and upgrades.
Potential value: If designed and marketed well, your token could potentially gain value as more people adopt and use it. This could lead to financial gains.
Learning opportunity: Creating your own token can be a great learning experience, helping you gain skills in blockchain development, token economics, and community management.
Cons:
Security risks: Any new token is at risk of security vulnerabilities that could lead to funds being lost or stolen. You'll need to have the token audited thoroughly.
Regulatory uncertainty: The regulatory landscape around cryptocurrencies is still evolving and unclear in many jurisdictions. You'll need to ensure your token complies with relevant laws.
Ongoing maintenance: Once created, your token will require ongoing maintenance, upgrades, and community management to remain relevant and functional over time.
DEFINITION OF COIN & TOKEN
Coin: A coin, in the context of cryptocurrency, refers to a digital or virtual currency that operates as a standalone unit of value on its own blockchain network. Coins are designed to serve as a medium of exchange, a store of value, and a unit of account. They possess their own independent blockchain technology and network, often with specific features and functionalities. Coins are typically used for various transactions, such as purchasing goods and services, transferring value, and participating in network governance. Examples of well-known coins include Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC), each of which operates on its own dedicated blockchain network.
Token: A token is a type of digital asset that operates on top of an existing blockchain. It represents a unit of value or utility and can have various functions within a specific ecosystem. Tokens are created through a process known as tokenization, and they can serve a wide range of purposes, such as enabling access to certain features, representing ownership, facilitating transactions, and even embodying unique digital items. Unlike traditional cryptocurrencies or coins, which have their own standalone blockchains, tokens rely on the infrastructure of an existing blockchain platform, such as Ethereum, Binance Smart Chain, or Solana, to operate.
EXAMPLE OF COINS
Some examples of cryptocurrency coins are:
Bitcoin - The first cryptocurrency coin was created in 2009.
Ether - The native coin of the Ethereum blockchain.
Litecoin - An alternative coin to Bitcoin that aims to process transactions faster.
Binance Coin - Created by cryptocurrency exchange Binance and used for paying transaction fees.
EXAMPLE OF TOKENS
Tokens can serve many different purposes and come in a variety of forms. Here are some common examples of tokens:
DeFi tokens
DeFi tokens power decentralized finance applications and protocols. They allow users to participate in activities like lending, borrowing, trading, and earning interest. Some examples of DeFi tokens are:
Aave (LEND): Used for earning interest and borrowing on the Aave lending protocol.
Compound (COMP): Governance token for the Compound lending protocol. Holders can vote on protocol upgrades.
Chainlink (LINK): Used to secure data feeds for decentralized applications built on Chainlink's Oracle network.
Governance tokens
Governance tokens give holders voting rights over how a protocol is governed and upgraded. Some examples are:
COMP (Compound) - mentioned above
Maker (MKR): Governance token for the MakerDAO stablecoin protocol.
Yearn.finance (YFI): Governance token for the Yearn.finance yield farming aggregator.
Non-fungible tokens (NFTs)
NFTs represent unique digital assets like art, collectibles, and in-game items. Some examples are:
CryptoKitties: NFTs representing unique digital cats that can be bred and traded.
CryptoPunks: Early NFT project featuring 10,000 unique pixel art characters.
NBA Top Shot: NFTs representing NBA video highlights and collectibles.
Security tokens
Security tokens aim to represent traditional financial assets like stocks, bonds, and real estate on the blockchain. Some examples are:
tZero: Security token trading platform for digital securities.
Polymath: Platform for issuing and trading security tokens.
SUMMARY
This article explains the distinction between coins and tokens using the story of two friends, Anmol and Anubhav, buying a motorbike. Just as Anmol and Anubhav's responsibilities differed, creating coins and tokens also involves varying levels of expenses and requirements. Coins require substantial investments for development, blockchain architecture, and compliance, while tokens can be built on existing blockchains like Ethereum. The article also discusses the reasons for creating coins and tokens, their pros and cons, and provides examples of both. Coins offer more control but come with higher costs and technical challenges. Tokens offer customization and potential value, but security risks and regulatory uncertainties must be managed. The definitions of coins and tokens are clarified, and various types of tokens like DeFi tokens, governance tokens, NFTs, and security tokens are presented.