Crypto coins and tokens: What’s the difference?
The beginner’s guide to crypto coins and tokens
If you're new to the crypto industry, you might think that "coins" and "tokens" are synonymous terms, interchangeably used to denote digital assets.
However, the terms coins and tokens broadly represent separate types of cryptocurrency. Each of these categories of cryptoassets offers its own unique qualities and use cases that distinguish it from the other.
It's useful to understand the difference between these two interchangeable buzzwords, particularly when trying to understand complex crypto concepts.
What is a crypto coin?
A crypto coin is the native asset of a blockchain protocol. This means the crypto coin serves as the medium of exchange for all transactions or smart contracts executed on that blockchain. Crypto coins exist on the base layer of a corresponding blockchain, rather than on a decentralized application (dApp) built on top of the blockchain.
Because they are the native cryptocurrency of a blockchain network, many think of these coins as "Layer 1" cryptocurrencies. While several different networks, applications, games or other types of protocols may run on top of these Layer 1 protocols, the Layer 1 chains serve as the foundation upon which other applications, and their associated crypto tokens, are built.
Crypto coins typically bear the same or a similar name as their respective blockchains. For example, the bitcoin cryptocurrency exists on the Bitcoin blockchain and the ether cryptocurrency exists on the Ethereum blockchain.
How do crypto coins work?
Blockchain users can use crypto coins in a variety of ways. Some use them as a medium of exchange for transferring value electronically in a peer-to-peer way. Others use them as a store of value that is not subject to the same types of controls as government backed currencies. Ultimately, crypto coins act similar to traditional currency or precious commodities like gold.
New coins enter into circulation in the form of validator rewards from blockchain consensus mechanisms like proof-of-work (PoW) and proof-of-stake (PoS). These processes require network users to either "work" to mine coins through the PoW mining process or lockup coins via staking to receive rewards through the PoS process.
What are crypto tokens?
Crypto tokens are digital assets built and deployed on top of a Layer 1 blockchain. In other words, crypto tokens are digital assets that are native to the products and services built on top of the so-called Layer 1 blockchains associated with crypto coins.
Ethereum is by far the most popular Layer 1 blockchain used for creating and launching crypto tokens. However, several other Layer 1 blockchains exist and serve as the foundation upon which crypto tokens can be built and deployed.
For example, within the Solana ecosystem, a variety of decentralized applications, games and services exist. Although each of these exist within the Solana ecosystem, they all have their own unique crypto token that serve a unique purpose within the given application.
Some examples of crypto tokens that exist within the Solana ecosystem include:
Tokens tend to have a broader range of functions than crypto coins and are responsible for expanding the breadth of decentralized services powering the blockchain ecosystem.
Many stablecoins, for example, are crypto tokens and represent digital assets that developers peg 1:1 to fiat currencies. Security tokens, utility tokens, governance tokens and non-fungible tokens (NFTs) are also examples of different types of crypto tokens.
How do crypto tokens work?
Developers build crypto tokens on top of other blockchains by using simplified development tools and adhering to specific token standards. Each Layer 1 blockchain has their own unique token standards.
Token standards set out specific smart contract functions that a token must be able to perform. These standards provide compatibility with the underlying blockchain and its ecosystem of dApps and services.
Ethereum developers were among the first to release their own token standard back in 2015. The most common Ethereum token standard is ERC-20, where ERC stands for "Ethereum request for comment."
ERC-20 sets out the smart contract specifications for creating and deploying fungible tokens on the Ethereum blockchain. This standard quickly became the most popular way to easily create cryptocurrencies without having to start from scratch.
To this day, developers have launched thousands of projects using the ERC-20 token standard. Ethereum has since released a further twelve token standards for creating a range of different types of crypto tokens, including multiple standards for non-fungible tokens (NFTs).
Unlike crypto coins, developers mint tokens all at once, and the maximum supply is created in one go. Developers can then programmatically distribute these tokens through various methods including token offerings. Examples of coin offerings include initial coin offerings (ICOs), initial exchange offerings (IEOs), and initial DEX offerings (IDOs). Developers can also use airdrops, micro tasks and other distribution methods to release tokens into the circulating supply.
As a result, launching a crypto token on top of a Layer 1 blockchain is often seen as a much faster way of securing seed capital for crypto startups. That is because the developers are able to leverage much of the already built and proven technical infrastructure of a Layer 1 blockchain, rather than needing to build a complete protocol from scratch. Unfortunately, some dishonest developers have abused this avenue in the past and the launch of new tokens can be undermined by a variety of highly sophisticated scams.
During the ICO boom of 2017, developers leveraged the pre-built infrastructure of Layer 1 blockchains to quickly spin up hundreds of fake projects. Their goal was to capitalize on a wave of speculative crypto investments rather than build truly innovative decentralized products and services. Oftentimes, these sham projects consisted of nothing more than a landing page, a vague whitepaper, and a fake team.
As always, early stage investing comes with risk and you should understand the potential issues with investing in crypto token offerings.
Summary of crypto coins and tokens
The difference between a coin and a token may seem to be immaterial since both have value and both offer utility. But it's important to understand the various methods we have to mine, trade, and use these forms of cryptoassets.
Cryptocurrencies come in all shapes and size, so understanding them is a key part of learning about the crypto industry. You can keep learning about crypto with the Kraken Learn Center, or you can check them out for yourself with Kraken.