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Crypto – a simple explanation of the difference between coins and tokens

1. Introduction

In the abstract of the Bitcoin whitepaper published in 2008, Satoshi Nakamoto stated, “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” This publication ignited a revolution in the digital assets space, leading to the emergence of numerous cryptocurrencies. As of September 2024, there are over 13,000 cryptocurrencies in circulation and the global cryptocurrency market capitalization exceeds US$2.3 trillion.

2. Understanding coins and tokens

Cryptocurrencies can be broadly categorized into two main types: coins and tokens. While the terminology can be confusing, understanding the distinction is crucial.

· Coins are the native currencies of Layer 1 blockchains, which operate independently and have their own underlying protocols. Their value can stem from scarcity (e.g., Bitcoin) or utility (e.g., Ethereum).

· Tokens, on the other hand, are built on top of existing Layer 1 blockchains and can derive value from various factors, including the success of the projects utilizing those networks. Tokens often have additional functionalities, such as governance or utility roles.

3. Coins

Coins serve as the native currencies of Layer 1 blockchains. Here are some prominent examples:

· Bitcoin (BTC): the first and most widely recognized cryptocurrency, serving as a store of value.

· Ethereum (ETH): a versatile platform enabling smart contracts and decentralized applications.

· Solana (SOL): known for its high transaction speeds and low fees.

Key features of coins

· Fungibility: each unit of a coin is identical to another (e.g., one Bitcoin is equivalent to another).

· Divisibility: coins can be broken down into smaller units (e.g., a Bitcoin can be divided into 100 million satoshis).

· Portability: coins can easily be transferred across various digital wallets.

· Limited supply: for example, Bitcoin has a maximum supply cap of 21 million coins, expected to be fully mined by 2140.

Coins can function as a medium of exchange or a store of value. Bitcoin is often referred to as “digital gold” due to its limited supply.

Types of altcoins

Beyond Bitcoin, other coins are categorized as altcoins, each offering unique features and improvements. Here are a few types:

1. Stablecoins: cryptocurrencies pegged to stable assets, such as fiat currencies (e.g., USDC, Tether).

2. Privacy coins: focus on user privacy and anonymity (e.g., Monero, Zcash).

3. Utility tokens: used within a specific blockchain to access services (e.g., Binance Coin, Chainlink).

4. Security tokens: digital representations of traditional securities, providing investment attributes like ownership and dividends (e.g., tZero, CURI).

5. Governance tokens: allow holders to vote on decisions in decentralized organizations (e.g., Uniswap, Aave).

6. Memecoins: created for fun or community initiatives (e.g., Dogecoin, Shiba Inu).

7. DeFi tokens: used in decentralized finance applications (e.g., AAVE, Compound).

8. NFT tokens: represent unique digital items like art or collectibles (e.g., ARTB).

9. AI tokens: facilitate transactions within AI networks (e.g., AGI).

10. Gaming tokens: used in online games to purchase in-game assets (e.g., MANA).

4. Tokens

Tokens operate on the infrastructure of existing Layer 1 blockchains, enhancing their functionalities. Unlike coins, tokens:

· Derive value primarily from the economic success of the projects they support, rather than from scarcity.

· Offer diverse functionalities, including governance, utility, and security features.

· Provide unique attributes specific to the applications they enable.

· Can represent assets or bundles of rights to those assets.

Categories of tokens:

· Non-Fungible tokens (NFTs): unique digital assets that cannot be duplicated, allowing for the tokenization of real-world assets and digital ownership of items such as art and intellectual property.

· Stablecoins: though named “stable,” they are generally classified as tokens since they operate on smart contract blockchains. They aim to maintain stable values, typically pegged to fiat currencies like the USD or commodities such as gold. For instance, USDC is backed by actual reserves, ensuring each token is redeemable for a corresponding dollar. In markets like South Africa, various issuers have launched Rand-pegged stablecoins.

· Security tokens: digital representations of traditional investments, enabling benefits like 24/7 trading and fractional ownership, which conventional shares do not typically allow.

· Utility tokens: provide access to specific features within a blockchain network. For example, Ether (ETH) serves as a utility token within the Ethereum ecosystem, facilitating transactions and powering smart contracts. Other examples include MakerDAO (MKR) and Basic Attention Token (BAT), each with distinct roles in governance and payment systems.

5. Market context

The cryptocurrency landscape is rapidly evolving. The proliferation of digital assets raises important questions about regulation, security, and market dynamics. Keeping abreast of current developments, such as regulatory impacts on cryptocurrencies and the rise of new blockchain technologies, is essential for understanding the space’s future.

6. Conclusion

In summary, while both coins and tokens play vital roles in the cryptocurrency ecosystem, they serve different purposes and derive value from different sources. Understanding these distinctions is crucial for anyone looking to navigate the complexities of digital assets effectively.