The world of cryptocurrencies is attracting more and more investors. However, it requires knowledge of at least the basic terms used every day in this specific industry. One of the most important are coins, altcoins and tokens – these, although often confused with each other, are significantly different. We explain what they are and what characterizes them!
Coins – what are they?
Coins, which are cryptocurrencies, have no physical form. Instead, they have a specific value, so they can be called virtual or digital money.
The primary feature of coins is that they operate on their blockchain, a digital ledger of transactions. The blockchain keeps track of all transactions that involve its native crypto coin. For example, when paying someone using Ethereum, the bill goes to the Ethereum blockchain. Every completed transaction is protected by encryption and available to every network member.
Altcoins – what are they?
In the world of cryptocurrencies, there is another term close to the presented coins. It is altcoins – this term, formed from the combination of the words alternative and coin, is used to describe the so-called alternative coins. Altcoins are any new currency created after Bitcoin, which dates back to 2009. Currently, there are more than 6,000 different altcoins on the market, and their number is constantly growing. The most popular alternative coins with the largest market capitalization include:
- Ethereum (ETH),
- Polkadot (DOT),
- Ripple (XRP),
- Tether (USDC),
- Litecoin (LTC).
What are tokens?
Coins are mistakenly associated with tokens. Unfortunately, many people use this term without being fully aware of what they actually are. According to the accepted definition, tokens are digital units representing a specific value limited to a particular concept. Tokens are usually generated from cryptocurrencies based on blockchain technology. The process of issuing virtual tokens is called tokenization. Due to the function that tokens perform, we can distinguish two basic types of tokens – exchangeable and non-exchangeable.
Belonging to the group of exchangeable tokens, utility tokens, which are created on a new protocol and act as a means of payment, are used in loyalty programs, companies rewarding employees, and cryptocurrency projects. A specific group of tokens are stablecoins – utility tokens created on blockchains of various cryptocurrency projects. They are characterized by minimal price volatility – their value corresponds to “stable” reserve assets.
Security tokens – despite their name, they represent financial value in the form of shares, bonds or options. For example, they can represent a share in a company, voting rights, a unit of value or all three simultaneously. Payment tokens, on the other hand, are used to make payments. Non-transferable tokens – NFTs, also known as collectable tokens, have gained popularity in recent months. They refer to unique tangible or intangible items, including virtual artwork and real estate.
Tokens do not have their blockchain. Instead, they operate on the blockchains of other cryptocurrencies, such as Ethereum. Most often, tokens are created and distributed through the standard ICO (Initial Coin Offering) process, which involves crowdsourcing to fund project development.
Cryptocurrencies vs altcoins vs tokens – what makes the difference?
Cryptocurrencies and altcoins are virtual currencies. They are mainly used to facilitate digital payments. The term tokens are sometimes used interchangeably with cryptocurrencies, including altcoins. While they may seem like the same thing to many people, the differences between the two are significant – they stem from the way one and the other work. Cryptocurrencies, such as Bitcoin and the alternative currencies that came after it use blockchains created for their purpose. A given cryptocurrency is the base coin for that blockchain. Tokens, by contrast, are based on off-the-shelf platforms. Some of them, including Chainlink (LINK) and Uniswap (UNI), are issued using the Ethereum network. Token transfer fees are charged in the native cryptocurrency of the blockchain they use. The uses of tokens are also different. Unlike coins (including alternative ones), primarily a means of payment, tokens can serve several other functions.
The two terms are confused mainly because both tokens, cryptocurrencies, and altcoins are devoid of physical form. Tokens, like virtual currencies, can be stored in virtual wallets that can be accessed with a private key. However, that’s where the similarities end.
So how do you quickly distinguish a token from a coin or altcoin? We deal with coins and altcoins when they are based on their network. If they are dependent on other platforms, they are instead tokens. Digital currencies are primarily created through the blockchain. On the other hand, Tokens are multi-functional tokens that use the blockchain.