Even though all coins are technically tokens, not all tokens are coins.

Essentially, a coin and a token are fundamentally the same. Both of them have value and can be used for payments. Coins can be swapped with tokens and tokens can be replaced with coins.

Cryptocurrencies are represented both as coins and tokens. So where does the difference occur and what are the definitions of these two?

The most significant difference between tokens and coins is that coins operate on their own blockchain. In other words, they have an independent blockchain.

The second most significant difference is the utility. There are certain things you can do with tokens and not with coins. Also, some marketplaces will accept coins and not tokens.

Let's have a deeper look into the functions of each

What is a Coin?

A blockchain can be defined simply as a database which keeps information in digital format and shares it between the nodes of a computer network. Blockchains are used to maintain a secure and decentralized record of transactions.

As mentioned before, coins operate on their own, independent blockchain. The blockchain the coin belongs to keeps track of all transactions that are made with its resident coin.

To put it simply, Ethereum has its own blockchain and when you send someone ETH, the transaction record is kept on the Ethereum blockchain.

Similarly, when you send or receive Bitcoin, the transaction will be kept on the Bitcoin blockchain.

Another quality of the Coin is that it is designed to be used as a currency. How? The reason Bitcoin was created in the first place was to find an alternative to the traditional monetary system. The first followers of Bitcoin, who have started buying the cryptocurrency in its early days, often define themselves as ‘anarchists’ .

Bitcoin was created as a tool against the governments as well as the traditional banking system and all the regulatory services around these systems. The most significant quality of Bitcoin is its transparent and anonymous nature and other coins, such as ETH or Litecoin, were inspired by this.

When we say that coins are designed to be used as a currency, we mean that you can today use these to purchase products and services from many well-known companies, including Amazon, Microsoft, and Tesla.

But it’s not just companies – there also are governments which have accepted crypto coins as their official currency or are accepting payments via cryptocurrencies. Canada, Australia, El Salvador are only a few of them.

Last but not least, Crypto coins can be mined! What does this mean? Crypto coins can be earned in a couple of ways. One of them is traditional mining, which uses the Proof of Work (PoW) system. First, let's explain Proof of Work and how it works without getting into too many technical details.

PoW functions on the Bitcoin network. As we have explained the blockchain earlier, all transactions made on this chain are recorded and saved on it and these transactions can be displayed by anyone on the chain. This is the foundation for the decentralized and transparent nature of the blockchain. One key objective is to prevent any alterations that might happen. As the blockchain is public, any alterations can be rejected by any user. In other words, users are able to determine if there is any tampering. And the way users identify tampering is through hashes, which are long strings of numbers that serve as Proof of Work.

With Proof of Work, miners compete against each other to solve complex problems using energy-consuming and powerful computers via trial and error. The first miners to solve the problem and authenticate the block can add new blocks of transactions, and they earn digital currencies for their work.

The other method to earn crypto coins is through the Proof of Stake (PoS) method.

The Proof of Stake method works with staking, where the miners have to stake digital currency before they can work on validating the transactions. With this method, a miner who wants to validate blocks will have to provide more coins on stake. More coins will give them more power to validate transactions.

Both methods have their Pros and Cons, but that's a topic for another article`s.

What is a Token?

Because of the wide use cases and the domination of Bitcoin and Ethereum in the cryptocurrency market, we have another word to describe all the other ‘coins’: a token.

Interestingly enough, these ‘coins’ are also described as ‘altcoins’.

Even though Bitcoin and Ethereum are also technically tokens, usually a “token” describes any cryptocurrency except Bitcoin and Ethereum.

Notably, decentralized finance tokens such as Chainlink, Aave or Uniswap operate on other blockchains, mostly on Ethereum.

The most significant feature of the coin is that they have their own blockchain and they operate on this blockchain. Crypto tokens, on the other hand, run on other coins' blockchain.

Another important difference between tokens and coins is what they are designed for. As mentioned before, crypto coins represent digital money. Tokens, on the other hand, can represent assets or ownership of items such as shares in a company.

A token will differ from a coin also from the point of view of liquidity –a token will generally not offer the same liquidity a coin would. This is also because of the restrictions on where and how you can use and spend a token.

Different Types of Tokens

DeFi tokens: DeFi (Decentralized Finance) refers to financial applications and projects in the public blockchain space. Applications and projects under a DeFi protocol are peer-to-peer protocols developed on the public blockchain. Defi apps offer lending, borrowing, saving, insurance and trading of financial tools.

Most DeFi applications are using the Ethereum network, but many alternative public networks are also in development.

PancakeSwap, Fantom, Chainlink and Aave are some examples of DeFi tokens or platforms.

Governance tokens: These are specialized DeFi tokens which provide their holders a say or possible monetization opportunities in the future of a protocol or app, including gaming projects. Most gaming projects use their governance tokens as a monetization mechanism inside the gameplay. These projects work as DAOs (Decentralized Autonomous Organization) and do not have centralized authorities.

Non-Fungible Tokens (NFTs): NFTs represent ownership to a one-of-a-kind digital or real-world assets such as real estate; they enable the identification of ownership and can be transferred between token holders.

Security tokens: Security tokens are used to replace traditional securities such as stocks, shares and bonds. The need for security tokens arose due to the incorporation of traditional securities into the blockchain. Digitized shares and bonds can also be used in online trading, therefore there is no more need for a middleman or broker.

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