#DefiFridays: Defi Tokens and Coins: What's the Difference?
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Getting started in the cryptocurrency industry can be difficult and intimidating. Although you may be familiar with Bitcoin, are you aware of the thousands of other coins and blockchain projects that exist?
It's simplest to divide cryptocurrencies into two distinct categories: coins and tokens, to gain a better understanding of the crypto markets. Almost everyone who has ever used cryptocurrency might once have confused a token with a coin.
We outline the key difference between them and review stablecoins as coins or tokens!
Token vs Coin: What is the Difference?
The terms "crypto coin," "crypto token," and "cryptocurrency" are often used interchangeably, but they are not the same thing. Both coins and tokens use the blockchain, but there are some key differences between the two.
We often refer to crypto coins as a type of digital currency that is native to a blockchain. This means they own and run on their unique blockchain. Coins offer dual functions of serving as a medium of exchange and storing value.
Crypto tokens are digital assets that can represent a physical object or grant access to platform-specific features and services. They are built on top of an existing blockchain using smart contracts.
Coins and tokens share a lot of fundamental similarities. Both are capable of processing payments and represent value. Coins can be exchanged for tokens and vice versa.
What are Crypto Coins?
Crypto coins are cryptocurrencies that own and run on their unique native blockchain. BTC is the cryptocurrency used on the Bitcoin blockchain. ETH powers the Ethereum blockchain. SOL facilitates transactions in the Solana blockchain.
Like traditional currencies, these crypto coins are primarily intended to serve as a store of value and a medium of exchange. Because of this, the term “cryptocurrency” is another name for crypto coins.
The process by which coins are created is another unique feature. Most cryptocurrencies are earned through a proof of stake (PoS) mechanism or mined using a proof of work (PoW) consensus mechanism.
What are Coins used for?
The first cryptocurrency, Bitcoin, was developed to serve as a substitute for traditional fiat currencies.
Crypto coins function in the same manner as paper money and metal coins used for exchange. As a result, we use them as a medium of exchange in the same way as a legal tender, such as US dollars, Naira, Pounds or euros.
They are often used:
As a store of value
To exchange for another cryptocurrency
As payment for goods and services
To facilitate transfer of funds
Also, some cryptocurrencies use smart contract technology to provide extra specialized features. $DASH, for example, is an altcoin that functions as a cryptocurrency and also grants its owners voting rights in a decentralized autonomous organization (DAO).
Some Popular Crypto Coins
Bitcoin (BTC); the first and largest cryptocurrency in the world, was introduced in early 2009 by the mysterious "Satoshi Nakamoto."
Ethereum or Ether (ETH), the second largest cryptocurrency which has offer special features on its blockchain. Ethereum enables the deployment of thousands of blockchain projects and NFTs, due to the development and use of smart contracts. It's viewed as the cornerstone of the blockchain revolution by many.
Binance Coin (BNB), runs a blockchain dubbed “Binance Smartchain”. It is one of the most popular blockchains for the deployment of meme tokens, NFT marketplaces, and other blockchain projects.
What are Tokens?
Crypto tokens are created using blockchain technology, like cryptocurrency coins. But, the major difference is they do not possess or have control over a blockchain. Instead, they are built on top of it and use smart contracts to offer financial services.
While cryptocurrency coins are similar traditional fiat money, cryptocurrency tokens are designed as assets or even deeds. An ownership stake in a DAO, a digital product or NFT, or even a digital item can all be represented with a cryptocurrency token. Crypto tokens can be purchased, sold, and traded like coins, but they are not a form of money.
So, crypto tokens are like coupons or vouchers, while cryptocurrency coins are like dollars and cents.
Types of Defi Tokens
Utility tokens: Designed to offer acces to financial services and other digital products. It is usually platform-specific, represents the decentralized project and developed by the token issuer or project team.
Governance tokens: Designed to offer its holders the right to vote and making decisions in a DAO.
Security tokens: Designed to act like traditional digital securities. They are also treated as a security by many governmental and regulatory organizations.
What are Tokens used for?
The majority of DeFi tokens are designed for use within specific dApps or blockchain-based projects. Tokens, unlike crypto coins, are created and distributed by the project developer rather than being mined. Tokens offer a variety of use cases, once they are in the possession of buyers.
Some Popular DeFi tokens and their Use cases
Filecoin (FIL) and Arweave (AR) offer holders the option of exchanging their utility tokens for the right to store data on their decentralized networks. These projects maximizes the potential of cloud storage by offering decentralized storage services.
Axie Infinity, one of the most popular play-to-earn (P2E) game project on the market Besides its native Axie token (AXS), the project offers a utility token called Smooth Love Potions (SLP). Players can carry out unique in-game tasks by earning or purchasing SLP.
Stablecoins: Are they Coins Or Tokens?
Stablecoins are digital currencies pegged to specific assets usually fiat currency. They have a slightly misleading name because most stablecoins are ERC-20 tokens. This means they operate on the Ethereum blockchain through a smart contract.
So, why are they called “stablecoins”? Their primary purpose as a medium of exchange is indicated by the name.
Take USD Tether (USDT), for example. It is a smart-contract-based stablecoin (i.e., it doesn’t have its own chain and is an ERC-20 token). It is backed by US dollars, held by the company (Tether) that issues the token, to maintain the value of every USDT at US$1.
Summary
Coins and tokens share a lot of fundamental similarities. Both are capable of processing payments and represent value. Coins can be exchanged for tokens and vice versa.
The utility is the main distinction between these two. Tokens can be used for some things that coins cannot. Some markets, however, only accept coins; they do not accept tokens.
Comparing coins to tokens is like comparing investors to traders. This is because all traders invest, but not all investors trade. Keep in mind that the majority of cryptocurrency users typically own both coins and tokens.
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