Simple Explanation: Coins vs. Tokens

In the cryptocurrency world, there are different types of digital currencies. Most people will say ‘coin’ when referring to any digital currency, but it is just a term that stuck. In the cryptocurrency industry, there are two types of cryptocurrencies. The most general division used to describe units on the blockchain is coins and tokens.

For easier visualisation about cryptocurrency type, jump to the table at the bottom.

Speaking broadly, digital currencies are a type of currency with no physical form using cryptography. Representatives of such currencies would be normally called digital tokens, but we call them cryptocurrencies. Their purpose is, like any other means of payment, to be used to buy or sell goods and services. The main advantages of a digital currency (cryptocurrency) are decentralisation, censorship resistance, and a borderless payment system.

Bitcoin and Altcoins

The first-ever digital currency in use is bitcoin, which was created as a censorship-resistant medium of exchange in pace with technological progress and with the properties of a traditional coin. Bitcoin is a protocol and a currency. That is, the Bitcoin protocol uses a distributed database, a record of transactions called the blockchain, and the bitcoin currency is used for transactions on the blockchain. Bitcoin has the word ‘coin’ in its name, revealing its characteristics, and the definition of a coin in crypto is best defined by bitcoin itself. As a matter of fact, coins have a native blockchain.

Not all digital currencies are coins. Shortly after bitcoin launched, alternative versions started to emerge. These alternatives are called altcoins, which is short for ‘alternative coins,’ and they are often the result of a bitcoin hard fork and not necessarily a means of payment, like a coin in the original sense. Altcoins can have their own blockchain but are not recognised as a payment mean. Some are meme coins, and others are privacy coins. Some examples in chronological order are litecoin, digibyte, dogecoin, XRP, dash, bytecoin, monero, stellar, and finally, ether.

Tokens

Before ether, other cryptocurrencies weren’t all meant to be like bitcoin but were meant to serve as a transmitter on the chain, such as XRP. In the first mass cryptocurrency-adoption wave, XRP was thought of as a coin, and it remains a top cryptocurrency by market capitalisation, regardless of its utility. Crypto tokens as we know them today started after ETH, a cryptocurrency launched in 2015 that was intended to be not a unit of currency but a unit of computational cost on the Ethereum network. Ethereum was built to serve as a global computer, and ether as an incentive for the network to operate. Ethereum opened the doors to crowdfunding and a solid platform for hosting other newly created digital tokens. Tokens became tightly connected to ICOs, so-called token sales that crypto projects used to raise funds.

Tokens are usually hosted on another blockchain, are 100% pre-mined, and are presumed to be a second-layer application. Tokens are a set of rules encoded in smart contracts, and creating them is costly. For easier classification and creation, Ethereum proposed a token standard, ERC-20 and ERC-721, a standardised smart contract. That is why token transactions are, by definition more, expensive than coin or native token transactions—a smart contract call is included in the transaction fee. However, Ethereum is not the only network deploying tokens. Other blockchains, such a Lisk, Waves, Stratis, EOS, and NEO also employ tokens.

Tokens have broad functionality, and we can best classify them according to their use as either utility tokens, security tokens, transactional tokens, or governance tokens. A specific example of tokens with ‘coin’ in their name are stablecoins.

	Transactional tokens serve as a unit of account. They come the closest to cryptocurrency coins. A use case is TRX, which launched as an ERC-20 token and later evolved into a coin.
	Utility tokens usually use existing blockchain infrastructure and have low issuance and management costs. Utility tokens are used to pay for the services proposed by the protocol—for example, 0xcert’s ZRX or Brave browser’s BAT.
	Security tokens are a product of regulator intervention. The word ‘security’ in their name implies the securities existing in traditional instruments, such as bonds, options, and shares. Security tokens represent tokens for financial instruments recorded on the blockchain, but this type of token is largely avoided due to the potential tax implications.
	Governance tokens are still a good topic for discussion, but their architecture aims for on-chain governance—for example, to securely vote on protocol upgrades. An example is ZRX
	Stablecoins are ‘more stable’ tokens and are the latest development in crypto-economics. They are cryptocurrencies pegged to the traditional currency, maintaining a ratio of 1:1. The most-traded stablecoin is tether (USDT), and because of its properties, it sometimes surpasses bitcoin in daily transactions. Other stablecoins are DAI, EURS, and PAX.

Coins vs Tokens

In emerging sectors, such as the cryptocurrency market, it is hard to describe newly created concepts and bring the technology closer to the users, so the existing monetary expressions are reused. Of course, the terms take on new meanings later on. The same has happened with crypto. The words ‘coins’ and ‘tokens’ are used interchangeably, even though there are differences between the two.

Coins have their own blockchain, and their circulating supply usually increases. Tokens, on the other hand, are implemented on top of another chain with a decreasing supply of tokens—for example, DTR. Note that coins usually act as a form of money, and tokens can be used for various purposes.

The table of cryptocurrencies on our website is sorted by type.