Coins and Tokens
There are a lot of terms on the cryptocurrency market that are confusing. For example, some people confuse the words “tokens”, “coins” and “altcoins”. We tell you what the difference between them is and why it is important.
If we talk about coins and tokens, the main difference between them is the way they are created. Cryptocurrency tokens are created on the basis of its own blockchain. The blockchain that underlies the coin functions on its own. That is, it is he who confirms all transactions, it is he who ensures the reliability of the coin, it is he who gives the coin value.
Tokens are not created on the basis of their own independent blockchain. Rather, they arise on an existing platform. Sometimes a token transforms over time into an independent coin. When this happens, the token creator launches a new blockchain.
But until that moment, the token functions on the basis of an existing blockchain. Imagine this in the form of a building. Blockchain is always the foundation. It is he who supports cryptocurrency – just as the foundation of a building supports its entire structure.
If you follow this metaphor, then cryptocurrency coin is a new building. He needs his own foundation, and he does not rely on any other structures. On the other hand, a token is a superstructure of an existing building.
To add a new floor to the house, you do not need to re-fill the foundation. You can build on top of what already exists. In principle, this is exactly how the cryptocurrency token works.
Coins, altcoins and tokens
With this design in mind, you can divide cryptocurrency space into two main parts. Firstly, these are cryptocurrency coins, each of which has its own independent blockchain. The main one that everyone knows about is Bitcoin. In particular, it was the creators of Bitcoin who wrote reliable code, thanks to which there is a decentralized registry that allows this cryptocurrency to function.
Since the launch of bitcoin, several more coins have arisen, in fact, branching from the original bitcoin code. These coins have slightly changed the Bitcoin blockchain. These are such coins as Namecoin, Peercoin, lightcoin and others. Since coins of this type originated from the bitcoin code, they are often referred to as “alternative coins”, or altcoins for short.
Altcoins make up a large class of cryptocurrency coins. Secondly, these are tokens. They do not use their own new blockchains. Also, they are not variations of the original bitcoin code. Rather, they are launched based on existing blockchains.
One of the main platforms for creating tokens is Ethereum. There it is incredibly simple to do, and the goal of Ethereum is to ensure that developers and companies create and launch their tokens on the basis of this blockchain.
Coins and Tokens: Why Are They Used
Another important difference between coins and tokens is that they have different applications. Coin value is usually based on their own blockchain. This means that they are interchangeable and can be traded. Cryptocurrency coins can be divided into smaller monetary units, but their value remains constant. As a result, trading in coins is relatively simple.
They can also be exchanged for fiat currencies at an understandable rate. Simply put, cryptocurrency coins are mainly used as currencies. Coin owners can buy goods and services on them. You can also trade coins. Tokens are mainly used in initial public offerings (ICOs).
This is an increasingly popular way to attract funding for new startups. It is arranged this way: the company uses a blockchain, for example, Ethereum, in order to create and launch its own token. Investors can buy these tokens and keep them for profit in the future or for trading.
The company uses the funds received during the ICO to begin work on the project. For token holders, they are, in fact, shares in this company. Sometimes a company can transform a token into a coin. When this happens, token holders exchange their tokens for coins, which can then be used as digital money.
In principle, coins and tokens are similar to each other, since they are all types of cryptocurrencies. Both of them are based on the blockchain. The difference lies in the way they are created. Coins have their own independent blockchains.
Tokens are created on the basis of an existing blockchain. This technical difference may not seem significant to you. However, in most cases, people are interested not in the technical side of cryptocurrencies, but in how they can make money.
And here it is important to understand what the difference between coins and tokens is in terms of their application in the real world and potential. Coins, in fact, are independent currencies. Some users like to pay for their purchases.
Others, “scammers,” invest in coins and wait until they rise sharply in value. Tokens, on the other hand, are usually used to attract start-up capital. Therefore, people who buy and store tokens usually perceive them as an investment in a startup.
Only instead of an IPO does this take the form of an ICO. For many, it has become much easier and more affordable to invest in startups through tokens. If you have just started exploring the world of cryptocurrencies, welcome to AMarkets Trading School: everything a beginner needs to know about the cryptocurrency market and the basics of investments.