Some people will use either name to refer to all the digital assets currently available. The differences between cryptocurrencies and crypto tokens are fundamental. Crypto tokens aren’t meant to be standalone currencies, but rather to represent a certain value, utility, or function within a specific blockchain network or platform.
- A fingerprint or iris scan can prove that you’re the owner of the data received.
- Unlike centralized exchanges (CEXs), DEXs do not require a trusted third party, or intermediary, to facilitate the exchange of cryptoassets.
- And UNI is easy to swap with any other ERC-20 token, just like the SAND we mentioned earlier.
- But it’s not just exchanges either, tokens also made way for more complex platforms supporting swapping, lending, and even crypto derivatives.
In fact, thanks to the creation and facilitation of smart contracts, the most common blockchain token platform are Ethereum. Tokens that are built on the Ethereum platform are known as ERC-20 tokens. Running nodes costs money, both in the form of hardware and electricity. So blockchain networks need a financial reward system to incentivize people to operate nodes.
It uses UNI as its native token, an ERC-20 supported by the Ethereum blockchain. And UNI is easy to swap with any other ERC-20 token, just like the SAND we mentioned earlier. On a very simple level, coins offer the basis of a secure network, while tokens allow for blockchain apps and platforms to build upon that base. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.
A key feature of coins is that they are designed to be used as a medium of exchange. That means you can use them to purchase goods and services just like any other currency. In addition to being used as a payment method, coins can also be used for speculation. That is, you can buy coins in the hopes that their price will go up to sell them at a profit. Crypto coins and tokens have a variety of use-cases and there is, of course, some crossover, with both coins and tokens having their uses as an exchange of value. This means that when analyzing them, you’ll often look at similar metrics; their use, active holders, value, allocation, market capitalization and so on.
DeFi tokens are permission for a user to access certain services of an application or an entire organization, also built on a blockchain. Good examples of this type of token are DeFi Coins or DeFi Yield. Stablecoins are a form of payment tokens whose price, in practice, should remain stable over time. Such tokens are usually backed by real assets or funds (such as short-term government bonds, fiat currencies, commodities, real estate, and securities) or other crypto assets.
Operate on their own blockchain
Anyone can make their own custom token on one of these platforms. Let’s use Bitcoin as an example to make sure you understand the above statements. For more on the differences between PoW and PoS, read Proof of Work vs Proof of Stake. However, it can be difficult to distinguish between a scam token and one representing an actual business endeavor.
This distinction is an important one for anyone hoping to understand cryptocurrency on a deeper level. At first glance, it may seem as though all cryptocurrencies are essentially the same. Lastly, coins are often the base currency of a blockchain project. This what are different types of tokens in blockchain means that they’re more likely to be used to buy actual goods and services. Beyond those initial use cases, each blockchain may have differing use-cases for their native coin though. Each network has its founder and some have completely opposite use-cases.
They can also take the form of algorithmic stablecoins (with an algorithm used to stabilize the volatility of the token’s value). While some of these stablecoins may qualify as financial instruments or electronic money according to some financial regulators, others may go beyond regulation and have a different status. To explain in simple terms, a crypto token is a record on a blockchain that confirms rights to something, such as the ownership of an asset. In this sense, cryptocurrencies are also tokens, but not all tokens are digital currencies.
Why do Web3 projects usually issue tokens instead of cryptocurrencies?
They are a bit of a misnomer, as most of them are actually ERC-20 tokens (i.e., they operate on the Ethereum blockchain through a smart contract). The name lends itself to their primary function of being a medium of exchange. Let’s start with the most popular crypto coin as of yet, Bitcoin. This coin exists as a censorship-resistant store of value and medium of exchange that has a secure, fixed monetary policy. The native token of Bitcoin, BTC is the most liquid cryptocurrency in the market. It has both the highest market cap and realized market cap in the cryptocurrency sector.
Terms are agreed upon by the parties involved, and the code is written to execute them. Distinguishing coins, altcoins, and tokens is a simple matter of definition. But those definitions aren’t universally accepted, and some are subject to change as the crypto universe evolves. While crypto-assets represent an important technological, financial, economic, and computer science innovation, investing in them should be considered risky. The original meme coin that started it all is Dogecoin (DOGE), which was branded around the “doge” Shiba Inu dog meme.
Token vs Coin: Their Purpose
If you’re considering crypto tokens as an investment, be sure to do your research on the team or company offering them. Crypto coins are designed to be used as currency, while crypto tokens are intended to represent an interest in an asset and facilitate transactions on a blockchain. All assets, be they securities, stocks, or real estate, have a property of value. Financial assets are easier to represent, meaning they can have different values depending on the assets they will be represented. It also means designated assets can be easily exchanged, transferred, or converted.
On the other hand, tokens are currencies (or digital assets) supported by a specific blockchain, rather than powering their own. They can hold onto them to represent a stake in the cryptocurrency company or for an economic reason—to trade or make purchases of goods and services. As a practical example, decentralized storage provider Bluzelle allows you to stake your tokensto help secure its network while earning transaction fees and rewards.
Today’s cryptocurrency world is characterized by a wide variety of coins and tokens, from payment cryptocurrencies such as Bitcoin and ETH to well-known NFTs. Below are the most common types of crypto tokens, each with its own uniqueness. They are created on blockchains that already exist, and typically represent an asset or provide the holder a specific service or access to an application.
A blockchain is a type of distributed database, meaning it’s hosted (or “lives”) on computers all over the world. These computers—which can even be in someone’s home—are referred to as “nodes” of the blockchain. This distribution of data (core to the new version of the Internet called “Web3”) means the cost of operating nodes is distributed as well.
These changes were intended to make Litecoin a faster and cheaper alternative to Bitcoin’s base layer transactions. Please note that the availability of the products and services on the Crypto.com App is subject to jurisdictional limitations. Crypto.com may not offer certain products, features and/or services on the Crypto.com App in certain jurisdictions due to potential or actual regulatory restrictions. 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 that issues the token, to maintain the value of every USDC at US$1. No matter what your goals are, it’s essential to do your research before investing in any cryptocurrency.
This incentivizes people and groups to mine on their own, helping to keep the network decentralized. Lastly, tokens can offer utility beyond simply https://www.xcritical.com/ being a tradable asset. For example, some tokens can be used to vote on governance decisions or access certain features of a blockchain platform.