What is a Token: Fundamental Differences Between Tokens and Cryptocurrencies

Understanding what a token is is essential for those looking to explore the world of cryptocurrencies. The confusion between the terms “token” and “coin” is common, but these two categories have distinct characteristics that set them apart. While tokens can function as bonuses, reward points, or advantages within a game or app, digital currencies act as substitutes for physical money in direct transactions.

Coins: Digital Currencies with Their Own Blockchain

Cryptocurrencies, or coins, are native assets that have their own blockchain. Bitcoin, Litecoin, and Ether are classic examples of this category. Each of these digital currencies exists and operates independently on its own distributed ledger system.

The primary function of a coin is to facilitate peer-to-peer transactions. All coins exist as data recorded in a global decentralized database. This ledger system, known as blockchain, maintains a permanent and verified record of all transactions, constantly validated by computers spread across the worldwide network.

Tokens: Assets Built on Existing Blockchains

Unlike coins, tokens are created and developed on existing blockchains that already operate. The most common blockchain platform for creating tokens is Ethereum, thanks to smart contract technology that facilitates their issuance and management.

The functionality of a token goes far beyond simply being a monetary value for exchange. Although they are created with support from a currency (like Ether on Ethereum), tokens are not real cryptocurrencies. They represent various types of assets and have specific utilities within their ecosystems.

Token Classification: The Main Types

There are several categories of tokens, each with distinct characteristics and purposes:

Security Tokens are best known for their similarity to futures contracts, initial public offerings, and other trust instruments. Most tokens issued through ICOs (Initial Coin Offerings) fall into this category. When someone acquires a security token, they are investing resources with the expectation of financial return, and these assets are regulated similarly to traditional securities.

Equity Tokens are rarer in the market. These tokens represent shares or ownership stakes in the issuing company. Few companies have attempted to launch ICOs of this nature because regulatory uncertainty still exists regarding which practices are legal and which are not.

Utility Tokens are developed for specific and unique functions within applications and platforms. Their main goal is to provide access to a particular product or service. They are rare because it is generally expected that their value will increase as their supply becomes limited.

Payment Tokens are exclusively used to make payments for goods and services. Their functionality resembles that of cryptocurrencies, but they remain as tokens and not genuine cryptocurrencies.

How Coins and Tokens Differ in Functionality

In summary, the main distinction is clear: coins are native assets with their own blockchains, while tokens are built on existing blockchains like Ethereum, NEO, or Waves. Digital currencies typically function as money, but some have other uses beyond that. They can power decentralized applications, serve as validation mechanisms within a network, or fuel smart contracts and token transactions. Understanding these differences is essential for safely navigating the crypto market and identifying what type of token or coin you are analyzing.