What is a coin?
Essentially, coins are digital assets that belong to their own blockchain. Coins are often compared to physical money, but they exist solely in digital form. They are created to be a medium of exchange. Thus, you can use them for purchases and transactions, just like any other currency. Additionally, you can buy coins in hopes that their price will rise and yield profit.
The creation process is what distinguishes coins from tokens. Coins are obtained either through mining via Proof of Work or through staking using Proof of Stake. In PoW, miners receive coins when they find a block and help secure the network. Meanwhile, in PoS, validators contribute to the network by staking their cryptocurrencies.
What is a token?
The main difference between a cryptocurrency coin and a cryptocurrency token is that coins have their own blockchains, while tokens use existing ones. A smart contract on the blockchain generates tokens and defines the rules for their issuance and use.
Tokens can exist alongside the native coin of a blockchain and be used on multiple blockchains. Additionally, they can serve various functions, which is why there are different types:
Utility tokens allow users to play games, access decentralized services, and sometimes leave tips.
Governance tokens give users the ability to vote on proposed changes to the protocol.
Security tokens act as digital analogs of real assets, such as stocks or bonds.
NFTs confirm ownership of items such as art or music through a special marker on the blockchain.
Coin vs Token: Key Differences
Knowing whether an asset is a coin or a token can give you insight into its purpose in the ecosystem and aid in research for investments. We have already established the main difference, but there are other factors that distinguish them:
Functionality: Coins are primarily used for transactions, while tokens can be used for governance, access to services, staking, and other purposes.
Creation: Tokens are easier to create than coins, as they can utilize existing models, such as the ERC-20 standard on Ethereum. Issuing a coin requires the development of a new blockchain, which is a complex and resource-intensive process.
Technical role: A coin is the foundation for the operation of a blockchain, whereas a token is used for applications or functions built on the blockchain.
Dependence: Coins depend on the performance of the blockchain, while the success of tokens may depend on the popularity of specific applications and projects.
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