Cryptocurrency Tokens vs Coins: What's the Difference?

23 Apr 2019

Cryptocurrency-based tokens are typically issued on blockchain or distributed ledger technology (DLT)-based platforms and they usually represent fungible and tradeable digital assets. Unlike cryptocurrency coins, which are developed for the sole purpose of being used as a medium-of-exchange (MoE) and/or a store of value (SoV), tokens are created in order to fulfill another purpose - besides simply functioning as a form of monetary exchange.

Although commonly used terms in the crypto sector such as digital currency, cryptocurrency,  and altcoins have fundamentally different definitions or meanings, they are often used incorrectly or in an inappropriate context, even by industry experts. While those who closely follow and understand crypto-related technology and concepts may not necessarily be confused by the incorrect use of basic terminology, newcomers to the digital asset space might find it challenging to grasp new ideas.

Ethereum, Nxt Platform Give Birth To Crypto-Based Tokens

Before the introduction of utility tokens such as Binance Coin (BNB), the world’s first coin was launched using the Bitcoin protocol, which was authored by Satoshi Nakamoto, the pseudonymous inventor of the world’s most dominant cryptocurrency. After Bitcoin (BTC) came other major cryptocurrencies including Litecoin (LTC) and Peercoin (PPC), among others.

However, it was not until late 2013 that crypto pioneers began experimenting with proposing and implementing digital asset platforms that appeared to enhance the functionality of cryptocurrencies beyond serving as a decentralized means of value transfer. While most blockchain industry participants are aware of Ethereum (ETH), the world’s largest platform for building decentralized applications (dApps), the majority of early crypto adopters are also familiar with the contributions made by the developers of the Nxt platform

Crypto Token-Based Economies Began In 2013

For the first time, the creators of Nxt proposed what they considered to be a complete economic system. This new transaction system was implemented using Nxt tokens - instead of using coins. The core infrastructure through which Nxt tokens are exchanged is based on Nxt platform’s account ledger. As explained on Nxt’s official website, the Nxt ledger can be accessed through the Nxt software client and it allows users to be “tagged,” or named, so that other platform users can recognize who they’ve transacted with.

Nxt tokens can be exchanged through the cryptocurrency platform’s built-in peer-to-peer (P2P) or decentralized asset exchange (DEX). Nxt tokens can also be used to avail services associated with the Nxt Data Cloud, which is a decentralized online storage space. This added utility to crypto-based tokens makes them useful beyond serving as strictly a method of payment.

Basic Attention Token (BAT): Experimenting With New Web Monetization Methods

More recent examples of token-based economies include the newly proposed online content creation incentivization model developed by the creators of the Basic Attention Token (BAT).

BAT token is primarily used to pay, or reward, content creators for their work. This type of incentivization scheme is fundamentally different from the traditional web monetization model that relies heavily on generating revenue from intrusive advertisements, in order to compensate content producers and pay for other management costs associated with operating an internet-based information resource.

While crypto-based tokenized economies are in their experimental stages of development, they have already been adopted at a relatively large scale in real-world scenarios. For instance, Ether, which is Ethereum’s native token, is used for transacting on a multi-billion dollar blockchain network that can be used to deploy enterprise-grade dApps.

Although ETH is still mainly used by traders and investors to engage in speculative trading and investments, the world’s most valuable token has proven to be increasingly useful as Ethereum’s ERC-20 standard token has now been utilized to launch thousands of initial coin offerings (ICOs).

Crypto Coins Still Dominate The Digital Asset Ecosystem

Despite an increasing number of users adopting tokens, the majority of the crypto market is still dominated by coins including Bitcoin (BTC), which presently has a market capitalization of almost $90 billion - according to CryptoCompare data. Meanwhile, Ether (ETH), the most widely used crypto token, currently has a market cap of approximately $17 billion - which is only one-fifth, or around 20%, that of Bitcoin’s market share.

Other major coins, which are referred to as altcoins, such as Litecoin (LTC), has a market capitalization of $4.7 billion. Some analysts argue that it’s not necessary to have more than one coin because having BTC is sufficient when trying to exchange digital value in a peer-to-peer (P2P) manner. However, a closer examination by other crypto veterans indicates that Litecoin arguably has a unique value proposition because it is one of the most established cryptocurrencies - apart from Bitcoin.

Litecoin Has A Relatively Large, Established Network Effect

Launched in 2011 by its creator Charlie Lee, Litecoin uses the Scrypt mining algorithm as opposed to Bitcoin’s SHA-256 mining protocol. While both Bitcoin and Litecoin are proof-of-work (PoW)-based cryptocurrencies, the latter has often been considered a testnet (testing network) for Bitcoin. This has allowed developers to test how certain technologies, such as Lightning Network (LN) protocol implementations, would work before they’re launched on a much larger network like the Bitcoin blockchain.

At present, transactions involving coins and their aggregate market cap is still significantly larger than the combined market cap of all crypto-based tokens in circulation. However, blockchain professionals including BlockFi’s Zac Prince and crypto pioneer Brock Pierce have argued that token-based economies will represent a much larger share of not just the digital asset market, but also the traditional financial ecosystem.

Token And Decentralized Finance (DeFi) Platforms Allowing Investors To Access New Types Of Liquidity Pools

Moreover, the emerging decentralized finance (DeFi) economy has already grown to capture more than a $400 million market share. Data from DeFi pulse shows that MakerDAO’s Ethereum-based tokens are currently valued at around $360 million. Decentralized finance protocols also represent innovative new ways to access liquidity pools which otherwise may not have been possible.

While it’s still early to accurately predict how widely adopted both crypto tokens and coins will be in the future economy, their respective use cases are being rapidly developed by thousands of blockchain startups throughout the world. Moreover, government officials including European Union (EU) ministers and prominent members of the International Monetary Fund (IMF) now believe cryptocurrencies are not only here stay, but they have also recommended that organizations and individuals start carefully examining how these new assets can benefit the global economy.

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