Infographic images by Dr. Shermin Voshmgir, Valentin Kalinov via BlockchainHub.net. See original infographic here.
Tokens and coins: What’s the difference?
Tokens and coins are often discussed as interchangeable concepts, but there are key differences. All tokens and coins are cryptocurrencies, but not all coins are a currency in the sense of being money.
A token represents a certain asset or utility, this can be other cryptocurrencies, but could be anything worth trading, usually a commodity. Basically, a service or unit of service that can be bought and sold. They are an essential component to the incentive protocol of the “permissionless blockchain”, in that they encourage a group of strangers to organize themselves around a specific blockchain or decentralized app.
Tokens are made and distributed through an Initial Coin Offering (ICO), which is like an Initial Public Offering (IPO) for stocks, but with some distinctions. An ICO is similar to crowdfunding, as a short campaign with no regulatory oversight. Most tokens are built on the Ethereum (ETH) platform and operate on top of a blockchain that can facilitate the creation of applications.
Coins are also known as “altcoins”, which means they are an alternative to Bitcoin (BTC), the biggest cryptocurrency. Most altcoins are derived from Bitcoin as a “fork”, meaning it was built on Bitcoin’s open-source code, with some changes and features to make each new coin distinct. Encryption techniques regulate the generation of units and verify the transfer of funds.
Coins that are not derived from Bitcoin created their own blockchain, such as: Ethereum, Ripple (XRP), and Omni (OMNI).
Digital Currency
Cryptocurrencies are interchangeable stores of value that can be transferred peer-to-peer (P2P) without going through a bank or regulatory middleman.
Unlike the traditional stock market, tokens do not grant any ownership rights in a company or entitle the other of tokens to cash flows, such as dividends.
Fueling the Network
To take advantage of the network, a user must use a token as payment. Tokens can also perform several tasks.
- Bitcoin for transactions
- Ether for computing power
- Siacoin (SC) for file storage
A Deeper Incentive
All stakeholders of the networks, from crypto miners, developers, to token holders have an incentive to contribute to the network by being rewarded with a stake in it. This stake is a token. The theory is that the better the individual works, the better the network performs, which creates more attention for the network and the price of that token will rise. The crux of this is that this could also lead to a temporary overvaluation of the token price. For example, in the Bitcoin network, it’s native token is Bitcoin.
Disrupting Organizations
Traditional organizations of people and formal contracts can be completely overhauled by blockchain cryptographic tokens. The rules written into its protocol software are fully transparent.
Investopedia’s Mark Kolakowski goes into greater detail with this in his article “Top-down vs. Bottom-up’.
Blockchain Hub’s infographic spells out the distinction in colorful detail:
Top Down Management
One legal entity employment contracts
Many layers of management for coordination and enforcement of processes
Many information and decision bottlenecks
Many sources of corruption |
Distributed Network of Autonomous Stakeholders
No centralized legal entity
No employment contracts
Machine consensus around token governance rulesets and smart contracts instead of legal employment contracts |
Types of Tokens
There are many different types of tokens and new developments in blockchain allow for new tokens capable of doing new things.
Currency Tokens
The most common type of token. Currency tokens are a medium of value exchange and base their worth on supply and demand. The most obvious example is the most popular Currency Token:
Bitcoin.
Utility Tokens
Gives users the ability to do things via a network. Also called “user tokens”.
Ethereum is the most well-known Utility Token. Ether runs smart contracts and code on its blockchain. Ethereum is also a Currency Token
Equity Tokens
Works like traditional stocks. Owning equity tokens is the same as owning equity and share in a company’s profits. It belongs in a subcategory to security tokens.
Filecoin (FIL) is an Equity Token that raised the largest ICO to date at $250 million.
Asset-Backed Tokens
These are the digital equivalent to any physical asset just like those traditionally used as a backing for financial securities. Asset-Backed Tokens can represent any asset: land, Fiat currency (EUR), download of a song, share in a company, insurance policy, tickets to an event. Example:
Ankorus (ANK) Tokens.
Reputation and Reward Tokens
These tokens specify that a user on a blockchain did something special and earned a reward. Some of these tokens cannot be traded. Example:
Steem (STEEM) network’s Smart Media Tokens.
Level of Tokens
Explaining the layers of tokens can be complex, however it is best compared to how the internet is layered. Each layer can be upgraded or patched, or even eliminated without affecting other layers.
A basic rundown of internet layers:
- Application layer: Where a user can use applications, ie: Google, Facebook.
- Session layer: Higher-level connects, ie: https://
- Transport layer: The ray connection, ie: TCP
- Network layer: Routing packets between routers, usually IP
- Physical layer: The medium where bits are transported, ie: cable fibre, WIFI
*Bitcoin does not have an application layer. Roostock (RSK) initiative is working on a sidechain that is fully compatible with every smart contract created for Ethereum.
The blockchain layer can even be broken down into four more layers, essentially the physical to transport layers in the internet, with similar properties.
- Security: A hacker can’t easily convince nodes that an alternate version of the ledger is the “consensus” if they don’t have the majority of computing power
- Liveness: Nodes can add new blocks to the ledger/chain with little latency (the time between request and response)
- Stability: Nodes can rarely be manipulated from the consensus ledger
- Correctness: Only blocks from valid transaction can be added to the ledger
Looking Ahead
The intricacies and nuances of tokens, the cryptocurrencies they represent, and the coins they produce can be very challenging to wrap your head around. Tokens are drenched in subcategories upon subcategories, each one riddled with technical jargon. Investors who want to get in this space have to put in extra work to maintain their due diligence, but there are plenty of resources that expand into greater detail.
Further Reading