Crypto

Cryptocurrency Coins vs. Tokens: What’s the Difference?

Cryptocurrency Coins vs. Tokens

The world of blockchain is definitely vast and complicated. There are many different categories of crypto, from layer 1 blockchain protocols to blockchain oracles.

While each category of crypto has its own use case and purpose, it may be helpful to distinguish the difference between a cryptocurrency coin and a cryptocurrency token. This can help us determine more accurately the different methods for buying the crypto asset, as well as spot crypto scams more easily.

Of course, crypto scams are plentiful and can happen for both cryptocurrency coins and cryptocurrency tokens, but understanding the difference can help us spot when the coin (or token) that we are buying is legitimate or clearly a scam

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What is a cryptocurrency coin?

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A cryptocurrency coin is a coin that has its own network (or blockchain). Cryptocurrency coins became popular during the ICO (Initial Coin Offering) craze of 2017. ICO  allows startups to raise significant amounts of money before they release anything.

Unlike going public on the stock market, which requires a significant amount of oversight and regulations in order to join, anyone can make an ICO and issue “coins” that represent a company’s (or project’s) “value”. This, of course, attracted many susceptible people, promising the moon on their landing page then not delivering on anything. A great example of this would be the Dragon Coin scam in 2017.

Of course, some ICOs are absolutely legitimate and deliver great returns upon their initial release on an exchange. The most epic example of a successful ICO is Ethereum: the ICO started at 2000ETH per BTC, which at the time was worth around $500. This means that one could purchase ETH for 25 cents each. Considering one ETH costs over $3000 today, this shows the potential of ICO’s.

To sum it all up, a cryptocurrency coin is a coin that lives on its own independent network and does not rely on any other networks or blockchains to operate. Great examples are $BTC, $LTC and $DOGE: all three of these run their own blockchain and require their own set of cryptocurrency miners in order to operate.

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Therefore, setting these three cryptocurrencies up to become scalable and handle a large amount of transactions requires a significant amount of mining power, and therefore a significant amount of investment. This is why ICO’s generally raise more money compared to IDO’s (Initial Dex Offering), and why cryptocurrency coins usually have larger market caps compared to their peers, cryptocurrency tokens.

What is a cryptocurrency token?

Shiba Inu token

A cryptocurrency token, as opposed to a cryptocurrency coin, relies on another network for all of its transactions, storage, and inputs into the blockchain.

A great example of this would be the Shiba Inu token ($SHIB): it is an ERC-20 token which was deployed on the Ethereum blockchain. ERC-20 is simply the standard given by the Ethereum community to define what attributes a token should have. If the Ethereum network suddenly vanishes, then no Shiba Inu transactions will be possible anymore, since SHIB is a token which was deployed on the Ethereum network.

The great advantage of deploying a token vs. creating a coin is the speed in which one can create a token + the immediate scalability of the token’s transaction capability.  Ethereum is an insanely large network, with thousands of nodes scattered across the world. It has processed an incredible amount of transactions already.

Therefore, instead of building your own blockchain from scratch, why not just borrow the resources of an already robust blockchain like Ethereum, and develop your blockchain application on that network? This can solve many of the costs associated with building a project, and all that is needed for every transaction with the token is a small network fee, called a gas fee in crypto terms. 

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Tokens can save project founders and developers countless hours of development by having their transactions secured by a trustworthy network. Many projects and teams deploy their token on Ethereum, but it is certainly not the only blockchain.

People can deploy tokens on $ETH, $MATIC (Polygon), BSC (Binance Smart Chain), $FTM (Fantom), $CRO (Cronos), $AVAX (Avalanche), $SOL (Solana), just to name a few. The basic idea to retain for a cryptocurrency token is simple: a token is a cryptocurrency asset which is deployed on another blockchain and uses the network of that blockchain for all transactions.

The disadvantage of a cryptocurrency token is the ease in which it can be made. Of course, we all know about the incredible success story of Shiba Inu (SHIB), however we do not talk about all of the scams and imitators of SHIB that exist.

There are so many that it is tough to count them. We have Floki Inu, Shiba Toby, CrogeCoin, Akita Inu, Red Panda Earth, and many, many more meme tokens that exist out there. Some of them are absolutely worthless and complete scams. How was anyone supposed to know that SHIB would become the incredible powerhouse of a token that it is today? There was absolutely no way to know back then in 2020, when it was deployed.

Conclusion

Overall, the difference between cryptocurrency coins and cryptocurrency tokens does not matter much. What matters is the project itself: what it accomplishes, and how it fits into the greater world of crypto. If the project has a useful utility, for example LUNA, then it may eventually be reflected by a larger market cap and a price increase.

However, knowing the difference between a cryptocurrency coin and cryptocurrency token can definitely help you spot when a project is a scam or not! For cryptocurrency coins, it is important to make sure that there is at least a blockchain explorer that you can check, for example Polygonscan for MATIC.

For cryptocurrency tokens, it is ideally best to have the smart contract (the code that powers the token) to be read or audited. Ideally, you know how to read smart contracts yourself and can spot scams yourself. But of course, many tools exist that help spot scams, like Tokensniffer