One of crypto’s fundamental questions no one is talking about:
Why is it Dogecoin and not Dogetoken?
- What are coins and what are tokens?
- The difference between coins and tokens.
- Examples of coins and tokens.
What Is a Coin?
- Medium of exchange
- Store of value
- Unit of account
Some of the characteristics and benefits of coins are:
- Decentralization: Coins are not controlled by any central authority or intermediary. They are governed by the rules of their protocol and the consensus of their community. This gives users more freedom and privacy over their transactions and funds.
- Security: Coins are protected by cryptography and encryption. They are resistant to hacking, censorship, and fraud. Users can trust that their coins are safe and authentic without relying on third parties.
- Scarcity: Most coins have a limited supply that is predetermined by their algorithm. This creates a deflationary effect that increases its value over time. For example, Bitcoin has a total supply of 21 million and Ethereum is deflationary. However, not all coins are scarce, such as Dogecoin, which has no cap on its supply.
Coins can vary based on how they are created, their value and the function they fulfill. Here are some examples of coin types:
- Native Coins: These are coins that run on their own blockchain and serve as the main currency of the network. Examples include Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC).
- Forked Coins: These are coins that are derived from an existing blockchain by splitting or branching off from it. Examples include Bitcoin Cash (BCH), Bitcoin SV (BSV) and Ethereum Classic (ETC).
- Wrapped Coins: These are coins that represent another asset on a different blockchain. They allow users to access cross-chain functionality and liquidity. Examples include Wrapped Bitcoin (WBTC), Wrapped Ether (WETH).
- Stablecoins are coins pegged to the value of another asset, such as fiat currency or gold. They aim to provide price stability and reduce volatility. Examples include Tether (USDT), USD Coin (USDC).
What Is a Token?
Tokens sit on top of an existing blockchain and depend on it for their operation. A token can represent various things, such as utility, governance rights, shares of ownership, or others.
- Utility: Tokens are necessary to use the decentralized applications (dApps) they are built for. Users can use tokens to pay for fees, perform actions, or receive benefits.
- Governance: Tokens can give users a voice in the decision-making process of the blockchain or dApp. Users can use tokens to vote on proposals, changes, or upgrades.
- Interoperability: Tokens can enable cross-chain communication and compatibility. Unlike coins, tokens can be supported by different blockchains.
Tokens are like digital currency for the protocol offering them. They can grant users access, rights or rewards.
Different types of tokens are based on their function, value proposition, use cases, etc. Here are some examples of token types:
- Utility Tokens provide access to a service or function on the blockchain or dApp. Examples include Uniswap (UNI) and Chainlink (LINK).
- Governance Tokens: They give users a say in the governance of the blockchain or dApp. Examples include Maker (MKR), Compound (COMP), Aave (AAVE), and most other tokens.
- Security Tokens represent a share of ownership or a claim on an asset or income stream. They are subject to securities regulations and compliance. Examples include Polymath (POLY).
- Non-fungible Tokens (NFTs) represent unique and indivisible digital items, such as art and collectibles. They are not interchangeable and have varying values. Examples include CryptoPunks and Bored Apes.
Coins vs. Tokens: The Difference
Now that we know what coins and tokens are, let’s see how they differ from each other. Here is a feature-by-feature comparison of coins and tokens:
Coins are more suitable for general transactions and value preservation, while tokens are more suitable for specific purposes and value creation. However, this does not mean that coins and tokens are mutually exclusive or incompatible. In fact, they can work together and complement each other in the crypto ecosystem. For example:
- Users can use coins to buy tokens or use tokens to pay for fees on coin networks.
- Users can wrap coins into tokens or unwrap tokens into coins to access cross-chain functionality and liquidity.
- Users can stake coins or tokens to earn rewards or participate in governance.
- Users can swap coins or tokens with each other using decentralized exchanges (DEXs) or automated market makers (AMMs).
*Source: Ivan Cryptoslav – Coinmarketcap