Crypto is a hot topic and there are many different cryptocurrencies out on the market. With everyone talking about cryptocurrency these days, you may be wondering if it’s time to start your own crypto journey.
But how do you know which ones will be worth investing in? Before formulating a crypto investment strategy, it’s important to understand the difference between coins and tokens. While they may seem similar, there are a few key differences between them that dictate how they function and where they fit into the greater crypto ecosystem.
Having clarity on each will not only give you a better understanding of the space, but also aid in forming an investment strategy for each.
The Differences Between Tokens and Coins
Although they are both digital assets, there are a few key differences between coins and tokens. Coins are typically the native cryptocurrency of a blockchain, while tokens are assets that function by using a blockchain.
Tokens utilize smart contracts to have a much wider range of utility, whereas coins are primarily used to store value on a blockchain, settle transactions on the network, and even exchange for real life goods and services.
The last major difference between crypto coin vs. token attributes is the way in which each is obtained. Aside from straightforward buying and selling on crypto exchanges, coins can be acquired through mining or staking, depending on the blockchain in question. Tokens, on the other hand, are distributed by project developers as incentives or rewards.
What is a Coin?
Put simply, coins are currencies in the crypto world. They are the base layer currency for their own blockchain instead of a cryptocurrency for a project running on top of an existing blockchain.
Essentially, this means that they are created, or “minted,” on the blockchain by users. Minting is typically done in two ways: mining or staking. Mining involves a proof-of-work system that rewards miners in coins for solving incredibly complex mathematical equations. Staking uses a proof-of-stake consensus mechanism that rewards stakers with coins for validating transactions by locking coins up for periods of time.
Much like how fiat is used as the native currency for exchange in the physical world, coins are the native currency for exchange in the digital world.
Use Cases of Crypto Coins
So, if crypto coins are digital currencies, why not just use cash or a credit card instead? Coins differ from regular fiat in that they are decentralized, fast and secure. Coins traded on blockchains are free from the red tape and middlemen involved in traditional banking, making them incredibly useful for the unbanked population around the world. Their decentralization is also a game-changer for international transfers. Instead of dealing with bank wires, which can take days to process and usually involve high fees, coins can be exchanged with just a few clicks and sent directly between parties, just like how the internet transfers information directly between parties. Because you’re not required to give personal information to make the transfer, blockchains do a better job of protecting people’s identity and financial security.
Examples of Coins
Bitcoin’s BTC, Ethereum’s ether (ETH), and Litecoin’s LTC are all prime examples of coins because they live as the foundational currency for their own blockchains. BTC is the most well-known coin that exists and can be mined using a proof-of-work system. LTC is another coin that can be mined on its own blockchain and promotes faster network settlement times than BTC. Ethereum’s ETH has just recently transitioned to a proof-of-stake coin as part of the highly-anticipated Ethereum Merge upgrade.
What is a Token?
In contrast to coins, tokens are digital assets that utilize blockchains with smart contracts to carry out various tasks. Tokens are not foundational currencies of a blockchain, but rather, they are built on top of existing ones. Utilizing smart contracts, they tend to offer more nuanced functions for carrying out various decentralized finance (DeFi) applications.
Use Cases of Crypto Tokens
Crypto tokens can be much more versatile in their use case. Like coins, tokens can be traded on crypto platforms. These are known as ‘transactional tokens.’ Take the blockchain game Axie Infinity’s token AXS, for example. AXS is used as a currency within its in-game ecosystem, however, the game is built on the Ethereum blockchain. So, while you may pay for things in the game using AXS, the transactions are settled using ETH.
Tokens can also be distributed as a monetary reward to users of a project by developers, like STEPN’s GMT token.
They can also take the form of non-fungible tokens (NFTs), which are unique, 1/1 digital assets that can be bought, sold, and even used within some games that run on a blockchain.
Utility tokens can be granters of access. Owning a utility token gives holders access to services on a particular blockchain that would otherwise be unavailable. Think of it as a key that unlocks special features.
Sometimes token ownership is less about the assets and more about making your voice heard. Governance tokens, for example, are tokens that give holders the right to vote on updates and measures that influence the future of a particular blockchain or project. By owning the token, holders get to collectively “govern” crypto projects through voting on proposals.
The true beauty in tokens lies in its ability to be more than one thing at once. A token can simultaneously unlock access to services, act as a governance token, and be a non-fungible digital asset. Due to their flexibility in DeFi, some people like to call tokens “programmable money.”
Examples of Tokens
ERC-20 is an example of a widely recognized token standard for creating and running tokens on the Ethereum blockchain. Other blockchains have their own token standards too, such as Solana’s SPL tokens, Binance’s BEP-20 tokens, and more.
Star Atlas is a cryptocurrency play-to-earn game that operates using two separate tokens, ATLAS and POLIS. ATLAS can be earned by playing the game and is used to buy and sell digital assets, while POLIS acts as the governance token for voting on the future development of Star Atlas.
While some tokens can earn rewards in-game or be used for governance, other tokens can give you benefits on centralized platforms as well. FTX Token (FTT), for example, is an ERC-20 token that offers discounted trading fees and omits withdrawal fees according to how many tokens you stake in the FTX exchange. Additionally, staking FTT creates eligibility for FTX airdrops that include NFTs and more.
Investing in Coins and Tokens
When it comes to coins and tokens, investors can open the door to a world of possibilities. Whether you believe in the future of a particular cryptocurrency or want to participate in exclusive decentralized applications and project governance, a diverse portfolio of both coins and tokens gives you exposure to all aspects of the crypto ecosystem.
FTX serves as one of the best gateways to the greater DeFi ecosystem, enabling you to take full advantage of the capabilities that crypto coins and tokens have to offer. Additionally, with each trade on FTX, a percentage of the trading fees are contributed to investments in humanitarian-focused projects as part of FTX’s effective altruism initiative.
To get involved, consider joining the FTT DAO, a like-minded community of FTX fans seeking to uphold effective altruism throughout the world.