By: Sameer Zubairi | 4 min read | 03/12/2018

What’s the Difference Between Tokens & Coins?

First and foremost, here is a quick explanation of the difference between coins and tokens, in case you need a refresher. The definition of a digital coin is an asset that is native to its own blockchain. Think about Bitcoin, Litecoin, or Ethereum, each of these coins exist on their own blockchain. Tokens are created on existing blockchains. In fact, as a result of the creation and facilitation of smart contracts, the most common blockchain token platform is Ethereum. Tokens that are built on the Ethereum platform are known as ERC-20 tokens. However, there are others, such as NEO, which uses NEP-5 tokens, Waves, Lisk, Stratis and more.

TOKEN VS. COIN: THEIR PURPOSE

Most tokens exist for the purpose of being used with decentralized applications, or dApps. When developers are creating their token, they can decide how many units they want to make and where these new tokens will be sent when they are created. They will pay some of the native cryptocurrency on the blockchain they are creating the token on at this point. Once created, tokens are often used to activate features of the application they were designed for like Gnosis, a prediction market platform built on the Ethereum blockchain. The project aims to allow people to make accurate predictions about real-world events like elections, market prices, etc. Users of the platform are rewarded for making accurate predictions by Gnosis in the form of GNO token or other cryptocurrencies as per the project’s preset rules.

HARD FORK OR CREATE A NEW BLOCKCHAIN?

The reality is that not all project teams or open-source communities are 100% in agreement on all issues. Frequently, we see disputes over which direction a blockchain, and its coin, should go. For example, Bitcoin Cash and Bitcoin Gold emerged as hard forks of the original coin, Bitcoin. In many cases, these hard forks create viable alternatives to existing blockchain projects. While hard forks do add a competitive element to the cryptocurrency market, it is possible for multiple cryptocurrencies originating from the same blockchain to exist in harmony. It’s worth noting that cryptocurrencies that arise from hard forks are coins, not tokens.

COIN SWAPS: MOVING FROM TOKEN TO COIN

While many hard fork coins are ranked high in terms of market cap, these projects do not represent a majority of cryptocurrencies. Most cryptocurrency projects on the market in 2018 actually start out by launching a digital token rather than a coin. There are several reasons why project teams do this. Many blockchain projects issue tokens during their ICOs with the intention of creating their own blockchain in the future. The process of raising money during an ICO doesn’t require a new project to already have an existing, standalone blockchain. For project teams, it’s easier to raise funds and distribute tokens via an existing blockchain. This reduces potential technical issues and streamlines the entire ICO investment process. Typically, project teams launch testnets of their own blockchains before releasing a publicly available cryptocurrency mainnet. Once a project team is ready to launch its mainnet, it usually conducts a coin swap. This is also known as a token swap. During this event, users are able to exchange their digital tokens for digital coins that can be used on the new, standalone blockchain. In 2018, EOS, Tron, VeChain Thor, and several other projects completed this process.

For investors, it’s necessary to remember that coin swaps can be done manually or automatically. Many exchanges like Binance, for example, have a feature that automatically swaps digital tokens for coins. Investors who store funds in an external wallet will have to go through a few manual steps before receiving new coins.

WHERE TO GET STARTED?

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