While talking about cryptocurrency the term token is often used as a synonym for coin but that is missleading. We will help you to understand the differences between coin and token.
Difference between Coin and Token
A coin is an entirely independent blockchain kind of like Bitcoin, Ethereum or Litecoin. So they have their own use-cases, management, and rules.
Thus, a Token exists on top of an existing blockchain. So Ethereum, for example, has decentralized applications that exist on top of the blockchain. As a result, you can use tokens as fuel for the network, company shares or otherwise. Therefore you can not only use it as a currency but also for other things. So the ERC20 is an example of a token that works on Ethereum.
Why do we need Tokens?
With a token, you can apply functions to a blockchain without having to develop your own blockchain. So you can develop applications that use the rules and infrastructure of the Ethereum network without creating your own blockchain. So, on the one hand, you save a lot of money. But on the other hand, you are completely dependent on the network. Thus, if the owner of Ethereum decides to close the network, there is no possibility to run your DApp.
Types of Tokens
A Utility Token is a usage token and you can use them as a key to your house. For each house, you need another key to open the lock. The same example applies to the utility tokens. So if you want to run an application on the Ethereum network, you need to create a special utility token to use it.
So Utility Tokens are not designed purely as an investment. But many people use them for that reason. Thus, they hope that the value of tokens will one day increase. Therefore they do not use the service of a utility token at all.
A Security Token is like a security paper. Therefore it is a mix between crypto tokens and classic securities. So these tokens have a clear financial motivation. This motivation comes from dividends, revenue shares or rewards.
Equity Tokens are real-life tokens. Something we know from the traditional world will be represented by a token. So for equity tokens, it could be stocks, real estates or cars. Thus, it would be possible to profit from the turnover of a company. So you can even obtain a voting right depending on the function of the token. So in this way, a common IPO can be replaced.
“Cryptocurrency Token” – Summarized:
- Coins represent independent blockchain
- So Tokens exist on top of an existing Coin
- Thus, with a token, you can apply functions to a blockchain without having to develop your own blockchain
- There are three types of Tokens: Utility Tokens, Security Tokens, and Equity Tokens
You like our article “An Easy Explanation of Cryptocurrency Token” and you want to know more? Here you can learn everything about ERC20 Token!