Crypto 101 — Coins vs Tokens
A friend recently asked me to explain the difference between crypto “coins” and “tokens”. With the rise in popularity of so many tokens, why would anyone bother to create a coin?
In general terms, “coins” are based on a network which is secured by a community. The network is a loose collection of computers run by individuals who are part of the coin ecosystem. The security of the network can take many forms; the two most popular being “proof of work” and “proof of stake”. Proof of work networks rely on miners to solve a cryptographic puzzle to secure the network and proof of stake networks rely on stakers who lock up their coins in a sort of time lock safe deposit box in exchange for a return. In both cases, the network is comprised of several constituents.
The various members of the coin network are usually associated with the project for different reasons. Full node operators, the individuals who run the computers, are usually offering services such as wallets, exchanges, mining pools, staking pools, block explorers, API services, etc. There are also end users who use the coin as a utility, to transfer payments, mint NFTs, execute smart contracts or as in game currency, among other things. There are traders and institutional investors who arbitrage the price of the coin or acquire and hold the coin for appreciation. Developers become involved with the project to extend the chain in unique ways for business purposes. Finally there are miners or stakers, who secure the network in exchange for revenue. All of these members of the community function together, yet autonomously, to create the ecosystem of the coin.
Examples of common mainnet “coins” include Bitcoin, Ethereum, Binance coin and Cardano. The coin which I created, Dynamo, is a mainnet proof of work coin.
In contrast, a token is a singular program existing within a host coin. Tokens are “smart contracts” which allow very specific functions and are limited to only those functions. Once a smart contract has been created it cannot be changed. Typically tokens are created to a particular standard so that they can be traded on distributed exchanges. Tokens may serve a particular purpose or may have no purpose at all. However the foundational feature of a token is that it is captive to its host coin. For example, Shiba Inu token is hosted as a smart contract on the Ethereum network. Thus it is subject to all the rules and constraints of Ethereum. Morever, it can never “do” anything more than whatever the initial contract that created it allows it to do. For these reasons, Tokens are very limited in their overall utility. Further, tokens do not enjoy the same community constituents that coins do. There are no miners or stakers (at least natively), there are no full node operators, API developers, wallet developers or block explorer hosting services. There may be users, however they tend to be very one dimensional due to the limiting nature of the contract. There are usually only traders and investors, making the token proposition a fairly shallow ecosystem overall.
A popular example of a commodity token is AXS, or Axie Infinity. This is a token hosted on the Ethereum network which is used as the in game currency for the popular play to earn game. Because AXS is built on top of Ethereum, it is subject to all of those rules. Users must pay a gas fee (in Eth) to exchange the token. Users can only trade the token on exchanges which support Eth tokens. The execution time of the contract can never be faster than how fast Eth processes transactions — average 13 seconds. Because it is a smart contract, it can never be extended to do anything beyond what its initial programming is.
Unsurprisingly, the majority of large market cap projects in crypto are mainnet coins, because the utility of those projects can be extended in ways that tokens cannot and because the community built around coins is much larger and diverse than tokens.
There is no question that tokens are here to stay, and do serve a specific purpose within the crypto world, however mainnet coins are the true engines of crypto and will continue to drive the financial innovation which has brought crypto into mainstream consciousness.