What is the Difference Between Coin and Token?

BitCOIN, Basic Attention Token are two very famous cryptocurrencies. Is it just by chance that one of these cryptos is called a coin and the other one a token? Or does it have an underlying meaning? That’s exactly the question of the day. In this blogpost I try to address this very question using analogies and examples so that anyone can take a wise call while investing into cryptos. So what after all is the difference between a coin and a token?

The Outsourcing Analogy:

Imagine that you start a business. Say you open a cute little bakery in the neighborhood. You are getting a good traction from the customers that are walking in. The feedback is awesome and you are now ready to deliver to their homes. What’s the next logical step? You could hire someone to do that in the nearby locations right? Alternatively, you could tie up with the like of Swiggy and Zomato to do it on your behalf.

Both the approaches have their own pros and cons. For example, if you hire someone, you don’t have to shell out a percentage of your order value to fund the delivery. Secondly, you can also ask that resource to fetch raw material nearby (basically, you can tweak his on description basis your needs).

In the latter case, you don’t have any fixed expenditure per month. Only the cases where you deliver are the ones where you pay a share. You get the idea.

Coin Vs Token:

That’s exactly how crypto projects evaluate their future. They can either build their own blockchain. This means they would take care of the security, efficiency of that blockchain. Also, the project would have to bear an additional cost, resources required to build and maintain their own blockchain.

Alternatively, they could build on the top of an existing blockchain like Ethereum, Solana, Avalanche etc. This means they now can focus on their core proposition and may be, pay a fee to use the existing infrastructure.

The best example of this would be the world’s biggest public blockchain, Ethereum. Ethereum mainnet blockchain has it’s native coin called ETH. However, projects like BAT or basic attention token are built on the top of Ethereum. This enables BAT to leverage the security and safety of Ethereum blockchain while using it’s ability to create smart contracts.

Transitioning from a Token to a Coin:

Taking the similar example we discussed above, there might be a case that you become a big enough bakery to sail your business without relying on the likes of Swiggy and Zomato. In that case you might be able to afford a couple of your own resources to run errands and deliver food right?

Same is the case with crypto projects. Some projects grow to the extent that they decide to take the blockchain related operations in house and switch to their own blockchain.

An example of this would be crypto.com. A project that has now come up with their own blockchain.

But this is not as easy as just creating the coin. For a successful transition, the developers must create something called a bridge (more on it in upcoming blogposts).

Users can then take their tokens and get it converted to the coins using that bridge.

Coins as Tokens:

Another important thing here is that some cryptocurrencies exist as coins and tokens both. So, I recently purchased something called wETH. This is a form of wrapped Ethereum on Polygon network. So Ethereum on polygon chain would be considered as a token as it is not the native currency of that blockchain.

But why would anyone do that? Well, an average transaction on Ethereum blockchain costs about $15-25 if you are lucky. On the other hand, same transaction on polygon would cost about a $0.1. This is the power of layer 2 solutions.

Conclusion:

Understanding the difference between coins and tokens is very important for a fruitful journey in cryptoverse. For that very reason, I would be covering different types of tokens. These tokens then decide if one should invest in it or not.

It is bound to get interesting from here on. Are you as excited as I am?

Got questions? Want to take it to the next level? Reach out to me using your preferred platform from the links below

Until next time..

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