With so many coins and tokens in the crypto space, it can be hard to tell what’s what when you’re new to the market. This can especially be true with Ethereum-based projects, as there are quite a few different types of ERC20 tokens in existence. In this article, we’ll go over some of the most important differences between coins and tokens so that you can invest more wisely and help others do the same.
The fundamental concept of blockchain
A blockchain is a list of all transactions involving cryptocurrencies and expands as new blocks are added to it and more data is input. In the context of bitcoin, a node is a miner that uses the block chain to confirm Bitcoin transactions. A block chain is a linked list that consists of a cryptographic hash of the previous block, a timestamp, and data about the transaction. As a result, Ethereum tokens depend on the Ethereum blockchain, while NEO tokens depend on the NEO blockchain. One major difference between cryptocurrencies like Bitcoin and other forms of currency is how they are created. Cryptocurrencies are mined by verifying other transactions. Tokens are initially distributed by way of an ICO or ITO (Initial Token Offering). Yet they will never be mined in any sense like many coins, and may also be distributed through presales and bounties before being made available on exchanges.
Types of blockchain tokens
There are two types of blockchain tokens- coins and tokens. Coins are digital assets that have their own blockchain. Bitcoin, for example, is a coin. Tokens, on the other hand, are digital assets that are built on top of an existing blockchain. Ethereum, for example, is a token. So, what’s the difference between a coin and a token? A few key differences include where they reside in terms of transactions, ownership, and how they’re created. Let’s break it down:
The difference starts with where the transaction happens- with a coin, it occurs in its own block; whereas with a token, it occurs within another blockchain. The difference also includes who owns them- with coins the original owner never relinquishes ownership; whereas with tokens the ownership shifts from owner to buyer when sold or transferred (also known as burning). Finally, there is a difference in how they’re created-coins are created by miners using high levels of computing power to solve complex mathematical problems (a process called mining); whereas tokens are typically distributed via initial coin offerings (ICOs).
ICOs – Initial Coin Offerings
In an ICO, a company offers investors digital tokens in exchange for cryptocurrency. This is different from a traditional IPO, where a company sells shares to investors in exchange for fiat currency. The main difference between a coin and a token is that a coin is its own blockchain, while a token is built on top of an existing blockchain. Coins are typically used as a form of payment, while tokens are often used to represent assets or utility. For example, Ethereum’s native token is called Ether, and it can be used to pay for transaction fees and services on the Ethereum network. Bitcoin, on the other hand, is both a coin and a payment system. It was created to function as a peer-to-peer electronic cash system without a central authority. However, users can also send bitcoin as payment to someone else who has a bitcoin wallet. These payments take place outside of the bitcoin blockchain – they are sent directly from one user’s wallet address to another user’s wallet address with no middleman (bank) involved.
Bitcoin – The first coin
Bitcoin is a form of digital currency and payment system that is not managed by any authority. Transactions are validated by computers solving math problems. A blockchain is the main shared record of transactions. Bitcoin is very different than all other forms of currency in that there are only 21 million of them in existence. Among these coins are Bitcoin, Ethereum, Ripple, and Litecoin. The limit for Bitcoin and similar coins is 21 million coins. Coins that do not have such limits are referred to as tokens. In the future, tokens could have a wider scope of use than coins, offering their holders more than coins can.
Smart contracts and utility tokens
Often, the terms coin and token are used interchangeably in the cryptocurrency world. However, there is a big difference between a coin and a token. Coins are their own blockchain while tokens are built on top of an existing blockchain. For example, Bitcoin is a crypto currency because it has its own blockchain. Ethereum is a token because it runs on the Ethereum blockchain. Both coins and tokens can be made for many different purposes. Some coins like Litecoin or Monero provide improved features over Bitcoin like faster transactions. Other coins are designed to serve as an investment opportunity by creating high demand for the coins with limited supply such as Ripple (XRP).
Where do Ethereum, NEO, XRP, etc. fit into this?
In the cryptocurrency world, there is a big difference between a coin and a token. Coins are their own standalone currency, like Bitcoin or Litecoin, that can be used to purchase goods and services. On the other hand, tokens are built on top of another blockchain and represent an asset or utility. Ethereum, NEO, and XRP are all examples of tokens. One way this difference plays out in practice is with ICOs. When someone wants to create a new cryptocurrency, they usually create a token on Ethereum’s platform rather than creating their own coin from scratch. The result is that some ICOs end up as ERC-20 tokens (the technical term for these kind of Ethereum-based tokens) such as OmiseGO, Golem Network Token, and Augur Project Token. Other ICOs are simply coins with their own blockchains, such as Stellar Lumens.
There are many reasons why you might choose one over the other when designing your ICO. For example, if you want to target developers and investors looking for new ways to build on a platform you would use Ethereum-based tokens. If you wanted a more decentralized application without any central point of failure then you might opt for coins instead of ERC-20 tokens since coins have their own network infrastructure.
How are different cryptocurrencies created?
Cryptocurrencies are created in different ways. For example, Bitcoin is mined through a process of solving complex mathematical equations. Ethereum, on the other hand, is not mined; instead, it is created through a process called proof of work. Other digital currencies are created by proof of stake. In this type of cryptocurrency, tokens are allocated to investors who have coins and hold them over time. The more you invest into a coin or token, the more tokens you will receive at the end. You can invest in tokens by purchasing them from an ICO or exchange such as Kraken or Binance.
Bitcoins can be purchased through exchanges
When you purchase a Bitcoin, you’re buying a digital asset that is used as a form of currency. You can use Bitcoins to purchase goods and services, or trade them for other currencies. Bitcoin is decentralized, meaning there is no central authority or government that controls it. Instead, it is managed by a peer-to-peer network of computers. Bitcoin is also divisible, so you can purchase fractions of a Bitcoin if you don’t want to buy an entire one.
A token is a digital asset that is often created on top of another blockchain (seven sentences): Tokens are digital assets that represent something else. For example, a company might issue tokens that can be used to purchase products or services from the company.