Cryptocurrency beginners often find it challenging to differentiate between a coin and a token, with some using these terms interchangeably. Although they may seem similar, tokens and coins have different distinct functions in the crypto ecosystem.

Coins are usually created on their blockchains and used as digital currency for transactions. A prime example is Bitcoin (BTC), which operates on the blockchain. On the other hand, tokens are developed on smart contract blockchains like Ethereum, the most popular platform for creating tokens. Tokens often represent assets or utilities, with the ERC-20 tokens being a notable example.

This distinction is crucial for anyone investing in cryptocurrencies or participating in the broader crypto ecosystem. So read along to learn more about the key differences between coins and tokens, their unique characteristics, applications, and how they contribute to the evolving ecosystems of cryptocurrencies.

---

Key takeaways

Coins and tokens are both digital assets in the cryptocurrency space, but they have key differences:

• Blockchain: Coins have their blockchains (e.g., Bitcoin, Ethereum), while tokens are built on existing blockchains (e.g., Tether, ERC-20 tokens)
• Creation: Coins are created through mining, while tokens are issued through ICOs or other methods such as Airdrops and Initial Exchange Offerings (IEOs).
• Transactions: Coins use native blockchains, while tokens rely on the host blockchain’s protocols.
• Function: Coins primarily act as digital money, while tokens have various functionalities (utility, governance, security).
• Value: Coin value comes from scarcity and utility, while token value is tied to associated projects/platforms.

---

What is a coin?

A coin is a digital or virtual currency with its independent blockchain, making it a standalone asset, hence the term “native coin.” Coins typically serve as digital money and can be used as a medium of exchange, a store of value, and a unit of account.

Some key characteristics include:

• Decentralization: unlike centralized systems, coins are not controlled by a central authority, which enhances security. For example, Bitcoin operates on a decentralized network maintained by a vast network of computers worldwide, known as nodes.
• Native blockchain: They operate on their networks, unlike tokens that depend on existing blockchains like Ethereum and Solana.
• Value: Coins can hold intrinsic value—that is, value derived from their underlying utility or potential— based on supply and demand.

What are examples of coins?

Several popular coins serve different purposes in the market. Here are a few examples:

• Bitcoin (BTC) was the first and most well-known cryptocurrency in 2009. It is used mainly as a digital store of value and medium of exchange. 
• Ethereum (ETH): Known for its innovative smart contract capabilities, it powers many decentralized applications (dApps).
• Litecoin (LTC): A lightweight alternative to Bitcoin, it was designed for faster daily transactions.
• Dogecoin (DOGE): Dogecoin started as a meme-based cryptocurrency but has gained popularity as a community-driven coin with a large following.
• Ripple (XRP): A digital payment network facilitating fast and efficient international money transfers.

As of August 30th, 2024, over 10,000 types of cryptocurrencies were in circulation, with a global market capitalization of $2.09 trillion.

Use cases of coins

Coins serve various purposes in the digital economy. Some critical use cases include:

1. Medium of exchange: Bitcoin enables peer-to-peer payments and online purchases.
2. Bitcoin, like gold or precious metals, is considered a store of value and a speculative asset. Some investors believe its decentralized nature and limited supply make it a good hedge against inflation, while others speculate on price fluctuations for potential profits.
3. Remittances: Coins can facilitate fast and low-cost international money transfers, making them ideal for remittances due to low transaction costs.
4. Decentralized Finance (DeFi): Coins like Ethereum are used in DeFi applications, which allow users to lend, borrow, and trade cryptocurrencies without the need for intermediaries like banks. For example, decentralized exchanges (DEXs) provide a platform for peer-to-peer trading of various cryptocurrencies.

What is a token?

A token is a digital asset within a blockchain network, such as Ethereum or Solana. This starkly contrasts coins, which are standalone currencies of their network. Tokens have many functionalities but are typically categorized into fungible and non-fungible.

• Fungible tokens: These tokens are interchangeable, meaning one token is equivalent to another of the same type. Fungible tokens can be traded like currency, making them suitable for various applications such as payments and transactions. Examples include stablecoins like Tether (USDT) and USDC. 
• Non-fungible tokens (NFTs) are unique digital assets that cannot be exchanged one-to-one. Each NFT is distinct and represents ownership of a specific item, such as a piece of digital art, a collectible, or even a virtual piece of real estate.

Key characteristics of tokens

• Built on existing blockchains: Tokens are typically created and deployed on blockchain platforms like Ethereum or Tron. This allows them to leverage the underlying blockchain’s security, scalability, and other features.
• Represent assets or utilities: Tokens can represent various assets or provide access to specific utilities. For example, they can represent shares in a company, voting rights, or access to a particular service or product.
• Programmable: Many tokens are programmable, allowing for complex functionalities and interactions within the blockchain ecosystem. This versatility enables developers to create innovative applications and decentralized services.
• Interoperability: Tokens can often be traded or exchanged for other digital assets, promoting interoperability within the cryptocurrency market. This can facilitate cross-chain transactions and increase liquidity.

Token use cases and prime examples

Tokens have diverse use cases that benefit various sectors. Some typical applications include:

• Access control: Tokens often provide users with access to services or communities. Utility tokens, for example, can be required to use specific applications.
• Voting rights: Some tokens, like fan tokens, give holders voting power on decisions regarding their teams, enhancing user engagement.
• Utility tokens: Tokens like Basic Attention Tokens (BAT) are used within specific platforms to access services. BAT, for example, rewards users for viewing ads on the Brave browser.
• Security tokens represent ownership in real-world assets, such as real estate or company shares, and are subject to securities regulations. Examples include Coinbase (COIN), which represents ownership of the cryptocurrency exchange Coinbase Global, and RealT, a platform that allows investors to purchase fractional ownership of real estate properties.

Technical differences between coins and tokens

Coins and tokens have unique technical characteristics influencing their usage, transaction processes, and overall functioning in digital currency. Let’s dive deeper and compare their distinctness

Blockchain independence

As mentioned earlier, coins run on their blockchains and act as the network’s medium of exchange. For example, BTC uses the Bitcoin blockchain, and ETHr uses the Ethereum blockchain. This independence allows coins to have complete control over their transaction processes. On the other hand, tokens were built on existing blockchains and relied on their infrastructure. One downside is that token transactions are subject to fees from the host blockchain. 

Creation and issuance

Coins are created through mining or minting on a dedicated blockchain. This can involve complex algorithms to validate transactions and create new units. On the other hand, Tokens are usually created through Initial Coin Offerings (ICOs) or other fundraising methods. The smart contract on the host blockchain defines the number of tokens that will exist. This method is often faster and cheaper than creating a new blockchain for coins.

Transaction mechanisms

Coins use their native blockchains for transactions. Each transaction is recorded on the blockchain and relies on its protocols for validation. This often leads to faster transaction times and less dependency on other systems.

Tokens rely on the protocols of the host blockchain for transactions. The efficiency and speed of token transactions depend on the blockchain’s performance. For instance, Ethereum’s network can sometimes slow down during high demand, affecting token transactions.

Primary functions

Coins mainly act as digital money. Their primary purpose is to serve as a medium of exchange, similar to regular currency. Coins allow users to make purchases, transfer wealth, and store value.

Tokens, in contrast, have a broader range of functionalities. They can serve various roles, such as utility tokens in an ecosystem, governance tokens for decision-making, or security tokens representing ownership in an asset. This flexibility makes tokens suitable for more complex financial interactions.

Value proposition

The value of coins typically comes from their scarcity and utility as currency. For example, Bitcoin’s limited supply contributes to its value. Users perceive coins as investments or stores of value in the market.

Tokens derive their value from the projects and platforms they are associated with. Popular tokens can increase in value as the platform grows. Users often view tokens as investment opportunities tied to the success of a specific project or service.

Coin and token case studies

Coins and tokens each have their own success stories. By looking at specific projects, one can better understand how they operate and what makes them work.

Successful coin projects

Bitcoin is the first and most famous cryptocurrency. Launched in 2009, it remains a primary example of a coin. It serves as a digital currency that can be used for transactions worldwide.

Another notable coin is Ethereum. It started as a platform for smart contracts. Today, it supports various decentralized applications (dApps) and has its own Ether currency.

Bitcoin and Ethereum have shown how coins can create value and provide a framework for other projects.

Successful token projects

Tokens like Uniswap (UNI) and Chainlink (LINK) are powerful examples of how tokens can serve specific functions and add value to their ecosystems.

• Uniswap is a decentralized exchange (DEX) that allows users to trade various cryptocurrencies. Its native token, UNI, grants holders voting rights on the platform’s governance, enabling them to shape its future direction.
• Chainlink is an oracle network that connects smart contracts with real-world data. This enables blockchain projects to access external information and execute more complex transactions, making it a valuable tool for various applications.

How to buy tokens on Paxful

Paxful is a peer-to-peer platform that allows you to buy, sell, and trade cryptocurrencies like Bitcoin, Ethereum, Tether, and USD Coin. While you can’t directly buy tokens on the platform, you can trade the BTC, ETH, USDT, or USDC in your Paxful account for tokens on other platforms. Here’s how:

1. Sign up and verify: Create a Paxful account in seconds using your phone number or email address. Next, verify your account by uploading personal documents such as your National ID or passport. This adds an extra layer of security. You’ll also get a free Paxful account to store your crypto.
2. Find a trade partner on the marketplace: Click the Sell tab from the homepage widget, select the crypto you want to trade away, click the Digital Currencies icon, and pick your preferred token from the list. Click Find Offers to see all potential trade partners who meet your criteria.
3. Select a trade partner: Choose a trade partner with a good record then click the Sell button on their offer to read their requirements.
4. Start the trade: If the terms are fair, enter the amount of crypto amount you want to trade away and click the Sell now button to start the transaction.
5. Complete the transaction: Inform your trade partner about your wallet address and other details needed to complete the trade. Next, tell your trade partner to send the tokens to your external wallet when ready. Note that at this point, your crypto is temporarily held in escrow until both parties fulfill their end of the bargain. Once you’ve verified that the tokens are in your wallet, release the crypto from escrow into your trade partner’s Paxful account.
6. Leave feedback: Both you and your trade partner can leave feedback for each other, building trust for future trades on Paxful.

---

Important Note: Paxful does not provide investment, tax, or legal advice, and you are solely responsible for determining whether any financial transaction strategy or related transaction is appropriate for you based on your personal investment objectives, financial circumstances, and risk tolerance. Paxful may provide information including but not limited to blog posts, articles, podcasts, tutorials, and videos. The information contained therein does not constitute investment advice, financial advice, trading advice, or any other sort of advice, and you should not treat any of the content as such. Paxful does not recommend that any digital asset should be bought, earned, sold, lent out, or held by you, and will not be held responsible for the decisions you make to buy, sell, trade, lend, or hold digital assets based on the information provided by us.