Lesson 7 – Tokens vs coins – what’s the difference?

In broad terms, a digital asset refers to a non-physical asset that is created, traded, and stored in a digital format. In the context of blockchain, digital assets include cryptocurrencies, also known as crypto coins and crypto tokens. Both coins and tokens are unique subcategories of digital assets, utilizing cryptography and advanced encryption technology to ensure the authenticity of crypto-assets by eliminating the possibility of counterfeiting or double spending.

Coins typically exhibit the following characteristics

1. They are decentralized, open-source, and rely on program code to manage output and transactions.

2. They are based on a native blockchain or other distributed ledger technology (DLT), which allows participants to enforce the rules of the system in an automated, trustless manner.

3. They use cryptography to secure the underlying structure and network system of the cryptocurrency.

What is a token?

Tokens, or crypto tokens, are digital units of value developed by blockchain-based organizations or projects based on existing blockchain networks. Although they are often compatible with the network’s cryptocurrencies, they represent a distinct class of digital assets.

Like coins, crypto tokens are developed using blockchain technology, but they are not part of a blockchain. Instead, they are built on top of an existing blockchain through smart contracts.

Crypto tokens generally have important characteristics, such as being:

1. Programmable: they operate on software protocols consisting of smart contracts, which in turn define the token’s features, functions, and network rules.
2. Permissionless: anyone can be a part of the system without needing special permissions.
3. Decentralized: the system operates according to rules defined by the network protocol and is managed by its participants, without central authority control.
4. Transparency: the protocol rules and transactions are visible and verifiable by everyone.

The most common types of tokens are

Crypto tokens

Crypto tokens are digital assets that are stored in a decentralized manner on a blockchain and are assigned certain functions or values. These values can represent a wide range of properties, functionalities, or rights. As a result, a number of token categories have emerged in both regulatory practice and the market, which recognize and classify these different properties as financial instruments. The creation process for these multifunctional crypto tokens is known as tokenization.

Utility tokens

Utility tokens are crypto tokens that grant access to specific services or products developed by the token issuer, similar to a ticket. Most tokens issued to date fall into this category.

Security tokens

These equity-like tokens behave like traditional securities and are even treated as such by the regulatory bodies. Holders of such tokens have membership rights or contractual claims similar to those of a stockholder or bondholder, including dividend-like payments, voting rights, or repayment claims.

Governance tokens

These tokens primarily serve as coordination tools. They enable people from all over the world to come together to achieve common goals. For example, they may offer holders voting rights in a DAO.

Non-fungible tokens (NFTs)

NTFs are unique, non-exchangeable tokens. They typically represent a specific item, such as a piece of digital art.