DeFi
September 28, 2022
What is Token Burn and it's effects on price
An A-Z guide on token burning and how it is largely impacting the cryptocurrency industry.
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Oftentimes it might get difficult for people to completely grasp the terminologies of a certain thing if a number of different terms resemble each other. The same is the case with cryptocurrency when it comes to things like Digital assets, crypto coins and tokens.
People often use all these 3 things without knowing their true meaning. They might be referring to crypto coins while saying tokens or about digital assets when they speak of crypto coins.
It could get really confusing. So that is why we are here to explain to you all the differences between Crypto coins and Crypto tokens and also explain what digital assets truly are.
Digital assets are basically non-tangible assets that are made in a digital format. These assets get stored and traded in a digital form as well. While referring to a blockchain, you can say that cryptocurrencies, crypto coins, tokens, etc, all come under digital assets.
Crypto coins and tokens are basically subcategories of digital assets. Generally speaking, crypto coins are referred to as cryptocurrencies only but when you go into technicalities, cryptocurrencies can either be crypto coins or crypto tokens.
All these things utilize the cryptography technique to keep the assets safe and secure and ensure that their authenticity remains intact. When you are trying to categorize digital assets, you can say that crypto coins are the native assets of blockchains whereas tokens get made as a part of a platform that is already present on a blockchain.
As mentioned earlier, crypto coins are a sub-part of digital assets and these are the native assets of a blockchain that are used in transactions on a network as a mode of exchange of currency. Crypto coins are issued by the network protocols that they run on and that is the reason why they are called a blockchain's native assets.
Crypto coins are used to obtain goods and services and they help in the trade or exchange of currency. They are basically a decentralized form of currency that is open-source and can be viewed by anyone. If you want to find out more about what crypto coins or cryptocurrencies are and how they work, check out our other articles on the same topics.
Token is another type of digital asset or cryptocurrency which shares a few similarities and a few dissimilarities with crypto-coins. By definition, a token is a unit of value that is issued by an organization or a project developed on an existing blockchain.
To put it in a straightforward manner, a token simply outsources the blockchain infrastructure from some other crypto-coin in order to deliver the said purpose of that token.
In other words, to create a token, you don’t have to worry about writing code, creating a suitable blockchain and establishing a validation technique. You just have to create your token on the blockchain of an existing crypto-coin which fulfills your requirements and it will run on that blockchain.
Now that you know the concept of tokens a bit better, we can proceed to take a look at different types of tokens. Tokens are classified into 5 categories based on their purpose. Let’s take a look at them one-by-one.
As the name suggests, a platform token is developed by a platform which is decentralized. The purpose of this token is to simply support the platform and its users. Such tokens help in the betterment of the decentralized platforms.
Uniswap token is an excellent example of platform token. Uniswap is used to swap ethereum with a number of tokens. Whereas, if users hold the uniswap token, they gain authority of some level to vote for upgrades in the platform.
If you know what securities are from the stock market, understanding security tokens will be quite easy for you. A security token is always tied to securities of some other asset. A token representing the value of an asset or which is backed by an asset is called a security token.
This can be a great way to safely buy an asset while not actually having to buy the asset physically. Instead buying a security token, which is a representation of that asset. However, it’s important to ensure that the token is actually backed by a real asset in order to stay out of any scam tokens.
Transactional tokens are the same as their name suggests. They are used to carry out transactions. The purpose of transactional token is to offer a faster and efficient way of transferring money.
Transactional tokens backed by stable currencies, offered by governments, can actually be a great alternative to transfer money. For example, xDai is a stable coin backed by USD and thus costs the same as current US dollar price.
Tokens like xDia have extremely low transactional fees and thus can be used to purchase things or transfer money overseas. The transactional costs can go as low as 0.000021 USD which is a lot less when compared to bank transfer fees.
Utility Token is one of the most useful types of tokens which is actually used for commercial purposes, like supporting creators or developers. BAT or Basic Attention Token is a great example of utility token.
BAT can be used to advertise on Brave browser and in turn reward the creators with BAT tokens which can be then traded with other cryptocurrencies.
Governance token is similar to platform tokens but unlike them, it has a sole purpose of allowing users of a particular platform to vote for certain decisions about the platform. More the number tokens a user is holding, more the voting authority.
Although, such tokens can give too much power in the hands of a single user and may create a room to question the decentralization of the platform.
So now you know that at the most basic level, crypto coins and tokens are different because crypto coins can be considered as tokens but all the tokens cannot be considered as crypto coins.
The way these two things differ is only based on how they are used and not much else. You can easily get confused between these two things. Crypto coins operate on blockchains whereas the tokens do not have their own blockchain.
If you take the example of Ethereum, you will find that the Ethereum blockchain has its own cryptocurrency Ether (ETH) and it gets used in all the transactions that are performed on the blockchain where a fee is required.
Similarly, the tokens on the Ethereum network are Maker, BAT, Tether, etc. These are all created with smart contracts on a blockchain and the transactions involving these tokens actually move the tokens between the points of sending and receiving. You can easily understand that by the NFTs example as when an NFT is transferred, the ownership of that token is transferred.
Crypto coins and tokens also vary in the way they get represented. A crypto coin is the digitalized form of an underlying value whereas a crypto token actually carries the deeds or assets. Tokens can be bought using coins but sometimes the value of a token exceeds that of the coins.
If you are still confused as to which asset is a crypto coin and which asset is a token, you only need to ask the question whether the asset is independent from other blockchains or if it is supported by an already existing blockchain and you will have your answer.
So to sum it all up, the crypto world is based on digital assets and there are a few subcategories of digital assets and in this article, we talked about the basic differences between crypto coins and crypto tokens.
Crypto coins are digital assets that are made based on a blockchain and they are native to it and operate on it whereas tokens are not dependent upon the blockchains like that and they get created using smart contracts.
So the next time you think of the words crypto coins or tokens, be sure to not misunderstand them for the other. Do check out our other articles on topics related to cryptocurrencies.
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