Part 3 of my “What is?” series
To all the crypto newbies out there who hear the terms “coin” and “token” thrown around almost interchangeably, I am here to provide some clarifications. Although these terms refer to two units of Blockchain and share many similarities, there are notable differences between them.
In a nutshell, “coins” are cryptocurrencies who possess their own Blockchain whereas “tokens” are cryptocurrencies built on top of an existing Blockchain. A coin is akin to the the roots of a tree and a token to a branch growing out of the tree. Simple, right?
Further, a coin is encrypted digital currency whose main purpose is to serve as a means of exchange or a store of value much like Gold or fiat, with the added bonus of decentralization and anonymity. Coins can be used outside of their native environments as they are independent of a platform.
A token, on the other hand, is dependent on a particular platform and can only be used within that ecosystem. So, in addition to being a medium of exchange within a network, tokens gives the holder access to a specific service or activity. The two examples below will illustrate these concepts clearly.
Bitcoin, is a cryptocurrency coin built on its own Blockchain. Bitcoin’s code is open source and accessible to all. Bitcoins can be exchanged for goods, services and other currencies. Originally intended to be used a currency much like fiat, it is increasingly considered “digital gold“, a borderless, permissionless and virtually unconfiscatable store of value protecting one from the consequences of economic crises and hyperinflation.
The transparency of Bitcoin’s code has allowed developers to create their own blockchains by tweaking the Bitcoin protocol. Computer scientist and ex-Google employee Charlie Lee famously created Litecoin by forking the Bitcoin blockchain and enabling quick transaction confirmations.
What is a fork? Investopedia defines a hard fork as the “radical change to the protocol of a blockchain network that makes invalid blocks/transactions valid (or vice-versa) […] which creates a permanent divergence from the previous version of the blockchain. Adding a new rule to the code essentially creates a fork in the blockchain: one path follows the new, upgraded blockchain, and the other path continues along the old path“. A hard fork results in the creation of a new cryptocurrency coin, not a token, since it creates a separate version of the original blockchain.
Binance Coin, despite its name, is a token that was built on the Ethereum Blockchain. It allows the holder to purchase cryptocurrencies on the Binance exchange platform. As you can see, Binance Coin is a medium of exchange in that it allows you to purchase cryptocurrencies, however it is limited to the Binance platform and has no real use outside of it.
These days, building your own basic blockchain is relatively easy. However, unless you are an expert programmer, programming a very sophisticated blockchain requires an important dose of time, effort and expertise.
Thus, most people choose to create a token on top of an existing blockchain. The advantage is that you don’t need to worry about the technical legwork involved in creating and maintaining the blockchain. However, the problem with creating a token is your reliance upon the native blockchain’s developers to improve their protocol in case you find limitations that need fixing.
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