Let’s say you want a new way to get around. Well, the way that I see it, you can either buy your car and have to manage that car like keep it up to date, change the oil, replace the tires, all that stuff.
It’s your overall responsibility to keep that car because it is yours.
The alternative is that you could rent a car. This means you can borrow a car for a monthly payment, and in that case, you can use it for whatever purposes you might need.
You just pay the owner the rent for using that car, and then you don’t have to worry about any of the issues.
Depending on the different factors in your life, you would have to choose the one that best fits your needs and which one was wiser to go with.
For example, you may not have a bunch of cash to buy a new car outright, or maybe you were just super busy, and you don’t want to take care of the maintenance.
Well, if you think of this analogy, it’s pretty much the same as the differences between a coin and a token.
What is The Differences Between a Coin and a Token?
A coin uses its blockchain to keep track of all the data, which in our car analogy would be owning the car.
When it comes to a token, though, you are using someone else’s coins blockchain as your infrastructure. You basically pay rent.
When you create a token, you don’t have to create the blockchain; write the entire code and worry about how it should be validated. Instead, you just make the token, and it runs on that blockchain.
The best example of this would be Ethereum. Ethereum is its blockchain that both stores value and validates transactions.
Ethereum’s team has been working very hard the past few years to improve the entire system, update how it works, and patch vulnerabilities.
An Ethereum token or an erc20 token uses Ethereum’s blockchain’s capabilities as its backbone and infrastructure.
For example, Basic attention token is an erc20 token built on the Ethereum network. The team decided it was not large enough to create their mainframe, but they wanted to create a system where users could reward the creators that they follow in a simple manner without going too deep into it.
The basic attention token team can focus on providing a great product that is the brave browser, a web browser that automatically replaces a website’s advertisements with advertisements that reward the creator with brave.
By creating a token, the brave team could rely on Ethereum’s network to provide safety and stability while focusing on their own product.
Also, you should know that a team of developers can migrate from a token to a coin if they decide that their project is growing quickly enough.
If we think about crypto.com, they recently just launched their mainnet, which is a fancy way of saying they launched their coin which is now validating their transactions.
They used to have a token, but it got so popular that they decided to create their own blockchain and branch off.
Here’s an important thing, you can’t convert a token straight into a coin. You can create a coin that functions the same way and then build a bridge that will allow users to swap out their previous tokens for the new coins.
In some cases, some coins like Leo are tokens on multiple networks.
For example, Leo is on the Ethereum network, the Binance smart chain network, and the hive network.
Another essential thing to know is that some coins are represented as tokens on other networks.
For example, a few days ago, I bought something called Binance peg Ethereum token on the Binance smart chain. I did not actually buy Ethereum, but instead, I purchased a representation of Ethereum on the Binance smart chain network that mimics the price of Ethereum.
You might be wondering why I did this?
Well, a regular Ethereum transaction is very high; however, a transaction on the Binance smart chain is only 50 cents. So it is much more affordable to trade a representation of Ethereum on the Binance smart chain network.
You can kind of think about it like this, if you buy a stock of gold, you own the stock but all it does is represent the gold. At any time, you can cash out that stock for a piece of gold. So it’s basically gold, at least for trading purposes.
I hope that this isn’t too confusing.
While that is a simple version of it, there are a few different types of tokens that we can use to categorize the purpose of each token.
Let me go over a couple of examples here and maybe you’ll get the hang of it if you haven’t already.
- Platform tokens
Platform tokens are created to support a decentralized application on the blockchain.
For example, Uniswap is a decentralized application (DAPP) that allows users to swap out Ethereum tokens for other Ethereum tokens.
And even though they are a decentralized app they also have their token; the uniswap token.
This token is given out to those who invest in their platform, and it has the promise that eventually, token holders can vote on changes in the future and maybe even earn some of the profits from the trades.
- Security Tokens.
Security tokens are minted to represent ownership of another asset.
For example, let’s say you wanted to buy gold but you didn’t actually want to hold the gold. Someone could create a token that is tracked to the price of gold.
Instead of actually owning the gold, you owned a representation of it which technically would be much safer because it is much more difficult to hack an Ethereum token than it is to break into someone’s house.
Now, the tricky part here is that there should be a real asset behind it.
For example, I could create a gold token ask you to invest in it and not have any gold.
- Transactional Tokens
Transactional tokens are used as a fast and easy way to transfer money.
If we think of the coin xDai, it is currently pegged to the united states dollar and it’s easy for people to pay for say maybe coffee or buying that shirt you like at that local store.
You can use it the same as cash. However, the expenses of it are super low. Right now, the transaction fee is .00002 united states dollars, and that is ridiculously low.
To give you an idea of how cheap that fee is, you could make over 47 000 transactions and only pay one dollar in fees for them all. Try doing that on PayPal or through a bank wire.
- Utility Tokens
Utility tokens are tokens that have a value tied to their ownership.
For example, a Basic attention token is an Ethereum token that can be used to advertise on the brave browser.
In other words, if I wanted to advertise this website on the brave web browser, I could do so very quickly with my Basic attention token. In other words, utility tokens can actually do something.
Security tokens don’t do anything, you just buy them and hold them but a utility token can actually be used for commercial intent.
- Governance Tokens
Governance tokens allow token holders to vote on certain things.
For example, Uniswap could be a governance token in a future version of the Uniswap exchange.
Token holders could choose to vote to raise the fee of a Uniswap trade from 0.3 percent to 0.6 and everyone with a token would be allowed to vote on that change.
The decision with the most votes chooses the winner so you actually have more voting power by holding more tokens.
Obviously, there’s a pretty good reason to hold more tokens. By holding more you, can actually control the platform more, but this comes up with the problem of the authority being centralized but we’ll save that for another article.
Now that we’ve went over the different types of tokens, hopefully, you understand why we need them and how some of them work.
If you’ve enjoyed this blog post, we highly recommend checking out some of our other articles.
Thank you, guys so much for reading. I hope that you learned something and I do hope to see you in the next post.