“What’s the difference between a coin and a token?” – a quick primer for beginners!
I wrote this article yesterday, to explain how a coin comes into play on the blockchain. I later realized that a lot of people may not know the differences between a “coin” and a “token”, so I’m going to explain that here!
Let’s start off with what a blockchain even is! A blockchain is just software that is open source and distributed across many computers. These computers that run the blockchain software are considered “nodes”, and they keep track of the blockchain ledger, and any coins, tokens, and transactions associated with it.
The “coins” on the blockchain are just data (ones and zeroes) that is already written into the software. Using Bitcoin as an example, all 21 million Bitcoins are already in the Bitcoin software, and ownership of these coins is designated through the use of public and private keys, which gives the owners access to their Bitcoin on the blockchain. Also, with each new transaction block that is mined, new Bitcoins are awarded to the miners that processed these blocks. I touched on this whole process in my previous post.
In other words, “coins” on a blockchain are just part of the software itself, and are there from it’s inception.
Tokens work a bit differently, in that they’re smart contracts that are deployed onto a blockchain, and are not innate to the blockchain software itself. Using Ethereum as an example, a token (such as an ERC-20 token), is something that a user creates, and deploys onto the blockchain software via smart contracts. When a token is added to the blockchain, the creator of the token is able to write the rules for how a token will work i.e. the max supply, tokenomics, burn rate, functions, etc. All of this is handled in the smart contract portion of it’s creation. Tokens do not have their own blockchain, so they have to abide by the rules of the governing blockchain i.e. Ethereum.
Hopefully this helps to explain the differences between a “coin” and a “token”!