What is cryptocurrency?
The term cryptocurrency refers to a class of digital assets that rely on cryptography and blockchain technology. Indeed, the feature that ties all cryptocurrencies together is their reliance on blockchain networks.
Initially, these virtual coins and tokens were designed as a non-sovereign alternative to fiat currencies like the USD. However, a digital asset can have a central authority and still be classified as a cryptocurrency.
Some cryptocurrencies have a clear centralized issuer, such as Circle for USDC and Tether Limited for USDT. Governments can also issue CBDCs (Central Bank Digital Currencies). However, there are many decentralized crypto projects like Bitcoin that have no clear leader or governance structure.
People often use cryptocurrency when referring to the industry as a whole. Although some conflate this term with coins, cryptocurrency should include any coins and tokens on a blockchain network. In other words, if you see these digital assets listed on reputable crypto price aggregator sites like CoinMarketCap, they are cryptocurrencies.
What is a crypto coin?
The reason many people confuse crypto coins with cryptocurrencies is because of the word "currency." Crypto coins are often used as mediums of exchange. However, this common use case isn't what sets digital coins apart from tokens.
The defining feature of a crypto coin is that it exists on a native blockchain. These coins don't rely on a separate blockchain protocol for their existence. Instead, developers build coins into the code for their foundational blockchain.
Bitcoin is a prime example of a crypto coin. All the bitcoins that miners create are recorded on Bitcoin's blockchain. The fact that BTC is on its native blockchain is the reason it's a coin rather than a token.
Other examples of crypto coins include Litecoin, Dogecoin, and Ethereum.
What are crypto tokens?
The primary feature that separates crypto tokens from coins is that the former exists on top of a blockchain. Crypto tokens aren't native to the blockchain they’re built on. Instead, developers take advantage of a pre-existing blockchain to launch their tokens.
Blockchain developers can release tokens on any blockchain, but Ethereum is a common choice. In fact, the category of tokens didn't take off until Ethereum introduced smart contract technology. Smart contracts make it easier for developers to launch dApps (decentralized apps) using blockchains like Ethereum.
Many Ethereum dApps list their own tokens for multiple purposes within their ecosystems. In Ethereum's case, these tokens often conform to a token standard called ERC-20. A few of today's most prominent tokens include Chainlink, Uniswap, and Aave.
Although most of today's tokens are on Ethereum, any digital asset built on another blockchain qualifies for this category. These include fungible and non-fungible tokens (NFTs) on competing blockchains like Solana, Cardano, and the BNB Smart Chain.
Native vs. non-native cryptocurrencies
Since the difference between native and non-native blockchains is crucial to the coin and token distinction, it's worth reviewing these terms in greater detail.
A native blockchain refers to the foundational layer of a cryptocurrency project. Developers may also refer to this blockchain as layer-1 because it doesn't rely on another network. The code that governs a native blockchain is self-contained, and its coins are only valid because of the protocol's built-in features. For example, Ethereum’s native token is ether (ETH).
Anything non-native in cryptocurrency is on top of a layer-1 blockchain. Therefore, a token is any crypto issued on another blockchain project, typically a smart contract blockchain like Ethereum.
There are also non-native layer-2 blockchains that derive their security from a native protocol. Examples of Ethereum layer-2 blockchains include Polygon, Arbitrum, and Optimism.
Uses for crypto coins
Crypto coins have many use cases, but most mimic the properties found in fiat currencies or precious metals. In the 2008 whitepaper "Bitcoin: A Peer-to-Peer Electronic Cash System," Bitcoin developer Satoshi Nakamoto likened BTC to a digital currency. People can still use digital coins to pay for goods and services or to exchange value with friends and family on crypto wallets.
Not all businesses accept crypto coins as payment, but a few nations like El Salvador and the Central African Republic recognize Bitcoin as legal tender. Plus, more payment platforms are integrating with Bitcoin's Lightning Network to make transactions cheaper and faster. For instance, it's now possible to access the Bitcoin Lightning Network on Strike, Exodus, and Cash App. There are also businesses like McDonald's, Overstock.com, and Tesla experimenting with cryptocurrency payments.
While most coins serve as decentralized peer-to-peer payment systems, some have become alternative long-term investments. For instance, it's common to compare Bitcoin to digital gold due to its scarce supply of 21 million coins. Some purchasers believe Bitcoin's decreasing issuance could serve as an inflation hedge and a store of value commodity similar to precious metals.
Crypto coins are also used to pay transaction fees and reward validators on their respective networks. For example, computers on Bitcoin's blockchain compete to solve an algorithm every 10 minutes. The first computer to correctly complete this algorithm will post the next block and receive BTC fees and rewards. Bitcoin's block rewards will reduce by half every four years until the network reaches 21 million coins.
Uses for crypto tokens
Like digital coins, crypto tokens have fiat value on cryptocurrency exchanges and NFT markets. Although tokens can be used as alternative purchases or mediums of exchange, there are far more potential uses for these cryptocurrencies. To better appreciate the many uses of crypto tokens, it's helpful to review the most popular token types:
- Utility tokens: They play a specific role within a Web3 project's ecosystem. For example, utility tokens can grant holders blockchain voting rights, staking privileges, or access to in-game items. As long as a cryptocurrency has a purpose within its dApp, it can be considered a utility token.
- DeFi tokens: They’re a subset of utility tokens associated with DeFi (decentralized finance) applications. These tokens often grant holders unique benefits on a DeFi protocol. Many dApps like Uniswap, Compound, and Aave use DeFi tokens as rewards to encourage people to add crypto to their liquidity pools.
- Governance tokens: As the name suggests, these grant holders the right to vote on upcoming proposals for a specific dApp. Typically, one governance token equals one vote. Anyone who holds governance tokens can stake them on active proposals to influence the future direction of a Web3 project.
- Play-to-earn game tokens: Many blockchain-based games like Axie Infinity reward players with in-game tokens. These tokens may be used to purchase digital items, upgrade characters, or access VIP experiences. Gamers can also convert P2E tokens into other cryptocurrencies or cash on an exchange.
- Security tokens: These represent partial ownership in third-party projects. It's helpful to think of security tokens as digital versions of traditional assets like stocks, ETFs (exchange-traded funds), and REITs (real estate investment trusts). Indeed, many security tokens track the real-world prices of equities. Since security tokens are primarily used for price speculation, they have to meet the U.S. Securities and Exchange Commission's standards.
- Wrapped tokens: They’re synthetic copies of an underlying cryptocurrency used on an alternative blockchain. These tokens are often used to transport crypto assets between blockchains on bridges. Web3 users deposit crypto collateral on a bridge to receive a wrapped version on another blockchain. The most common example of a wrapped token is Wrapped Bitcoin, which is a synthetic copy of BTC on the Ethereum blockchain.
- Stablecoins: Since stablecoins are always on top of a smart contract blockchain, they're technically crypto tokens. Although most stablecoins track the price of USD, they can also track assets like gold. Many stablecoins like USDT and USDC exist on multiple blockchains but are most actively traded on Ethereum.
- NFTs: Non-fungible tokens (or NFTs) are unique virtual assets that represent some form of digital media. While NFTs are often associated with animated pictures like the Bored Apes, they have countless potential applications, including metaverse land rights, virtual tickets, and digital albums.
Wrapping up
Defining crypto terms can be confusing. However, the primary difference between coins and tokens is relatively straightforward. If a cryptocurrency is on a native blockchain, it's a coin. In contrast, cryptocurrencies issued on top of another blockchain are tokens.
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