Market data website CoinMarketCap lists price data on the top 1500 or so cryptocurrencies based on average prices and trading volumes across major cryptocurrency exchanges. Among the data’s main filter options are to split results by ‘coins only’ and ‘tokens only’. Cryptocurrencies are commonly classified as either a ‘coin’ or a ‘token’. What’s the distinction between the two?
There are two main ways different sources distinguish between cryptocurrency coins and cryptocurrency tokens. One of them is erroneous. A major contributor to this confusion is the large volume of online content currently being spewed out by the cryptocurrency space. Whether content marketing of questionable quality commissioned by the industry itself, a large section of which has piled into the ‘gold rush’, or by hobby cryptocurrency enthusiasts, one fallout of the fact the cryptocurrencies space is still a relatively new, and a bit of an online Wild West, is that there is a lot of poor quality information out there. Many of those writing on the topic lack experience and genuine expertise and fall into the trap of perpetuating inaccuracies published elsewhere.
Here we’ll highlight the commonly propagated ‘wrong’ way cryptocurrencies are defined as either coins or tokens. And, of course, the correct definition of the two categories.
Cryptocurrency ‘Coin’ Definition
A common mistake in defining crypto ‘coins’ is that they are cryptocurrencies that are intended to serve as a direct alternative to Fiat currencies ie. as cash. The accepted definition of a currency is a medium of value exchange that is generally accepted in exchange for goods and services. That means within a relatively broad content ie. a country, all, or a large majority, of vendors of general goods and services will accept the currency units in an exchange transaction. A necessary precondition for this is that transactions will be either instant or guaranteed and cleared within a short period of time.
Goods and services will either be priced in that currency or there will be an accepted benchmark exchange rate between the currency in question and a base currency pricing is provided in. Additional pre-requisite qualities are a currency must be divisible and its unit fungible.
It is an easy assumption, and mistake, to presume that cryptocurrencies such as Bitcoin, Bitcoin Cash and Litecoin, intended as direct Fiat alternatives are those defined as ‘coins’. And that cryptocurrencies such as Ethereum’s Ether, which are intended only to be ‘spent’ on a particular Blockchain platform are defined as cryptocurrency ‘tokens’.
The correct technical definition of a cryptocurrency coin is the units of cryptocurrencies that are built on their own unique Blockchain protocol. Ether and XRP, while not intended as able to be used to buy a loaf of bread in a theoretical cryptocurrency future, but only to pay for the use of functionalities of the Ethereum and Ripple platforms, are still, therefore, cryptocurrency ‘coins’.
Cryptocurrency ‘Token’ Definition
Cryptocurrency ‘tokens’ on the other hand are units built on top of another Blockchain, such as those associated with decentralised applications (Dapps) built on Ethereum or NEO or smart contracts like ICOs (Initial Coin Offering). Cryptocurrency tokens can either be assets, as in the case of ICO tokens, or have utility, like the tokens of Blockchain platforms built on Ethereum. An example of this would be the TRX token of Tron, an Ethereum-powered online content marketplace.
A further confusion is that there are cryptocurrency tokens designed to subsequently be converted into coins. An example of this is EOS, the fifth largest cryptocurrency by market capitalisation. EOS is currently an ICO token built on Ethereum. However, EOS is currently developing its own proprietary Blockchain platform which, on its mainframe release planned for June, will actually be a direct rival to Ethereum as a smart contract and Dapp platform. When the EOS Blockchain is released the Ethereum-based EOS cryptocurrency tokens will be converted into EOS platform cryptocurrency coins.
In summary, cryptocurrency ‘coins’ are cryptocurrencies that have their own, separate proprietary Blockchain. Cryptocurrency ‘tokens’ are cryptocurrencies built on a Blockchain platform that facilitates the creation of smart contracts and Dapps.