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PATHWAY E) Digital Assets Explained

chapter 1/4

Crypto Coins and Tokens: Their Use-Cases Explained

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Beginner
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KEY TAKEAWAYS:
— Coins are any cryptocurrency that has a standalone independent blockchain (Bitcoin, Ethereum, Ripple…)

— Tokens are digital assets that operate on an existing blockchain network instead of on their own. This gives them some interesting properties relating to interoperability.

— Coins and tokens may seem similar but there’s a lot more to know under the hood; Together, they have built the basis of DeFi, a thriving digital art scene and even decentralized governance.

Entering the cryptocurrency market can be a complicated and daunting task. You may have heard of Bitcoin, but what about the other thousands of coins and blockchain projects out there? How do they work and are they all the same?

Well the answer is no, they are not all the same at all. While many cryptocurrencies offer the same core feature: a peer-to-peer transfer of monetary value, the purposes of different coins and tokens can vary greatly. But before we get into the specifics of different purposes of digital assets, let’s first start with the primary purpose of their creation: as an exchange of monetary value. Or more precisely, as currency. 

This key use-case has built the base of the cryptocurrency market as we see it today. The core tenets of blockchain technology, transparency, provenance and immutability, have the power to change the financial market as we know it.  In short, there would be no DeFi without coins or tokens.

On a very simple level, coins offer the basis of a secure network, while tokens allow for blockchain apps and platforms to build upon that base. But there’s a bit more to it than that. 

Let’s explore what crypto coins and tokens are in the first place.

Crypto Coins and Tokens: What Are they?

Crypto coins and tokens are digital assets primarily used for monetary transfer, or as a store of value. Put simply, they are both currencies using blockchain technology at their base. But that’s largely where the similarities end. In fact, the tech behind coins and tokens are quite different. 

Without getting too technical, coins are the native currencies of specific blockchains. For example, BTC is the native coin of the Bitcoin network. On the other hand, tokens are currencies (or digital assets) supported by a specific blockchain, rather than powering their own.

To see how this works in action, let’s explore each of these types of assets.

What Are Crypto Coins?

Coins refer to any cryptocurrency that has a standalone, independent blockchain — like Bitcoin. Put simply, if the cryptocurrency runs on its own blockchain, then it is a coin. This native coin is what you use for paying transaction fees and participating in the network. This native coin is what network participants receive in return for keeping that network secure.

To explain, coins provide the necessary basis of a blockchain network’s security model. As you might already know, blockchains require crypto miners or validators to secure the network and process transactions. But creating a decentralized blockchain isn’t as easy as it sounds. Miners and validators put in work to secure blockchain networks, and as a result, they require an incentive.

For example, on a proof-of-work blockchain, miners must solve complex mathematical equations which take an incredible amount of computational power. This requires specialized equipment and can consume a lot of increasingly expensive energy. On a proof-of-stake network validators must lock up huge amounts of funds as collateral in a process called crypto staking

Since the network needs participants, but processing transactions involves hard work, the security of a network relies on its incentivization structure. Since public blockchains are decentralized, coins are an integral part of this security model, as miners and validators must have an incentive to keep the system running.

Beyond those initial use cases, each blockchain may have differing use-cases for their native coin though. Each network has its founder and some have completely opposite use-cases.

What Are Crypto Coins For?

Let’s start with the most popular crypto coin as of yet, Bitcoin. This coin exists as a censorship-resistant store of value and medium of exchange that has a secure, fixed monetary policy. The native token of Bitcoin, BTC is the most liquid cryptocurrency in the market. It has both the highest market cap and realized market cap in the cryptocurrency sector. Bitcoin is used as a store of monetary value often dubbed “digital gold”, since it is secure and extremely decentralized.

However, other coins have been created for different reasons. All non-bitcoin coins are named “altcoins” but don’t let that fool you: They don’t all serve the same purpose.

So how do crypto coins work in practice? Well, Ripple (XRP) coin was created specifically to aid the traditional banking system, and therefore follows a more centralized model than Bitcoin. Then you have stablecoins, offering a way to transfer the value of a fiat currency using the security of a blockchain. A good example of a stablecoin is USDT, a cryptocurrency version of the United States Dollar (USD).

But it’s not all about serious financial instruments. You also have more frivolous coins, such as memecoins. A good example of a memecoin is Dogecoin. In this case, the coin’s only purpose is to represent a meme or piece of popular culture.

In short, not all coins are secure, not all coins are decentralized and, in fact, some coins don’t have a solid purpose at all. The only feature that links them is being a native coin of a blockchain network, but more often than not, they serve a purpose as some kind of currency.

Coins

What Are Crypto Tokens?

So now you know about native coins, but what about crypto tokens? 

Put simply, tokens are currencies (or other types of assets) supported by a specific blockchain, but they aren’t the native coin of the network. If that sounds complicated, let’s dive into how that works in practice.

The Ethereum network is the second most popular blockchain in existence and it also supports the most tokens out of any other blockchain so far. While the Ethereum network’s native coin is Ether, it also supports lots of other Ethereum-based currencies that follow a specific standard called the ERC standard. To explain, there are multiple currencies (and other assets) on the Ethereum network that are not Ethereum’s native Ether and each of those assets are known as tokens. 

The first token offered by the ERC standard was the ERC-20 token. In short, this fungible token standard allows users to create, issue and manage currencies supported by Ethereum. It actually fueled the ICO craze of 2017, with countless projects launching their own tokens on the blockchain. Since then, the standard has only expanded, adding ERC-721 tokens (non-fungible tokens) and ERC-1155 tokens (semi-fungible tokens) too.

A good example of an Ethereum token is SAND, the currency of blockchain metaverse, The Sandbox. This ERC-20 token lives on the Ethereum network, however, its primary purpose is as an in-game currency in the Sandbox game.

The reason the Ethereum network can support tokens is due to its smart contract compatibility. To clarify, the ERC standard allows you to deploy smart contracts that allow for fungible or non-fungible tokens. In other words, you can create your own cryptocurrency or digital asset without launching a whole blockchain yourself.

But tokens aren’t just for the Ethereum network. Today, multiple blockchains support fungible and non-fungible tokens, such as Solana, Cardano and Tezos.

What Are Crypto Tokens For?

Well, like crypto coins, there are multiple use-cases for crypto tokens. On a simple level, tokens can help blockchain apps and platforms to enable users to pay for specific services or fees. But there’s a bit more to it than that. 

Blockchain Apps Driven By Smart Contracts

Since smart contracts allow for digital asset transfer with conditions, tokens can have in-built rules. This means tokens can involve conditions relating to their distribution, transfer or even involving instructions directing to other tokens or protocols. This core functionality led to the creation of tokens with extra abilities coins weren’t previously capable of. Using smart contracts, tokens can have specific burn functions or conditional events attributed to them, creating a unique experience for their holders. In short, dapps and blockchain apps became a reality thanks to smart contracts and the tokens issued using them.

DeFi

Many blockchains are decentralized, and smart contracts allow for interoperable tokens and self-executing code. Using these two innovations, decentralized exchanges went from pipe-dream to reality. This created the core basis of DeFi as we know it today. Put simply, smart contracts allow the easy creation of digital assets which are all interoperable on a specific network. This means that swapping, lending and transferring these tokens is much easier and more secure than swapping different crypto coins. So naturally, their innovation opened the door to platforms capitalizing on this interoperability. 

A great example of this is Uniswap, a completely decentralized and automated crypto exchange. It uses UNI as its native token, an ERC-20 supported by the Ethereum blockchain. On Uniswap, fees and services are payable in UNI. And UNI is easy to swap with any other ERC-20 token, just like the SAND we mentioned earlier. 

But it’s not just exchanges either, tokens also made way for more complex platforms supporting swapping, lending, and even crypto derivatives. You can even buy tokenized real-world assets on the blockchain today. Yes–that’s right. There are crypto tokens that represent precious real world assets such as gold or silver too. These types of tokens are just the tip of the iceberg.

Utility

Some tokens are created as financial instruments and some without any reason at all, but some tokens serve a single purpose as part of a specific project or ecosystem. These are known as utility tokens, and they are responsible for all sorts of different ways web3 communities run or present themselves. 

Some utility tokens may act as in-game currencies, whereas others may be awarded as part of a loyalty scheme when using a specific company. Another popular use case for utility tokens is as decentralized voting instruments in DAOs. There are endless possible use cases for utility tokens. Who knows, you might come up with the next best use-case yet.

Understanding Coins Vs Tokens

Crypto coins and tokens have a variety of use-cases and there is, of course, some crossover, with both coins and tokens having their uses as an exchange of value. This means that when analyzing them, you’ll often look at similar metrics; their use, active holders, value, allocation, market capitalization and so on. But that’s largely where the similarities end.

See, coins are integral to the security of a blockchain and incentivize participant’s good behavior. They tend to be less volatile than tokens, and also less frivolous—but that’s not always the case. If you’re analyzing coins, it’s always clever to look at the technical side of how the network operates, such as its consensus mechanism. This gives you an insight into where that native coin is going, and whether the participant responsible for processing transactions is doing so effectively.

Tokens, on the other hand, provide purpose and utility to the network’s users, promoting the network’s growth in relevance and users. While that may sound trivial compared to security, each of these assets play a valuable role. 

Tokens are much quicker and easier to launch than coins. This means they are more than sufficient for temporary or singular use cases. But don’t don’t underestimate them for being easy to launch. Believe it or not, some tokens on the Ethereum chain have grown so far that they outweigh many coins with their own entire networks. ERC-20 token DAI is a great example of this. Even as an Ethereum token, DAI has far surpassed the Avalanche Network in terms of market cap. 

But of course, you can’t have tokens without coins. These two assets work in tandem to create a better decentralized experience for everyone. For decentralized peer-to-peer transfer of digital assets, you will need to rely on the native coin of a blockchain network. Then to benefit from interoperability, you’ll need to use tokens. Put simply, the question of coins or tokens depends very much on the specific use-case and the blockchain you want to use.

Crypto Coins and Tokens Vs Traditional Finance

While cryptocurrencies may seem overwhelming at first, it’s undeniable that blockchain technology is making the whole concept of “being your own bank” completely possible. With the innovation of tokens, cryptocurrencies are not just useful as a store or transfer of value, but also as financial instruments such as derivatives and representations of tangible assets too.

The difference between these assets in traditional finance and DeFi is ownership. While your bank doesn’t give you true ownership of any of the assets you store in your bank account, your crypto wallet is built a little differently. Using a non-custodial wallet, you retain the ownership of the assets in your account. That means that whether you want to lend your crypto tokens or use them as collateral to borrow funds yourself, or even create a decentralized blockchain game, only you have custody of your assets. This is clearly much more favorable than forfeiting your ownership to a centralized company. Imagine the centralized company (or bank) you trusted with your funds closes down, In this instance, your funds might be at risk. 

If you want to start lending, borrowing and more, then why trust a service that retains custody over your assets? Using blockchain technology, as long as you have a non-custodial wallet, saves you this worry. 

With Ledger’s ecosystem you can store and manage both coins and tokens with confidence they are secure while retaining ownership. You can even lend, borrow and access countless blockchain apps directly within Ledger Live, meaning you don’t need to forfeit custody of your keys to start exploring.

The future of finance is decentralized, and using each of these important digital assets, and understanding how they work, will give you the edge when holding or trading cryptocurrencies.


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