So you’re familiar with the idea of a cryptocurrency, perhaps even a blockchain. But have you ever wondered why some of these assets are called coins and others are tokens? They might well seem the same on the surface but, as the distinction suggests, they’re not. Bitcoin and Ether are coins, Tether and Shiba Inu are tokens.
So what’s the difference?
A crypto coin usually serves the function of being the native coin of a blockchain, which is used to trade currency, store value, the usual. A token is pretty similar, or at least it has similar functions. But, crucially, it tends to use another coin’s blockchain.
Ethereum uses Ether as its native currency, but tokens such as BAT (Basic Attention Token) and Loopring exist on Ethereum’s blockchain. They do this because the team of developers (usually smaller in number) can allow Ethereum to provide all the safety and security while the team behind the token just focuses on making a token that has good features. Ethereum’s blockchain calls its tokens called ERC20 tokens.
Are some blockchains better than others?
You could argue that, for sure. Bitcoin, for example, doesn’t really allow you to make anything on its blockchain, whereas Ethereum and Solana’s blockchains allow developers to create everything for everything from new tokens and meme coins to decentralised applications.
If tokens aren’t coins, how can they have a value?
They still have functions. Let’s look at Tether (USDT), the most popular token at the moment, as an example. This is a stablecoin, which means it tries to match itself to the value of a fiat coin. In Tether’s case it aims to be of the same value as one US dollar; for the token to be at, or constantly near 0.0 per cent increase and decrease, so there’s no risk of waking up and seeing your money has chopped in half. It’s useful for people who aren’t ready to risk the volatility that you’ll find with all other forms of crypto, yet they still want a crypto wallet.
You can argue that meme coins don’t do much, but they undeniably have a form of value. At the time of writing, Coinbase says Shiba Inu’s value has climbed 91,838,886.86 per cent in the last year. There are, to be clear, no typos there.
What do tokens actually do?
Security tokens are decentralised digital tokens that make you prove you are who you say you are, in order to access some data. Transactional tokens are used to transfer money, usually in order to make sure the fees are super low. Governance tokens are there to let people vote – if you own a token, you get a vote. If you own two you get two votes, etc. So tokens vary massively.
I saw some hype about Loopring recently. That’s a token, right?
It sure is, on the Ethereum blockchain – which means it has all the security that has made Ethereum a blockchain powerhouse that some think will even overtake Bitcoin.
The hype is due to ridiculous price increases. Those are mainly thanks to rumours about a link-up between Loopring and GameStop (which essentially is that GameStop are building an NFT marketplace using Loopring technology). But they’re also due to the features Loopring is promising which would make the token and its technology very accessible for people across the planet both in terms of finance and ease of use.
It’s aiming to be a sort of platform token-cum-blockchain that will let developers create their own decentralised exchanges. This will pave the way for things like NFT marketplaces to come to fruition (this is what GameStop is working on, and rumoured to be working with Loopring to generate). The uniqueness of Loopring is also why it’s performing well – we’re talking an increase from £0.31 to £2.16 (at the time of writing) within a month. That’s a 677.5 per cent gain.
Are there any other tokens I should know about?
Well, we’ve mentioned Tether, Loopring, and Shiba Inu. Other popular tokens include USD Coin, Chainlink, Wrapped Bitcoin (a version of Bitcoin that is compatible on Ethereum’s blockchain) and Uniswap. There are, thought, hundreds.
Wait – what’s Wrapped Bitcoin?
Say you want to use a decentralised application which is based on Ethereum. Or perhaps you want to buy a NFT made using the Ethereum blockchain, but you want to use your Bitcoin for it.
Well, you can’t, because Bitcoin can’t be used on Ethereum. Peak!
But, actually, it’s alright because you can swap your Bitcoin for Wrapped Bitcoin (wBTC), which has been designed to work on Ethereum’s blockchain. Easy. They always retain the asset of the coin they’re mimicking, too, so a wBTC is the same value as one BTC. There are other wrapped tokens, too. Being able to move between blockchains is currently a difficult thing to do, and wrapped tokens are one of the only solutions for it at the moment.
So that’s tokens for you: forms of currency and other valuable tools that are developed on a blockchain that they’re not native to, and often with a variety of different functions. Whereas a crypto coin is usually the native coin of a blockchain (like Ether on Ethereum) and is mainly used for trading and buying purposes.
Make sense? Lovely job.
Speak to a Financial Conduct Authority-registered financial adviser before taking financial advice, and think carefully before making any decision