Tokens and coins are often used interchangeably. What is the difference and what does it mean you will learn on this page.
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What is the difference between a tokens and coins?
The cryptospace has many new investors, enthusiasts, developers and with it many new terms. These terms can cause a lot of confusion on several levels. Blockchains, (crypto)coins, tokens, equity tokens and utility tokens are some of these new terms. Although it all seems very confusing, the reality is a lot easier.
To begin with, a distinction must be made between shares, as we know them from the stock exchanges, and digital money. Digital money, such as Bitcoin, is intended as a means of payment. In addition to Bitcoin, there are many other types of “cryptocurrency” that exist. They measure their value by supply and demand, just like gold and silver do. There are also shares in the crypto space, so-called equity tokens. These act like shares, but recorded on the blockchain. Briefly, below are the definitions of a coin, token, equity, utility token and security token.
To start with a ‘coin’, a ‘crypto-coin’. A coin runs on its own blockchain, on its own system. It is therefore completely independent. A coin could be compared with a contemporary currency, such as the Euro. Bitcoin is a coin and has been developed with the aim of serving as a digital payment method.
Next there are tokens. Tokens, by definition, do not run on their own blockchain, unlike a coin. They are added to an already existing blockchain. Tokens can have the same functionality as a coin, although this is not very common. There are a number of different types of tokens.
Anyone can easily create their own token and run it on an already existing blockchain. For example Ethereum, after this company has built its own blockchain, these tokens can be swapped into coins. Once this ‘coins swap’ has taken place, the former tokens will run on their own blockchain and have become coins. Their functionality does not change!
“Sometimes when someone has created a token, the developer is busy building their own blockchain in the background. When it is launched, it will be quite easy for the developer to run existing tokens on a new, proprietary blockchain. These tokens are then exchanged for “coins” via an exchange. These are also known as “swaps”. As a user, you will not notice this exchange. After all, the name of your crypto currency remains the same, but it now runs on its own blockchain and not on the blockchain of Ethereum, for example.
What are Equity Tokens?
Equity tokens are just like stocks, as we know them from the stock exchanges. If you buy an equity token, you own a share in the company. As a result, people are also entitled to a share of the profits of this company and to a certain extent the right to employee participation. The main difference between equity tokens and shares is that with equity tokens, the share is registered on the blockchain instead of on paper or in a database. You can say that equity tokens are the stocks of the 21st century.
What are Security Tokens?
However, security tokens are also a kind of shares, only you do not own a part of the company. You own a token that measures its value against the success of the company and can therefore decrease or increase in value.
What are Utility Tokens?
Utility tokens are the ‘usable tokens’ of a particular blockchain. These tokens are used as internal means of payment for a particular service, such as voting rights.
All cryptocurrencies vary in value continuously, this is because their price is based on the principle of supply and demand. If more people want to exercise voting rights on a company, the utility token will become more valuable. After all, you must first purchase the token to use this service. If more people believe in a particular company, the equity or security tokens will increase in value. If more people believe in the usefulness of Bitcoin, Bitcoin will become more valuable.