The terms “cryptocurrency”, “coin”, and “token” tend to be thrown around pretty interchangeably. In a lot of cases, a coin and a token don’t seem any different at all. If you log into your favorite cryptocurrency exchange, they will be all mixed together in a giant list and behave exactly the same. However, behind the scenes, they are operating very differently. If you are planning on creating your own cryptocurrency, it’s important to know the differences. Depending on your needs, coin or token creation can drastically change your project scope, the type of users your project appeals to, and especially the way it is used.
Keep in mind that there is no central body anywhere defining these terms, the definitions and distinctions tend to come from general community consensus, so all of these terms can be somewhat fluid, but based on web3devs’ interaction with various blockchain communities around the Internet, we’re pretty confident these terms represent the current consensus. Blockchain tech changes fast, though, so don’t hesitate to reach out and correct us if you’re reading this at a later date and things have changed.
The term “cryptocurrency” is a fairly broad term. Out of the three terms we’re defining here, this one is probably the most ambiguous. The traditional definition was that a cryptocurrency is a digital currency that utilizes blockchain technology, which in turn uses cryptography to verify transactions. In the past few years, though, we’ve seen really interesting projects like Iota, which doesn’t even use a blockchain! These days, people typically use the term “cryptocurrency” as any digital currency which uses cryptographic techniques of some kind in place of a centralized party to verify transactions.
Coins are a type of cryptocurrency. Once again, these definitions are somewhat vague and fluid, but generally, coins represent cryptocurrencies with their own blockchain and completely independent ledger of all the transactions since the creation of the coin. Bitcoin, Dogecoin, Litecoin, Dash, etc. are all coins since they exist independent of any other blockchain. Because of that, each coin will typically have its own suite of software like wallets and miners. If it’s not explicitly mentioned, a good way to tell if a project is a coin or token is to go to its website. If there’s a big “download wallets” button front-and-center, it’s probably a coin and not a token.
When people talk about tokens, they are usually referring to a currency that is built on top of an existing blockchain. More often than not, they are specifically referring to a smart contract that exists on the Ethereum network. Tokens like Golem and Augur do not have their own blockchain. They are simply a smart contract on the Ethereum network that maintains the tokens’ balances for users that already exist on the Ethereum network. These typically are built according to certain standards, most likely what’s referred to as the ERC20 token standard, but more and more are being built on the new ERC721 standard. These tokens will most likely not have their own wallets, since the Ethereum infrastructure supports all of this functionality out of the box for any tokens built with and Ethereum smart contract. Because tokens are smart contracts, they are generally used as a component of a decentralized application and have other aspects rather than simple financial transactions. If you go to a project’s website, and there’s very little being said about sending and receiving money, and a lot of copy dedicated to something non-financial, it’s most likely a token.
Fungible vs. Non-fungible
The main difference between the two most popular types of tokens (ERC20 and ERC721) is an issue of fungibility. Fungibility is the aspect of whether or not any given token is completely interchangeable with another. In the case of ERC20, individual tokens are all exactly the same. If you have one Ether and I have one Ether and we trade, absolutely nothing will change (technically, there will be a state change on the chain, but for all intents and purposes, everything will still look exactly the same). In fact, in ERC20 contracts, each person’s amount of currency is just tallied in a list. This is very different from the bitcoin protocol where transactions are tracked to specific coins.
In the ERC721 standard, tokens are not completely interchangeable. The famous example of a non-fungible token is Cryptokitties. Each cryptokittie is a single ERC721 token. The cryptokittie you have and the one I have are distinct and unique. If we switch, it’s not as simple as updating our totals on a balance sheet, we will have a completely different item.
Neither standard is necessarily better or worse than the other, they are simply different and work well for different types of use cases.
Creating your own cryptocurrency
If you’re looking to create your own cryptocurrency, it’s important to understand the tradeoffs of both coins and tokens. Creating a coin is a much more intensive project, but it is much more customizable since you’re not constrained by another project’s protocols. However, if you don’t need much customization, if you just need a cryptocurrency that can send and receive, a token is probably the way to go as the entire infrastructure to use that currency is already there.
web3devs provides a cryptocurrency creation service if you are ready to start on creating a coin today.