Learn Academy Introduction to cryptocurrenciesLesson 4: What Is a Token? What Is a Coin?

Lesson 4: What Is a Token? What Is a Coin?

After completing this lesson, you will be able to:

Explain the difference between coins and tokens.

Know which major cryptocurrencies are coins and which are tokens.

Name some use cases for tokens besides cryptocurrency.

Understand why you don’t get a physical coin when you buy a Bitcoin or other unit of cryptocurrency.

Understand that there are many different kinds of tokens.

Welcome to lesson number four in Kriptomat’s Introduction to Cryptocurrencies. This lesson is “What Is a Token? What Is a Coin?”

Like just about everything in the crypto world, this story starts with Satoshi Nakamoto:

The inventor of Bitcoin could have called his invention Bytecard or Bitbills. But he chose the name “Bitcoin.” Ever since, we have used the words “coins” and “tokens” as the units of cryptocurrency.
Just as you can have one dollar or one euro or one franc, you can have one Bitcoin or one Shiba Inu or one Cardano.
You don’t actually get a physical coin when you purchase cryptocurrency. You get a virtual coin. According to Encyclopedia.com, “virtual” in this usage means “not physically existing as such but made by software to appear to do so.”
Unlike real coins, crypto coins are divisible. When you buy Bitcoin, you don’t have to save money until you have enough to buy a whole coin. You can purchase 15 or 20 euros’ worth of Bitcoin, a fractional amount. Tokens work the same way. All crypto platforms and wallets handle this smoothly.

We sometimes call units of crypto coins, and sometimes we call them tokens

Coins and tokens are essentially the same thing.

By convention, we refer to a blockchain’s native currency as a coin. For example, Bitcoin and Ethereum are coins.

Currencies that don’t have their own blockchains are called tokens. Examples include Tether, Shiba Inu, Chainlink, and Uniswap.

Tokens tend to have a wide variety of uses

Consider an application that is based on smart contracts on the Ethereum blockchain. Maybe it’s a decentralized finance (DeFi) app that lets you earn rewards by lending some of your crypto to special funds – “liquidity pools” – that other users can borrow from. This app is likely to pay rewards to lenders using its cryptocurrency. It is very common for DeFi applications and other blockchain-based apps to pay rewards and charge fees in their tokens.
These application-specific tokens account for most of the cryptocurrencies that have been created. Developers tend to create a new token for each app or platform they create, and in the fast-growing blockchain world, that is thousands of new tokens per year.

You could also use tokens to establish an economy within a customer loyalty program. Imagine that you own a cabin at a popular lake resort. Your customers could earn tokens every time they stay with you, then trade the tokens for room upgrades, discounted stays, or dining room vouchers. These tokens would work like the “points” travelers accrue in airline and hotel loyalty programs, but they are more secure and more flexible.

If other cabin owners agreed, you could create a small market in which guests all earn the same tokens and can trade for benefits at all the properties. These tokens could be bought and sold on platforms like Kriptomat, but they are primarily used within the loyalty program and the dApp that manages it.

Owning a particular project’s tokens could give you voting rights in the project’s future. These are known as governance tokens.

Other tokens exist to celebrate celebrities or internet memes. To provide stability in the notoriously volatile crypto market. To let users share in a project’s success, much as owning stock does.

While we’re at it, we should probably say a few words about nonfungible tokens, or NFTs

NFTs are tokens on the blockchain, but they are not really cryptocurrencies. They aren’t intended to be used as currency for buying and selling goods and services.
We will have much more to say about NFTs in our next lesson.

I hope you’ve enjoyed this brief tour of blockchain coins and tokens!

So – what have we learned?

The only coins in the crypto world are virtual, not metal.
You can buy, sell, or own a portion of a cryptocurrency coin or token.
Tokens have a wide variety of uses.

That’s the end of this lesson! Test your understanding and earn points toward a Kriptomat Academy certificate of achievement by taking the test!

What is the difference between a coin and a token?

It is possible to buy, sell, and own partial coins, but tokens are indivisible.

Coins are the native currency of their own blockchains, while tokens are implemented for specific purposes on other blockchains.

Coins have cash value and tokens do not.

Coins have serial numbers, but all tokens are identical.

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Which of these cryptocurrencies are coins?

CryptoPunks and Mutant Ape Yacht Club

Dai and Chainlink

Ethereum and Fantom

MakerDAO and Chainlink

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Which of these is NOT a use of tokens?

Accumulating voting rights for a blockchain-based project or platform.

Paying fees and receiving payments in a DeFi application.

Depositing sums into a state-licensed bank.

Earning rewards within a customer loyalty program.

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Why don’t you get a physical coin when you purchase a crypto coin or token?

Your name is added to the list of token owners so anyone with an internet connection can look you up and see your net worth.

Physical coins would be unwieldy with some currencies. For example, 1 euro could buy you more than 80,000 Shiba Inu tokens.

Technically, any cryptocurrency can be redeemed for whatever backs it – typically gold coins. But in practice, no one requests the coins.

All transactions are stored on the blockchain open ledger, which establishes your ownership and the right to transfer the crypto to any address on the blockchain. The entry on the blockchain establishes your ownership without physical possession of coins, much like a deed establishes ownership of a house.

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How are NFTs different from other tokens?

NFTs are unique, not interchangeable.

NFTs are usable only by collectors and artists.

NFTs are used to buy and sell items in games and metaverse-like environments, but not to buy goods and services in the offline world.

There is no tax on NFT transactions.

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