If you've been interested in the crypto world for a while, I'm sure you heard the word "token" a lot. The concept behind it, though, can be quite confusing. Aren't all the cryptocurrencies also tokens? And if not, why do some people use these terms interchangeably? You don't have to feel overwhelmed by all these crypto-related issues. We're here to rescue you and achieve clarity.
The crypto world is fairly new and, because of that, is in constant evolution. We've been through the primary definition of blockchain and the difference between a crypto coin and a crypto token here on the blog. In case you need a refresher, let me give you a very brief introduction.
The easiest way to differentiate a token from a coin? Understanding if what we're looking at is running on its own blockchain or not.
A coin is a crypto asset that has its own blockchain – that's why sometimes they're also called "native token", I know, confusing – while a token runs on another blockchain.
Another thing to keep in mind is that coins can be used mostly for payments while tokens have multiple uses, which include payments, but not only.
Tokens are created through a process called Initial Coin Offering (ICO), which is the crypto version of an IPO. Instead of mining, investors interested in the company and their projects can purchase those tokens.
Let's say you decided to move out of your shared apartment. You're tired of somebody else eating your food, and it's time to finally get your own place. Depending on the circumstances of your life, you're going to face two options. Option number one: you're going to buy your first apartment. It's going to be pricey, and you'll have to take care of a lot of things that generally are delegated to the landlord, but you'll have the freedom to be fully independent about any renovation or possible change you want to do. The other option is renting an apartment. You're going to make your monthly payments and make full use of the apartment without the hassle of taking care of more annoying aspects like maintenance and so on. But you'll have to ask permission for big changes, and your landlord might not be cooperative from time to time. That's how coins and tokens work.
A coin uses its own blockchain to keep track of all the data, which in our analogy corresponds to owning the apartment. On the other hand, tokens use other coins' infrastructure and pay rent. When creating a token, you don't need to create a new blockchain, the full code or worry about validating transactions. You just create the token and let it run on other blockchains.
The easiest way to understand how a token works is by looking at Ethereum. Ethereum has its own blockchain that both stores value and validate transactions. The team behind it has spent years improving the system, updating it and looking for vulnerabilities. An Ether token uses the Ethereum blockchain capabilities as a backbone and infrastructure.
Let’s compare that with the Basic Attention Token (BAT). The team behind it wanted to create a simple system to reward the creators for their online followings. By using the Ethereum blockchain, they could focus their attention on the project's ultimate goal without wasting too many resources on stability and security, as these were already provided.
When a project is growing too much, a team can migrate a token to a coin. You can't convert a token straight into a coin, but you can design a coin that functions the same way. Later, you'll create a bridge that will allow users to swap their old tokens for the new coins.
Some tokens are available on multiple blockchains, allowing users to enjoy the benefits attached to the different chains when sending and/or receiving tokens.
Another useful thing to know is that some coins can be represented as tokens on other blockchains. Do you wonder why? It's just a matter of money. A transaction directly made on Ethereum blockchain is way more expensive than the same transaction made on other blockchains. That’s why, for example, some people created tokens that mirror the price of Ethereum but on different blockchains, making it much more affordable to trade a representation of the coin – the token – instead of the original coin.
Every token has its own purpose, and some have more than one. The topic is extremely vast, and we'll need way more than one blog post to analyse every aspect of it. But at least now, you'll probably know a bit more about it. Hopefully, next time you talk with your friend obsessed with cryptocurrencies, the topic won't seem obscure anymore.