What is the difference between a coin vs token?
The crypto market has more than ten thousand listed projects, and all have their currencies; coins or tokens. Each project has a particular purpose and offerings. Some are big, and many are small, but all need their own currency to sustain their operation.
Some projects have their own layer-1 platforms. Evolved from Bitcoin’s “blockchain” concept, these more comprehensive ecosystems have unique blockchains that offer ‘smart contracts’ for layer-2 projects to operate and specific services within their ecosystem. Ethereum is the first blockchain that successfully implemented this concept, and now this ecosystem is the largest one in the market. Important to note that, each blockchain is independent and not connected to each other… yet!
Each blockchain has its own native currency, i.e. Ethereum is ‘ETH’. This native ‘coin’ is used to sustain its ecosystem’s local economy – mainly to cover transaction costs within the chain, referred to as ‘gas fees’. Each layer-2 project that operates on Ethereum’s ecosystem has a smart contract via a published contract address in the blockchain. Each smart contract has its own currency, referred to as tokens, to conduct its local project operations i.e. for rewards and incentives for the project development etc. In the Ethereum case, most smart contracts* have a token standard of ERC20. Accordingly, as the common denominator, all ERC20 tokens are tradable via all decentralised financial services (DeFi) on the Ethereum blockchain.
For example; Compound Finance has a unique Ethereum blockchain contract address to validate its smart contract in this blockchain, and it has its own token; ‘COMP’, to sustain its own local project activities. If you decide to trade COMP to another ERC20 token, then decentralised exchanges (DEXs) like Uniswap will provide the platform for you to complete this permission-less exchange process; as long as the other token has the same token standard (i.e. belongs to the same ecosystem).
Using Ethereum as an example again; there are also ‘wrapped tokens’… This is when other native currencies (not part of the Ethereum blockchain) are represented as ERC-20 standard tokens by securing a smart contract on the Ethereum blockchain. For example, Bitcoin has its own blockchain, and the only way to integrate BTC coin directly into the Ethereum DeFi system is to transact with WBTC (wrapped bitcoin). It has the same value as BTC but, it’s an ERC20 token which gives the flexibility to trade this asset permission-less; without the need to send BTC coin to central exchanges and sell it then buy an ERC20 token and then send it back to your ETH wallet.
Note: Each blockchain has a different token standard; hence, currently, you can not swap a token from ‘Solana’ blockchain with a token from ‘Ethereum’ blockchain on a decentralised exchange platform. But this will change in the near future.
Top 5 Eco-Systems
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(*): The above information is about fungible tokens. There are other token standards that are utilised for other types of transactions – they are called NFTs (Non-fungible Tokens). Please do your own research.
