What's the difference between Coin and Token?
Tokens, ERC20, and why it's relevant.
People use both terms as synonyms, but actually, they are not. A big part of the confusion comes from the term “cryptocurrency” itself. Because of the term “currency”, it seems natural to refer to them as “coins”.
However, there is actually a key distinction between both.
Let me give you an example first. When people decide to create an online shop, they can choose between setting up their own webpage from scratch or using platforms like Shopify. Most often than not, the latter is a way more convenient choice. Why? because you don’t need to worry about any infrastructure, design, payment gateway, and other functionalities. Shopify solves that for you, you just need to focus on creating your account, set up your storefront, and start doing business. In exchange, they benefit by charging you a fee for using their platform.
The same logic applies to the crypto world. Developers need to be able to code on something, store their data, and validate their transactions. They need a blockchain to build their protocols on and ensure it’s secured by its cryptography. For this, you can either build your own blockchain, or you can piggyback on somebody else’s.
This is exactly the difference between a coin and a token.
The key factor is where the project is built on, and whether it has its own blockchain.A coin is built on and uses its own blockchain, whereas a token uses someone else’s blockchain as the backbone, without having to worry about developing its own infrastructure. Therefore, Ethereum’s cryptocurrency ETHER is a coin, whereas UNI (from Uniswap), which is built on Ethereum’s blockchain, is a token.
Now you know that the majority of the thousands of cryptocurrencies listed on exchange platforms are actually tokens.
What is ERC20?
There are different types of token standards. Even within Ethereum itself, there are many others. ERC20 is currently the most popular and commonly used.
ERC20 is a standard for Fungible Tokens for those applications built on Ethereum’s blockchain, which outlines some mandatory and optional functions a token needs to have.
Now, why would people want to follow a specific standard instead of just programming their tokens however they want to? Besides the question of what’s the point of reinventing the wheel, the answer is scalability.
Think of it this way. In our houses, we have different outlets to plug in our electronics. All these outlets are designed for the same type of plugs, and all the manufacturers in the country will make sure to produce their electronics with that plug, so no matter which brand you buy, and which outlet you’d like to plug it into in your house, it will work seamlessly, without any additional effort to ensure they are compatible.
The same thing happens in crypto.
You want to make sure your product shares the same interface as the rest of the ecosystem to ensure interoperability, and be able to be integrated easily to other projects in the network, such as exchange platforms, wallets, etc, to scale your operations.This way, for an exchange platform, for example, there is no need to be integrating token by token, but do it just once for ERC20 standard, because all ERC20 tokens share the same interface in the programming level.
Does token standard impact its value?
The answer is, NO. A token standard has nothing to do with the actual value of the token.
A token is the virtual representation of something, and this something can be fiat currency like USD, an ounce of gold, financial assets, etc. So the value of a token comes from the token’s market valuation that has to do with what it represents. In the cases of NFTs (Non-Fungible Tokens), it can even represent art, real estate, unique collections, etc.
Why is this relevant?
To quote Ray Dalio, “decision making is a 2 step process: first learning, and then deciding. Learning must come before deciding”.
Knowing the difference between coin and token, and how the standards work, will give you a better understanding and perspective of a project.
For example, just because a token has been added to a big exchange platform doesn’t necessarily mean it has gained the right validation, it might be because it follows a token standard that has already been integrated into that platform.
At the same time, knowing that ERC20 is the most popular and commonly used token standard and that all the applications that adopt this standard are by definition, part of Ethereum’s blockchain, also brings some perspective regarding how powerful network effects and ecosystems are.
Having said this, I do want to clarify that just because a protocol is originally built on a specific blockchain, doesn’t mean it can’t migrate into a different one. This space is growing and evolving at a very fast pace, and there are already quite a few Ethereum competitors in the market!