TLDR: Coins are native tokens of a blockchain and are currencies that can be exchanged or invested. Tokens correspond to projects built on top of blockchains and are project- or application- specific, typically giving the token-holder privileges, voting rights, or perks within the token’s corresponding project. Tokens can be investments. All coins are technically tokens but not all tokens are coins.
Understanding the difference between a coin and a token is important to help you best evaluate and diversify your digital assets portfolio.
Coins and tokens are both considered digital assets, but there are a few key differences.
This saying may be familiar: A square is a rectangle but a rectangle is not a square.
Well, coins are tokens, but not all tokens are coins.
Coins are a blockchain's native tokens — sometimes called intrinsic tokens or base tokens. For instance, bitcoin ($BTC) is the native token of the Bitcoin blockchain; $BTC powers the Bitcoin blockchain and miners are rewarded with it for validating transactions on it. Likewise, ethereum ($ETH) is a coin; it is the native token of the Ethereum blockchain. All coins are technically tokens.
Tokens, colloquially used to mean anything that is not a coin, correspond to projects or applications built on top of or derived from existing blockchains. This is why they are sometimes referred to as derivative tokens.
Derivative tokens are application or project specific and can be exchanged for one another. Derivative tokens are fungible, meaning they can always be exchanged for one another, and transferable (they can be sent between wallets). There is usually a fixed supply of tokens. When a project releases tokens, it releases a fixed supply to more easily manage the tokenonomics.
Read More: WTF Is... Tokenomics?
Most tokens are derived from the Ethereum blockchain, because Ethereum is an infrastructure upon which other applications and projects can be built. Specifically, the ERC-20 standard enables developers to create and release tokens that fuel and correspond to the application they have built on Ethereum. For instance, Decentraland is a metaverse running on the Ethereum blockchain. Decentraland released the $MANA token — an ERC-20 token — so that Decentraland users and members can acquire $MANA and burn it to exchange for plots of land in the metaverse. The plots themselves are another type of token, in this case a non-fungible token, or NFT.
Projects or applications will “tokenize” — i.e. release tokens for a project — to raise liquidity and to give community members and investors a stake in the project. Tokens have different and sometimes multiple use cases within a project.
Tokens come in a number of categories, including but not limited to: governance tokens, utility tokens, social tokens, stablecoins, and wrapped tokens. Each of these categories serves a different function:
The above categories of tokens are all fungible, meaning they can always be exchanged for another of it. However, a non-fungible token (NFT) is technically a token too; it is simply unique from all others. NFTs are sometimes used to equate to the perks of the token categories above (ie using an NFT for membership or voting rights into a community). Project founders decide for themselves whether they want to do an NFT raise or a fungible token raise.
Coins (native tokens) are fungible too: one $BTC can always be exchanged for one $BTC.
Roughly but simply stated: [derivative] tokens run the project and coins run the blockchain.
Read More: WTF Is... An NFT?
In the crypto and web3 zeitgeist, “coin” and “token” can often be used interchangeably, especially in conversation. The simplest way to differentiate is asking whether this token powers its own blockchain? If not, it’s not a coin.
My favorite example to illustrate this confusion is ApeCoin ($APE). It’s called Coin, so it must be a coin right? Wrong.
$APE is an ERC-20 token derived from the Ethereum blockchain. There is no Bored Ape Yacht Club blockchain (yet). So, following our definitions, ApeCoin is not a coin. It’s a token.
More specifically, $APE is a governance and utility token for the Bored Ape Yacht Club ecosystem and owning $APE means membership in their DAO. $APE can be exchanged for in-ecosystem perks. $APEs value increases or decreases on secondary markets — exchanges — based on the success of the Bored Ape Yacht club ecosystem. When the ecosystem released $APE — its initial token offering to NFT holders and beyond — people bought the token, thus funding the project.
Confusingly, Initial Token Offering (ITO) and Initial Coin Offering (ICO) are often used interchangeably in conversation. But remember: it is only a coin if it’s powering its own blockchain. Releasing a derivative token is like creating a project-specific economic market.
Like most things in crypto and web3, there is a gray area in naming and definitions. Could $APE be considered a coin if it moves to its own blockchain? Sure. Does much change for the holder? Not necessarily.
What is at stake if we say “coin” when we mean “token” and vice versa? On a micro-level, not much: just be sure you are on the same page as who you are taking to. But on a macro-level, it is important to know what you are purchasing and investing in because tokens and coins behave differently.
Invest in coins because you believe in the blockchain, it corresponds to and you believe adoption of that blockchain will grow. Invest in derivative tokens because you believe in and want to participate in a particular project.
Ledger Academy: Coins vs. Tokens
Crypto Tokens vs. Coins: What’s the Difference?
Decrypt: What Are ERC-20 Tokens, Gas, ETH? Ethereum's Architecture Explained
This is not financial advice. If you don't want to spend money investing in crypto or Web3 — you don’t have to. The intent of this article is to help others educate themselves and learn.
Nicole Kyle is a storyteller, podcaster and gender equity advocate exploring the intersection of money, equality, technology, and creativity with a focus on crypto & web3 education. Nicole is a 2022 LinkedIn Top Voice in Gender Equity.