There was a time when Bitcoin was the only cryptocurrency existed and for a long time, it was all that anyone cared about. Doing any cryptocurrency transactions meant that you were dealing with bitcoins and everything was very clear cut and easy to understand. But as cryptocurrency and blockchain technology continued to evolve and grow, many more new and relevant cryptocurrencies started to emerge.
Some of these cryptocurrencies were actual coins but others are just tokens. However, there are a lot of people who have started to use these two terms interchangeably, which in actuality is an over-simplistic and mostly wrong way of going about these cryptocurrencies.
Coins vs Tokens
As Andreas Antonopoulos tries to explain, “I think a good definition is this: a ‘coin’ has its own blockchain, whereas a ‘token’ does not. A ‘token’ is implemented on top of a ‘coin.’ For example, the colored coins used in CounterParty, Omni, and other implementations. Those are all tokens and they work on top of Bitcoin, which is a coin with its own blockchain. All of the ERC-20 and ERC-721 tokens that exist in Ethereum, those are all tokens. They don’t have their own blockchain, they operate on top of the Ethereum blockchain. People may use these terms interchangeably, which is very confusing for most new users. I think one way to remove the ambiguity – though it will not be a perfect rule and will probably be violated – is to call things with their own blockchain ‘coins,’ and things which operate on top of another blockchain as a smart contract or secondary layer ‘tokens.’”
The flexibility of developing a Coin
Commenting further on how some of the most popular cryptocurrencies, if Ripple and Litecoin are actually coins or just tokens, he elaborates, “Both Ripple and Litecoin are independent coins, they are not tokens on another blockchain. They have very different histories and paths.”
“Litecoin is primarily based on Bitcoin’s codebase, which it has slightly modified, has been following the development of Bitcoin very closely, and is meant as a ‘lighter, faster’ version, exploring different trade-offs between scalability, security, and centralization. It still retains more than about 99% of the Bitcoin codebase and keeps upgrading accordingly.”
“Ripple, on the other hand, is a completely separate codebase. It has nothing to do with the code in Bitcoin. It has a different model for implementing its network architecture and the validation of transactions. It uses a federated system instead of a decentralized blockchain. It has different properties for security and scalability.
Tokens and the limitations of Bitcoin’s blockchain
As everyone reading is probably aware that the ERC-20 standard for creating tokens has been hugely successful, and has driven many individuals and businesses to Ethereum. But are there any such smart contract protocols that allow the creation of tokens secured to Bitcoin’s blockchain?
Antonopoulos tries to answer this question by adding, “First of all, I don’t think Vitalik will blush if Bitcoin does smart contracts too. As I have said before, I don’t think Ethereum and Bitcoin are competing directly, nor do I think they can, because the flexibility that exists in Ethereum makes it less suitable for doing the robust reserve currency functions of Bitcoin. The robust reserve currency functions of Bitcoin make it less suitable for doing flexible smart contracts. You can’t get both. I know a lot of people will tell you that we can get both in one or the other system.”
“Bitcoin maximalists will tell you that Bitcoin can do everything Ethereum can do, only better. Ethereum maximalists will tell you that Ethereum can do everything Bitcoin and other chains can do, only better. I don’t think that is the case. In practice, there are engineering trade-offs that must be made, where you can’t get everything in one.”
These statements paint a very clear picture of which cryptocurrency is a token and which is a proper coin and also tells us how even two cryptocurrencies can be radically similar or different from each, and Bitcoin, while also being unique in their own right. However, when it comes to Token creation and smart contracts, Ethereum’s superiority is hard to challenge.
This article is a transcription of Andreas Antonopoulos’ explanation on ‘Coins’ and ‘Tokens’ Terminology.