How to understand what a token is and how it differs from a traditional coin

If someone is new to the world of cryptocurrencies, the first confusion usually revolves around a basic question: what is a token and how does it fundamentally differ from a coin? The answer is not only terminological. Understanding what a token is means grasping the architecture of blockchain systems and their economics. This knowledge will open the way to a deeper understanding of risks and opportunities in the crypto market.

Fundamentals: What is a token in reality

To understand what a token is, we must start with the technology. A token is a digital asset that does not exist independently but is built within an existing blockchain network. Unlike coins, which operate on their own separate blockchains, tokens rely on the infrastructure and security mechanisms of someone else. You can think of them as an application layer that “borrows” the underlying blockchain.

Why is this important? Because it explains why launching a token is much faster and cheaper. A developer does not need to create a complete blockchain from scratch with millions of dollars in expenses. They only need to deploy a smart contract on an existing network. That’s why we have thousands of tokens but only dozens of major blockchains.

Famous examples illustrate this hierarchy: UNI is the governance token of the Uniswap platform on Ethereum, CAKE belongs to PancakeSwap on BNB Chain, and GMT serves the move-to-earn project StepN on Solana. All rely on the security and validation of their host networks.

Different forms of tokens in the current market

Not all tokens serve the same purpose. Utility tokens provide access to functionalities within a platform—they can be used to pay fees or unlock special features. Governance tokens give their holders the right to vote on the future of projects, often within decentralized autonomous organizations (DAOs). Security tokens represent ownership in real assets or shares in companies, similar to tokenized stocks. And then there are NFTs—non-fungible tokens—that are unique and serve to prove ownership of digital art, collectibles, or gaming assets.

This categorization is key for investors because each category carries different risks and potential.

Basic differences between a token and a coin

What is a token versus a coin? The answer lies in their fundamental nature, not how they are traded.

Native blockchain versus shared blockchain: Coins are native assets—Bitcoin exists on the Bitcoin blockchain, Ethereum on Ethereum. Tokens do not have their own blockchain; they operate within the rules of someone else’s system.

Technological standards: Since tokens share a blockchain with other assets, they must adhere to standard protocols. On Ethereum, this means ERC-20 for fungible tokens, ERC-721 for NFTs, and ERC-1155 for hybrid assets. This standardization allows seamless integration with wallets, DEXs, and DeFi platforms—but also means a token is limited by its host blockchain.

Transaction fees are paid in the blockchain’s native currency: Here’s a surprise that confuses beginners. When you send Bitcoin, you pay a fee in Bitcoin. But when you send a token like UNI, the fee is paid in ETH (gas on Ethereum), not in UNI. This is a fundamental difference with practical implications for your wallet.

Unique versus shared addresses: Each coin usually has its own address format. Tokens on the same blockchain share addresses with the native coin. One Ethereum address can hold ETH alongside thousands of ERC-20 tokens (USDT, SHIB, MATIC) without needing separate addresses.

Why tokens are so widespread

Simple answer: they are cheap and flexible. A developer can deploy a token in minutes. Then they benefit from the security and user base of the existing blockchain. Integration with the ecosystem is easy—wallets, exchanges, DeFi protocols—all automatically support them.

This creates a positive cycle. More tokens attract more projects. More projects attract more users. And more users mean greater security and value for the host blockchain.

But there is a catch.

Risks you need to know

The same dependency that makes tokens attractive is also their weakness. If the blockchain becomes congested, tokens lose liquidity. If the blockchain is compromised, all tokens are at risk.

Another risk is the ease of creating tokens. Thousands are born every month, but most never gain real users or trading volume. The low barrier to entry also makes the space full of scams and speculative projects.

And there is a psychological risk. When you see a token priced at one hundredth of Bitcoin, it’s easy to think you’re getting a cheap buy. That’s not true. It’s not about absolute price but market cap and future adoption.

Which type should you own?

What is a token versus a coin from an investment perspective? The answer depends on your risk tolerance and goals.

Layer 1 coins (Bitcoin, Ethereum) and layer 2 solutions are traditionally more stable. Long-term investors prefer them because they form the backbone of the ecosystem.

Tokens are for those who tolerate volatility. DeFi tokens, GameFi projects, and metaverse assets can explode—or disappear. The average annual return can be great, but individual selection is critical.

A sensible portfolio combines both: stable fundamentals of coins with carefully selected tokens with real utility.

Final thoughts

What is a token? It’s an asset that is not independent but lives within something larger. A coin is a sovereign currency of its own world.

Understanding this difference is not just academic. It influences how you should choose investments, manage risks, and understand the crypto market. Even experienced traders benefit from revisiting these basics as the ecosystem constantly evolves.

This content is for informational purposes only and does not constitute investment advice.