Understanding what tokens are in cryptocurrency and how they function

When we talk about cryptocurrencies, the terms “Token” and “Coin” are often used interchangeably. But what exactly is a Token? Are they really the same? The answer is no. With the evolution of the blockchain ecosystem—especially after the emergence of Ethereum—these two concepts have gradually diverged, yet in Chinese translations, they are often confused as the same word—“代幣” (dàibì). This leads many investors to misunderstand their fundamental differences. This article will clearly explain the core characteristics of Tokens, their classification system, and the essential differences between Tokens and Coins.

What is a Token? Understanding the Concept Through Its Historical Development

To understand what a Token is, we need to review the development of cryptocurrencies. In the early days, projects like Bitcoin, Litecoin, and Dogecoin were commonly called “Coins,” referring to cryptocurrencies with their own independent blockchains. At that time, the concept of Tokens did not exist, so there was no confusion.

Everything changed in 2015. The birth of Ethereum introduced a groundbreaking technical standard—ERC-20. This standard allowed anyone to create and issue their own tokens on Ethereum without developing a separate blockchain. Since then, Tokens have gradually become an important part of the crypto asset space.

The fundamental definition of a Token is: a digital asset issued on an existing blockchain that represents specific rights or functions. It can be traded, transferred, or exchanged on its respective blockchain. Unlike Coins, Tokens do not have their own dedicated blockchain; they depend on public chains like Ethereum, Polygon, etc. Therefore, broadly speaking, Tokens can be understood as a collective term for non-blockchain-native tokens, including DeFi tokens, Layer-2 ecosystem tokens, NFT-related tokens (such as APE, SAND), and more.

What are the three main types of Tokens? Their uses and characteristics

To fully understand what a Token is, it’s also important to learn about its diverse classification system. According to the authoritative classification by the Swiss Financial Market Supervisory Authority (FINMA), Tokens can be divided into three main categories, each with different functions.

Payment Tokens aim to facilitate secure, efficient, and low-cost transaction settlements. Stablecoins like USDC and USDT are typical examples. These Tokens serve as a store of value and a medium of payment.

Utility Tokens are designed to provide access rights and usage credentials for various applications. Most ERC-20 tokens on Ethereum fall into this category. Holding such Tokens allows users to access specific features or governance rights within DeFi protocols, games, or social platforms.

Asset-backed Tokens represent actual rights to a project or asset. Holding these Tokens means you are a participant in the project and can benefit from the appreciation of the token’s value. It’s important to note that in the crypto space, asset-backed Tokens usually do not involve actual ownership or dividend rights of a company; their value is mainly derived from market consensus.

In practice, many Tokens combine two or even all three of these characteristics. For example, UNI can serve as a governance token for protocol decision-making, as well as provide fee discounts and liquidity mining rewards.

What are the key differences between Tokens and Coins? Understanding blockchain architecture distinctions

To precisely distinguish between Tokens and Coins, the core difference lies in the blockchain they belong to. Coins have their own independent blockchain infrastructure—for example, Bitcoin (BTC) runs on the Bitcoin blockchain, Ethereum (ETH) on the Ethereum blockchain—they are the native assets of these networks. Tokens, on the other hand, do not have their own blockchain; they depend on existing public chains.

This fundamental difference results in multiple distinctions. Coins are typically considered Layer-1 assets, carrying the foundational infrastructure of the network. Tokens are often Layer-2 or application-layer assets, developed on top of existing infrastructure for specific use cases.

Functionally, Coins are mainly used for payments and staking, while Tokens have a broader range of applications—payments, staking, governance voting, liquidity incentives, and more. In terms of issuance, Coins are usually obtained through mining, whereas Tokens are often initially issued via ICOs, IDOs, or IEOs.

Common Coins include BTC, LTC, ETH, SOL, DOT, ADA, XRP, FIL, etc. Popular Tokens include MATIC, SAND, COMP, LINK, UNI, MKR, AAVE, and other major projects within the DeFi ecosystem.

Should you invest in Tokens or Coins? How to choose the right asset

When faced with the choice between Tokens and Coins, investors often find themselves in a dilemma: which is a better investment? The answer is: they each have their own features and complement each other.

Think of Coins as the builders of the infrastructure layer, while Tokens are service providers at the application layer. Coins focus on solving scalability and security issues of the blockchain itself, indirectly meeting user needs; Tokens develop specific applications and services on top of this infrastructure, directly creating value. Both are indispensable.

Compared to Coins, Tokens have a broader application scope. The value of Coins is often limited to building and optimizing the infrastructure—if they fail, recovery is difficult (e.g., projects like QTUM and BTM have gradually faded from the market). Tokens, however, because of their flexible use cases, can quickly pivot to new applications if a particular product does not gain market acceptance. For example, MakerDAO’s RWA (Real-World Assets) initiative is a typical case.

Another key difference is volatility. Token prices tend to be significantly more volatile than Coins, especially in bull markets. The price swings of UNI, SNX, MKR often exceed those of BTC and ETH, offering short-term traders larger profit opportunities but also higher risks.

Two ways to trade Tokens? Choosing the right investment strategy

Token trading methods are similar to those for Coins, mainly divided into two categories.

First: Spot Trading is the most straightforward investment approach. Investors buy actual Tokens with real funds—for example, purchasing 1 UNI for $3, owning the actual token. The advantage is direct security and ownership, but it requires full capital upfront and vigilance against fake tokens. Always verify the token’s contract address on official websites or blockchain explorers like Etherscan to avoid scams.

Second: Margin Trading amplifies gains through leverage but also increases risks. Unlike spot trading, margin trading (including CFDs and U-based contracts) involves only a portion of the capital as collateral to control larger positions. For example, with 10x leverage, spending $0.3 on margin can control a $1 position in UNI. It’s important to note that margin trading usually does not involve actual token ownership.

When engaging in margin trading, always follow these principles: control your position size, set leverage cautiously (preferably no more than 10x), and understand the high volatility of Tokens, which can lead to liquidation. Token prices, especially new tokens, often fluctuate wildly—much more than Bitcoin’s typical 10% daily swings—so risk management is crucial.

Regardless of the trading method, choosing a secure, regulated trading platform is essential to protect your funds, ensure transparent transactions, and manage risks effectively. Trading on reputable platforms is a necessary step to safeguard your investments.

Deep understanding of what Tokens are and their core features will help investors make smarter decisions. Whether investing in Tokens or Coins, always base your choices on thorough knowledge and align your strategy with your risk tolerance.