Deepen the understanding of the essence of Tokens: definition, classification, and the core differences with Coins

What Does Token Mean? Core Concept Explanation

A Token in the cryptocurrency world is a digital asset representing specific rights or certificates, commonly translated into Chinese as pass, token, or token. These assets can be traded, transferred, and exchanged on their respective blockchain networks, but their fundamental characteristic is—they do not have an independent blockchain ecosystem.

The emergence of Tokens is closely related to the rise of Ethereum. In 2015, Ethereum introduced the ERC-20 token standard, an innovation that enabled any developer to create their own Token on Ethereum, opening the floodgates for explosive token growth. Today, Ethereum has become the blockchain with the largest issuance of Tokens, which also explains why many investors confuse Tokens with Coins—along with the development of the ERC-20 ecosystem, the crypto market has transitioned from a “coin-only” era to an era where “coins + tokens” coexist.

Simply put, Token is a collective term that covers all non-native tokens on public chains, including DeFi tokens, Layer-2 application tokens, and NFT-related tokens (such as APE, SAND, etc.).

Token Classification System: Three Main Types and Practical Applications

According to the classification framework of the Swiss Financial Market Supervisory Authority (FINMA), Tokens can be roughly divided into three categories:

Payment Tokens mainly aim to achieve secure, efficient, and low-cost payment functions. Stablecoins (like USDC, USDT) are typical representatives of this category. They are pegged to fiat currencies, providing convenience for value storage and transfer between parties.

Utility Tokens serve as access passes for various applications, mostly ERC-20 standard tokens on Ethereum. These Tokens grant holders usage rights within specific ecosystems, such as governance voting rights, service access, etc.

Asset Tokens represent ownership certificates of a project or service. Holders can enjoy the value appreciation of the respective project, but it’s important to note that in the crypto space, Asset Tokens usually do not involve company ownership or dividend rights.

It’s worth noting that in actual operation, a single Token often exhibits two or even three of these characteristics simultaneously, making strict categorization sometimes impractical.

Fundamental Difference Between Token and Coin: Blockchain Layer Perspective

The most fundamental difference lies in ownership of the blockchain. Coins (like BTC, ETH) have their own independent blockchain—they are native assets of their respective networks. In contrast, Tokens do not have their own blockchain but are built on existing blockchain ecosystems.

This difference results in varied functionality scopes. Since Coins operate at Layer-1, they can support a complete application ecosystem. Tokens, constrained by the architecture of their host blockchain, mostly operate on Layer-2 or higher layers, which limits their ecosystem applications compared to Coins, and often makes independent application development difficult.

Specific comparison:

Investment Perspective: Tokens and Coins Each Have Their Strengths

From an investment standpoint, Tokens and Coins each have advantages; both are closely related and indispensable.

If Coins are viewed as the infrastructure layer solutions, then Tokens are the application layer services built on top. The former focuses on optimizing blockchain’s basic performance, indirectly meeting user needs; the latter develops various applications and services directly on that foundation, addressing practical demands.

Compared to Coins, Tokens have greater scalability in applications and services. The value of Coins is limited to infrastructure development; if they fail (e.g., QTUM, BTM), they often cannot recover. Tokens, on the other hand, can continuously introduce new services or applications. Even if a particular market performs poorly, they can quickly pivot (e.g., MakerDAO launching RWA business).

Volatility differences are also noteworthy—Token prices tend to fluctuate more than Coins. For example, UNI, SNX, MKR exhibit significantly higher volatility than BTC and ETH, especially during bull markets. This creates more and larger trading opportunities for short-term traders but also entails higher risks.

How to Trade Tokens: Spot and Margin Trading

Spot Trading: Direct transfer of ownership

Spot trading involves full payment for actual Token assets. For example, if UNI is priced at $3, the buyer pays the full amount and obtains ownership of the Token. The advantage is transparency and directness, but investors must beware of fake tokens—due to blockchain openness, different teams may issue tokens with the same name but different contract addresses. Always verify the contract address via official websites or block explorers before purchasing to avoid buying worthless counterfeit tokens.

Margin Trading: Leverage trading with small capital

Margin trading is a non-full payment mode, where investors only need to deposit part of the funds as margin to control a larger Token position. For example, using 10x leverage to trade UNI, with a price of $3, only $0.3 is needed to establish a 1 UNI position. Derivative trading such as CFDs and U-based contracts usually do not involve actual Token transfer, thus avoiding fake token risks.

However, the high leverage characteristic of margin trading comes with high risks. Since Token volatility is often greater than Coins, especially for newly launched tokens, liquidation risk should not be underestimated. Industry advice suggests keeping leverage below 10x and always being cautious of daily volatility—although a 10% daily fluctuation in BTC is rare, such situations are more common in Token markets.

Essential Risks to Know Before Trading

Regardless of the trading method chosen, selecting a safe, reliable platform regulated by authoritative agencies is the first step in Token investment. Many unregulated or illegal trading venues exist, so investors must exercise caution.

Additionally, Token investments require stricter position control and risk management compared to Coin investments. The volatility and risks of emerging Tokens often exceed expectations. Therefore, when establishing positions, maintain caution, especially avoiding large investments without thorough understanding of the project fundamentals.