Understanding the Token Ecosystem: How to Differentiate Between Tokens and Coins, and the Applications of Bank Tokens

What Exactly Is a Token? Understanding the Core Concepts of Digital Assets in One Article

In the development of cryptocurrencies, a Token is a digital asset built on an existing blockchain infrastructure that represents specific rights, certificates, or value claims. In Chinese, we call them tokens or passes, but this concept is far more complex than early Coins (such as Bitcoin or Litecoin).

The reason why Tokens have become an essential part of the crypto ecosystem stems from Ethereum’s introduction of the ERC-20 standard in 2015. This standard enabled any development team to quickly issue their own tokens on Ethereum without establishing a separate blockchain infrastructure. As a result, Ethereum has become the public chain platform with the largest token issuance volume worldwide.

It is worth noting that Bank Tokens are called “Bank Passes” or “Bank Tokens” in Chinese, which are digital certificates issued by financial institutions to verify transaction identity and security, sharing similar characteristics with crypto Tokens in traditional finance.

What Is the Fundamental Difference Between Coin and Token?

At first glance, Coin and Token seem to be the same, but they have an essential difference at the blockchain technology level.

Coins have their own independent blockchain systems, for example, Bitcoin (BTC) runs on the Bitcoin blockchain, and Ethereum (ETH) is built on the Ethereum mainnet. These are Layer-1 native assets, serving as the base currency of their respective networks.

In contrast, Tokens are built on existing blockchain ecosystems and are Layer-2 or higher-level derivative assets. They do not have independent operation capabilities but run through smart contracts on existing blockchains. This characteristic determines that Tokens are usually used for specific application scenarios, while Coins are mainly used for payments and system maintenance.

In terms of application breadth, the Coin ecosystem is relatively simple, mainly limited to payments and staking. However, Token functions are much richer, including governance voting, liquidity mining, NFT trading, and more.

Into Which Three Categories Do Tokens Fall? What Are Their Uses?

The crypto industry generally classifies Tokens into three main categories based on their actual use:

Payment Tokens aim to build secure, fast, and low-cost payment systems. Stablecoins are a typical example of this category, pegged to fiat currencies, used for transaction settlement and value storage.

Utility Tokens provide access rights and usage permissions for various applications. Most ERC-20 tokens belong to this category, enabling specific functions through smart contracts, such as exchanges, lending, voting, etc.

Asset Tokens represent ownership or income rights to a project or asset, similar to stocks. Holding such tokens means participating in the project and enjoying the benefits of token value appreciation. However, it’s important to note that crypto investors usually do not have legal ownership or dividend rights in the project.

In practical applications, a Token often possesses two or even three of these attributes simultaneously, making classification quite complex.

Invest in Tokens or Coins? A Comparison of Advantages and Disadvantages

Coins and Tokens each have their strengths, with the biggest difference lying in application prospects and risk tolerance.

Coins serve as the infrastructure of public chains, solving the underlying issues of blockchain systems. If a Coin fails, there are no alternatives. For example, Quantum Chain (QTUM) and Bytom (BTM) had good technical prospects but ultimately limited market recognition.

Tokens are innovations at the application layer, with relatively dispersed risks. Even if a particular application fails to gain market acceptance, issuers can launch new applications or services. MakerDAO’s RWA (Real-World Assets) business is a typical example; when the original business cools down, new directions bring new growth opportunities.

From a volatility perspective, Token prices are usually much more volatile than Coins. Tokens like UNI, SNX, MKR often experience price swings exceeding BTC and ETH, especially during bull markets. This provides more opportunities for short-term traders but also entails higher risks.

How to Trade Tokens? Two Main Methods Explained

Spot Trading: Buying Actual Tokens

Spot trading is the most direct investment method—you buy and hold actual tokens. For example, if UNI is priced at $3, paying $3 gets you ownership of one UNI token.

But there is an important risk here: fake tokens. Since anyone can issue Tokens, malicious actors often create counterfeit tokens with the same name as well-known tokens but worthless. For example, the legitimate ABC token may be valuable, but someone might issue another token called ABC with no actual use or liquidity. If you buy it by mistake, you might never be able to sell it.

The simple way to prevent this is to verify the token’s smart contract address on the official website or blockchain explorer before trading. This is the only effective method to distinguish genuine from fake tokens.

Margin Trading: Using Smaller Capital to Leverage Greater Returns

Besides spot trading, investors can participate in the Token market through margin trading. In this mode, you do not actually hold the tokens but predict prices via leveraged contracts.

For example, using 10x leverage to go long on UNI at $3. If the price rises to $4, your profit is $1, representing a 333% return.

The appeal of margin trading is the ability to amplify gains with small capital, but the cost is risk multiplied. Token volatility is much higher than Coins, especially for newly issued tokens, where daily fluctuations over 10% are common. Therefore, controlling leverage (recommended not to exceed 10x) and setting reasonable stop-loss and take-profit levels are crucial.

Choosing a Trading Platform: Safety Comes First

Regardless of the trading method, platform security and regulatory compliance are the top considerations. Selecting a trading platform regulated by authoritative agencies with comprehensive risk control systems is the first line of defense to protect your funds.

Before engaging in any Token investment, it’s wise to spend time understanding the platform’s background, user reviews, and security records.

Summary: Core Points of Token Investment

Tokens are an indispensable part of the crypto ecosystem. Compared to Coins, they offer more application possibilities but also come with higher volatility and risks. Whether through spot or margin trading, investors should proceed cautiously, fully understanding the risks and choosing secure platforms. Remember: knowledge and risk management are always the best investment tools.