What Are Tokens?

Coins vs tokens

People use "coin" and "token" interchangeably, but they are different things.

A coin is native to its blockchain. ETH is Ethereum's coin. BTC is Bitcoin's coin. You need the native coin to pay gas fees.

A token is created by a smart contract on an existing blockchain. USDC, UNI, and LINK are tokens built on Ethereum. They follow the ERC-20 standard so they work with any Ethereum wallet.

Types of tokens

Tokens serve different purposes. The four main categories:

Stablecoins

Designed to hold a steady value, usually $1. Used for trading, payments, and savings without price volatility.

USDC — backed by cash and US Treasury bonds. Issued by Circle.
USDT (Tether) — the most widely traded stablecoin. Backed by reserves.
DAI — backed by crypto collateral locked in smart contracts. No company controls it.

Governance tokens

Give holders the right to vote on protocol decisions.

UNI — vote on Uniswap fee structures and treasury spending
AAVE — vote on lending risk parameters and new asset listings
MKR — vote on MakerDAO stability fees and collateral types

Utility tokens

Required to use a specific service.

LINK — paid to Chainlink oracle nodes for providing off-chain data to smart contracts
FIL — paid to Filecoin storage providers for decentralized file storage
GRT — paid to indexers on The Graph for querying blockchain data

Wrapped tokens

Represent an asset from another blockchain.

WBTC (Wrapped Bitcoin) — Bitcoin represented as an ERC-20 token on Ethereum
WETH (Wrapped ETH) — ETH wrapped in an ERC-20 format for DeFi compatibility

Token supply and economics

Every token has a supply schedule. This matters because supply affects price.

Token	Max supply	Model
BTC	21 million	Fixed, halving every ~4 years
ETH	No hard cap	Net issuance can be negative (deflationary since EIP-1559)
USDC	No cap	Minted when dollars are deposited, burned when redeemed
UNI	1 billion	Fixed, fully distributed over 4 years

Inflationary tokens continuously mint new tokens (like new money being printed). Deflationary tokens burn tokens over time, reducing supply. ETH burns a portion of gas fees, which sometimes makes it deflationary during high-usage periods.

Key takeaways

Coins (ETH, BTC) are native to their blockchain. Tokens (USDC, UNI) are created by smart contracts.
ERC-20 is the standard that makes all tokens compatible with every Ethereum wallet and app.
Tokens come in four main types: stablecoins, governance, utility, and wrapped.
Token supply (fixed, inflationary, or deflationary) directly affects value over time.