What Are Tokens?
Coins vs tokens
The distinction used here is between a network's native asset and an asset implemented by a contract.
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 track a reference value, often one dollar. They can lose that peg and expose holders to issuer, reserve, or collateral risk.
- 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 another asset in a token format. The underlying asset may be on the same chain or a different chain.
- 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 | Check the current governance and issuance rules | Initial distribution and subsequent inflation are separate parts of the schedule |
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 defines common interfaces; wallets and applications still need to support a token's behavior and network.
- Tokens come in four main types: stablecoins, governance, utility, and wrapped.
- Token supply (fixed, inflationary, or deflationary) directly affects value over time.
Quiz: What Are Tokens?
1 / 5What is the difference between a coin and a token?