Understanding the meaning of tokens: a complete guide from definition to trading

In the world of cryptocurrencies, the terms Token and Coin are often used interchangeably, causing confusion among many investors. Actually, understanding what a Token means is not difficult — it represents a digital asset built on an existing blockchain, while a Coin is a cryptocurrency that has its own independent blockchain. To help you fully grasp the meaning of Token and its investment directions, this article will provide an in-depth analysis from multiple perspectives.

What Does Token Mean? Just Look at This Definition

Simply put, a Token is a digital certificate created on an existing blockchain, representing some form of rights, value, or functionality. It cannot exist independently and must be issued and circulated on a public chain (like Ethereum).

This phenomenon has its historical background. In early cryptocurrency days, there were only native coins like Bitcoin, Litecoin, and Dogecoin, collectively called Coins. It wasn’t until Ethereum launched the ERC-20 standard in 2015 that developers could issue their own Tokens on Ethereum, leading to the current mixed usage of Coin and Token.

From a technical perspective, the meaning of Token — it is an application-layer product. If Coins were created to solve blockchain infrastructure issues, Tokens are developed on top of that infrastructure for various application scenarios. Currently, Ethereum has become the blockchain with the largest Token issuance, and its ERC-20 standard has become an industry norm.

It’s important to note that “Token” does not refer to a specific currency name but is a general term for a whole class of tokens. This includes DeFi ecosystem tokens like UNI, COMP, AAVE; NFT-related tokens like SAND, APE; Layer-2 tokens like MATIC, and more.

Detailed Explanation of the Three Types of Tokens: Each Has Its Purpose

To better understand what Token means, we need to look at its classification. The Swiss financial regulator FINMA divides Tokens into three main categories:

Payment Tokens: Function as Payment

These Tokens are mainly designed for fast, secure, and low-cost payments. Stablecoins are typical examples, pegged to fiat currencies (like USD) to avoid the volatility of the crypto market. Such Tokens allow users to settle transactions with confidence, without worrying about price fluctuations.

Utility Tokens: Functionality and Access Rights

This is the most common form within the Ethereum ecosystem. They provide access licenses for various applications — for example, trading on Uniswap requires UNI, borrowing on Compound requires COMP. Holders of these Tokens can enjoy specific application permissions and governance rights.

Asset-backed Tokens: Ownership Certificates

Asset-backed Tokens represent ownership rights, similar to company stocks. Holders gain some form of entitlement to project revenues. However, in the crypto space, holding a Token usually does not mean legal ownership of the project, nor does it often include dividends; it’s more about community participation rights and value recognition.

It’s worth noting that in practice, a single Token often exhibits two or even three of these characteristics simultaneously, making it difficult to categorize strictly. This complexity and richness are what make the Token ecosystem so diverse.

What Is the Difference Between Token and Coin? The Fundamental Distinction

After understanding what Token means, let’s look at the core difference between Coin and Token. The most fundamental difference lies in blockchain ownership — Coins have their own dedicated blockchain, while Tokens do not.

Bitcoin runs on the Bitcoin blockchain and is the native asset of that network; Ethereum runs on the Ethereum blockchain and is its native asset. These cryptocurrencies with their own independent blockchains are Coins. In contrast, Tokens like UNI, SAND, LINK depend entirely on Ethereum’s infrastructure and cannot exist independently outside of Ethereum.

This difference leads to several chain reactions:

Ecosystem Application Capabilities — Coins can build their own application ecosystems; for example, Solana has hundreds of DeFi applications built on its blockchain. Tokens’ applications are usually limited within the ecosystem of the blockchain they depend on.

Technical Hierarchy — Coins are Layer-1 (base layer) assets, while Tokens are often Layer-2 or higher-layer applications.

Issuance Methods — Coins are often mined or created through proof-of-work or proof-of-stake mechanisms, whereas Tokens are issued via ICO, IDO, IEO, or other fundraising methods.

Risk Characteristics — The survival of Coins depends on the reliability of their blockchain technology; if the blockchain fails, it’s often irrecoverable (examples include early failures like QTUM, BTM). Tokens’ risks are more related to the applications they are part of; even if an application fails, Token holders’ losses are usually manageable.

From market performance, Tokens tend to have more volatility than Coins within the same period. This means more short-term trading opportunities but also higher risks — Tokens can surge in bull markets and plummet in bear markets more easily.

Should You Invest in Tokens or Coins? Each Has Its Advantages

Now that you understand what Token means and the differences between the two, your investment choice becomes clearer. In fact, Coins and Tokens are complementary rather than competing.

From an investment perspective, Coins have the advantage of being foundational infrastructure with a stable ecosystem, making long-term holding relatively stable. Bitcoin and Ethereum maintain their leadership because they control the underlying blockchain technology.

Tokens, on the other hand, excel in diverse application scenarios, rapid innovation, and potential short-term gains. MakerDAO can launch new RWA (Real World Asset) businesses, Uniswap can expand into derivatives trading, and Token issuers have more flexibility. This is why new investment opportunities often emerge in the Token space rather than in Coins.

However, high returns in Tokens come with high risks. Newly issued Tokens are especially volatile, and some projects may even fail. Therefore, conservative investors should prioritize Coins for allocation, with Tokens as a supplement; aggressive investors, with full risk awareness, can seek more opportunities in the Token space.

Complete Steps to Start Trading Tokens

Once you understand the meaning of Token and the investment logic, the key is to learn how to operate practically. There are two main ways to trade Tokens:

Method 1: Spot Trading of Tokens

Spot trading involves directly buying the Token itself. For example, if UNI is priced at $3, paying $3 gets you one UNI. This is the most straightforward method, but you need to be aware of fake tokens — don’t buy tokens with the same name but unknown sources.

A simple way to prevent this: verify the Token’s contract address on the official website or blockchain explorer (like Etherscan). Fake tokens with the same name do exist, and buying the wrong one could leave you unable to sell.

Method 2: Trading Derivatives of Tokens

Besides spot trading, you can trade Token derivatives like CFDs (Contracts for Difference). The advantage here is no actual transfer of Token ownership, thus avoiding fake tokens.

Derivatives trading uses margin, meaning you only need to put up part of the position size to control a larger amount. For example, with 10x leverage on UNI, instead of paying $3 for one UNI, you only need $0.30. This creates greater opportunities for short-term trading but also increases risk.

The golden rule of leverage: don’t use more than 10x leverage. Since Tokens are more volatile than Coins, excessive leverage greatly increases liquidation risk. Even seemingly “new” Token projects can see 50% or more drops in a short period.

Practical Guide to Trading Tokens

Regardless of the method chosen, proper operation procedures are crucial. Selecting a safe, regulated trading platform is the first step. For example, trading UNI on a CFD platform:

Step 1: Register an Account
Visit the official platform, click sign-up, fill in basic info, and complete registration. Ensure the platform is regulated by reputable authorities.

Step 2: Search for the Trading Pair
Enter “UNI” in the search bar, find the “Uniswap” trading product. Confirm the correct trading asset before proceeding.

Step 3: Set Trading Parameters
Based on your risk tolerance, set parameters such as:

• Trade direction: buy (bullish) or sell (bearish)
• Trade size: according to your funds
• Leverage: recommended no more than 10x
• Stop-loss: maximum acceptable loss price
• Take-profit: target profit price

Review all settings carefully, then click to open the position. The trade takes effect immediately.

This simple three-step process can start your Token trading journey. But remember — understanding Token, managing risks, and choosing the right platform are all essential.