Module 1: Introduction to Crypto Markets
Coins, Tokens, Stablecoins, and NFTs
Chapter 5 of 15 · about 7 minutes
5.1 Thousands of names
Mint opened a crypto price tracker for the first time and scrolled. And scrolled. Bitcoin, Ethereum, then thousands more. Some had serious-sounding names, some were named after dogs, and some had prices with so many zeros after the decimal point that Mint lost count.
"Are these all different blockchains?" Mint asked.
"Most of them aren't," said Hash. "That's the first thing to understand. There's a difference between a coin and a token, and once you see it, that list makes a lot more sense."
5.2 Coins versus tokens
A coin is the native asset of its own blockchain. BTC is the coin of the Bitcoin blockchain. ETH is the coin of Ethereum. Coins are usually used to pay transaction fees and to reward the miners or validators who secure the network.
A token is an asset created on top of an existing blockchain using a smart contract. It doesn't have its own blockchain. It lives on someone else's, the way an app lives on your phone's operating system.
Here's an analogy. Think of a blockchain as a country, and its coin as the national currency. Tokens are like gift cards, loyalty points, or company shares issued within that country. They follow the country's rules and use its infrastructure, but they represent something separate.
On Ethereum, most tokens follow a shared standard called ERC-20. Because they all follow the same rules, any wallet or exchange that supports one ERC-20 token can support them all. This standardisation is a big reason why creating a token became so easy, and why there are so many of them.
| Coin | Token | |
|---|---|---|
| Has its own blockchain | Yes | No |
| Created by | The blockchain's own rules | A smart contract |
| Used to pay network fees | Usually | Usually not |
| Examples | BTC, ETH | Stablecoins, governance tokens, most memecoins |
"So making a token is easy?" Node asked.
"Very," said Hash. "Anyone can create one in minutes. Which means existing tells you nothing about whether it's valuable or legitimate."
5.3 Stablecoins: crypto that doesn't move
Remember Node's complaint in Chapter 1: Bitcoin's price moves too much to price groceries in it. Stablecoins are the crypto industry's answer to that problem. They're tokens designed to hold a steady value, almost always one US dollar.
Stablecoins have become one of the most widely used parts of crypto. Traders use them to park money between trades without leaving the crypto system. People in countries with high inflation use them to hold dollar value. Businesses use them to send money across borders quickly. Remember Mint's $500 transfer? A dollar stablecoin would avoid the price-volatility problem Hash raised in Chapter 2.
But not all stablecoins are built the same way, and the differences matter a great deal.
Fiat-backed stablecoins are the most common. A company holds real dollars and short-term government bonds in reserve, and issues one token for every dollar held. You trust that the reserves are really there and that you can redeem your tokens. Examples include USDT (Tether) and USDC (Circle).
Crypto-backed stablecoins are created by locking up other crypto, like ETH, as collateral in a smart contract. Because crypto prices move, these systems require you to deposit more collateral than the stablecoins you receive, for example $150 of ETH to create $100 of stablecoins. If the collateral value falls too far, it's automatically sold. DAI, now part of the Sky ecosystem, is the best-known example.
Algorithmic stablecoins try to hold their value through automated supply adjustments and incentives rather than full reserves. This design has a troubled history. In May 2022, TerraUSD (UST), one of the largest stablecoins at the time, lost its peg in a matter of days. Its sister token, LUNA, collapsed from tens of billions of dollars in value to almost nothing. We'll study what happened in the Postmortems module.
| Type | What backs it | Main risk |
|---|---|---|
| Fiat-backed | Cash and government bonds held by a company | The issuer: reserves, transparency, and regulation |
| Crypto-backed | Excess crypto collateral locked in smart contracts | Sharp crypto crashes and smart contract bugs |
| Algorithmic | Incentives and supply mechanics | Loss of confidence can cause a rapid collapse |
The key lesson: "stable" describes the goal, not a guarantee. When a stablecoin falls below its target value, it's said to have depegged.
5.4 Other kinds of tokens
Beyond stablecoins, you'll encounter several broad categories of tokens. The lines between them are often blurry.
Governance tokens give holders a vote on decisions about a protocol, such as changing fees or how a treasury is spent. Their value depends on whether that voting power, and any economic rights attached, actually matter.
Utility tokens are meant to be used within a particular application, for example to pay for a service or access a feature. In practice, many tokens marketed as utility tokens are mostly traded speculatively.
Wrapped tokens represent an asset from one blockchain on another. Wrapped bitcoin, for example, lets bitcoin be used in Ethereum applications. Each wrapped token is supposed to be backed one-to-one by the original asset held somewhere, which introduces trust in whoever holds it.
Liquid staking tokens represent staked assets, like staked ETH, while letting the holder keep using them. We'll cover these in the DeFi module.
Memecoins are tokens built mainly around a joke, an image, or an online community, often with no utility at all. Some have reached enormous valuations. Many more have gone to zero, sometimes within hours. They are the most speculative corner of an already speculative market.
Tokenised real-world assets (RWAs) are tokens representing things outside crypto, such as government bonds, money market funds, or real estate. This is a growing area where traditional finance and crypto overlap.
5.5 NFTs: one of a kind
Every token we've discussed so far is fungible, meaning each unit is interchangeable with every other unit. One USDC is identical to any other USDC, just as one dollar note is worth the same as any other.
A non-fungible token (NFT) is different. Each NFT is unique, with its own identifier, and can't be swapped one-for-one with another. Think of a concert ticket with a specific seat number, or a property deed. NFTs record ownership of a unique item on a blockchain.
NFTs became famous during 2021, when digital art and collectible profile pictures sold for extraordinary sums, followed by a sharp crash in prices and trading volume. Beyond collectibles, NFTs are used for things like event tickets, in-game items, domain names, and membership passes.
"So if I buy an NFT of a picture, I own the picture?" Mint asked.
"Usually not," said Hash. "You own a token that points to the picture. Copyright and the right to use the image depend on whatever terms the creator set. Always read what you're actually buying."
5.6 How to think about a new token
When Mint asks "what is this token?", here's a short set of questions to start with. We'll go much deeper in the Fundamental Analysis module.
- Is it a coin with its own blockchain, or a token on another chain?
- What is it for? What does holding it actually give you?
- What backs its value, if anything?
- Who created it, and who holds most of the supply?
- Is the contract address the official one? Scammers often create fake tokens with the same name as real ones.
That last question catches a lot of people. On most blockchains, anyone can create a token with any name and symbol. Two tokens can both be called "USDC," and only one is real. The contract address, not the name, is what identifies a token.
5.7 Try it yourself
Open an Ethereum block explorer and search for "USDC." You'll likely see several results. Find the official one, typically marked as verified, and note its contract address. Then compare it to the address listed on Circle's official website.
Next, look at the "Holders" tab for any token you're curious about. How concentrated is ownership? If a handful of addresses hold most of the supply, that's important information. We'll explore why in Chapter 10.
Key takeaways from this chapter
- A coin is the native asset of its own blockchain. A token is created by a smart contract on an existing blockchain.
- Creating a token is easy, so the existence of a token says nothing about its value or legitimacy.
- Stablecoins aim to hold a fixed value, usually one US dollar, and are among the most widely used crypto assets.
- Fiat-backed, crypto-backed, and algorithmic stablecoins carry very different risks, and stable is a goal, not a guarantee.
- Other token types include governance tokens, utility tokens, wrapped tokens, liquid staking tokens, memecoins, and tokenised real-world assets.
- NFTs are unique, non-interchangeable tokens. Owning one doesn't automatically mean owning the rights to the underlying content.
- A token is identified by its contract address, not its name. Always verify before buying.