> For the complete documentation index, see [llms.txt](https://money.web3economy.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://money.web3economy.io/web3-networks/network-coins-and-tokens.md). # Network coins & tokens Web3 networks can support several kinds of digital assets. The most important distinction for this analysis is between the coin native to the network and tokens created through the network’s programmable functionality. A **network coin** is part of the underlying protocol. It is commonly used to pay for network resources, compensate node operators and support the security or governance of the network. A **token** is created and managed on top of the network. Its rules are normally defined by a smart contract or another application-level mechanism. Tokens can represent money, commodities, ownership, membership, access rights or other forms of value. Both network coins and fungible tokens can be transferred, exchanged, held as assets and potentially adopted as money. However, their relationship with the underlying network gives them different properties and responsibilities. ## **Network coins** A network coin is the native fungible asset of a Web3 network. It exists as part of the network’s core ledger and is recognised directly by the protocol. Examples include ETH on Ethereum, SOL on Solana, ADA on Cardano and BNB on BNB Chain. The network coin is commonly connected to the operation of the network. Users or transaction sponsors may need it to pay transaction fees, while node operators receive it as compensation for processing activity and maintaining the ledger. Depending on the network’s design, the coin may also be used within its consensus process. In a proof-of-stake system, participants can commit network coins to help secure the network. Their economic exposure creates an incentive to follow the protocol’s rules. The coin may also be involved in governance. Holdings, staking participation, fees or other coin-based contributions can influence decisions about network parameters, protocol upgrades and treasury expenditure. These functions create a direct relationship between demand for the network and demand for its native coin. As more people submit transactions or participate in network activity, the need to obtain and use the coin may increase. ## **Tokens** Tokens are digital assets created on a Web3 network. On programmable networks, developers and communities can deploy smart contracts that define how a token is created, transferred and governed. Sometimes functionality for creating a token is built into the network itself as a primary function. A tokens parameters may determine its supply, divisibility, transfer rules and administrative powers. It may allow new units to be created, remove units from circulation or establish conditions under which particular transactions can occur. Tokens can represent physical or digital assets. A token might represent a form of money, a claim on a commodity, a share of ownership, membership of a community or access to an application. Unlike the network coin, a token is not normally required for the core network to continue operating. A token can lose demand or fail while the underlying network continues processing other transactions and supporting other assets. A single network can support a large number of tokens, each with different rules, purposes and governing communities. This allows different groups to use the same shared infrastructure without adopting the same asset or monetary policy. ## **Native and application-level assets** The difference between a network coin and a token can be understood as a difference between protocol-level and application-level assets. The network coin belongs to the protocol level. Its operation is integrated into the ledger, fee system and potentially the consensus mechanism. Changing its fundamental rules may require a network-wide protocol update. Tokens belong primarily to the application level. Their rules are implemented within the functionality provided by the network. A token community can modify its contract or governance arrangements without necessarily changing the underlying protocol. This separation allows the core network to concentrate on maintaining a secure and reliable ledger while communities experiment with different assets on top of it. The separation also reduces the impact of an individual token’s failure. A badly designed token can harm its holders, but it does not necessarily alter the balances or rules of the network coin. By contrast, a serious failure involving the network coin can affect node compensation, transaction processing, consensus and every application relying on the network. ## **Fungible and non-fungible tokens** Tokens can be fungible or non-fungible. A fungible asset consists of interchangeable units. One unit of the same token is intended to be equivalent to another unit. Money is commonly fungible because participants do not need to distinguish between individual units of the same denomination. A non-fungible token represents something individually distinguishable. Its identity and associated information matter, so it cannot necessarily be exchanged on a one-for-one basis with another token. The monetary analysis in this documentation is primarily concerned with network coins and fungible tokens. Fungibility allows an asset to be divided, counted and exchanged in standard units, making it more suitable for use as money, financial liquidity or collateral. ## **Tokens as representations of assets** A token can represent an asset that exists outside the network. For example, it may represent a claim on fiat money, gold or another commodity held by a custodian. The token makes the claim transferable through the Web3 network. Instead of moving the underlying physical asset, users transfer the token representing it. A token can also represent a fully digital asset that exists only within an application or online community. In this case, there may be no physical asset or external institution providing its value. The reliability of an externally backed token depends on more than the security of the Web3 network. Users must also consider whether the backing exists, whether it is secure and whether the token can actually be redeemed according to its stated terms. The network verifies the transfer of the token, but it cannot independently guarantee that an external custodian is holding the promised asset unless reliable information about that asset is made available. ## **Stablecoins** Stablecoins are tokens designed to maintain a comparatively stable value. They are commonly linked to fiat currencies or other assets. USDC and USDT are examples of tokens intended to track the value of the United States dollar. They are available on several Web3 networks. A stablecoin can be used as a medium of exchange while the network coin pays for the infrastructure processing the transfer. Alice might send Bob a token representing one dollar while a small amount of the network coin is used to pay the transaction fee. This illustrates the separation between the asset used for payment and the asset used to operate the network. Stablecoins can adopt different methods for maintaining their value. Some depend on reserves held outside the network, while others use digital collateral and smart-contract mechanisms. Whatever method is used, the token’s stability is distinct from the security of the underlying network. A network can continue operating correctly even if a stablecoin loses its intended value. ## **Network coins and tokens as money** Both a network coin and a fungible token can potentially be used as money. A network coin may achieve monetary use because it is widely available, transferable and required for network activity. People may begin accepting it for goods and services in addition to using it for transaction fees or network participation. A token can be designed specifically as a medium of exchange. Its governing community can choose its supply rules, price-stability mechanisms and other monetary properties. Neither asset becomes money merely because it is technically transferable. Monetary use depends on acceptance. People must be willing to receive the asset with the expectation that they can later use it in another exchange. A network coin has some built-in demand because of its connection to network operation. A token must generally develop demand through its backing, utility, community adoption or monetary characteristics. This gives the two assets different starting positions even when their supply and demurrage policies are otherwise similar. ## **Acceptance and awareness** If a Web3 network achieves widespread adoption, its network coin is likely to become one of the best-known assets within that ecosystem. Users or transaction sponsors need access to the network coin to pay for network usage. Node operators receive it, applications account for it and exchanges make it available to participants entering the network. This creates a common point of awareness. A user may not interact with every token, but they are likely to encounter the network coin. Tokens operate in a more fragmented environment. A single network can contain many tokens, and users are not required to adopt any particular one. Different communities may accept different assets for different purposes. A token can still achieve broad acceptance, particularly when it is connected to a widely used currency, asset or community. However, it must compete with other tokens for attention, liquidity and adoption. The network coin may therefore have more general awareness than an individual token, while tokens may achieve stronger acceptance within particular communities or use cases. ## **Demand** Demand for the network coin is connected to demand for the network itself. If the coin is required for transaction fees, participants need to obtain it whenever they use network resources. The amount required for each transaction may be small, and wallets or applications may handle the process automatically. Nevertheless, someone within the transaction process must normally provide the native coin or otherwise compensate the network. This demand continues for as long as the network remains active and the coin retains its protocol-level responsibilities. Demand for a token is not equally guaranteed. Users can choose whether to adopt it, and alternative tokens may provide similar functions. A community can move to another token or create a new one if the existing implementation no longer meets its needs. A token may develop strong demand through stable value, asset backing, application use or community acceptance. However, that demand depends on the continued relevance and reliability of the token rather than on a protocol-level requirement. ## **Competition** Network coins compete primarily through competition between networks. A new network can emerge with different technical capabilities, fees, governance or economic incentives. Launching and establishing a new network is more difficult than creating a new token. The network must attract node operators, developers, users, applications and liquidity. It must also demonstrate that it can maintain a secure and reliable ledger. Once a network achieves broad adoption, its existing users and applications can create network effects that make direct competition more difficult. Tokens face a different competitive environment. New tokens can be created relatively easily on an established programmable network. Communities can experiment with new supply policies, governance systems and monetary incentives without establishing an entirely new ledger. This lowers the cost of experimentation but increases continuing competition. A token-based monetary system may need to adapt as other communities introduce alternatives with more desirable properties. Competition can also occur for reasons unrelated to technical design. People may choose a token because it reflects their values, belongs to their community or is accepted by the applications and businesses they use. ## **Governance** The network coin is governed as part of the wider network. Changes to its supply, fee role or consensus function can affect every participant and application. If the network is globally adopted, coin governance may involve a large and diverse population. Agreement can become slow and difficult, while delegating authority to a small group can create concentrated influence. The network coin therefore benefits from relatively simple and predictable rules. The fewer parameters that require frequent intervention, the easier it is to maintain confidence in the underlying infrastructure. Tokens can adopt governance arrangements that are specific to their communities. A national token, local currency or online-game token may have different decision-making requirements. A smaller community may be able to make decisions more quickly. It may also be able to design its token around local economic conditions and preferences. This flexibility introduces its own risks. A small group may gain control over the token, alter its supply or change its rules for private benefit. Users must understand who possesses administrative authority and how governance decisions are made. Tokens can also be designed with fixed or immutable rules. This increases predictability but reduces the ability to respond to changing circumstances. ## **Implementation flexibility** The network coin needs to support the continuing operation of the network. Its design must account for node compensation, fees, security and potentially governance. These responsibilities limit how freely its monetary policy can be changed. A modification intended to improve one function might weaken another. For example, a policy that substantially reduces demand for the coin could affect node compensation or the cost of acquiring influence over the network. The network coin therefore benefits from an implementation that is robust, understandable and difficult to manipulate. Tokens do not ordinarily carry the same network-wide responsibilities. Their designers have more freedom to experiment with supply changes, holding charges, transfer conditions and governance mechanisms. A token can be created for a particular country, city, online community or game. Its design can reflect the scale and economic characteristics of that environment. This makes tokens more suitable for context-specific monetary experiments. If an experiment fails, users can move to another token without necessarily abandoning the underlying network. ## **Predictability** A globally used network coin needs a high degree of predictability. Users, node operators and applications must understand how it will behave and whether its core properties are likely to change. Frequent or unpredictable changes could weaken confidence in the network and make long-term planning difficult. Because the coin can be connected to consensus and node compensation, poorly designed changes may create systemic risks. Tokens can vary more widely in predictability. A token with immutable rules may be highly predictable, while one governed by a small and active community may change frequently. Flexibility and predictability can therefore pull in different directions. The ability to change a token allows its community to respond to new conditions, but it also creates uncertainty about its future rules. The appropriate balance depends on the purpose and scale of the token. ## **Price stability** The network coin may struggle to maintain stable purchasing power because its demand reflects activity across the entire network. If a network serves users in many countries and supports a wide range of applications, the economic conditions influencing demand can be highly complex. Increasing usage may cause the coin to appreciate, while declining activity or competition from another network may reduce its value. Changing the coin’s supply to offset every movement in demand would introduce substantial implementation and governance complexity. A fixed or simple supply policy is easier to secure but may allow the coin’s price to change as network activity expands or contracts. Tokens can focus on a narrower economic environment. A token created for a particular country or community may be governed using information relevant to that economy. This does not make price stability simple, but it reduces the range of conditions that must be considered. A token intended as a medium of exchange may therefore have more flexibility to prioritise stable purchasing power than a network coin responsible for supporting global infrastructure. Some tokens, including stablecoins, connect their value to existing fiat currencies or assets. Others can use their own supply policies. The network coin does not need to adopt the same approach because it does not necessarily need to become the primary medium of exchange. ## **Financial collateral and liquidity** Both network coins and tokens can be used as financial collateral. They can also be deposited in protocols that facilitate exchange, lending and borrowing. The network coin may be particularly suitable because its demand is tied to the continuing use of the network. If the network remains operational and widely adopted, users can expect some continuing need for its coin. This can make it a common reference asset within the ecosystem. Tokens can be paired with it in exchanges, allowing users to move from one token into the network coin and then into another token. A dominant network-coin pairing may reduce liquidity fragmentation. If every token needed a deep direct market against every other token, liquidity would be spread across a large number of pairings. Tokens can also become important forms of liquidity and collateral. A widely accepted stablecoin may provide more predictable purchasing power, while a community token may be particularly useful within local financial applications. The reliability of each asset depends on its design and adoption. A network coin is exposed to network-level risks, while tokens may introduce contract, governance, backing or application-level risks. ## **Failure and systemic importance** A network coin is a mission-critical component when it is used to pay fees or compensate node operators. A serious collapse in its demand or value can weaken the economic incentives supporting the network. If the coin is also used in consensus or governance, concentrated ownership or sudden price changes may affect network security and control. Tokens are generally less systemically important to the underlying network. An individual token can collapse without preventing nodes from processing transactions involving other assets. This separation is valuable because it allows monetary and financial experimentation without placing the entire network at risk. However, a token can become systemically important within a particular application or community. If many people depend on it as money or collateral, its failure can still cause substantial economic harm even though the underlying ledger continues operating. ## **Coexistence within one network** A Web3 network does not need to choose between having a network coin and supporting token-based money. Both can exist and perform different functions. The network coin can focus on sustaining the shared infrastructure. It can compensate node operators, pay for network resources and support security. Tokens can provide different mediums of exchange for different communities. Each community can select its preferred monetary policy, governance arrangements and mechanisms for preserving value. This creates a layered monetary environment. The network coin supports the ledger, while tokens use that ledger to implement context-specific assets and monetary systems. A person may use several forms of money without interacting directly with the complexity of each conversion. Wallets and applications can exchange assets in the background according to the user’s preferences. The existence of multiple tokens therefore does not eliminate the need for a network coin, and the existence of a network coin does not prevent communities from creating other forms of money. ## **Demurrage and relative desirability** If a network coin and a token adopt the same supply and demurrage policies, the network coin may be more desirable to hold because of its protocol-level demand. The network coin is needed for network activity, is likely to have broad awareness and may be supported by deeper financial markets. An individual token may be easier to replace and may depend on a smaller community. This creates an important relationship between their monetary policies. If a token carries a substantially higher holding charge than the network coin while offering similar expected growth, users may prefer the network coin. The network coin’s demurrage rate could therefore influence the rates that token-based monetary systems can sustain. A token may require a lower rate, more stable purchasing power or other characteristics that make it desirable within its intended community. At the same time, setting the network-coin rate too low may encourage excessive storage of the native asset. Setting it too high may weaken demand and encourage users to hold tokens or external assets until the network coin is required. The network coin and tokens must consequently be considered as parts of the same economic environment. Their supply policies, carrying costs, liquidity and expected returns influence how users distribute their holdings between them.