What are all the different types of cryptocurrencies?
Throughout the past decade, the crypto world has experienced the steady rise of numerous cryptocurrencies with different functions and purposes. While most of these digital currencies share common characteristics such as decentralisation and ease of transfer, there is a wide variety of cryptocurrencies each with their own uniqueness. This article will provide an overview of the different types of cryptocurrencies and help you understand what each asset has to offer.
Payment Cryptocurrencies were created as an alternative monetary system to allow users to conduct peer-to-peer transactions. Also known as P2P, peer-to-peer transactions are the direct transfers of cryptocurrency without the need of a central authority such as a bank, on the blockchain. P2P is made possible through a series of uniquely verified codes and encryption to make and enforce smart contracts on the blockchain. Miners compete to verify P2P transactions by solving mathematical problems in exchange for cryptocurrency rewards. This is the process all payment cryptocurrencies go through.
Bitcoin, the world’s first cryptocurrency and a payment cryptocurrency.
As mentioned before, payment cryptocurrencies like Bitcoin run on a dedicated blockchain as a closed source network. This means the platform is built to support only its currency-related issues and restricts smart contracts or other third-party apps from operating on this blockchain.
Another feature of payment cryptocurrencies is their limited supply. Generally speaking, there is a maximum number of digital currencies that can be created at any given time. Bitcoin, for example, has a max cap of 21 million coins. The limited supply of each crypto helps to increase their value in the market.
Apart from Bitcoin, other payment cryptocurrencies include Litecoin, Monero, Bitcoin Cash (BCH), Ripple (XRP) and more.
Utility tokens are similar to payment cryptocurrencies in that they are both virtual currencies built on a blockchain network, can hold value and be exchanged. While payment cryptocurrency is created as an alternative monetary system, utility tokens are designed to represent physical/ tangible assets or a certain utility or service.
For example, utility tokens can represent real estate, art or intangible assets such as processing power or data storage space. They are also used as a governance mechanism and distributed by developers to holders for voting on decisions that will dictate a protocol’s future, including upgrades and the direction of the blockchain project. The process of creating crypto tokens to serve these various functions is known as tokenization.
Ethereum and Binance Coin are classical examples of utility tokens. Ethereum is credited as the earliest platform to incorporate the idea of an open-source blockchain for developers to build decentralized applications, other cryptocurrencies and utility tokens. Its native cryptocurrency, Ethereum (ETH) was created to support the native blockchain and power smart contracts on the network.
Let’s take a look at other types of utility tokens.
This type of token grants holders access to any content within a network. An example is Storj, an ERC-20 token, which allows developers to upload and distribute files within a decentralised cloud storage network called Storj DCS.
Non-Fungible Tokens (NFTs)
Non-fungible tokens (NFTs) are unique tokens that contain valuable information to prove they are one-of-a-kind, with their ownership limited to a single individual at a time. NFTs are often used to represent valuable assets such as artwork, real estate, videos, in-game items and its creator will always retain ownership of the NFT and earn royalties each time the NFT changes hands.
During periods of high volatility and general uncertainty in the digital assets market, many users often turn to stablecoins for a store of value. Stablecoins are pegged to a physical currency (U.S. dollars, EURO, etc.) to maintain its value, give it a 'stable' quality and limit price fluctuations.
Stablecoins shouldn’t be confused with Central Bank Digital Currencies (CBDC). Although they often contain an abbreviation of a pegged currency (i.e., USDT), they are not controlled by any government agency or institution. Rather, stablecoins are managed by independent companies saddled with the responsibility of maintaining the reserves that determine their market value.
Central Bank Digital Currencies (CBDC)
Central Bank Digital Currencies CBDC is the digital form of a country's fiat currency that is also a claim on the central bank. Instead of printing money, the central bank issues electronic coins or accounts backed by the full faith and credit of the government. It is primarily issued and regulated by the central bank of a country or region. Most of its operational processes (blockchain technologies, payment gateways, etc.) are similar to other cryptocurrencies. Still, every transaction is documented and closely monitored by government agencies, which conflicts with crypto's anonymous and decentralised nature.
Apart from the classifications explained above, you might also come across other terms used to describe cryptocurrencies.
Altcoins: Following the introduction of Bitcoin, many other token projects emerged as alternatives with a few changes to how they operate. These are called ‘altcoins.’ An example is Litecoin, which was also designed to be a digital payment solution.
Memecoins: These are cryptocurrencies inspired by a joke/meme and eventually managed to gain traction. A popular example is Dogecoin.
Cryptocurrencies may seem like a complicated mess to a beginner, but hopefully, this article should have demystified the concept for you a bit by explaining the various types and its functions.
If you are looking to invest in cryptocurrencies, remember to always do your research on a project before investing, as they are valued differently and sometimes affected by unique factors.