What Are Different Types of Cryptocurrency?
How Many Types of Cryptocurrency Are There?
Numerous types of cryptocurrency coins exist. There are thousands of them. Most digital coins are based on the principles that were applied when Bitcoin was launched:
Not issued, regulated, or maintained by a central authority such as a bank.
Based on distributed ledger technology (blockchain).
The data is protected by cryptographic algorithms.
Users manage their assets through a wallet without intermediaries.
The underlying blockchain technology allows developers to create various types of digital money to solve many problems in areas such as finance, healthcare, energy, information storage, privacy, security, machine learning, payments, and content ownership.
With the development of information technology in distributed networks, the basic protocols and methods for confirming transactions have also improved. Bitcoin is a popular cryptocurrency, but due to the peculiarities of is system, the use of this coin in everyday transactions is limited:
The rate of mining of new blocks remains low.
The network consumes a lot of electricity.
Due to the limited block size, there may be a queue of uncommitted transactions.
Many shortcomings of BTC and similar projects of the first generation were eliminated after the introduction of the smart contract system. In 2017, an even more advanced, third generation of blockchain technologies appeared, the main idea of which was to achieve maximum speed and security of transactions.
Blockchain 1.0
The first crypto generation included Bitcoin and those cryptocurrencies that appeared in 2011-2013. The main idea of digital finance of that period was decentralization. For the first time, users were able to transfer and store assets without the participation of intermediaries (banks or payment systems). But the scope of the projects was limited to electronic transfers. The problem with scalability and transaction processing speed pushed developers to introduce new, more advanced technologies. Examples of the first generation cryptocurrencies: BTC, LTC, NMC, STC.
Blockchain 2.0
A new stage in the development of digital technologies was the introduction of smart contracts – agreements, the execution of which takes place within the blockchain. For example, the developer of a computer game puts it up for sale. A client who wants to download the program places funds in a cryptocurrency wallet and signs a smart contract. After one party transfers the source code of the application (game) via the blockchain, the system automatically records the fulfillment of the terms of the transaction and transfers the reward for the program to the developer. These operations are carried out automatically, which excludes fraud or unauthorized intervention of third parties.
Blockchain 2.0 technologies accelerated the processing of digital transactions and helped to implement them in various areas: offline trading, application development, public administration.The second generation includes Ethereum and its forks, as well as the types of cryptocurrencies issued on its blockchain according to the ERC-20 standard.
Blockchain 3.0
The growth in the capitalization of digital currencies made developers think about transferring blockchain technologies to other areas. In particular, ideas related to DLT technologies (distributed ledgers) are discussed. Cloud storages are usually hosted on dedicated servers, which can be disabled or blocked. If information (documents, videos, music) is distributed among the computers of all network users, each member of the community can access it and synchronize it with the data they already have. But the implementation of this technology requires:
High speed of confirmation of transactions, an order of magnitude higher than the time of mining blocks in Bitcoin or Ethereum.
Protection of personal data and anonymity of users.
Low network costs. Blockchains 1.0 are not suitable for this purpose due to the high power requirement for computing new blocks.
Compatibility of different digital projects.
What Are the Types of Cryptocurrency According to Their Purpose?
Records in distributed ledgers can perform not only an economic function, but can also be used as a unit of account in individual digital projects. Cryptocurrencies can be classified according to their purpose:
Payment Tokens
Payment tokens are used as a means of calculation. Digital coins perform an important function – they are used as a means of payment. This category of cryptocurrencies is sometimes referred to as currency coins. The most famous currency coins are BTC, BCH, XMR, XRP, LTC, DOGE, RVN and others.
Platforms Coins
A separate class includes those types of cryptocurrencies that ensure the entry of smart contracts into distributed platform ledgers. The list of these assets includes ETH, NEO, ATOM.
Stablecoins
Stablecoins were created as a way to overcome the excessive volatility of cryptocurrencies. Their value is tied to real assets:
Fiat money whose price is based on the amount of reserves held by a financial institution. Main USD peg: TrueUSD (TUSD), USD Tether (USDT), USD Coin.
Cryptocurrencies. To guarantee the value of a stablecoin, excess collateral is used (the amount of collateral is higher than the asset). The greatest representative is DAI.
Precious metals. The cost is tied to the gold rate: PAX Gold, DGX Gold Token.
Exchange Tokens
Crypto exchanges issue their own tokens that act as securities of the trading platform. Basically, these cryptocurrencies differ in privileges for owners and are developed according to the standards of the Ethereum network. They are used as fuel for exchange operations, bringing additional bonuses, discounts and dividends to traders. Holders of these digital assets can receive:
Part of the profit that went to the exchanges for paying commissions for exchange transactions by clients.
The right to participate in the management of the site.
Discount on commissions and fees.
Increased deposit and withdrawal limits.
DeFi Tokens
Decentralized finance is a highly secure peer-to-peer borrowing market that has continued to grow since 2020. A separate class of tokens is used in decentralized systems. This list includes:
P2P lending protocols secured by digital assets;
decentralized exchanges;
platforms for issuing digital shares.
Each token is designed to function in the corresponding financial application. They are usually created on the same blockchain as the native project.
What Is the Classification of All Types of Cryptocurrency According to Their Functionality?
The difference between cryptocurrencies lies in the functions they perform:
Commission. Facilitate the collection of generated payments.
Managerial. They give voice in DeFi protocols and allow owners to influence the daily work and development of the project.
Collateral. If there is a shortage on the borrowing platform due to liquidated user credits, any imbalance are covered by such tokens. They are vital for protocols that create artificial assets or use cryptocurrencies as collateral. Since it is based on the blockchain, the advantages are inherited from it: immutability; openness and availability of information.
Security Tokens
Security token is a unique digital record issued on the blockchain representing a stake in an external asset. A company wishing to distribute shares to investors can use a security token (STO), which offers the same benefits as traditional securities (shares), voting rights and dividends. Companies can raise start-up capital through digital technologies. Investors are provided with investment tokens that entitle them to receive dividends. Security tokens are usually backed by the startup's authorized capital. This type can be compared with the securities of enterprises in the real sector of the economy: stocks or bonds.
AppCoins
Other types of cryptocurrency include application tokens (appcoins) are a type of cryptocurrency that grants the holder the right to use the services of a platform or service. They are compared with keys for activating applications installed on computers or mobile devices.
NFTs
In electronic form, you can create not only money, but also intangible assets: text documents, images, movies. Non-fungible tokens (NFTs) are smart contracts that prove ownership of digital objects. They allow users to register copyrights for music, drawings, text documents, and applications.
Web 3 Tokens
Decentralization is possible not only in payment systems, but also in the field of information exchange. Third-generation Internet technologies (Web 3.0) are usually understood as distributed information storage methods, P2P communication systems, and the concepts of data transfer between different electronic devices (“Internet of Things”). In all such networks, tokens are used as a payment unit. An example of cryptocurrencies used in the field of Web 3 is IOTA, which pays for the transfer of data between devices connected to the Internet of Things. This category also includes NOIA and ICP coins.
What Types of Cryptocurrency Are There According to Their Generation Model?
Cryptocurrencies may differ in the method of issue (emission).
Mining
Mining coins by performing cryptographic calculations. In networks operating according to the Proof-of-Work method, users provide their equipment (processors or video cards) to perform calculations when generating blocks. As soon as a new entry is made to the chain, the miners who participate in its creation receive a reward in the form of a certain number of coins. New blocks are mined in the Bitcoin, Litecoin, Bitcoin Cash networks and other projects based on the Proof-of-Work proof method.
Forging
In some networks, the approval of transactions is not carried out by calculations, but by the method of confirming the share of ownership (Proof-of-Stake). Forging is an analogue of mining in networks that use the Proof-of-Stake algorithm. New tokens are distributed in proportion to the share of the one who participates in the creation of the block. The chances of forming a new block are proportional to the number of cryptocurrency units. The probability of success in this case does not depend on the computing power required to make entries in the blockchain.
ICO
One-time generation of all coins that are distributed between developers and investors (depositors). Tokens can be issued automatically by their creators. In this case, all units of account are immediately credited to users' wallets. The distribution of assets can be made in proportion to the contributions of the participants. This process resembles an initial public offering on stock exchanges, in which traders receive ownership of securities, in return making contributions to the start-up capital of the company.
What Are The Main Differences Between Altcoins and Bitcoins?
Bitcoin and altcoins are very similar because they operate on the same mechanism. But they have many differences. For example, Bitcoin creates new crypto blocks according to the proof of work algorithm. To do this, the computer must solve a puzzle. This process is very energy-consuming, because you need to go through millions of code combinations.
Altcoins use a Proof-of-Stake algorithm or another. This way they become more competitive – it takes much less energy to mine altcoins. It also reduces transaction verification time.
The capabilities of Bitcoin smart contracts are very limited. Altcoin creators can remove this drawback
The biggest disadvantage of altcoins is that they do not have enough influence. Bitcoin dominates the market. Ethereum holds the second place. The remaining altcoins occupy less than 40%. This affects their value.
Some altcoins are created quickly and copy the source code of other coins. Such cryptocurrencies are underdeveloped. This means that not all altcoins can be decentralized. Instead, they will be controlled by their creators.
Most altcoins are limited in use because they are not accepted everywhere as payment, compared to Bitcoins.
Altcoins lack what Bitcoin has, namely history, capitalization and community. Since Bitcoin was first, it had more options. For example, 15,000 companies around the world accept Bitcoin payments. Some altcoins can also be used to buy things in real life. Ethereum is often used to pay for goods and services in the metaverse.
