While there is no denying that Bitcoin was the first cryptocurrency to operate publicly, it should be noted that there are several other types of cryptocurrencies on the market. These cryptocurrencies are differentiated according to the following:
- the code designs
- how they are formulated
- use case
- application, etc.
Below, we share the popular types of cryptocurrency and tokens you should know about.
Popular Types of Cryptocurrencies
1. Utility Tokens
Utility tokens have been designed specifically for use within a certain network or blockchain application. This type of token works by providing access to an exclusive service or product (that is buying an Amazon gift card).
The utility token acts as a medium of exchange and unit of account in the system, while its value is determined by the demand for the underlying product/service. Examples include Bancor Network Token (BNT), Civic Wallet Token (CVC), and many others.
2. Security Tokens
Security tokens are similar to utility tokens with the exception that they are designed for use as securities. That means that these tokens represent ownership of something tangible like stocks, bonds, real estate, and commodities.
For example, Augur REP is a security token built on top of Ethereum’s smart contracts which represents ownership stakes in the outcome of future events (prediction markets). Similarly, LTO Network uses blockchain technology to create digital representations of physical gold bars, allowing people to trade gold safely and easily. In addition, security tokens give investors additional legal protection against fraud.
3. Stable Coins
Stablecoins are cryptographically-secured assets pegged to traditional fiat currencies such as US dollars, Chinese Renmimbi, Japanese Yen, British Pounds, euros, Swiss Francs, and South Korean Won. They were created with stability in mind because one of their main goals is to eliminate price volatility. Since stablecoins are tied to a fiat currency, their prices will fluctuate based on local economic conditions.
However, they are still considered cryptoassets since they can be traded and bought just like any other coin. Some examples of stablecoins are Tether (USDT), TrueUSD (TURU), Paxos Standard (PAX), Dai (DAI), Gemini Dollar (GUSD), Circle USD Coin (USDC), Cred (CRED), Basis (BASIS), and many more.
4. ERC20 Tokens
ERC20 tokens are typically used as a method to raise capital through initial coin offerings (ICOs). ICOs provide companies with a way to fund their operations by selling new digital coins and tokens to early adopters.
ERC20 tokens function similarly to how utility tokens do except that ERC20 tokens are not necessarily intended to provide access to anything. Instead, ERC20 tokens merely serve as a cryptographic representation of ownership rights within a particular project. To learn more about this type of token, check out our guide here.
5. Non-Fungible Tokens (NFTs)
Similar to collectibles, non-fungible tokens are unique and are meant to be sold or purchased individually rather than in bulk. These types of assets usually exist in the gaming industry (such as CryptoKitties) but NFTs aren’t limited to games alone. Other examples include Magic: The Gathering cards, video game characters, and comic book heroes. Check out our comprehensive article here to learn more about NFTs.
6. Exchange Tokens
Exchange tokens allow users to convert cryptocurrencies into each other directly without going via a centralized third party. A popular exchange token is Changelly, which allows users to quickly swap between different tokens at low fees.
7. DeFi Tokens
Defi tokens are financial applications that run on the blockchain. Defi tokens allow individuals to take advantage of interest payments, zero-fee transactions, and decentralized oracles while staying inside the cryptocurrency ecosystem. One of the most well-known DeFi tokens is Maker (MKR), which was formerly called Compound.
8. Privacy Tokens
Privacy tokens are becoming increasingly important today. From ZeroCoin to Monero, privacy-centric altcoins continue to grow in popularity. While some privacy coins supply anonymity by default, others offer better and more advanced techniques.
9. Asset-Backed Tokens
Asset-backed tokens give investors a secure form of ownership without having to own an asset or cryptocurrency. This allows for increased liquidity, but also comes with its fair share of legal risks. One example of an asset-backed token is Digix Gold (DGD).
10. Future Tokens
Future tokens are similar to prediction markets; participants get paid when someone else pays for a service. They could even replace a traditional stock market. For instance, Gnosis uses prediction markets to predict major geopolitical events.
How Cryptocurrencies Are Differentiated
To understand the differences between cryptocurrencies, we need to first consider what makes them so distinct from traditional forms of payment. When it comes down to it, there are two primary characteristics: decentralization and security. Traditional banking methods require central authorities to facilitate exchanges and transfers.
Through blockchain technology, however, smart contracts make these processes transparent and automated — removing the possibility of fraudulent activity. Similarly, blockchains create additional layers of security because all data is publicly available online — providing transparency of who owns what assets. By combining both attributes, blockchains enable trustworthy transactions.
What Are Coins?
Cryptoassets are often referred to as “digital money,” yet this term is somewhat misleading. What exactly does “money” refer to in a digital context? Historically, fiat currencies have been considered tangible objects, such as paper bills, metal coins, or plastic credit/debit cards.
However, blockchain technology has made it possible to transfer value over the Internet in a way that resembles physical cash. As a result, many people use the terms “crypto assets” or “cryptocurrency” interchangeably. Although this may seem like a technical distinction, it can help clarify how various crypto asset classes differ from one another.
What Are Tokens?
Tokens are used to compensate parties involved in transactions using cryptographic algorithms. They can be either ERC20 compliant or non-compliant. The former type of token can represent anything of value within their respective ecosystems.
Non-ERC20 compliant tokens typically have less functionality and are more suitable for speculative investments. ERC20 compliant tokens follow specific rules about how they should interact with other parties, whether they’re based on Bitcoin or Ethereum.
What Are Altcoins?
Altcoins are alternative versions of bitcoin, created by independent developers. Some altcoins focus on technological innovation, while others aim to compete directly with bitcoin itself. Altcoins may offer new features not found in earlier iterations of the Bitcoin protocol. There are hundreds of altcoins currently circulating in the market, including Litecoin, Ripple, Dogecoin, Dash, Peercoin, and MaidSafeCoin.
Why Have So Many Cryptoassets Emerged?
The advent of mobile phones, smartphones, and internet access has ushered in a wave of tech-driven innovations in recent years. People now carry around devices capable of storing vast amounts of information, purchasing goods and services, sending payments, sharing news, and connecting to social networks.
It’s become incredibly easy to move money across borders quickly and at a low cost. This presents an unprecedented opportunity for individuals and companies alike to develop products and services that leverage this medium.
Why Is Blockchain Technology Important?
In 2015, Satoshi Nakamoto published a white paper describing the blockchain concept. Since then, many have attempted to build upon this idea and improve upon the core concepts behind cryptocurrency. While the original design focused primarily on peer-to-peer trading, many other applications have emerged.
These include smart contracts (which are essentially self-executing agreements), decentralized apps (DApps), and distributed ledgers. Distributed ledger technologies allow multiple entities to conduct financial transactions without the need for third-party verification. Furthermore, due to its immutable nature, the blockchain eliminates the risk of fraud associated with traditional banking systems.
Conclusion
Cryptoassets are rapidly gaining traction worldwide, thanks in part to a growing awareness of blockchain technology. The rise of cryptocurrencies, however, has also exposed some significant security issues. With each passing day, hackers increase their efforts to infiltrate cyberspace and steal user data.
Cryptographers continue to work tirelessly to solve these problems, but it will take time before we see widespread adoption. In the meantime, investors will need to do their best to educate themselves on the nuances of different crypto asset classes. Understanding what makes them unique will go a long way toward helping you avoid potential pitfalls.
