After the invention of Bitcoin (BTC), thousands of other cryptocurrencies have been created over the past few years. But each cryptocurrency is built on different blockchains which differentiates one from another, in this article we are going to review the four types of cryptocurrencies and their blockchains.
What is cryptocurrency?
Cryptocurrency is a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography which was created using encryption algorithms. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system.
To use cryptocurrencies, you need a cryptocurrency wallet. These wallets can be software that is a cloud-based service or is stored on your computer or your mobile device. The wallets are the tool through which you store your encryption keys that confirm your identity and link to your cryptocurrency.
However, they are thousands of cryptocurrencies out there, with many more being started daily, so how can we classify them?
They all depend on blockchain technology, but there are many differences between them. This article will help make sense of the landscape of types of currencies and look to help categorize cryptocurrencies into four broad categories which are:
- Payment Cryptocurrency
- Stablecoins
- Utility Tokens
- Central Bank Digital Currencies
Payment Cryptocurrency
Cryptocurrency emerged in 2008 with the Bitcoin whitepaper as a scientific experiment which was the most famous and first successful example of a digital payment cryptocurrency.
In less than ten years, it had become a part of the global financial system with a capitalization of trillions of dollars. The purpose of a payment cryptocurrency, as the name implies, is not only as a medium of exchange but also as purely peer-to-peer electronic cash to facilitate transactions.
Since this type of cryptocurrency is meant to be a general-purpose currency, it has a dedicated blockchain that only supports that purpose which is a decentralized application (Dapps) that has no central server, nor a specific actor responsible for the system.
It is anonymous: Although there is a public ledger of transactions, it only contains account numbers (so-called “addresses”). It does not include any names, phone numbers, or even IP addresses. These payment cryptocurrencies also tend to have a limited number of digital coins that can ever be created, which makes them naturally deflationary. As fewer and fewer of these digital coins can be mined, the value of the digital currency is expected to rise.
Examples of payment cryptocurrencies include Bitcoin, Litecoin, Monero, Dogecoin, and Bitcoin Cash.
Stablecoin
Since stablecoins came into existence, trading cryptocurrencies has become easier for traders because they now have a point of reference in fiat currency. And Tether (USDT) is just one of the many.
Tether was one of the first stablecoins, and it is also the most popular and liquid one right now. The concept promoted through USDT as a stablecoin is that every token is backed by one US dollar. Hence, the 1-to-1 ratio between USDT and USD should almost always stay at the same level. This way, traders can use their activity as a cryptocurrency “tethered” to the real-world US dollar.
Because of the one-on-one connection to the US dollar, USDT allowed users to keep their funds in a cryptocurrency that retains the same value as the fiat currency.
The benefit comes from the fact that cryptocurrency traders didn’t have to pay additional fees for fiat transactions and stopped waiting days for their funds to reach a destination.
Utility Tokens
A utility token is a cryptocurrency on a smart contract blockchain that serves a specific function in a crypto project’s ecosystem. Utility tokens, unlike coins and security tokens, give users access to dozens of features on blockchains and in decentralized applications (dApps). As smart contract blockchains like Ethereum continue to scale, more blockchain developers are issuing unique utility tokens for their Web3 projects.
On a smart contract blockchain, any crypto project can put out utility tokens that give users access to special features. For instance, utility tokens can be used to purchase in-game items in metaverse titles like The Sandbox. Some utility tokens, like Uniswap’s UNI, may grant holders voting privileges on a decentralized application.
The point is that utility tokens only serve a function within their respective ecosystems. While utility tokens have monetary value in the open crypto market, they aren’t trying to be a medium of exchange, an inflation hedge, or a long-term store of value. Instead, developers create utility tokens to drive growth and engagement or raise funding for their dApps.
There are dozens of possible use cases for utility tokens. A few common ways people use utility tokens include:
- Service Token: Some cryptocurrency projects issue Service Tokens that grant the user authorization to an interconnection asset which allows the user to perform something on a network. One such type of this service token is Storj, an alternative to Google Drive, Dropbox, or Microsoft Onedrive.
- Finance Token: Another example of a token is Binance’s Binance Coin (BNB), which was created to give the holder discounted trading fees. As this type of token grants access to a cryptocurrency exchange, you will sometimes hear it referred to as an Exchange Token.
- Governance Token: Governance tokens are tokens that developers create to allow token holders to help shape the future of a protocol. Governance token holders can influence decisions concerning the project such as proposing or deciding on new feature proposals and even changing the governance system itself.
- Non-Fungible Tokens (NFTs): Non-Fungible Tokens (NFTs) are certainly one of the hottest topics in the Decentralized Finance (Defi) space that can not be copied, substituted, or subdivided, they are recorded in a blockchain, and that are used to certify authenticity and ownership. The ownership of an NFT is recorded in the blockchain and can be transferred by the owner. However, NFTs are not a cryptocurrency, as cryptocurrencies are fungible, meaning one unit of a particular cryptocurrency is identical to the next. A holder of one BTC should be completely indifferent if another person offers them another unit of BTC. However, for NFTs, each one is unique and non-fungible, so we don’t include them as a cryptocurrency.
Central Bank Digital Currency (CBDC)
Central bank Digital currencies are digital tokens, similar to cryptocurrencies, issued by a central bank. They are pegged to the value of that country’s fiat currency.
Many countries are developing CBDs, and some have even implemented them. Because so many countries are researching ways to transition to digital currencies, it’s important to understand what they are and what they mean for society. technology, which should increase payment efficiency and potentially lower transaction costs. For many central banks around the world, using CBDCs is still in its early stages. However, several CBDCs are based on the same ideas and technology as cryptocurrencies like Bitcoin.
However, as CBDCs are effectively monitored and controlled by the Chinese government, holders of this cryptocurrency give up the advantages of decentralization, pseudonymity, and lack of censorship. which maintains a “paper trail” of transactions for the government, which can lead to taxation and other economic rents being levied by governments.
Conclusion
Cryptocurrency is a hot topic in the global financial system. which is always meant to be free from government control and manipulation, even though this fundamental part of the industry has grown wider as it has become more popular. The cryptocurrencies that are based on Bitcoin have often tried to show that they are better or different from Bitcoin.
Additionally, cryptocurrencies are intended for payments, transmitting value as digital money across a decentralized network of users. Many altcoins (i.e., those that are not Bitcoin or sometimes Ethereum) are classified in this way, some of which may have more volatility than BTC.
