Cryptocurrency is a vast ecosystem of different blockchains, protocols, coins, and technologies that you may never have even heard of. As a result, it can be challenging to wrap your head around it all.
Still, it’s a good idea to understand the basics. What are the different types of cryptocurrency, and what are they used for?
At its core, cryptocurrency is a form of digital money. You can use it to buy things online or send money to someone across the world. The main difference between crypto and traditional money is that it’s decentralized and peer-to-peer. This means that no one – not even governments or banks – controls the technology behind cryptocurrency.
Have you ever wondered about the difference between Bitcoin and altcoins? Or perhaps you’re unsure how to tell a coin and token apart. This article will explore the different categories of cryptocurrency and their unique practical applications.
Why are there different types of cryptocurrencies?
The world of cryptocurrency is immense and worth trillions of dollars. So how is it possible for such a substantial financial network to operate without the oversight of a centralized authority?
The answer is blockchain. Blockchain technology establishes a permanent, unchangeable record of all the transactions on its network so that you don’t need to trust a third party to verify transactions.
Blockchain technology also makes it possible for thousands of different cryptocurrencies to exist and serve unique purposes. Crypto is not just limited to digital payments. It can be used to store value, provide financial liquidity, represent ownership of physical assets, grant voting rights, and much more.
As time goes on, the changing needs of society require innovative solutions. Some of the world’s most pressing issues could be addressed by new cryptocurrency platforms.
Coins vs. Tokens
Before we go any further, we should clear up a common source of confusion. Tokens and coins are often used interchangeably, but they’re two separate things. You should be aware of the differences before reading the rest of this article.
· Coins have their own blockchains and are often used to store or exchange money.
· Tokens are built on top of existing blockchains and can have a variety of utilities.
For example, Bitcoin is a perfect example of a coin. It has its own blockchain, can be used as a form of digital payment, and is the primary cryptocurrency for storing value. Other coins include Ethereum, Litecoin, and Cardano.
While coins are more general-purpose, tokens usually have a specific purpose that is only applicable to their own blockchain. They provide a mechanism for transactions on a range of decentralized applications (dapps).
For instance, users who want to store or retrieve their files on the decentralized storage network Filecoin must pay fees using its native utility token, FIL. Other tokens include Chainlink, BNB, and Compound.
Bitcoin vs. Altcoins
Altcoins are simply any coins that aren’t Bitcoin.
In the early stages of cryptocurrency development, many altcoins were launched to improve on Bitcoin’s model. Litecoin, for example, is an early altcoin built on the same protocol as Bitcoin but with faster block rates and lower transaction fees.
As time went on, more altcoins began to differentiate themselves from Bitcoin. For example, the second-largest cryptocurrency by market cap, Ethereum, is an altcoin that runs on an entirely different type of blockchain – proof of stake (PoS). Instead of functioning as a payment system, Ethereum is a platform that hosts a huge ecosystem of decentralized applications.
When it comes to the utility of altcoins, there’s no single answer. Altcoins like Cardano and Solana are smart contract platforms with a similar purpose to Ethereum. Litecoin and Ripple are payment systems that offer an alternative to Bitcoin. Some altcoins, such as Dogecoin, have no identifiable utility but have still proved to be a valuable speculative asset in the crypto market.
Blockchain Layer 1 vs. Layer 2
You may have heard about different layers in blockchain. It’s an important topic because it addresses one of blockchain’s most significant hurdles: scalability.
Layer 1 is the blockchain – it’s the base layer of the decentralized network. Bitcoin and Ethereum are two examples of Layer 1 blockchains.
While both of these networks can securely validate transactions, they’re limited by scalability. For greater user adoption to occur, Layer 1 blockchains need to improve their transaction speed and handle more data. That’s where Layer 2 solutions come in.
Layer 2 solutions provide base blockchains with different alternatives to help them scale. For example, some handle payments, while others process smart contracts. The common feature is moving some of the workload off the original chain to reduce network congestion and improve efficiency.
An example of a Layer 2 solution is Polygon. It’s a multi-chain network that aims to help Ethereum improve its efficiency, security, and scale by offering different ways to bundle transactions. It can process up to 65,000 transactions per second.
What are the different types of cryptocurrency?
Cryptocurrency can be broken down into several groups and is most commonly categorized by use case. Some of the main categories and their popular cryptocurrencies include:
· Store of value
Bitcoin (BTC)
· Smart contracts
Ethereum (ETH), Cardano (ADA), Solana (SOL), Polkadot (DOT), Fantom (FTM), Polygon (MATIC)
· Payments and settlements
Litecoin (LTC), Ripple (XRP), Monero (XMR), Stellar Lumens (XLM)
· Utility
Chainlink (LINK), The Graph (GRT), VeChain (VET), Filecoin (FIL)
· Stablecoins
Tether (USDT), USD Coin (USDC), DAI (DAI)
· Exchange tokens
Binance Coin (BNB), Uniswap (UNI), SushiSwap (SUSHI)
· DeFi
Compound (COMP), Aave (AAVE)
· Meme tokens
Dogecoin (DOGE), Shiba Inu (SHIB)
· Non-fungible tokens (NFTs) and gaming
Axie Infinity (AXIE), THETA (THETA), Chiliz (CHZ)
We won’t be able to get into all of these categories in this article. However, you’ll find an overview of the main categories and their use cases below. Use this information as a starting point to learn more about the different types of cryptocurrency as you build your portfolio.
Store of Value
Bitcoin (BTC)
Bitcoin is the original cryptocurrency. It was created in 2009 by a person going by the pseudonym Satoshi Nakomoto, who wanted to revolutionize the financial system. Satoshi envisioned a world where anyone could send a digital payment directly to someone else without the oversight of centralized authorities.
Bitcoin is based on a proof of work blockchain that allows transactions to be immutable, independently verifiable, mobile, private, and highly secure.
Over the years, millions of people worldwide have come to recognize the value of such a system, and both Bitcoin adoption and its market price have skyrocketed. As a result, it’s now the most valuable cryptocurrency by market cap. Generally, it sets the tone for the crypto market action as a whole.
Bitcoin can be used for online payments, but it has slower speeds and higher transaction fees than alternatives like Litecoin or Ripple. Despite its limitations, its network security and proof of long-term viability are second to none. As a result, Bitcoin is now more commonly used as a digital store of value.
Although it may take more time before digital cash is the norm as Satoshi envisioned, Bitcoin’s most important contribution perhaps has been setting the stage for the exciting innovations in cryptocurrency that we see today.
Smart Contracts
The topic of smart contracts deserves its own article. In short, smart contracts are programs that self-execute when specific requirements are met. It’s one of the foundational aspects of blockchain technology and has an extensive range of use cases for application development.
Ethereum (ETH)
Ethereum is a smart contract platform that allows users to build decentralized applications (dapps). It’s currently the largest such ecosystem and hosts over 3,000 dapps. Some of these dapps help users lend or borrow crypto. Others are created for trading, investing, insurance, or even crowdfunding purposes. There are few limits to the potential of new decentralized finance applications built on the Ethereum blockchain.
Cardano (ADA)
Cardano is a high market cap altcoin that offers an alternative to Ethereum’s smart contract dapp development platform. For one thing, it’s built on a proof of stake consensus mechanism, which is faster and more energy-efficient than Ethereum’s current proof of work model (although Ethereum will switch to a PoS model in Ethreum 2.0). In addition, Cardano emphasizes a research-backed development model that has proved to be slower in launching new applications but may ultimately ensure its long-term viability.
Polkadot (DOT)
As the crypto domain continues to expand, it can be a challenge for different blockchains to communicate. Polkadot aims to be the interoperability solution for all. It enables the easy transfer of data or assets between blockchains, with the end goal of establishing a fully decentralized, user-controlled web. DOT is its native token used for network transactions, as a governance mechanism, and to create parachains (parallel chains).
Payments and Settlements
Payment and settlement tokens facilitate the quick and secure transfer of value across different cryptocurrency blockchains.
Stellar (XLM)
One of the earliest goals in the cryptocurrency space was to make digital payments fast and affordable. Stellar is one such network dedicated to this goal. Using XLM, high transaction fees are a thing of the past. Each transaction only costs 0.00001 XLM. This makes it easier than ever to transfer money worldwide.
Utility Tokens
Utility tokens provide a specific purpose on their native blockchains. For example, they can be used for providing network security, granting governance privileges, generating rewards to incentivize use or a wide range of other functions.
Chainlink (LINK)
LINK is an Ethereum-based utility token that powers Chainlink, a decentralized oracle for DeFi apps. The platform helps facilitate the transition of real-world data onto the blockchain. LINK rewards network participants who mine and stake their assets to secure the platform and validate new data.
Stablecoins
Stablecoins represent fiat currency. Their value is directly pegged to the physical currencies behind them. The most common examples of stablecoins are Tether (USDT) and US Dollar Coin (USDC). Each coin is supposed to be pegged to the dollar in a 1:1 ratio.
The goal of stablecoins is to provide more stability, transparency, and lower fees. For example, in a period of high market volatility, investors can trade other coins for stablecoins instead of cashing out into fiat.
Below you’ll find a few of the most popular stablecoins on the market.
Tether (USDT)
The concept of stablecoins has proved incredibly useful, and Tether stands at the forefront of this category. USDT was launched in 2014 and currently has the largest 24h trading volume out of any cryptocurrency. However, while it’s a suitable medium of exchange for crypto trading, there is some controversy around whether or not Tether has the fiat reserves to truly back USDT in a 1:1 ratio.
US Dollar Coin (USDC)
Like Tether, the value of USDC is tied to the dollar. It was launched in 2018 and has ties to Coinbase, one of the largest cryptocurrency exchanges. It features the same utility as other stablecoins in its category but is perceived to be more trustworthy than Tether. This is due to more transparency and regular audits on its fiat reserves.
Dai (DAI)
DAI is different from the other two stablecoins mentioned above. It’s also pegged to the value of the US dollar in a 1:1 ratio, but it’s backed by cryptocurrency instead of fiat. A system of smart contracts works in the background to manage the collateral and keep it stable. The benefit to this system is that it isn’t backed by physical fiat reserves that other stablecoins claim to have but are not independently verifiable.
Exchange Tokens
Exchange tokens are native tokens on cryptocurrency exchange platforms. They can be used to provide liquidity or incentivize usage by providing trading rewards and discounts.
Binance Coin (BNB)
BNB is the native utility token for the Binance exchange – the largest cryptocurrency exchange in the world by trading volume. It serves several functions on the Binance blockchain. For example, it allows traders to access trading fee discounts on the platform and pays for gas fees on the Binance Smart Chain. In addition, it can be used for online payments and other digital financial services.
DeFi Tokens
DeFi tokens are used across a vast array of decentralized finance applications. They’re commonly used for lending, borrowing, staking, or providing liquidity, but they also have other use cases.
Aave (AAVE)
Aave is one of many decentralized finance protocols used for borrowing and lending cryptocurrency. Users can earn interest by lending their crypto to liquidity pools. At the same time, borrowers can use this crypto as collateral to take out flash loans. The platform offers a revolutionary approach to financial tools that were previously only available through large financial institutions.
Meme Tokens
Meme tokens like Dogecoin or Shiba Inu don’t have any inherent utility. Instead, they derive their value from the strength of their community and social media momentum. As a result, their price often fluctuates wildly in response to mentions from influential figures or pop culture references.
Shiba Inu (SHIB)
Shiba Inu is a meme coin that exploded in popularity over the past year. While it was started as an experiment in community building rather than to provide real-world utility, the team behind Shiba Inu has recently attempted to build value by launching DeFi products such as a decentralized exchange.
NFTs and Gaming
Non-fungible tokens (NFTs) are the latest trend to take over the world of cryptocurrency. While they’ve become popular thanks to trading digital art or in-game assets, they can also be used for other purposes such as tracking proof of ownership records or establishing provenance.
Axie Infinity (AXS)
Axie Infinity is one of the top games in the rapidly expanding crypto game and NFT universe. Players can collect, train, breed, and battle with token-based creatures known as Axies. Each Axie is an NFT that can breed other Axies to be traded on the in-game marketplace.
Further Exploring the World of Cryptocurrency
Hopefully, this basic overview has given you a glimpse into the wide world of cryptocurrency. As you can see, it’s an enormous domain that can take a long time to explore. In addition, there are so many different ways to categorize crypto, so it’s possible that many of the examples mentioned above overlap.
Once you’ve developed a fundamental understanding of the layer-1 blockchains like Ethereum, Solana, Polygon, Polkadot, or Cardano, take some time to dive into their ecosystems. You’ll discover a diverse collection of layer-2 tokens that all exist to serve specific purposes.
Perhaps you’re drawn to payment tokens for processing transactions at lightning speeds, data oracles for relaying real-world information, or even digital art and gaming assets. Whatever your interests, there is a crypto project out there that you can get behind.