Different Types of Cryptocurrency

Cryptocurrency is a broad ecosystem of different blockchains, protocols, coins, tokens, and technologies. As a result, it can be challenging to understand how the different categories fit together. Still, it can be helpful to understand the basics. What are the different types of crypto assets, and what are they commonly used for?

At its core, cryptocurrency is a broad term for digital assets that use blockchain or distributed ledger technology. Some crypto assets can be used for payments or value transfer, while others are designed for applications such as smart contracts, decentralized finance, governance, data services, gaming, or digital ownership.

Many crypto networks are designed to operate without a single central operator, although decentralization varies by network. This means that transaction validation and network activity may be handled by distributed participants rather than a traditional intermediary such as a bank.
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 explores common categories of cryptocurrency and some of their practical uses.
 

The world of cryptocurrency is immense, with total market value often measured in the trillions of US 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 creates a shared, tamper-resistant record of transactions, which can reduce reliance on a central intermediary to verify and reconcile activity. 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 technology evolves, some crypto projects aim to address real-world problems, although outcomes vary widely by design, adoption, and regulation.
 

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 well-known 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. 
For instance, users who store or retrieve files on the decentralised storage network Filecoin may pay network fees using its native token, FIL. Other examples of tokens include LINK, COMP, UNI, and AAVE.
 

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, Ethereum is an altcoin that runs on a proof-of-stake (PoS) blockchain. 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.

You may have heard about different layers in the 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.

Polygon is often discussed as an Ethereum scaling network. It is a multi-chain ecosystem designed to improve throughput and reduce costs, using different approaches depending on the Polygon network. Throughput varies by network conditions and implementation.
 

Cryptocurrency can be broken down into several groups and is often categorized by use case. These categories are simplified for education. Some assets may fit into more than one category, and use cases can change over time.
Some common categories and examples include:

• Store of value
  Bitcoin (BTC)
• Smart contract platforms
  Ethereum (ETH), Cardano (ADA), Solana (SOL), Polkadot (DOT), Fantom (FTM), Polygon
• Payments and settlements
  Litecoin (LTC), XRP, , Stellar Lumens (XLM)
• Utility tokens
  Chainlink (LINK), The Graph (GRT), VeChain (VET), Filecoin (FIL)
• Value-referenced crypto assets / stablecoins
  USD Coin (USDC)
• Exchange or platform-related tokens
  BNB, Uniswap (UNI), SushiSwap (SUSHI)
• DeFi tokens
  Compound (COMP), Aave (AAVE)
• Meme tokens
  Shiba Inu (SHIB)
• NFTs and gaming-related tokens
  Axie Infinity (AXS), THETA, Chiliz (CHZ)

We won’t be able to get into all of these categories in detail in this article. However, the overview below explains some of the main categories and how they are commonly used. Use this information as a starting point for understanding different types of crypto assets, not as a recommendation to buy or trade any specific asset.
 

Bitcoin is the original cryptocurrency. It was created in 2009 by a person or group using the pseudonym Satoshi Nakamoto. Bitcoin’s white paper described a peer-to-peer electronic cash system designed to allow online payments without relying on a traditional financial intermediary. Bitcoin is based on a proof-of-work blockchain that makes transactions difficult to alter and independently verifiable, supported by a global network of nodes and miners.

Over the years, Bitcoin adoption has grown, while its price has remained volatile across multiple market cycles. Bitcoin is often the largest cryptocurrency by market capitalization and is closely watched by market participants. Bitcoin can be used for online payments where accepted, but transaction speed, fees, and usability can vary depending on network conditions and payment infrastructure. Bitcoin is also often discussed as a potential digital store-of-value asset, but it is not guaranteed to hold value and can experience significant price declines.

Bitcoin helped introduce blockchain-based digital assets and influenced later crypto network development.
 

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 decentralised applications (dApps). It is one of the largest smart contract ecosystems and supports thousands of 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 large-cap altcoin that offers an alternative smart contract platform. It uses a proof-of-stake consensus mechanism; Ethereum also moved to proof of stake in September 2022. 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 support interoperability across multiple networks. 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).
   

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. The minimum per-transaction fee is 0.00001 XLM (the base fee), although total cost can vary depending on the number of operations in a transaction. 
   

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. Chainlink uses node operators to deliver data services, and the network also supports staking for certain roles and incentives.

Value-referenced crypto assets (VRCAs), also known as stablecoins, are designed to track the value of a fiat currency, such as the U.S. dollar, or another reference value using different reserve, collateral, or stabilization models. An example of a VRCA is Circle’s USD Coin (USDC). Many fiat-referenced stablecoins aim to maintain a 1:1 value with the U.S. dollar, but designs and risk profiles differ by issuer and structure.
Stablecoins are often used in crypto markets to hold or move value between platforms, but they are not risk-free. Fees, transparency, reserve models, liquidity, and redemption rights can vary by stablecoin, issuer, platform, and network. VRCAs can also deviate from their reference value.

Below are a few examples of stablecoins commonly discussed in the market.

• 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 are native tokens on cryptocurrency exchange platforms. They can be used to provide liquidity or incentivize usage by providing trading rewards and discounts.

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 decentralised finance protocols used for borrowing and lending crypto assets. Users can earn interest by supplying assets to liquidity pools, while borrowers may post collateral to access loans (including flash loans, which have specific technical requirements).

Meme tokens like Dogecoin or Shiba Inu are often driven by community interest, social media attention, and speculative trading. Some may have limited or changing utility, and their prices can be highly volatile. Because meme tokens can be sensitive to online trends, influencer activity, and broader market sentiment, users should understand that price movements can be unpredictable and losses can occur.
 

• Shiba Inu (SHIB)

Shiba Inu is a meme coin that gained significant popularity during past market cycles. It started as a community-driven project and has since expanded into additional ecosystem products, including DeFi-related features such as a decentralized exchange.
Like other meme tokens, SHIB can be highly volatile and speculative, and its future use and adoption are uncertain.

Non-fungible tokens are a category of crypto assets used to represent unique digital ownership on a blockchain. 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 an example of a blockchain-based game that uses non-fungible tokens. 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.

Hopefully, this basic overview has given you a glimpse into the wide world of cryptocurrency. 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.