📚 School’s in session…
Today, thousands of cryptocurrencies exist, and more are still being launched daily. Although you'll notice some obvious and other more subtle distinctions between them, they all operate using the same fundamental blockchain model — facilitating the transfer of money electronically between zero-trust parties.
In this guide, we clarify the market by discussing four major types of crypto:
- 📀 Standard, eg. ⭐ BTC
- 📀 Utility tokens, eg. NTFs
- 📀 Value stores, eg. stablecoins
- 📀 CBDC: central bank digital currency
Types of Cryptocurrencies — Overview
As a quick summary of our findings and how we came to them:
- 💿 It's a good question — how do we categorise all of the different cryptos, given that there are of them now, additional ones are coming onto the market, and some of them work very differently from each other?
- 💿 We can start with definitions: all types of crypto rely on blockchain technology, albeit with a lot of variations in how.
- 💿 In terms of covering the most used forms, we can group them roughly into four dimensions: 1) for paying 2) as tokens 3) as value stores, eg. stablecoins 4) as central bank digital currencies (CBDCs).
⭐ This is a useful introductory exercise, to get a sense of things. Nevertheless, there are other ways to group cryptos.
Standard Types of Crypto
We’ve used the catch-all term ‘standard crypto’ to designate the types of cryptocurrencies that were modelled along the mysterious Satoshi Nakamoto‘s original concept. As the creator of bitcoin, some of these names are the most famous in the industry.
It’s possible to think of these coins as the “original payment types” because the very first coin was Bitcoin (by Nakomoto as a way of circumventing central banks). With a 🔱 market cap of over £250 / £315 billion — as of November 2022 — it’s also accurate to say Bitcoin (BTC) is the most popular crypto in the world.
In second place for popularity is Ethereum (ETH). This denomination also operates very similarly to BTC though it has just under half as much market value.
You have to go to third place for market cap to find something other than standard crypto… Tether is the third most used crypto. This stablecoin has only a quarter the value of BTC and half that of ETH.
Indeed, the first popular cryptocurrency used for digital payments was Bitcoin, which is arguably the most well-known cryptocurrency. Standard payment cryptocurrency serves as a means of paying for goods and exchanging value digitally.
Generally speaking, this form of crypto has a specialised blockchain that exclusively serves as general-purpose money. This means that these blockchains cannot support the operation of smart contracts or decentralised applications (Dapps).
Utility Tokens
Utility tokens are another prevalent kind of crypto. Any crypto asset that operates on top of another blockchain is a token. The idea of permitting other crypto assets to “run on top of” its blockchain was originally introduced by the Ethereum network. Tokens add functionality and power to the chain.
Vitalik Buterin — the creator of Ethereum’s creator — in fact, viewed his digital asset as an open-sourced configurable currency that would enable decentralised applications and smart contracts to bypass established legal and financial institutions.
Tokens, like ETH on the Ethereum network, aren't really subject to caps — this is another important distinction between them and payment cryptocurrencies.
Each Utility Token has a particular function on the blockchain, known as a use case.
For instance, Ether’s use case is to pay transaction costs in order to add an item onto the Ethereum blockchain or for creating and buying Dapps on the network. These tokens are sometimes called Infrastructure Tokens.
1. Finance Tokens
An example of a Finance Token is Binance’s Binance Coin (BNB), designed to let users reduce trading costs. Because it also gives users access to the crypto exchange, it is also called an Exchange Token.
The initial coin offering (ICO), which brings investors into premature cryptocurrency companies, is where tokens are most frequently traded. Security Tokens, a kind of shared ownership, are the tokens that reflect possession or other entitlements to another security or asset.
Security and exchange tokens are more widely categorised as Financial Tokens — used in financial activities including lending, crypto trading, crowdsourcing, and wagering.
2. Service Tokens
Some crypto ventures offer service tokens, which allow the owner to execute an action on a network or have access to resources. Storj, a competitor to Dropbox, Google Drive, and Microsoft Onedrive, is one such form of this service token. The platform lets users who want to keep data in the Cloud, by renting underutilised hard drive space.
How do users pay for the service? That’s right — Storj’s native utility token is used. In order to earn these tokens, however, those who are actually loaning hard drive space need to successfully go through random file verification each hour, using cryptographic processes, to validate that they are still storing the data.
3. Governance Tokens
Tokens may also be used for governance, which is an intriguing use. The power to vote on specific issues inside a cryptocurrency network is granted by these tokens to their holders.
These often involve greater, more important choices or adjustments and are required to preserve the network's decentralised character — this prevents the decision-making authority from being concentrated in a small group and enables the community to decide on ideas through their votes.
In this way, governance tokens are used to audit various crypto network infrastructures.
A DAO (Decentralized Autonomous Organization), a kind of virtual cooperative, might serve as an illustration. The Genesis DAO is the most well-known of them. More recently, the MakerDAO introduced the MKR, a distinct governance token. MKR holders have the opportunity to vote on issues involving Dai, MakerDAO's stablecoin.
4. Entertainment and Media
Finally, there are the Media and Entertainment Tokens, which may be spent for online gaming, media, and entertainment — one such token is the Basic Attention Token (BAT), which rewards users who choose to see adverts with tokens that can subsequently be used to reward top content producers.
5. Non-Fungibles? ❌
You might be perplexed as to why Non-Fungible Tokens (NFTs) were mentioned this late. Unquestionably, they are one of the trendiest subjects in the Decentralized Finance (DeFI) industry.
But NFTs are not cryptocurrencies since one unit of a given coin is the same as the next. If someone gives you any BTC, as long as it is indeed BTC, the owner should be utterly uninterested. The same applies to all cryptocurrencies. NFTs, on the other hand, are not classified as cryptocurrencies because every one of them is unique and non-fungible.
Stablecoins
Stablecoins are designed to serve as a value store. They are designed to provide less volatility present in many crypto assets — so that the reserves in your 💼 crypto wallet hold better value over time. Despite being based on a blockchain, they retain their value since they can be converted into one or more paper currencies. Stablecoins are therefore anchored to a “real” currency, most frequently the US dollar or the Euro.
To ensure the value of the cryptocurrency, the business that oversees the peg is obliged to have reserves. Investors are drawn in by this stability — stablecoins can be used as a means of savings or a medium of exchange, enabling regular value transfers without the price fluctuations of digital currencies.
The most well-known stablecoin is Tether's USDT, which ranks after Bitcoin and Ether as the next-biggest cryptocurrency by market cap.
Since the USDT is linked to the US dollar, its value should remain constant at a dollar — a bit over 80 pence as of December 2022. This is accomplished by backing each USDT with reserve assets in the form of money or cash equivalents equal to a dollar.
Holders can exchange their fiat money for USDT into their 🏛️ BTC-friendly bank or immediately redeem their USDT with Tether Limited for that dollar, less any fees Tether levies. Tether also makes money by lending money to businesses.
However, there is no control or regulation of stablecoins by the government. Another well-known stablecoin, TerraUSD, and its twin coin, Luna, both fell apart in May 2022. They crashed from a dollar to just 11 cents (9 pennies).
The issue with TerraUSD was that it was underpinned by its own coinage, Luna, as opposed to investing reserves in money or other secure assets. Luna's value dropped from over $80 (£65) to a tiny fraction of a penny after its meltdown in May. TerraUSD's peg to the USD was broken as holders of stablecoins rushed to redeem them.
Once again, the lesson is to exercise caution before purchasing any stablecoins by reading the whitepaper and being familiar with how the stablecoin manages its reserves.
Central Bank Digital Currencies (CBDCs)
The central banks of several nations (such as the Bank of England, responsible for intervening in a country’s economy 🏛️ when necessary) have released a specific kind of digital money that qualifies as a type of cryptocurrency.
CBDCs are issued by central banks in the form of tokens or digital records linked to the currency and connected to the national currency of the area or nation supplying them.
Since central banks are the ones that issue this digital money, they retain complete control and oversight over the CBDC. For many nations, the adoption of a CBDC into the monetary system and fiscal policy is still in its early stages; nevertheless, it could spread over time.
CBDCs are based on the same blockchain systems as cryptos, which could improve payment efficiency and perhaps cut transaction fees. Many central banks throughout the globe are currently developing their usage of CBDCs, but many of them are built on the same ideas and technologies as cryptocurrencies like Bitcoin.
The currency is comparable to other well-known cryptocurrencies in that it is produced in token format or with digital records to show ownership. The advantage of decentralisation, pseudonymity, and absence of censorship is forfeited by CBDC owners, however, as these cryptocurrencies are effectively controlled, scrutinized, and tracked by the government that issues them.
A “paper trail” of CBCDs is automatically created for the government, allowing it to levy taxes and other forms of economic lease.
On the bright side, CBDCs may be fairly anticipated to hold their value indefinitely or at the very least mirror the pegged paper currency in a politically stable and inflationary context.
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