What are the Different Types of Cryptocurrencies?
Key Takeaways:
- There are already over 13,000 cryptocurrencies, and many more are being generated every day.
- Despite being founded on the same ideas as Bitcoin, most cryptocurrencies have their unique characteristics and functionalities.
- Cryptocurrencies may be categorized depending on a variety of elements, including their traits and use cases.
Different Types of Cryptocurrencies: The first and largest cryptocurrency by market capitalization, Bitcoin, was introduced on January 3, 2009, by an unidentified person (or group of persons) going by the name of Satoshi Nakamoto. Investors, the IT community, and idealists who believed it to be the future of money were drawn to Bitcoin because it demonstrated the viability of blockchain-based virtual currencies. The characteristics of decentralization, immutability, censorship resistance and scarcity of Bitcoin in particular were praised by users.
There are more than 13,000 cryptocurrencies in circulation, although Bitcoin was the first usable public digital money. These cryptos can be grouped according to their utility, use cases, and a variety of other characteristics. Continue reading for information on the various kinds of cryptocurrencies as well as suggestions on how to diversify your cryptocurrency holdings.
Types of Cryptocurrencies
There are several cryptocurrencies, and while they all have various purposes, most are based on the ideas of Bitcoin:
- They are not created, controlled, or maintained by a single organization like a government or central bank.
- On a distributed ledger powered by blockchain technology, they exist.
- Through encryption, they are protected.
- Holders can view and control them since they are kept on blockchain wallets.
Bitcoin may have been created by Satoshi to serve as a means of trade (much like fiat money), but cryptocurrencies now serve many other purposes. Some cryptocurrencies are made to function as investment vehicles and repositories of wealth that can be exchanged on markets and exchanges because blockchain technology enables developers to use cryptography to construct practically anything they can imagine.
Other cryptocurrency initiatives serve objectives much beyond those of investment vehicles and value repositories. NFTs, for instance, are distinctive crypto tokens that reflect things found in the real world, such as works of art, music, real estate, in-game goods, etc. The fear of losing out is another driver for the creation of many sorts of cryptocurrencies (FOMO). Because of the cryptocurrency industry’s explosive growth over the past five years, developers and investors are always looking for methods to create and invest in the “next Bitcoin.”
Let’s explore some of the many kinds of cryptocurrencies now:
Coins
Cryptocurrencies have coins that exist on their blockchains. They essentially serve as the local currencies that support the tax and incentive systems on their networks. For instance, Ethereum validators receive payments in ETH whereas Bitcoin miners receive payouts in BTC. Similarly to this, a user must pay a gas tax for every transaction on the Ethereum network in Gwei, a unit of ETH, the native currency of Ethereum.
Some currencies, like Bitcoin, function as a store of value and offer substitutes for fiat money. Since there will only ever be a maximum of 21 million coins, Bitcoin has a proven scarcity that makes it a better store of value than fiat money and inflation.
Some coins only have been used for certain chains. For instance, to ease cross-border payments, Ripple employs its native asset, XRP, which also functions as a bridge cryptocurrency and is required to cover transaction costs. To enable almost instantaneous settlements at affordable transaction costs, XRP is the preferred exchange medium between banks, payment service providers, and cryptocurrency exchanges.
Tokens
The blockchains on which tokens are based are native to them, making them currency. You don’t have to code the token from scratch when producing one; instead, you follow a predetermined template. As a result, manufacturing tokens is quicker and simpler than creating coins.
Blockchain’s cryptography component makes it easier to create distinctive tokens that make use of the chain’s architecture, as demonstrated by Ethereum’s ERC-20 token standard. The fact that the transaction fees for tokens are settled in the native coin of the underlying blockchain is another distinguishing feature of tokens. Think about the decentralized exchange (DEX) Uniswap, which is based on the Ethereum blockchain. Uniswap has its coin, UNI, however, you still need ETH to cover gas costs while using it.
Stablecoins
A stablecoin is a cryptocurrency whose price is controlled by a stable asset, such as the US dollar or gold. They are intended to offer all the advantages of cryptocurrencies while reducing the extreme volatility that plagues the industry. Since even bitcoin, the most valuable cryptocurrency according to market cap, undergoes considerable price fluctuations, volatility essentially renders cryptocurrencies undesirable for everyday usage and even as a store of value.
Stablecoins have a significant impact on the cryptocurrency market since they allow traders to close out positions without having to exchange their cryptocurrency back into fiat currency because they keep a 1:1 relation to their underlying asset.
The four categories of stablecoins are as follows:
Fiat-Collateralized Stablecoins
The most well-known stablecoins have 1:1 fiat money backing. The fiat collateral is held by a centralized issuer or custodian. It must match the quantity of stablecoin tokens that are in use. According to market capitalization, the leading fiat-collateralized stablecoins are Tether (USDT), USD Coin (USDC), and Binance USD (BUSD).
Crypto-Collateralized Stablecoins
The collateral for these stablecoins is another digital asset (or a collection of assets). Crypto-collateralized stablecoins employ smart contracts in place of custodians to store the collateral. To obtain tokens of comparable value, you must lock your cryptocurrency in a smart contract vault while purchasing (minting) these stablecoins. After receiving the collateral you earlier locked, you lock your stablecoin in the vault (burn). According to the market cap, Dai (DAI) is the largest crypto-collateralized stablecoin.
Algorithmic Stablecoins
Algorithmic stablecoins achieve price stability without the need for fiat or cryptocurrency collaterals by employing specialized algorithms and smart contracts to control the number of tokens in circulation. The algorithm essentially reduces the number of tokens in circulation when the token price is below the target and increases it when it is above the target. A typical illustration of an algorithmic stablecoin is Fax (FRAX).
Commodity-Backed Stablecoins
Commodities like gold, oil, and real estate are used as security for these stablecoins. The two most often used gold-backed stablecoins are Tether Gold (XAUT) and PAX Gold (PAXG). Gold is the most widely used collateralized commodity. Investments in assets that may be difficult to access locally are made possible by commodity-backed assets, which may add liquidity to an otherwise illiquid asset class.
Exchange Tokens
Cryptocurrencies issued by crypto exchanges are known as exchange tokens. Exchanges have developed as a more direct channel for trading cryptocurrencies, helping to hasten their acceptance. With their exchange tokens, which may provide trading fee benefits like better APR or better APY for customers that invest in their exchange tokens, they are now the main entry point into the cryptocurrency market.
Exchange tokens are frequently released to raise money for business expansion. However, not every exchange has its native tokens; whether an exchange chooses to issue or not depends on its objectives. Application areas for exchange tokens often involve payment systems, governance, and increasing liquidity. Typically, these tokens function as exchange utilities and provide holders with member-based advantages (like trading bonuses). One of the largest exchange tokens by market cap is the native token of Binance (BNB).
DeFi Tokens
DeFi tokens are digital currencies designed specifically for distributed applications. Technically speaking, they are utility tokens because they frequently have a defined function in DeFi programs. On the underlying blockchains of their apps, developers issue DeFi coins. Since the majority of DeFi apps utilize the Ethereum network, the majority of these tokens adhere to the ERC-20 standard.
DeFi tokens frequently serve as incentives for users to join their systems. These tokens are specifically provided as incentives to DeFi customers who secure their money in a protocol’s liquidity pool. Your exposure to smart contract risks and temporary loss increases if you lock assets in a liquidity pool. As a result, to give the web3 community much-needed liquidity, developers must offer token prizes. The governance token of the DEX is the UNI from Uniswap, giving its users the ability to vote on ideas like how to spend the treasury or future developments. Users may receive these tokens via airdrops or by earning them through liquidity mining.
Meme Tokens
Meme tokens are cryptocurrency projects that draw their importance from memes; some of these projects, like Dogecoin Shiba Inu, have a market worth of over $1 billion. These tokens live on hype, beginning as a lighthearted token based on a well-known meme like Doge and gaining traction as the community begins to embrace them.
Governance Tokens
Cryptocurrencies are called governance tokens to allow their owners to decide how web3 projects will develop in the future. Decentralizing decision-making and including the community in project governance is their primary function. Owners of governance tokens can all influence the project’s future course. When voting on proposals, having a lot of tokens gives you more voting power. Every decision is put to the holders’ vote, including when to spend money and whether to modify a protocol’s characteristics.
Developers may submit suggestions since most projects have a consistent approach to doing so. Depending on their voting power, token holders decide whether to support or reject a proposal if it comes to a vote. Decentralized autonomous organizations view these coins as essential decision-making components (DAOs). One renowned governance token is COMP from Compound. It enables members of the Compound community to vote on crucial choices like whether or not to completely reduce COMP payouts.
NFTs
NFTs are distinctive tokens that enable holders to substantiate their ownership of physical or virtual assets but are not quite cryptocurrencies. They can stand in for anything, including real estate, event tickets, and digital items like music and films. It is simple to exchange these products and the likelihood of fakes is reduced by turning them into tokens that exist on the blockchain. One of the most well-known NFT collections is the Bored Ape Yacht Club (BAYC).
The distinctive properties (metadata) that each NFT token carries allow each copy of an object to be uniquely identified from the others, even if 200 copies of the identical thing are produced and the same amount of NFTs are issued to indicate their ownership. This suggests that even if 200 investors are holding products that appear to be similar in their web3 wallets, each of them may insist that their copy is unique.
GameFi Tokens
One of the newest blockchain developments that combine DeFi and NFT ideas is called GameFi. GameFi uses a play-to-earn approach as opposed to typical games, which are built on a “pay-to-win” structure and allow players to buy upgrades to give themselves a competitive advantage over other players. The approach calls for motivating participants to take part in and advance through tasks.
Some GameFi has gone beyond the fundamentals to incorporate DeFi elements like staking, where members deposit tokens to earn interest and other benefits that may be used to purchase more in-game products or unlock new possibilities. Axie Infinity’s AXS, which serves as a governance token and allows token holders to influence and vote on the course of the Axie Infinity game, is one of the most popular GameFi tokens in the crypto realm.
Wrapped Tokens
Networks like Bitcoin and Ethereum may be thought of as various distributed ledgers. Blockchains cannot effortlessly connect since they are isolated. Moreover, because only the Bitcoin blockchain “understands” the Bitcoin language, native currency like Bitcoin cannot be used on non-native networks like Ethereum.
The value of a native asset can be transferred to a non-native asset via wrapped tokens, a type of cryptocurrency. Wrapped Bitcoin is a well-known illustration of a wrapped token (WBTC). Since WBTC and Bitcoin have a 1:1 connection, 1 WBTC should always be equivalent to 1 BTC. In other words, WBTC keeps tabs on BTC’s value. The use of native currency on other networks is increased through wrapped tokens. For instance, utilizing WBTC on the Ethereum network, you may take part in numerous DeFi activities including lending, staking, yield farming, and more.
FAQs – Types of Cryptocurrencies
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Conclusion
We talked about the many forms of cryptocurrencies, ranging from coins to wrapped tokens. CoinGecko features more than 80 categories, including Move-to-Earn, yield farming, and the many ecosystems in the area, and there are more than 13,000 cryptocurrencies. To assist you to get started on navigating the market and to give you a sense of the functions different cryptocurrencies play in the crypto ecosystem, we’ve examined 10 of these categories in this post.
Disclaimer
Please bear in mind that the material in this article is not financial or investment advice. The information in this article is strictly the author’s opinion and should not be interpreted as trading or investment advice. We make no assurances about the completeness, trustworthiness, or accuracy of this content. The cryptocurrency market is notorious for its tremendous volatility and irregular moves. Before investing, any investor, trader, or the regular crypto user should perform comprehensive research and get familiar with any local regulations.
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