Types of Cryptocurrencies: A Complete Guide 2024
Types of Cryptocurrencies: A Complete Guide 2024. Bitcoin, the first and largest Cryptocurrency by market capitalization, was founded on January 3, 2009, by an anonymous person or group of people using Satoshi Nakamoto. Bitcoin attracted investors, techies, and idealists who viewed it as the future currency and demonstrated the viability of virtual currencies based on the blockchain. The unique qualities of Bitcoin, such as its decentralization, immutability, resistance to censorship, and scarcity, particularly impressed individuals.
There are over 13,000 other cryptocurrencies, while Bitcoin was the first viable public digital currency. These cryptocurrencies can be grouped according to their applications and practicality, among many criteria. Continue reading to understand better the cryptocurrency options and some suggestions for diversifying your crypto holdings.
Types of Cryptocurrencies
Although most cryptocurrencies are built on the ideas of Bitcoin, there are many more, and they all have various purposes:
- Nothing like a government or central bank has ever made them, run them, or provided any support.
- They reside on a blockchain-powered distributed ledger.
- Cryptography ensures their security.
- Holders can access and control them through blockchain wallets.
While Satoshi may have initially intended Bitcoin to function as a medium of exchange similar to conventional currency, the utility of cryptocurrencies has since grown beyond that original purpose. Given that blockchain technology enables programmers to construct nearly any cryptographic asset, some cryptocurrencies are made to be exchanged on exchanges or used as investments.
Not all types of cryptocurrency ventures are only looking to make money. Some have much grander ambitions. For instance, NFTs are one-of-a-kind crypto tokens that stand in for tangible things like works of art, songs, houses, virtual goods, etc. Fear of missing out (FOMO) is another factor that has led to the development of various cryptocurrency varieties. Motivated by the explosive growth of cryptocurrencies over the past five years, developers are always thinking of new methods to create value, while investors are always trying to find the “next Bitcoin” to invest in. Now, let’s dive into some of the types of cryptocurrencies available:
Coins
Coins are digital assets that exist on separate ledgers called blockchains. Simply put, they power their chains’ tax and reward systems by functioning as native currencies. For example, Bitcoin miners receive BTC rewards, and Ethereum validators receive ETH rewards. Similarly, Gwei, a unit of Ethereum’s native token, is required as a gas cost for all network transactions. Alternatives to fiat currency exist in certain currencies, such as Bitcoin, which serve as a store of value. Bitcoin is an alternative to fiat currency and inflation because of its provable scarcity; there will only be 21,000,000 coins.
Other coins are only helpful for certain chains. To pay transaction fees and operate as a bridge cryptocurrency, Ripple’s native coin, XRP, is essential for cross-border payments. XRP has emerged as the dominant exchange medium among banks, payment service providers, and crypto exchanges to enable near-instant payments at cost-effective transaction fees.
Tokens
Digital assets known as “tokens” are based on blockchain technology and are thus intrinsic to the underlying blockchains. Instead of starting from scratch with the code, you can follow a predefined template when making a token. This simplifies and speeds up the process of making tokens instead of coins.
An example of a unique token that uses the chain’s architecture is Ethereum’s ERC-20 token standard, made possible by the cryptography component of the blockchain. Tokens are also distinguishable since the native coin of the underlying blockchain is used to settle transaction fees. Take Uniswap, for example; it’s a DEX that runs on the Ethereum network. Even though Uniswap has its coin, UNI, the gas fees associated with using it require Ethereum.
Stablecoins
Stablecoins are a type of Cryptocurrency with value pegged to something more solid, such as the dollar or gold, so it doesn’t fluctuate too much. These solutions aim to offer the advantages of cryptocurrencies while reducing the extreme volatility seen by the market. Since even the most valuable Cryptocurrency, bitcoin, is subject to significant price fluctuations, the inherent instability of the market makes cryptocurrencies unappealing for day-to-day transactions and long-term investment.
An essential part of the cryptocurrency market is stablecoins, which allow traders to exit positions without converting their Cryptocurrency to fiat money. This is because stablecoins maintain a 1:1 ratio to their pegged asset. The following is a list of all four stablecoin varieties:
Fiat-Collateralized Stablecoins
Most stablecoins’ value comes from the same amount of fiat currency. A central authority or trustee has the fiat collateral. A stablecoin’s value should scale linearly with the supply of tokens in circulation. The most valuable fiat-collateralized stablecoins as of right now are USD Coin (USDC), Binance USD (BUSD), and Tether (USDT).
Crypto-Collateralized Stablecoins
Another digital asset, or collection of assets, serves as security for these stablecoins. Crypto-collateralized stablecoins, instead of custodians, use smart contracts to retain collateral. Stablecoins allow buyers to “mint” their Cryptocurrency by securing it in an intelligent contract vault in exchange for tokens of the same value. Next, you lock your stablecoin in the vault (burn) to get your collateral. Regarding market capitalization, Dai (DAI) is the largest crypto-collateralized stablecoin.
Algorithmic Stablecoins
Algorithmic stablecoins are a new type of Cryptocurrency that uses smart contracts and specialized algorithms to control the supply of tokens rather than fiat or crypto collaterals to stabilize prices. In essence, the algorithm reduces the total token supply when the token’s price drops below a certain threshold and raises it when it rises over that threshold. To illustrate the concept of an algorithmic stablecoin, consider Frax (FRAX).
Commodity-Backed Stablecoins
Precious metals, energy, and property are some commodities collateralizing these stablecoins. Two of the most prominent stablecoins backed by gold are Tether Gold (XAUT) and PAX Gold (PAXG), and gold is the most widely used collateralized commodity. Investments in assets that may be difficult to access locally can be made possible through commodity-backed assets, which also add liquidity to an otherwise illiquid asset class.
Exchange Tokens
Crypto exchanges are the issuers of exchange tokens, a type of Cryptocurrency. The emergence of exchanges as a more direct means of exchanging cryptocurrencies has accelerated their acceptance. Now that they have their exchange tokens, customers can stake them for greater APY or trade fees, making them the principal entry point into the crypto world.
It is common practice for businesses to issue exchange tokens as a means of financing expansion. The exchange’s goals determine whether to give or not issue; nevertheless, not all exchanges have their native tokens. Common uses for exchange tokens include monetary transactions, decentralized administration, and increased liquidity. These tokens typically serve a practical purpose on their respective exchanges and provide holders with member-exclusive perks, such as trading incentives. Among the most valuable exchange tokens in terms of market capitalization is Binance’s native coin, BNB.
Defi Tokens
DeFi is created with the express purpose of serving in it. In a technical sense, they are utility tokens because of the specialized function they frequently serve in DeFi programs. The underlying blockchains of developers’ applications are used to create DeFi coins. Since most DeFi applications are Ethereum-based, most tokens adhere to the ERC-20 standard.
To encourage more people to use their systems, DeFi tokens frequently provide incentives. In exchange for securing their money in a protocol’s liquidity pool, DeFi customers receive these tokens. Smart contract risks and irreversible loss are potential outcomes of locking assets in a liquidity pool. Therefore, developers should reward the web3 community with tokens to create liquidity. For the DEX’s governance purposes, users can cast votes using Uniswap’s UNI token, which grants them access to the treasury and the ability to purchase future upgrades. Users can receive these tokens through airdrops or earn them by mining liquidity.
Meme Tokens
Some cryptocurrency projects, called meme tokens, have billion-dollar market caps. These include Dogecoin and Shiba Inu. These efforts are essential because of memes. These tokens may delight you. They start as silly tokens based on memes like Doge and gain momentum as the community accepts them. Meme coins must go beyond meme culture to prosper. Metaverses, play-to-earn games, and Shiba Inu’s Shibarium and ShibaSwap are examples. DeFi tokens are intended for decentralized apps. Because of their use in DeFi applications, these tokens are utility tokens. Some cryptocurrency projects, called meme tokens, have billion-dollar market caps. These include Dogecoin and Shiba Inu. These efforts are meaningful because of memes. These tokens may delight you. They start as a fun meme-inspired token like Doge and gain momentum as the community adopts them. Meme coins must go beyond meme culture to prosper.
Governance Tokens
One form of Cryptocurrency is the governance token, which grants its holders a voice in the future direction of web3 projects. Giving community members a voice in project governance and decentralizing decision-making are two of their primary functions. Everyone who owns a governance token has a say in how the project develops. The ability to vote for more proposals is directly proportional to the number of tokens held. From allocating cash to modifying protocols, holders have a say.
Developers can submit recommendations through a standard mechanism used by most projects. Token holders use voting power to support or reject a proposition if it goes to a vote. Decentralized autonomous organizations (DAOs) rely on these tokens when making decisions. As an example of a governance token, Compound’s COMP is well-known. Members of the Compound community can cast ballots on significant issues, such as whether or not COMP incentives should be eliminated.
NFTs
Despite their similarities to cryptocurrencies, NFTs are distinct tokens that can verify ownership of physical and digital goods. They have various possible uses, from real estate and event tickets to digital items like music and films. Regarding NFT collections, Bored Ape Yacht Club (BAYC) ranks high.
The unique metadata that each NFT token has ensures that even if you make 200 identical replicas of an item and distribute the same amount of NFTs to signify ownership, each one will still be uniquely identifiable from the others. Imagine a scenario where 200 investors have identical products in their web3 wallets. This means that each investor can claim their copy is unique.
GameFi Tokens
One emerging trend in blockchain technology that combines DeFi and NFT ideas is GameFi. Using a play-to-earn concept, GameFi differs from conventional games that rely on a “pay-to-win” system where players can purchase upgrades to gain an advantage. Incentives for participation and leveling up are critical to the model.
Staking is one example of how some GameFi has incorporated DeFi features beyond the fundamentals; players stake tokens to earn interest and other benefits, which they can then use to purchase additional in-game things or unlock new abilities. As a governance token, AXS allows token holders to influence and vote on the course of the Axie Infinity game, making it one of the most prominent GameFi tokens in the cryptocurrency market.
Wrapped Tokens
Comparing Bitcoin and Ethereum to separate distributed ledgers is one approach to comprehending both networks. Blockchains can’t work together well because they’re all separate. Additionally, native currencies like Bitcoin cannot function on non-native networks such as Ethereum because no blockchain other than Bitcoin “understands” the Bitcoin language.
You can transfer the value of one native asset to another non-native asset using wrapped tokens, a kind of Cryptocurrency. Wrapped Bitcoin (WBTC) is a well-known example of a wrapped token. Because of the direct correlation between the two currencies, 1 WBTC should always be equivalent to 1 BTC. The value of WBTC, however, is precisely proportional to BTC’s worth. Wrapped tokens increase the value of the native currency on different networks. On the Ethereum network, for instance, you can use WBTC to participate in several DeFi activities, such as lending, staking, yield farming, and more.
Conclusion
From coins to wrapped tokens, we covered everything in our discussion of types of Cryptocurrency 80 categories are available on CoinGecko, including Move-to-Earn, yield farming, and other ecosystems in the area. There are more than 13,000 cryptocurrencies in all. This article has examined ten categories to help you navigate the market and give you an idea of different cryptocurrencies’ functions in the crypto industry.
