Types of Cryptocurrency

What are the Main Types of Cryptocurrencies?

Presently, there are thousands of cryptocurrencies out there, with many more being started daily. While they all rely on the same premise of a consensus-based., decentralized, and immutable ledger in order to transfer value digitally between trustless parties, there are subtle and not-so-subtle differences between them.

This article will make sense of the landscap and look to help categorize cryptocurrencies into four broad types: 

1. Payment cryptocurrency

2. Utility tokens

3. Stablecoins

4. Central Bank digital Currencies ( CBDC)

Key Highlights

> There are thousands of cryptocurrencies out there, with many more being started daily, so how can we classify them?

> They all depend on blockchain technology, but there are many differences.

> Broadly speaking, we will classify them into four categories : 

Payment Cryptocurrencies, Tokens, Stablecoins, and Central Bank Digital Currencies.

Payment Cryptocurrency

The first major type of Cryptocurrency is payment cryptocurrency.

Bitcoin, Perhaps the most famous cryptocurrency, was the first successful example of a digital payment cryptocurrency, was the first successful example of a digital payment cryptocurrency. The purpose of a payment cryptocurrency, as the name implies, is not only as a medium of exchange but also a purely peer-to-peer electronic cash to facilitate transactions.

Broadly speaking, since this type of cryptocurrency is meant to be a general- purpose currency, it has a dedicated blockchain that only supports that purpose. it means that smart contracts and decentralized applications ( Dapps) cannot be run on these blockchains.

These payment cryptocurrencies also tend to have a limited number of digital coins that can ever be created, which makes them naturally deflationary, with less and less of these digital coins can be mined, the value of the digital currency is expected to rise.

Example of payment cryptocurrencies include Bitcoin, Litecoin, Monero, Dogecoin, and Bitcoin Cash.

Utility Tokens

The second major type of cryptocurrency is the Utility Token. Tokens are any cryptographic asset that runs on top of another blockchain. Ethereum network was the first to incorporate the concept of allowing other crypto assets to piggyback on its blockchain.

As a matter of fact, Vitalik Buterin, the founder of  Ethereum, envisioned his cryptocurrency as an open-sourced programmable money that could allow smart contracts and decentralized apps to disintermediate legacy financial and legal entities.

Another key difference between tokens and payment crypto currency is that tokens like Ether on the Etherenum network, are not capped. These cryptocurrencies are, therefore, inflationary - meaning that since more and more of these tokens are created, the value of this digital asset should be expected to fall, like a flat currency in a country that is aonstantly running its cash printing press.

A Utility Token serves a specific purpose or function on the blockchain, called a use case.

Ether's use case, as an example, is for paying transaction fees to write something to the Ethereum blockchain or building and purchasing Dapps on the platform. In fact, the Ethereum network was changes in 2021 to expend, or burn off, some of the Ether used in each transaction to align the use case. You will hear these sorts of tokens to as infrastructure Tokens.

Service Tokens

Some cryptocurrency projects issue Service Token that grant the holder access to or allow them to perform something on a network. One such type of this service token is Storj, an alternative to Google Drive, Dropbox, or Microfoft Onedrive. The platform rents unused hard drive space to those looking to store data in the Cloud.

These users would pay for the service in Storj's native utility token. To earn these tokens, those who are storing the data must pass random file verification cryptographically every hour to ensure that the data is still in their possession.

Finance Tokens

Another example of a token is binance's Binance Coin (BNB), which was created to give the holder discounted trading fees, As this type of token grants access to a cryptocurrency exchange, you will sometimes hear it reffered to as an Exchange Token.

Token are most commonly sold by intial Coin Offerings (ICO), which connects early-stage cryptocurrency projects to investors. The ones that represent ownership or other rights to another security or asset are called Security Tokens, a type of fractional ownership. More broadly speaking, exchange and security tokens belong to a larger class of Financial Tokens related to financial transactions, such as borrowing, lending, trading, crowdfunding, and betting.

Governance Token

Another interesting use of tokens is for governance purpose. These tokens give its holders a right to vote on certain things within a cryptocurrency network. Generally, these tend to bigger and more significant changes or decisions and is necessary to maintain the decentralized nature of the network. This allows the comunity, through their votes, to decide on proposals, rather then focus the decision- making power in a small group.

An example would be a DAO (Decentralized Autonomous Organizations), which are a type of virtual cooperatives. The most famous of these is the Genesis DAO. More currently, the MakerDAO has a separate governance token, called the MKR. Holders of  MKR get to vote on decisions pertaining to MakerDAOs stablecoin, called Dai.

Media and Entertainment Tokens

Lastly, there are also Media and Entertainment Tokens, which are used for content, games, and online gambling. An example is Basic Attention Token (BAT), which awards tokens to users who opt-in to view advertisements, which then can be used to top content creators.

Non-Fungible Tokens (NFTs)

you might wonder why another commonly heard token hasn't been mentioned. Non-Fungible Tokens (NFTs) are certainly one of the hottest topics in the Decentralized Finance ( DeFI) space. However, NFTs are not a cryptocurrency as cryptocurrencies are fungible-meaning one unit of a particular cryptocurrency is identicle to the next.

A holder of one BTC should be completely indifferent if another person offers them another unit of BTC. Same for any cryptocurrency. However, for NFTs, each one is unique and non-fungible, so we don't include them as a cryptocurrency.

Stablecoins

Given the volatility experienced in many digital assets, stablecoins are designed to provide a store of value. They maintain their value because while they are built on a blockchain, this type of cryptocurrency can be exchanged for one or more flat currencies. So stablecoins are actually pegged to a physical currency, most commonly the U.S. dollar or the Euro.

The company that manages the peg is expected to maintain reserves in order to guarantee the cryptocurrency's value. This stability, in turns, is attractive to investors who might use stablecoins as a savings vehicle or as a medium of exchange that allows for regular transfers of value free from price swings.

The highest profile stablecoin is Tether's USDT, which is the third-largest cryptocurrency by market captilaization behind Bitcoin and Ether. The USDT is pegged to the US dollar, meaning its value is supposed to remain stable at 1 USD each. It achieves this by backing every USDT with one US dollar worth of reserve assets is cash or cash equivalents.

Holders can deposit their flat currency for USDT or redeem their USDT directly with Tether Limited at the redemption priceof $1, less fees that Tether charges. Tether also lends out cash companies to make money.

Central Bank Digital Currencies (CBDC)

Central Bank Digital Currency is a form of cryptocurrency issues by the central banks of various countries. CBDCs are issued by central banks in token form or with an electronic record associated with the currency and pegged to the domestic currency of the issuing country or region.

Since this digital currency is issued by central banks, the central banks maintain full authority and regulation over the CBDC. The implementation of a CBDC into the financial system and monetary policy is still in the early stages for many countries; however, over time it may become more widely adopted.

Like cryptocurrencies,CBDCs are built upon blockchain technology that should increase payment efficiency and potentially lower transaction Costs. While the use of CBDCs is still in the early stages of development for many central banks across the worls, several CBDs are based upon the same principles and technology as cryptocurrencies, such as Bitcoin.