What Are the Different Types of Cryptocurrency? Explained
The crypto market has come a long way. We have witnessed an influx of cryptocurrencies designed for specific use cases. Some have gone ahead to make a mark in the budding crypto space, while others have had underwhelming and short stints in the market. That said, it is important to understand the different types of cryptocurrencies currently existing to fully appreciate the growth of the industry and have a firm grip on where the market is headed.
What Are the Various Types of Cryptocurrencies?
It is common knowledge that bitcoin is the first of its kind; the blockchain network that opened our eyes to the many advantages of utilizing a decentralized and transparent infrastructure as a payment solution. As such, it is only fair that we classify bitcoin as a type of cryptocurrency because its framework gave birth to numerous other digital assets. At the center of its operation is the Proof of Work mechanism that ensures that all transactions are valid. Here, a consensus mechanism powered by miners competing to find new blocks enables a system that evades contributions from central authorities.
Once bitcoin became a phenomenon, there were attempts to clone its functionalities or create improved versions. In other cases, some participants of the bitcoin network who were frustrated by the development cycle of the digital assets chose to execute hard forks and create new strains of bitcoin where they can tweak certain functionalities as they deem fit. All the cryptocurrencies that fall under these categories are called Altcoins, coined from the fact that they are alternatives to Bitcoin.
However, it is important to note that some altcoins have way more advanced functionalities than bitcoin. For instance, Ethereum does not focus on enabling cross border payments. Instead, its blockchain implements smart contracts and provides an infrastructure for developers to deploy their decentralized applications, dapps. The ability to provide blockchain support for third-party dapps has earned these cryptocurrencies an integral place in the crypto conversation.
Remember that I discussed how dapps depend on the infrastructure of certain altcoins. Well, these dapps offer tokens tied to smart contracts for users to enjoy certain privileges or claim the ownership of tokenized assets. In clearer terms, smart contracts remove intermediaries from everyday operations. However, because it is impossible to exchange physical assets on blockchains, we can tokenize them and use smart contracts to automatically distribute or transfer them. For tokens that do not represent physical assets, they offer token holders access to a percentage of the platform's revenue or purchasing or voting power.
The Other Categories of Cryptocurrencies
Apart from the three different types of cryptocurrencies highlighted above, some categories further determine the unique use cases of digital assets. They include:
Stablecoins: These are cryptocurrencies pegged to traditional assets to reduce their volatility. Examples are USDC, USDT, and Tether.
Exchange Coin: As their name implies, these coins are native to crypto exchanges and offer users access to discounts or a share of the exchange's earnings.
Privacy Coins: With these coins, users can enjoy improved privacy whenever they execute transactions. They include Monero, Zcash, and Dash.Central Digital Currencies (CBDCs): They encompass digital assets affiliated with central banks. One of the most anticipated CBDC is the one being developed in China.
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