What are the different types of cryptocurrencies?
Learning about cryptocurrencies can be daunting when there are thousands of them! It can be easier to understand these assets when you separate them into categories.
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In this article:
- What is a cryptocurrency?
What is a cryptocurrency?
A cryptocurrency is a digital currency secured by cryptography.
Cryptocurrencies rely on blockchain technology. Most cryptocurrencies are not issued or controlled by a central authority, like a bank or government.
Cryptocurrencies are designed to be nearly impossible to counterfeit or double-spend. Different cryptocurrencies achieve this through various consensus mechanisms.
What are payment currencies?
As the name suggests, payment currencies are for making payments. Some examples of payments may include:
- Goods and services
- Peer-to-peer money transfers
While every cryptocurrency can theoretically be used to pay for things, merchant adoption or acceptance by providers of goods and services is more widespread for payment currencies.
Cryptocurrencies like Bitcoin (BTC), Litecoin (LTC), and Bitcoin Cash (BCH) are popular and well-known payment currencies.
What are blockchain platforms?
Blockchain platforms provide more functionality than just payments.
These platforms allow for the creation of digital assets (tokens and NFTs) and decentralized applications (dApps and Web3 apps). Blockchain platforms become their own ecosystems that are powered by a primary asset. For example, the Ethereum network is powered by ETH.
Some other blockchain platforms include BNB Smart Chain, Cardano, Polygon, Solana, and TRON.
What are stablecoins?
Stablecoins are assets that are pegged to the value of a fiat counterpart.
In other words, the value of these assets is programmed to remain consistent and stable. You can contrast this with other types of cryptocurrencies, whose value fluctuates regularly.
For example, Tether (USDT) and USD Coin (USDC) are two stablecoins that are pegged to the value of the US dollar. This means 1 USDT token is designed to always be worth 1 USD.
Due to their stable nature, these assets are very popular among regular traders. Stablecoins provide a way to temporarily capture value without the need for offboarding to a traditional fiat currency. If a trader assumes an asset is going to lose value soon, they could swap the asset for a stablecoin to prevent financial loss.
Different stablecoins follow different methods to maintain a stable price. For an in-depth explanation of how stablecoins work, check out our article: What are stablecoins?
There are far too many stablecoins active today to list them all here. Some examples of stablecoins include Tether (USDT), DAI (DAI), and USD Coin (USDC).
What are privacy coins?
Some cryptocurrencies are created with a focus on privacy.
In privacy coin transactions, only the sender and receiver know the number of coins transacted. Additionally, the balance of a privacy coin wallet address is only known by the owner of the wallet.
These privacy features are in sharp contrast to blockchains like Bitcoin, which show transaction amounts for each transaction as well as wallet address balances.
Cryptocurrencies like ZCash (ZEC) and Monero (XMR) are examples of privacy coins.
What are utility tokens?
Utility tokens are digital tokens that are used solely for a blockchain-based product or service. They typically run on a blockchain platform.
ERC20 tokens that run on the Ethereum blockchain are the most popular utility tokens. There are also many other token types that run on their respective blockchains, such as BEP20 tokens on BSC, and TRC10 and TRC20 tokens on TRON.
One example of an ERC20 utility token is Golem (GLM), which runs on the Ethereum network. On the Golem platform, users pay each other GLM to rent computing power. The more GLM you provide, the more computing power you can rent. In this case, the GLM token's purpose is to pay for renting computing power from another user.
Arweave (AR) is an example of a utility token that runs on its own blockchain. Arweave is a blockchain that allows users a way to store files indefinitely for a one-time cost. The cost for this storage is paid in the blockchain's native token, Arweave (AR), and the data storage is within the Arweave blockchain, providing immutability and forever storage.
Aside from GLM and AR, other examples of utility tokens include Basic Attention Token (BAT), Civic (CVC), OMG Network (OMG), and 0x Protocol (ZRX).
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