The Main Types of Cryptocurrency

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Bitcoin was the first cryptocurrency to be invented as a peer-to-peer version of electronic cash. The Bitcoin whitepaper came out 13 years ago and through the years facilitated a major disruption to the financial world. The main aim of Bitcoin and early cryptocurrency tokens were to act as an alternative, efficient method of payment between users. However, the blockchain ecosystem has made big technological advancements since then. We are now at a point where many types of tokens with different utilities are growing in market capitalization.

Obviously, the blockchain world is an ecosystem experiencing constant innovation, where many cryptocurrency tokens can have multiple utilities. Therefore, it is not uncommon for tokens to serve many types of participants and classify themselves under two or more types that we will discuss. Hence, the combination of these functionalities is what makes this ecosystem so unique!

Payment Tokens

Payment tokens usually refer to cryptocurrencies aiming to serve the main functions of money. Combining the efficiency of a blockchain network and the ability to be a great store of value is what made Bitcoin the primary example of a payment token. With a market capitalization of >$1.1 trillion and recent adoption rates by financial institutions, the first cryptocurrency is rightfully the “King of Crypto”.

However, several technical drawbacks resulting in high transaction fee costs and slow confirmation times exist. SegWit and Lightning network are the most notable developments of the Bitcoin ecosystem to tackle scalability and cost issues. These issues are the reason that many alternative payment tokens emerged in an attempt to claim the top position in the “Payment Tokens” category.

Litecoin went live in October 2011, as the first notable Bitcoin hard fork. It is approximately four times faster than Bitcoin and still remains among the top cryptocurrencies by market capitalization. Litecoin uses Scrypt which is a different hashing algorithm than Bitcoin which adopts SHA-256. As an early pioneer in the space, Litecoin is still among the leading payment tokens but has failed to keep up with Bitcoin’s popularity.

Bitcoin Cash is the main reference point of an alternative payment token to Bitcoin. It emerged as a hard fork of Bitcoin in August 2017, enabling an increase of the block size limit to 32 MB. This feature facilitates faster execution times and lower transaction fees in comparison to Bitcoin. Further hard fork implementations on the Bitcoin Cash network resulted in new cryptocurrency tokens – Bitcoin ABC and Bitcoin Satoshi Vision. Each one of them has differences in vision, with the first one aiming at inclusion of smart contracts and oracle services and the latter one aiming at an increase of the block size to 128MB.

Privacy Tokens

The first payment tokens enabled transparent, peer-to-peer transfer of value between participants. A concern for some crypto enthusiasts is that early cryptocurrencies were indeed more efficient than traditional currencies, but were not actually enhancing anonymity in transactions. Therefore, Zerocoin protocol was the first attempt to describe how a privacy token can function. This idea gave birth to Zcash, a privacy token hiding user identities and origins of transactions, while recipients and amounts are still visible. A new form of zero-knowledge cryptography called zk-SNARKs, is the technological innovation behind this feature.

Monero is a popular privacy token with an initial release in March 2014. Monero’s ring signatures is a tool enhancing a high degree of anonymity in transactions, by obfuscating transaction history. It implements this by associating an input with many possible outputs, aka the ring size of the transaction. Stealth addresses is another primary Monero feature that hides the addresses of recipients by generating a one-time address for each transaction.

Privacy tokens are basically a form of payment tokens, with additional privacy of transactions. Grin made headlines in early 2019, due to the combination of features found in Zcash and Monero. Grin combined zero knowledge proofs and ring signatures, by mixing inputs and outputs into one transaction. This feature saves space in comparison to Bitcoin thereby improving scalability and speed. Refer to the Mimblewimble protocol for more details.

Decentralized Application (Dapp) Tokens

The concept of dapps gained momentum in 2015 upon the launch of Ethereum. The community realised that cryptocurrencies can function beyond the means of payment. Ethereum paved the way for many smart contract platforms to emerge and thousands of dapps to be built on top of them. Ethereum was the first of its kind but technically lacks in terms of speed and scalability to some competitors. The upcoming shift to Proof-of-Stake looks promising for the Ethereum community, since scaling solutions like sharding can solve many fundamental issues.

Other platforms that have developed with the aim to facilitate the creation of dapps include Cardano, Polkadot, Algorand and Binance Smart Chain (BSC).

Many of them are highly efficient and more scalable than Ethereum. Cardano can handle more than 250 transactions per second which could possibly increase to 1 million, via a layer 2 solution called Hydra. Polkadot aims to achieve scalability and speed with the adoption of interoperable parachains that connect to a relay chain. Parachains are identical to Ethereum’s shards. Algorand adopts a Pure PoS protocol and achieves efficient layer 1 and interoperability solutions with a high degree of speed (approximately 5 seconds for an atomic transfer). BSC is now the second biggest dapp platform after Ethereum, using Tendermint BFT consensus mechanism which achieves approximately 1 second average block time.

These platforms serve as the base for the creation of thousands of DeFi tokens. Most of these tokens aim to serve as utility tokens for various dapps, such as games, NFTs, DEXs, decentralized lending protocols and other DeFi related services. For example, the SWAP token is a utility token for the TrustSwap and The Crypto App services. The platform tokens i.e. ETH in the case of SWAP, are essential to pay for the transaction or gas fees of the corresponding network.

Stablecoins

A main concern of the crypto community is that cryptocurrencies are very volatile and unstable. Therefore, the creation of stablecoins provides tokens of stable value in comparison to Bitcoin, Ethereum and other volatile assets. Stablecoins are algorithmically pegged to the value of another asset or a basket of assets. The peg can relate to fiat currencies, commodities, other cryptocurrencies, or even adjust to a specific monetary policy.

Stablecoins can be useful in money transfers and as payment tokens to employees. In addition, they are also commonly used as collateral in decentralized lending services. Tether (USDT) is the top stablecoin in market capitalization and maintains its peg to the USD. Similarly to other stablecoins, there are allegations for false claims that USDT tokens are fully backed by fiat currencies. USDC is the second stablecoin by market capitalization and also maintains its peg to the USD.

Gold is a common commodity that backs stablecoins. AABB Golden Token and Tether Gold are two examples. AABB holds physical gold assets that back the stablecoin from the company’s mining production segment. Other characteristics include support at a minimum of 0.1 grams spot price of gold, while OTC markets are listing its holding company. Tether Gold has gold reserves in Swiss vaults, where holders can exchange the stablecoin for physical gold or cash. Holders can use their wallet address to access the physical bar of gold they own.

Some of the most interesting cases of stablecoins hold reserves in cryptocurrencies. DAI stablecoin is built on the Ethereum network and maintains its peg to $1 using a system of collateral and price feeds. Users provide ETH tokens as collateral to a smart contract and in return receive a loan in DAI. Due to new developments, a basket of cryptocurrencies can now back DAI, including USDC.

Central Bank Digital Currencies (CBDCs)

Governmental authorities were doubting the impact of cryptocurrencies during their early years. However, there are many competitive functionalities that blockchain networks enable in comparison to conventional financial mechanisms. Therefore, central bank authorities like the European Central Bank and Bank of International Settlements are actively working to launch centralized versions of a digital currency.

CBDCs’ main utility will be to act as a form of payment and settlement token. The first versions of CBDCs are denominated in the value of the corresponding national unit of account and issued by a central bank. China, Bahamas, Singapore, Sweden and The Marshall Islands are among the pioneers of CBDCs. CBDCs are mostly in the planning and experimental stages.

The two main types of CBDCs are retail and wholesale. 

A retail CBDC will have a similar role as central bank money for the public. The monetary policy of the country will be the base for the supply of a retail CBDC. It will be adopted as a legal tender and a medium of payment and pegged to the corresponding fiat currency. The difference between a retail CBDC and traditional money is that it will adopt benefits of a blockchain network like fast settlement, traceability and 24/7 availability of transactions.

A wholesale CBDC will have the primary objective to replace or co-exist with central bank reserves in order to improve settlement efficiency within financial institutions. Currently, central banks use the debit-credit system instead of actually transferring monetary values between accounts. Wholesale CBDCs can eliminate intermediaries, costs and time-consuming tasks in settlement procedures and interbank payment transfers.

Non-Fungible Tokens (NFTs)

Conventional cryptocurrencies like Bitcoin and Ethereum are fungible. For instance, always 1 Bitcoin is equal to 1 Bitcoin and 1 Ethereum is equal to 1 Ethereum. The ERC721 standard on Ethereum introduced the concept of non-fungibility in cryptocurrencies. CryptoKitties was the first NFT use case where users could trade, breed and raise virtual cats. Dragon was the first CryptoKitty to reach a sale price of 600 ETH, one of the highest trade prices to date. The concept was soon developed to link CryptoKitties with special characteristics and real-world assets like art.

NFTs are now expanding in the crypto world to represent unique digital and physical artworks, in-game items, domain names, coupons/rewards and other real-world assets. The most expensive NFT artwork sale to date is a Beeple’s collage consisting of 5,000 images. The piece was bought at Christie’s auction house for over $69.3 million. Jack Dorsey’s (Twitter CEO) first tweet was sold for $2.9 million. We shall expect NFTs to expand further during the following years within the industries of automotive and real estate property.

Conclusion

We are still in the early adopters’ phase of the crypto and blockchain industry. It seems though that the socioeconomic impact of this technology is going to be massive for the world. Many types of cryptocurrency tokens are emerging and co-exist to bring more efficient solutions for users. A lot of cryptocurrency tokens may fall into multiple of the above categories, each one with its own group of users.

It is very significant that cryptocurrency operations operate under non-hostile legislation. Regulators are currently exploring how cryptocurrencies can fit into existing regulations or adapt to new ones.

One thing is for sure…Change is Inevitable!

 

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