What are the Different Types of Cryptocurrencies?

According to CoinMarketCap, there are more than 22,000 cryptocurrencies in the market presently–this is a challenge for any investor trying to build his crypto portfolio, because well, understanding the different types of cryptocurrencies is crucial for anyone considering entering this digital asset landscape.

In this article, we seek to give a high-level overview of how these cryptocurrencies are categorized, by diving into the difference between crypto coins and tokens, as well as exploring various sub-categories, and what purpose each of them serves.

What is cryptocurrency?

 

Coins vs. tokens

Crypto coins and crypto tokens are both digital assets built on blockchain technology, but they differ in their underlying architecture and purpose.

• • Coins: These are native digital assets of a specific blockchain network. Bitcoin (BTC), the first and most well-known cryptocurrency, is a prime example, as is Ether (ETH). A coin primarily functions as a medium of exchange (like money), used for transactions, paying network fees, and rewarding miners/validators for securing the network.

 

• • Tokens: These digital assets reside on an existing blockchain, usually Ethereum. Tokens typically do not have their own blockchain and rely on the underlying network for security and functionality. They are created and issued through smart contracts on these established blockchains. Examples include ERC20 tokens on Ethereum, SPL tokens on Solana and DRC-20 tokens on Dogecoin.

 

An analogy to understand the difference: crypto coins are like countries with their own sovereign currencies, while tokens are like companies or organizations issuing shares or vouchers on top of an existing country's currency system (It is worth mentioning that within this space, the term cryptocurrency is sometimes loosely used to refer to either coins or tokens.)

 

Different types of tokens

 

Tokens can represent a wide range of assets and utilities beyond just currency, such as:

• • Utility tokens: Provide access to specific services or functionalities within a platform or dApp, like the FIL decentralized storage network token that allows users to pay for storing their data.

 

• • Governance tokens: Grant holders voting rights on proposed changes to the protocol, like Uniswap's UNI token. These tokens essentially function as a stake in the project's future direction. Decentralized Autonomous Organizations (DAOs) often utilize governance tokens.

 

• • Payment tokens: Designed primarily for making payments, these tokens function similarly to traditional currencies. Examples include Basic Attention Token (BAT) used for rewarding users in a privacy-focused browser.

 

• • Non-fungible tokens (NFTs): Unique digital assets that represent ownership of items like artwork, collectibles, or in-game assets. 

 

• • Security tokens: These tokens represent ownership in a real-world asset, such as real estate or a company, that's been tokenized on a blockchain. Security tokens are a relatively new and evolving area within the crypto space.

 

 

Specialized cryptocurrencies

Beyond the above general uses, there are cryptocurrencies created for specific purposes, which include the main categories below:

 

• • Privacy coins: Focused on anonymity and untraceable transactions, these coins prioritize user privacy. Transactions on privacy-oriented blockchains like Zcash (ZEC) and Monero (XMR) are obfuscated, making it difficult to track the origin or destination of funds.

 

• • Memecoins: Often created as a joke or social commentary, these lighthearted tokens have gained surprising popularity. Dogecoin (DOGE), inspired by a popular internet meme, is a prime example. Its closest competitor, Shiba Inu (SHIB) is another. While memecoins can be highly speculative investments, some have achieved significant market value.

 

• • Stablecoins: Designed to offer price stability, these tokens are pegged to a real-world asset, typically the US dollar.There are two main types:

 

• • • USD-backed stablecoins: These tokens are backed by reserves of the underlying asset (USD) held by the issuing institution. Tether (USDT) is a widely used USD-backed stablecoin.

 

• • • Algorithmic stablecoins: These rely on smart contracts and economic incentives to maintain a peg to their target asset. DAI is a well-known example of an algorithmic stablecoin.

 

• • AI cryptocurrencies: Focused on the integration of artificial intelligence with blockchain technology, these tokens fuel projects that aim to leverage AI for various purposes within their ecosystems.

 

• • Wrapped tokens: These tokens represent another cryptocurrency that's been "wrapped" for use on a different blockchain. For instance, Wrapped Bitcoin (WBTC) allows users to hold Bitcoin on the Ethereum network.

 

 

In Conclusion

In summary, crypto coins have their own independent blockchains and primarily serve as currencies, while tokens are built on existing blockchains and can represent a wide variety of assets, utilities, and functionalities beyond just currency. Understanding these core categories equips you to navigate the exciting yet complex world of cryptocurrencies with a bit more clarity, especially if you’re looking to invest in promising blockchain projects because as you know by now, research is crucial before you put your money into any asset. 

 

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