What Are the Different Types of Cryptocurrency and Tokens?
Cheers to this brave new world of cryptocurrencies! You may or may not have heard of Ethereum, but you certainly know something about Bitcoin. But what if I tell you that there are many other cryptocurrencies out there? From Web3 tokens, ICO tokens, ERC20 tokens, DeFi tokens to stablecoins, you will be amazed at what this dynamite cryptocurrency has to offer.
With altcoin season, bitcoin prices continue to soar, especially with Elon Musk changing his Twitter bio to #bitcoin. The cryptocurrency market is like a behemoth and the industry continues to flourish to become even more significant.
So, if you’re curious about what comes after Bitcoin, read on as we cover different cryptocurrencies. Perhaps you’ll even find insights into diversifying your investment portfolio.
What is Cryptocurrency?
Much like a type of fiat currency (your standard dollar bill), cryptocurrency is decentralized, relying only on a peer-to-peer network of user machines or “nodes.” This means that it is independent and not controlled by a central bank or monetary authority. Cryptocurrency, also known as virtual currency or digital currency, is often recognized as a medium of exchange for transactional purposes.
Unlike US dollars, ownership of cryptocurrency is usually recorded on a blockchain that uses a few key components. In the case of Bitcoin, it is the ledger distributed across every node in the network, the encrypted transactions, the timestamp server, the Proof-of-Work consensus, and the network of running nodes themselves.
Sounds too complicated?
Such an arrangement expands the capacity of cryptocurrency beyond ordinary money, as seen in the case of crypto-tokens. But more importantly, Bitcoin, being the first currency structured differently, started a major decentralization trend where governments and traditional banks no longer have a say in your privacy.
Difference between coins and tokens
There are three types of cryptocurrencies. Includes bitcoins, altcoins and tokens.
bitcoins
In 2008, an anonymous developer known as Satoshi Nakamoto published a white paper describing the first electronic money independent of governments or banks: Bitcoin (BTC). Unlike traditional online payment, it promises a lower transaction fee and is fully decentralized.
There are no physical bitcoins, instead balances are held in a decentralized public ledger system known as a blockchain. These Bitcoin token balances are later stored using public and private keys for decryption. For ease of understanding, a public key is like your bank account number that allows you to send or receive bitcoins. By comparison, a private key is a secret key that you use to authorize a bitcoin transmission.
As a cryptocurrency, Bitcoin is accepted as a means of payment for products sold or services offered, which work just like fiat currency. Although it is decentralized, the most intriguing part of bitcoin is its competitive exchange rate against the dollar, which attracts potential investors and traders. Despite not being legal tender, Bitcoin remains a popular type of cryptocurrency and has inspired many creators to launch their own cryptocurrencies, collectively known as altcoins.
altcoins
At first, Bitcoin was the only cryptocurrency, but later other projects began to emerge. So born of altcoins. All of them, and many others, were born out of their original platforms, their original blockchains, and they all differed slightly from the Bitcoin blockchain.
These newly constructed coins like Fantom were developed primarily for individual use, to serve as a digital currency that could be better than Bitcoin in some ways, at least according to the developers of these projects.
Simply put, they were created to compete with Bitcoin by changing the rules to appeal to different users. And while some of them are challenging Bitcoin after all these years, ironically, the good old 10-year-old grandfather is still strongly dominating the market. At the same time, all other types of cryptocurrencies are currently popular altcoins or altcoins.
Tokens
Nowadays, crypto tokens are usually developed to start a crypto ecosystem. You know, it works almost like bonus miles. You can’t buy bread with your miles, but you can buy a plane ticket, and the more miles you have, the better it is for the airline ecosystem. The same approach works with cryptographic tokens!
Don’t worry, you’ll find practical examples later in the article. You now understand that cryptographic tokens don’t necessarily have their original blockchains.
Types of cryptographic tokens
Depending on the functions that cryptotokens serve, they can be divided into several categories:
ERC-20 tokens
One major difference between ERC20 tokens and all other types of tokens is that ERC20 tokens are created on top of the Ethereum blockchain.
The truth is that ERC20 is not even a token, but rather a standard token. Suppose a company decides to release a dApp, a decentralized application, on the Ethereum platform. For their token to work, they have to produce it according to the ERC20 standard, which defines the rules.
Therefore, the tokens below can be considered ERC20 as long as they are launched on the Ethereum platform. Below we explore the different categories of tokens, and some tokens can even fall into more than one category.
Exchange tokens
One of the ways the cryptocurrency trading platform distinguishes itself from its competitors is the many currency pairs and types of trading, such as OTC, margin trading or futures and indeed native currency tokens.
These tokens add value because users can use them to pay fees, buy and sell other cryptocurrencies, or enable certain functions like voting for new coins in the community.
Probably the best known and most liquid exchange token is the BNB token of the Binance exchange. However, there are of course also other exchange tokens such as Huobi Token (HT), KuCoin Shares (KCS), Bibox Token (BIX), etc.
DeFi tokens
DeFi tokens were all the rage in the summer of 2020, known as the summer of DeFi. DeFi stands for Decentralized Finance and refers to decentralized finance applications such as trading, lending and borrowing, derivatives, synthetic products, insurance and more.
DeFi TVL went from $1 billion in 2020 to over $100 billion in 2022 during the Bitcoin bull market. Does this mean it is a potential channel to disrupt the cryptocurrency market? If so, how?
Believe it or not, the cryptocurrency niche is still centralized. Let’s take Binance as an example; he still belongs to a group of people who contradict Satoshi’s vision.
What he defines as DeFi is the goal of staying away from traditional crypto platforms. The purpose of DeFi projects is to allow users to borrow and lend over a peer-to-peer network, use loans and “farm” tokens only for business.
These tokens or “cultivated” tokens produced on these platforms are DeFi tokens, including but not limited to Chainlink (LINK), Uniswap (UNI), Aave (AAVE), Dai (DAI), and others.
Administrative credentials
Management tokens are used to make decisions that dictate or control the future of the protocol. Token holders have the right to vote and therefore have a say in decisions on new feature proposals and changes to the project governance system.
There are a growing number of decentralized protocols with on-chain governance that allow governance token holders to influence the decision through on-site voting systems. As Dapps are emerging, governance plays a vital role in the synergy where stakeholders and developers can work together to shape the future of the protocol through more transparent discussion and debate.
For example, the AAVE token allows community holders to vote on major changes to the AAVE protocol. This means that if you have AAVE, you have a say for or against proposed or future proposed changes.
Real World Activation Tokens
This type of token, also known as a security token, could become the next big thing in cryptocurrencies once regulators around the world decide how to regulate it. Real World Asset Tokens represent real-world assets that are undergoing “tokenization,” a process that helps convert real-world assets, such as real estate, into digital tokens.
Let’s say you want to buy part of an apartment in New York City as an investment, but not the whole apartment because it’s too expensive. You can do this by purchasing digital assets that can be easily shared.
Credential security has been a buzzword for some time now, but their implementation requires a lot of good regulation and standardization. That’s why we haven’t heard much about it yet.
For example, PAXG Token or Pax Gold is an asset-backed token where one token represents a fine Troy ounce of London Good Delivery gold bullion held in professional vaults. Anyone who owns PAXG is entitled to that gold held by the Paxos Trust Company, making it a true asset token.