Blockchain, the different types of cryptocurrency, and their uses
We’ve all heard of bitcoin, amongst many other big name cryptocurrencies, but not too many of us actually know what they do. There are more than 7,500 crypto assets available, each with their own unique use cases.
On top of being digital currency, used to make payments or as a store of value, many cryptocurrency projects actually have much deeper fundamental values and, aside from wealth generation, there are many crypto projects that are working to provide solutions to real world problems.
It will be much easier to grasp the different functions of cryptocurrencies if you already have an understanding of how the blockchain works. If the word, blockchain, means nothing to you, I recommend watching the short video below.
So we know what the blockchain is, but how do we know which of the 7,500+ cryptos are worth investing in?
Even understanding the basics of cryptocurrency, many people use the words ‘coins’ and ‘tokens’ interchangeably, but it is important to know how they differ from one another if you want to be able to understand their value.
Coins are built on their own blockchain and are intended to be used as a form of currency, while tokens are created on an existing blockchain, usually with alternative uses.
Tokens are programmable assets that allow for the creation and execution of unique smart contracts, which establish ownership of assets outside of the blockchain network. Tokens can represent units of value, including real-world items like money, points, coins, digital assets, and more — all with the ability to be sent and received.
Similarly to an IPO, an Initial Public Offering of company stocks, tokens are usually created and initially distributed through an Initial Coin Offering (ICO). In general terms, any blockchain-based cryptocurrency that is not bitcoin is referred to as an altcoin.
What are Altcoins?
The name, altcoin, came about through the shortening of “alternative to bitcoin,” and most altcoin projects were launched to improve Bitcoin in one way or another. Some of the most noteworthy altcoins include Cardano (ADA), Polkadot (DOT), Ripple (XRP), Shiba Inu (SHIB), Dogecoin (DOGE), and of course, Ethereum (ETH).
Similarly to Bitcoin, most altcoins have a finite supply. This helps to create demand and reinforce the perceived value.
Although most altcoins are built and operate on the same basic framework as Bitcoin, each offers a unique characteristic to it’s investors, such as smart contracts, lower price volatility or alternative processes for validating transactions. The different categories and their uses are summarised below.
1: Payment currencies
As the name suggests, payment currencies are mainly accumulated and used for payments. There are no boundaries on what can be bought with payment currencies, but some common uses are payment for goods and services, payment of bills, or converting between crypto and fiat currencies.
Theoretically, any digital asset can be used as a means of payment, but merchant acceptance is more common, and point of sale services are more accessible for payment currencies.
Bitcoin Cash (BCH) is my go-to payment currency, mainly due to its low transfer fees and high value.
2: Blockchain-based platforms
Blockchain-based platforms, or blockchain economies, expand upon the functionality of blockchain technology to allow users to create their own digital assets.
Blockchain-based platforms will normally contain different assets, applications and processes, allowing users to build their blockchain asset into a blockchain ecosystem.
You’ve probably heard of Ethereum, a God among Blockchain-based platforms, but some of the other blockchain economies you may have heard of include Ethereum Classic (ETC), Eos (EOS), Neo (NEO), and Tron (TRX).
3: Privacy coins
Most blockchains are publicly visible, so there are some digital assets that are created with a focus on privacy. Privacy coins differ to normal blockchain transactions, where only the sender and receiver are able to see the number of coins transacted.
Privacy coin wallet balances are also only able to be seen by the owner of the wallet.
Crypto assets such as ZCash (ZEC), Monero (XMR), Komodo (KMD), and PIVX (PIVX) are among the most popular Privacy Coins.
4: Utility tokens
Utility tokens are used for a blockchain-based product or service. They are used within a particular blockchain economy (or ecosystem) and the majority are classed as ERC20, meaning Ethereum Request for Comment. ERC20 tokens run on the Ethereum blockchain, but with the continued release of other blockchain platforms, other token types like TRC10 and TRC20 have also emerged.
Shiba Inu (SHIB) is the largest ERC20 token holding, now with over one million unique wallet addresses, but a better example of a Utility Token is Golem (GNT). Golem is a platform where users can pay GNT to rent computing power for memory-intensive tasks.
5: Security tokens
The new kid on the crypto block. Security tokens derive their value from an external, tradable asset, such as stocks or real estate.
A tokenised version of a stock grants you the same rights as one purchased from a traditional stockbroker, including voting rights and profit share. The major difference between utility tokens and security tokens is that security tokens are created to appreciate in value, acting solely as investments. Thus, they fall under the same regulatory oversight as other investment products.
If a company issues a security token for the first time, the process is not called an ICO (Initial Coin Offering) but STO (Security Token Offering), and must be registered with the respective financial market authority. An equity token is also a form of security token.
Stablecoins are created with the aim to to be, as the name suggests… stable.
The price of a stablecoin is pegged to an external reference, such as the US Dollar, which removes volatility when comparing to other digital assets. Stablecoins are popular among traders, as when they are expecting a dip or crash in the market, they transfer their holdings from volatile currency to stablecoins to prevent financial loss.
Different stablecoins follow different methods to maintain a stable price, but some examples include USD Coin (USDC), Paxos (PAX), Gemini (GUSD), TrueUSD (TUSD), Tether (USDT), and Dai (DAI).
Hopefully this article has given you a better understanding of the different types of cryptocurrencies and their uses. Free to reach out if you are still feeling lost, or looking for guidance.
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