10 types of cryptocurrencies: Explanations and examples
The above is a more general definition for all types of cryptocurrencies. As you will learn from this guide, some assets may not fall under this definition, but they are all cryptocurrencies in one form or another.
However, before you start reading, it is important to remember that Bitcoin (Bitcoin) is the first cryptocurrency, so it has the status of a separate asset outside the categories. The rest of the blockchain projects can be divided into several types.
Service tokens
Utility tokens mainly exist as accessibility features on the blockchains they represent. To simplify understanding, we can say that such tokens are a currency in some computer game. Where to buy resources you can only for a certain gold, which is released by the game itself.Everything is exactly the same with cryptocurrencies. There is a project and its token. To pay for a transaction on the network of any blockchain, you must have a token of this blockchain on your wallet. You have to buy a Utility token if you want to work with the ecosystem of his project.
For example, ARK tokens give the right to vote for the direction of the protocol through a delegated proof of stake (DPoS). This is how utility tokens differ from investment (security) tokens, with which you get income by simply owning them. The most popular service tokens are:
Ether (ETH) is a native coin on the Ethereum blockchain that serves as a gateway for smart contracts to access the Ethereum Virtual Machine (EVM);
Binance Coin (BNB) — originally created to pay commissions on the Binance exchange, eventually turned into a widespread utility token with more than 120 use cases.;
Basic Attention Token (BAT) - plays an important role in properly stimulating various players in the Brave browser ecosystem, including advertisers, content creators or publishers and users The Internet.
Other notable service assets include Golem (GNT), OmiseGO (OMG) and 0x (ZRX).
Payment cryptocurrencies
As the name implies, we are talking about crypto assets used to pay for various goods and services. In fact, all assets can be a form of value transfer, but only a few of them can be used as money.
To be considered a payment asset, an asset must display the following qualities of money:
Portability — means that the token can be easily moved from one place to another;
Divisibility — a coin or token can be divided for use and for exchange;
Acceptance — how well an asset can be accepted by users as a means of payment;
Durability — physical forms of money must pass a durability test, during which it will be proved that the material from which they are made will last a long time. This is less of a concern for digital assets, but to some extent it is still important for investors to consider the longevity of the project to ensure that it can last long enough to be accepted as money.
Here are some examples of cryptocurrencies that can be used for payment:
Bitcoin (BTC) is the first cryptocurrency;
Bitcoin Cash (BCH) — a fork of the Bitcoin blockchain;
Dogecoin (DOGE) is a meme coin, a favorite of Elon Musk;
Litecoin (LTC) is the second fork of Bitcoin after Namecoin and has only small differences from it, for example, higher transaction processing speed;
Dash (DASH) is a privacy—oriented payment network.
Stablecoins
Stablecoins are cryptocurrencies whose value is tied to the value of more stable assets. As a result , there are four different types of stablecoins:
Fiat—backed stablecoins are the most common stablecoins with the largest market share. Their value is tied to the value of a traditional currency, such as the US dollar, for example. The leading stablecoins — Tether (USDT), USD Coin (USDC), TrueUSD (TUSD) and Binance USD (BUSD) — are pegged to the US dollar;
Crypto—backed stablecoins - these cryptocurrencies have received their value from other, more well-known cryptocurrencies, such as Bitcoin. The idea may seem pointless, given that the cryptocurrency is incredibly unstable. Therefore, coins of this type reduce risks by over-provisioning, thus ensuring that they can absorb wild fluctuations in the price of the underlying asset. A good example is MakerDAO's DAI, backed by Ethereum. DAI is created when a user sends a certain amount of ETH to a smart contract, which issues a token. This type of smart contracts is called "Collateralized Debt Position" (CDP) and ensures that money not backed by ETH cannot be created;
Algorithmic stablecoins are a newer type of stablecoins. These tokens are unique in that they have no collateral. The stability of their prices is provided by algorithms, smart contracts or the actions of users who interact with them. Whenever the demand for algorithmic stablecoin grows, new tokens will be minted to lower the price to the target level. If the demand for the coin decreases, the tokens are redeemed and burned to reduce the circulating supply and increase the price. The most famous or infamous example of an algorithmic stable coin was TerraUSD (UST). Other well-known algorithm-based stablecoins are FRAX, FEI and RAI;
Commodity—backed stablecoins - as the name suggests, these stablecoins are backed by real assets such as precious metals and oil. By holding a stable coin secured by a commodity, the owner, in fact, owns a share of the tangible asset in the physical world. Some examples of such stablecoins are Tether Gold (XAUT) and PAX Gold (PAXG), both of which track the price of the US dollar and are supported by gold reserves.
READ ALSO: Stablecoins: everything you need to know about the future of digital money
Exchange tokens
Exchange tokens are utility tokens that are used within the crypto exchange ecosystem to pay for services and as an investment asset to hedge risks during a market downturn. Such tokens also provide users with various bonuses and advantages when working with exchange instruments and products.
Most of the leading crypto exchanges issue their tokens:
Binance Exchange – Binance Coin (BNB);
Exchange Crypto.com — chain token Cronos.org (CRO);
Huobi Exchange — Huobi Token (HT);
KuCoin Exchange — KuCoin Shares (KCS);
Uniswap DEX — UNI tokens.
Meme Coins
Meme coins are cryptocurrencies created to exploit the phenomenon of memes in social networks. Despite the reason for its origin, some meme coins have become notable cryptocurrencies and have grown greatly in market value.
The first and currently the largest meme coin by market capitalization - Dogecoin (DOGE) — was created for entertainment by software engineers Billy Marcus and Jackson Palmer back in 2013.
The market value of Dogecoin has grown over the years, making it one of the ten most valuable blockchain networks. There were several other cryptocurrencies seeking to repeat the success of DOGE. Notable among them is the Shiba Inu (SHIB) project, closely related to the dog theme, which also experienced explosive growth after launching in August 2020.
GameFi Cryptocurrencies
The GameFi term is a truncation of the words "gaming finance" and combines the ideas of both decentralized finance (DeFi) and non—interchangeable tokens (NFT).
This GameFi group includes all tokens from metaverse games, including projects such as Axie Infinity (AXS/SLP), Splinterlands (SPS/DEC), Alien Worlds (TLM), Decentraland (MANA/LAND) and The Sandbox. Most GamiFi tokens are used as service tokens to reward players.
READ ALSO: The Complete Guide for Parents on Digital Gaming Currencies
Central Bank Digital Currencies (CBDC)
Cryptocurrencies and other digital payment solutions are becoming increasingly popular, so central banks are showing interest in developing their own response to these technologies in the form of CBDC. Central bank digital currencies are digital variants of national currencies controlled by central banks.
The purpose of creating a cryptocurrency of this type is to adopt some of the desired characteristics of digital assets, such as security, low transaction costs and fast execution time, but at the same time maintain control over supply and demand.
According to the IMF, almost 110 countries are actively considering the introduction of CBDC, and some have already begun their deployment.
READ ALSO: CBDC: Which countries are using, launching or testing Their Own Digital Currencies
Security Tokens
Security tokens are digital equivalents of traditional securities, such as shares or property rights, but existing on the blockchain. This type of asset already has a legal justification for its creation, and you can also receive dividends on these tokens.
Security tokens are most often used in the Ethereum blockchain in accordance with the ERC-1400 standard. The issuance of these tokens is called a secure token offering (STO), and these activities are conducted in accordance with financial regulations established by agencies such as the Securities and Exchange Commission (SEC) in the United States or the Swiss Financial Market Supervisory Authority.
Examples of security tokens are BCap Blockchain Capital, SPiCE VC, Sia Funds and Science Ventures.
Wrapped tokens
A wrapped token is a copy of a crypto asset that exists in another blockchain, but is tied to the value of the original token. It is called wrapped because the original asset is placed in a kind of digital storage that allows you to create a copy of the token in another blockchain.