In this article, we will discuss different types of cryptocurrency which you should know about.
A crypto-currency is a digital asset or token which is generated and spent in accordance with lines of code.
Traditional or FIAT currency, on the other hand, is issued by the Central Bank or any other specified Financial Authority. The authority prints bills in accordance with the monetary policies of the government and state of the economy.
The basic operation of any financial trad-able asset is based on it’s supply and demand. In case of national currency, a country’s exports and imports, GDP, along with other socio-economic factors determines the exchange rate with currencies in the market.
However, in case of cryptocurrency it is based on the design, which regulates production, and its’ utility.
The total supply of the digital tokens is limited by code. Moreover, the period for generation or distribution process is also determined by an algorithm.
By being securely transferable across borders, these digital assets aim to replace the FIAT currency and the existing payments and financial system.
Overview of the Crypto Markets and Classification Types
There are a plethora of cryptocurrencies in the market. Nevertheless, the top 3 cryptocurrencies account for around 70% of the crypto market capitalization, with Bitcoins dominance alone above 48%.
The classification of cryptocurrencies can be based on many aspects – application, type of algorithm, governance model, type of asset backing it, and so on.
On the basis of governance
Centralized and decentralized, this is a tricky one, there are so many cryptocurrencies in the market that there is no real way of saying which one is truly decentralized.
Most cryptocurrencies employ a distributed consensus mechanism (different parties verify and record the same thing). However, many different newly launched cryptocurrencies are more inclined towards centralized validation or verification (E.g. XRP). While some others are looking to shift from a few centrlazied validating nodes to eventually become decentralized (E.g. EOS, Stellar).
On the basis of Generation Process
Basic models for mining/ generating cryptocurrencies or distribution: Proof of Work (PoW) and Proof of Stake. Proof of Work is the system which uses electrical energy as proof of work, it employs mining hardware for it.
Proof of Stake (PoS) is an energy efficient alternative of PoW which uses the principle amount to stake the cryptocurrency instead of buying mining hardware. There are some other different types of validation techniques like Proof of Concept (PoC), Proof-of-Correctness (with Ripple) or Stellar Consensus Protocol and so on.
The classification on the basis of application is as follows,
1. Payments Focused
Bitcoin was the first cryptocurrency to be released in the market with the idea to create a digital economy built on the principles of gold standards. The limited supply of a Bitcoin along with a periodic mining or generation process was envisioned as the ideal economic system built on trust and transparency.
Nevertheless, as Bitcoin grew in size, the problems of scalability and high transaction fees (upto $55 at high) made it infeasible to be used as a medium of payment. The average cost of transaction is around $0.5. Nevertheless, most exchanges charge around 0.0005 BTC for a Bitcoin withdrawal around $3-5. Hence, it renders it unusable for micro-payments, nonetheless, Bitcoin attained the Store of Value (SoV) or digital gold status quo.
Cryptocurrencies like Bitcoin [BCH] Cash and Litecoin [LTC] were introduced for the sole purpose to be used as a medium of exchange globally. XRP and Stellar (XLM) are other payment focused blockchain-based platforms to facilitate cross border transfer of value with participation of centralized insitutions. The transaction cost or fees of these cryptocurrencies are considerably low.
By 2014, cyber-crimes and Ponzi schemes had found a new avenue – Bitcoin and it was grabbing a lot of attention from regulatory authorities all over the world. If Bitcoin was ever going to be a global currency, it warranted KYC (Know Your Customer), approval and regulation of crypto Exchanges. Hence, the anonymity of Bitcoin (BTC) addresses was lost; this was a small price the community paid for global acceptance.
Moreover, anonymity along with ‘fungibility’ is regarded as one of the primary characteristics of ‘money.’ Traditional money notes are essentially bearer documents whose ownership is not defined. The person with the custody of the bill is the owner and is liable to the amount printed.
There are many privacy-centric cryptocurrencies in the market. Some of the popular tokens among them include,
- Monero: Monero has already gained recognition in the dark web (e.g., Alphabay), making it number one privacy-focused coin.
- Zcash: Zcash with its Z-snarks protocol and dual address system provides for both private and public transactions. It is one of most advanced cryptocurrencies, technically. Moreover, it is also compatible with Ethereum. Hence, can be efficiently used on ETH based smart contracts and decentralized applications (Dapps).
- Dash: Dash is also a privacy centric fungible cryptocurrency, the team behind Dash is working rigorously in Latin American countries of Venezuela and Brazil etc to increase adoption and easy remittance.
3. Stable Coins
A stablecoin is basically a crypto-graphic version of a FIAT currency. Economically, it is no different from digital cash on Venmo, PayPal account, Cash App, etc. Nevertheless, technically is entirely different.
Most stablecoins are backed one-to-one by the respective FIAT currency or a specified amount of any other asset like Gold.
The Blockchain or cryptocurrency version can be spent only on wallets compatible with them. Whereas, the other digital payment systems act as money transmitters, which requires registration with the service providers and are usually linked to bank accounts.
The custody of the actual asset is managed by trustees and digital asset management firms. The cryptocurrency transactions are more transparent than banking operations, keeping records of transactions and new money being assigned on the Blockchain. Most popular stablecoins in the market are USDT (Tether), USDC, DAI, TUSD etc.
4. Exchange focused
Exchange tokens are blockchain based utility tokens which run on a ‘fee-based revenue model’. A part of the exchange fees earned via operations is reflected to burn a specified amount in the cryptocurrency. Almost all large or small exchanges are now adopting the exchange token model to lead growth.
Binance, Okex, Huobi, Bitfinex, and many others like WazirX, in India have launched their respective exchange tokens in the market – Binance [BNB] Coin, OkB, Huobi Token [HT], LEO Unus Led [LEO] are the few other leading one’s.
For e.g. with Binance, every quarter the company aims to use 20% of their profits to buy back BNB coins and burn them out of circulation. This reduces the supply of BNB quarterly, and the holders of BNB will benefit from low trading fees on exchange.
The total market capitalization of exchange tokens is over $5 billion, with around 60% dominance by BNB.
5. Utility or Blockchain Network tokens
After Bitcoin, some FinTech leaders and visionaries from the world realized the potential of distributed consensus and blockchain beyond its utility as a payment system. One such developer Vitalik Buterin developed a platform built on Blockchain to execute programs – Ethereum.
These programs are executed on a distributed network of nodes forming a decentralized supercomputer. These facilitate execution of programs or smart contracts which help in building decentralized applications (Dapps).
There are many blockchain projects that offer a platform to build applications. The most popular programming languages used on these platforms are solidity (Ethereum, Hedera, and Tron) or C++ (NEO and EOS).
These platforms give rise to utility tokens which serve various specific purposes based on design apart from functioning as a medium of exchange. These functions include DeFi, exchange tokens, oracle (Chainlink), IoT (IOTA) and other economic models mapped in line of code.
6. DeFi focused
The applications of DeFi replicate financial models onto these decentralized networks. These include loans, savings, trading, insurance, payments etc.
DeFi is a FinTech movement which aims at improving the financial system by eliminating centralized control, intermediary cost, improving connectivity and building security and trust. One of the most popular blockchain based lending platforms is Compound. One can deposit crypto to the Compound smart contract as collateral, and borrow against it.
Decentralized Exchange (DEX) and other payment models are also viable applications of DeFi becoming popular in the last couple of years.
Crypto – An Investment Vehicle or Future of FinTech?
The primary purpose of cryptocurrencies in the past few years have been its use as an investment vehicle. The ICO bubble of 2017 saw a new cryptocurrency for every other application in the market, be it games, blogging, music and video uploads, voting platforms, and even medicinal applications.
However, after the bubble burst in 2018, it became quite clear that the plans and designs were significantly far fetched and lacked real business. Post which, the arguments against centralization and government regulations continued to haunt the cryptocurrency market.
In present time, Bitcoin has established itself as a weak safe-haven or economically uncorrelated asset with limited supply. Ethereum and other smart contract platforms are striving to become the world computer on which DApps could be run.
Moreover, other utility tokens are moving the global economy to a ‘tokenized system’ , where trust, execution and storage of value are all performed securely on the blockchain without much centralized control or third party interference.
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