Key Takeaways
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Currently, there are more than 13,000 cryptocurrencies, with many more being created daily.
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Though most cryptocurrencies are based on Bitcoin principles, they have distinct features and functions.
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Cryptocurrencies can be classified based on their use cases, characteristics, and many other factors.
On January 3, 2009, an anonymous individual (or group of individuals) going by the name Satoshi Nakamoto launched Bitcoin – the first and still the biggest crypto by market cap. Bitcoin proved the feasibility of blockchain-based virtual currencies and drew the attention of investors, the tech community, and idealists who saw it as the future of money. In particular, people were impressed with Bitcoin’s features of decentralization, immutability, censorship resistance, and scarcity.
Although Bitcoin was the first practical public digital currency, it’s not the only crypto in existence – there are over 13,000 cryptocurrencies. These cryptos can be classified based on their use cases, utility, and many other factors. Read on to learn more about the different types of cryptocurrencies and for some ideas on how to diversify your crypto portfolio.
Types of Cryptocurrencies
There are numerous cryptocurrencies and they are meant to serve different functions, although most are based on the Bitcoin principles:
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They are not created, governed, or backed by a central authority such as a central bank or government.
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They live on a distributed ledger utilizing blockchain technology.
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They are secured with cryptography.
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They are stored on blockchain wallets, which enable holders to view and manage them.
Satoshi might have invented Bitcoin as a medium of exchange (like fiat currency), but the use of cryptocurrencies has expanded beyond acting as a medium of exchange or currency. Since blockchain allows developers to create almost anything possible using cryptography, some cryptocurrencies are designed to act as investment vehicles and stores of value that may be traded on marketplaces/exchanges.
Other crypto projects have purposes far beyond investment vehicles and stores of value. NFTs, for example, are unique crypto tokens representing real-world objects, such as art, music, real estate, in-game items, etc. The other reason for the existence of different types of cryptocurrencies is driven by the fear of missing out (FOMO). Ignited by crypto’s rapid growth in the last five years, developers and investors continuously look for ways to invent and invest in the ‘next Bitcoin’ respectively.
Now, let’s dive into some of the types of cryptocurrencies available:
Coins
Coins are cryptocurrencies that live on their own blockchains. Essentially, they act as the native currencies facilitating the tax and reward mechanisms on their chains. For instance, miners on the Bitcoin network earn BTC rewards, while Ethereum validators are rewarded in ETH. Likewise, for any transaction on the Ethereum network, a user has to pay a gas fee in Gwei, a denomination of ETH, Ethereum’s native coin.
Some coins, like Bitcoin, act as a store of value, providing alternatives to fiat money. The demonstrable scarcity of Bitcoin – there will only be a maximum of 21 million coins – makes it an alternative store of value to fiat money and inflation.
Other coins have exclusive chain-specific applications. For example, Ripple uses its native coin, XRP, to facilitate cross-border payments, where it serves as a bridge cryptocurrency and is needed to pay transaction fees. XRP is the leading exchange medium between banks, payment service providers, and crypto exchanges to facilitate near-instant settlements at cost-effective transaction costs.
Tokens
Tokens are cryptocurrencies that are built on blockchains – they are native to the blockchains they are built on. When creating a token, you follow a specified template - you don’t have to code the token from scratch. This makes the process of creating tokens faster and easier than creating coins.
The cryptography element of blockchain facilitates the development of unique tokens that use the chain’s infrastructure to work, as exemplified in Ethereum’s ERC-20 token standard. Another identifying aspect of tokens is that the fees for their transactions are settled in the underlying blockchain’s native coin. Consider the Uniswap exchange, a decentralized exchange (DEX) built on the Ethereum blockchain. Despite having its own token, UNI, you need ETH to pay for gas fees when interacting with Uniswap.
Check out this article to learn more about coins and tokens.
Stablecoins
A stablecoin is a cryptocurrency whose value is tied to a stable asset, like the U.S. dollar or gold, to stabilize its price. They are designed to provide all the benefits of cryptocurrency while mitigating the rampant volatility plaguing the crypto market. Essentially, volatility makes crypto unattractive for daily use and even as a store of value, as even bitcoin, the biggest crypto by market value, experiences significant price swings.
Bitcoin price chart between November 15, 2022, and November 22, 2022.
Stablecoins play a major role in the crypto space, as they let traders exit positions without having to convert their cryptocurrency back to fiat money, as they maintain a 1:1 ratio to their pegged asset.
Here are the four types of stablecoins:
Fiat-Collateralized Stablecoins
The most popular stablecoins are backed by fiat money on a 1:1. A central issuer or custodian holds the fiat collateral. It must be proportional to the number of stablecoin tokens in circulation. Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) are the top fiat-collateralized stablecoins by market cap.
Crypto-Collateralized Stablecoins
These stablecoins are backed by another digital asset (or basket of assets) as collateral. Instead of using custodians to hold collateral, crypto-collateralized stablecoins use smart contracts. When buying (minting) these stablecoins, you lock your crypto in a smart contract vault to receive tokens of equal measure. You then lock your stablecoin in the vault (burn) to receive the collateral you locked earlier. Dai (DAI) is the biggest crypto-collateralized stablecoin by market cap.
Algorithmic Stablecoins
Instead of using fiat or crypto collaterals, algorithmic stablecoins achieve price stability through specialized algorithms and smart contracts to regulate the supply of tokens in circulation. Essentially, the algorithm minimizes the number of tokens in circulation when the token price falls below the target and increases the number in circulation when it rises above its target. Frax (FRAX) is a common example of an algorithmic stablecoin.
Commodity-Backed Stablecoins
These stablecoins are collateralized using commodities, such as precious metals, oil, and real estate. Gold is the most popular collateralized commodity, and Tether Gold (XAUT) and PAX Gold (PAXG) are the top gold-backed stablecoins. Commodity-backed assets allow investments in assets that might be far from reach locally and inject liquidity to an illiquid class of assets.
Exchange Tokens
Exchange tokens are cryptocurrencies issued by crypto exchanges. To accelerate crypto adoption, exchanges emerged as a more direct gateway for trading cryptocurrencies. They are now the primary gateway into the crypto world, offering their own exchange tokens that may come with trading fee benefits like better APR, or better APY for users that stake their exchange tokens.
Often, exchange tokens are issued to raise funds for business development. But not all exchanges have their native tokens – the decision to issue or not to issue is based on an exchange’s goals. The typical applications of exchange tokens include payment methods, governance, and boosting liquidity. Generally, these tokens play a utility role in their exchanges and offer holders member-based benefits (like trading bonuses). Binance’s native token (BNB) is one of the biggest exchange tokens by market cap.
DeFi Tokens
DeFi tokens are cryptocurrencies native to decentralized applications. They often play a specific role in DeFi apps, which technically makes them utility tokens. Developers issue DeFi tokens on the underlying blockchains of their applications. Most of these tokens follow the ERC-20 standard because most DeFi apps run on the Ethereum network.
DeFi tokens often facilitate incentives to draw more users to their protocols. In particular, these tokens are offered as rewards for DeFi users who lock their assets in a protocol’s liquidity pool. Locking assets in a liquidity pool exposes you to smart contract risks and impermanent loss. As such, developers must incentivize the web3 community with token rewards to provide much-needed liquidity. Uniswap’s UNI is the governance token of the DEX, entitling its users to vote on proposals like usage of the treasury or future upgrades. These tokens may be airdropped to users, or users can earn them through liquidity mining.
Meme Tokens
Cryptocurrency projects that derive their relevance from memes are popularly known as Meme tokens, and some of these have a market cap of over a billion dollars, like Dogecoin and Shiba Inu. These tokens thrive on hype, starting out as a fun token built around a popular meme like Doge, and picking up momentum as the community starts jumping onboard. For meme coins to sustain in the long run, their value needs to be more than just the meme culture. Some evolve into larger projects, like Shiba Inu's Shibarium and ShibaSwap, while others develop play-to-earn games and metaverses.
Governance Tokens
Governance tokens are cryptocurrencies that let the holders vote on the future of web3 projects. Their main role is decentralizing decision-making and giving the community a say in governing projects. All governance token holders can participate in shaping the project’s future direction. Holding many tokens translates to more voting power when voting for proposals. Holders vote on everything – from spending funds to adding or removing features from a protocol.
Most projects use a standard proposal submission method, which allows developers to submit proposals. If a proposal proceeds to vote, the token holders vote for or against it based on their voting power. These tokens are considered integral decision-making elements for decentralized autonomous organizations (DAOs). Compound’s COMP is a famous example of a governance token. It allows the Compound community members to vote on significant decisions, like whether Compound should cut COMP rewards entirely.
NFTs
NFTs are not exactly cryptocurrencies, but they are unique tokens that allow holders to prove their ownership of real-world or digital items. They can represent anything – from digital files like music and videos to real estate and event tickets. Converting these items into tokens that live on the blockchain makes it easy to trade them and minimize counterfeits. Bored Ape Yacht Club (BAYC) is one of the most popular NFT collections.
One unique feature of NFTs is even if you create 200 copies of a single item and issue the same number of NFTs to represent their ownership, every copy of the item will be exclusively identifiable from the rest because of the special characteristics (metadata) that each NFT token has. This implies that while 200 investors might be holding similarly looking items in their web3 wallets, they can each claim that their copy is unique.
GameFi Tokens
GameFi is one of the latest blockchain trends that combine DeFi and NFT concepts. Unlike traditional games, which are based on a “pay-to-win” mechanism and let participants buy upgrades to gain a more competitive edge over others, GameFi leverages a play-to-earn model. The model entails incentivizing players to participate and progress through activities.
Some GameFi has gone beyond the basics to include DeFi aspects like staking, where participants deposit tokens to generate interest and other rewards, which they can use to buy more in-game items or unlock new potential. One of the top GameFi tokens in the crypto space is Axie Infinity’s AXS, which functions as a governance token, enabling token holders to shape and vote for the direction of the Axie Infinity game.
Wrapped Tokens
One way of understanding networks like Bitcoin and Ethereum is as different distributed ledgers. Since blockchains are siloed, they cannot communicate seamlessly with each other. Moreover, you cannot use native coins, like Bitcoin, on non-native chains such as Ethereum since only the Bitcoin blockchain “understands” the Bitcoin language.
Wrapped tokens are cryptocurrencies that allow you to port the value of a native asset to a non-native asset. One of the popular examples of wrapped tokens is Wrapped Bitcoin (WBTC). WBTC is tied on a 1:1 to the value of Bitcoin; therefore, 1 WBTC should always be equal to 1 BTC. In other words, WBTC tracks the value of BTC. Basically, wrapped tokens expand the utility of native coins on other chains. For example, you can participate in various DeFi activities, like lending, staking, yield farming, and more, using WBTC on the Ethereum ecosystem.
Conclusion
We discussed the different types of cryptocurrencies, from coins to wrapped tokens. There are over 13,000 cryptocurrencies, and CoinGecko has over 80 categories, including Move-to-Earn, yield farming, and the different ecosystems in the space. In this article, we’ve covered 10 of these categories to give you an idea of the roles different cryptocurrencies play in the crypto space, and also to help you get started on navigating the market.
Josiah is a tech evangelist passionate about helping the world understand Blockchain, Crypto, NFT, DeFi, Tokenization, Fintech, and Web3 concepts. His hobbies are listening to music and playing football. Follow the author on Twitter @TechWriting001
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