The world of cryptocurrency is vast and complex. While Bitcoin is the most well-known cryptocurrency, there are actually over 6,000 different cryptocurrencies in existence. These digital assets vary significantly in their features, use cases, and goals. In this beginner's guide, we explore the primary categories of cryptocurrencies and what makes each type unique.
Digital Coins (Bitcoin, Litecoin, Bitcoin Cash)
Purpose: Act as an alternative digital currency for paying for goods and services or transferring value.
Features:
· Decentralized - Not issued by any central authority like a government or bank.
· Finite supply - The total supply of coins is fixed with new coins released at a controlled rate. For example, Bitcoin is limited to 21 million coins.
· Pseudonymous - Transactions and accounts are not directly tied to a real-world identity but can still potentially be traced back to the original owner.
· Deflationary - The finite supply means the value of individual coins may increase over time relative to the supply of goods and services. This rewards early holders.
• Examples - Bitcoin, Litecoin, Bitcoin Cash, Bitcoin SV, etc. Bitcoin is by far the most popular and valuable digital coin.
Transactional Tokens (XRP, Stellar Lumens, Bitcoin Cash)
Purpose: Facilitate fast, low-cost global payments and transmit digital representations of fiat currencies or other assets.
Features:
· Fast transaction times - Transactions settle in 3 to 5 seconds with negligible fees, enabling high volume payments processing.
· Highly scalable - The network architecture allows for significantly more transactions per second than first-generation cryptocurrencies like Bitcoin.
· Compliant - Issued by private companies with a focus on compliance, partnerships with established financial institutions and integration with traditional financial services.
· Non-mining based - New coins are issued and distributed by the company or non-profit behind the token rather than by rewarding miners. There is typically a fixed total supply.
· Stable value - The tokens aim to maintain a stable value relative to the assets or fiat currencies they represent, so they function more as a transaction facilitator than as an investment.
Examples - XRP, Stellar Lumens (XLM), USD Coin (USDC) and others. XRP and XLM are popular native tokens, while USDC is a regulated stablecoin pegged 1:1 with USD.
Computing Tokens (Ether, EOS, NEO)
Purpose: Pay for computation, resources, and services on decentralized computing platforms known as "smart contract" blockchains or distributed computing networks. Used to power dApps, open finance apps, games, and other systems built on these blockchains.
Features:
· Turing complete - The blockchain fully supports self-executing computational code known as smart contracts. This allows for complex automated transactions and decentralized applications.
· Proprietary blockchains - Issued by companies that built their own blockchain technology optimized for scalable computing and smart contracts. Not forked from Bitcoin.
· Mining or staking - New coins are distributed as block rewards to those helping secure and process transactions on the network. Staking refers to earning rewards for pledging your coins to the network.
· Utility value - The tokens primarily derive their value from the demand for computational services and resources on the network. However, they are also often traded as speculative investments.
· Interoperable - Some platforms allow for cross-chain compatibility and interaction between tokens and applications built on different computing blockchains.
Examples - Ether (Ethereum), EOS, NEO, Cardano (ADA), Polkadot (DOT), Solana (SOL) etc. Ether and EOS are the most established computing tokens.
Governance Tokens (Maker, Compound, Aave)
Purpose: Provide holders with voting rights and control over a decentralized protocol, application or organization. Allow the community using a network to guide its development and manage resources.
Features:
· Voting mechanisms - Holders can stake tokens to vote on governance proposals related to the protocol or application. Proposals may include technical upgrades, resource allocation, fees, partnerships, and more.
· Volatile value - The value of governance tokens depends heavily on the perceived value and future potential of the network or organization they represent. Value can fluctuate greatly with the success or failure of governance votes.
· Earn rewards - Stakers sometimes earn additional tokens as rewards for voting and securing the network, similar to earning interest. But rewards are not guaranteed.
· Non-transferrable - Some governance tokens cannot be bought or sold on secondary markets. They are earned through using a protocol or application and can only be used for staking and voting. They have no set market value.
Examples - Maker (MKR), Compound (COMP), Aave (LEND), Uniswap (UNI), etc. These are all governance tokens for prominent decentralized finance (DeFi) protocols, allowing community members to guide the direction of the open-source financial applications.
Platform Tokens (Binance Coin, KuCoin Token, Huobi Token)
Purpose: Pay for transaction fees, trading discounts and other services on the exchange platform that issued the tokens. Also used for staking, payments, and governance on some platforms.
Features:
· Discounts and reduced fees - Tokens usually provide holders with lower trading fees and other benefits on the native platform. This incentivizes customers to remain loyal to the exchange.
· Proprietary blockchains - Some platforms like Binance Smart Chain have launched their own blockchain networks optimized for fast trading and staking of the native token.
· Highly volatile - The value of platform tokens is closely tied to the popularity and success of the exchange, so they can be subject to extreme price swings.
· Non-portable - Tokens are typically only useful within the ecosystem of the exchange that issued them and are not easily portable to other platforms. They must be converted to other cryptocurrencies to be cashed out or moved.
· Examples - Binance Coin (BNB), KuCoin Token (KCS), Huobi Token (HT), etc. BNB is the most successful platform token, used heavily on Binance for discounts and also Binance Smart Chain.
· Revenue share - Some platforms distribute a percentage of net transaction fees to token holders, similar to stock dividends. But unlike dividends, rewards are not guaranteed and highly variable.
There are many other niche cryptocurrency types like security tokens, collectibles, loyalty tokens, and more. But digital coins, transactional tokens, computing tokens, governance tokens, and platform tokens make up the majority of the cryptocurrency market and use cases today. Each type of crypto has a different purpose, feature set, and value proposition for holders and the communities they serve.
While cryptocurrency remains a risky and volatile asset class, understanding the unique features and functions of the top types of cryptocurrencies can help you make more informed investment and trading decisions. And as more real-world applications for blockchain technology emerge, the opportunities within the cryptocurrency industry - for both financial gain and truly realizing decentralization - will only continue to expand.
So whether you're just initiating your crypto journey or on your way to becoming a blockchain expert, keep exploring and learning about the nuanced differences between cryptocurrency categories. What types of crypto you choose to buy, trade or accumulate ultimately comes down to your financial goals, risk tolerance, and vision for the role that cryptocurrency and decentralization will play in the future. But the more you understand about how each crypto type works and what value it provides, the better equipped you'll be to navigate your way to success in this dynamic and fast-changing space.
