Coins Versus Tokens
Before further exploring this topic, it’s essential to demystify the difference between coins and tokens. More often than not, these terms are interchangeably used, but they technically have different meanings. Coins are native currencies to a blockchain, such as Bitcoin, Ethereum, and Litecoin.
In most cases, they are designed to offer the same value as money, even though they may have extra use cases. On the other hand, tokens run on third-party blockchains. For example, the token Maker runs on the Ethereum blockchain. Uniswap, running on Ethereum, is also a token. Solana is a coin because it has its native network. Easy peasy!
What are Altcoins?
Now that we have talked about coins and tokens, you may also want to learn about “altcoins.” This is a common term in the crypto world, so it helps to understand it. Initially, the word “cryptocurrency” only referred to BTC.
This is because it was the first and only fully launched digital coin. Over time, developers found some weaknesses in the original Bitcoin protocol and invented other coins to improve on these weaknesses or offer alternative solutions. All these coins were named “altcoins.” Therefore, an altcoin is any other coin that is not BTC.
Different Types of Cryptocurrencies
Let’s now get deep into the major types of digital coins. There are over 12,000 cryptocurrencies as of writing this. However, they all fall within the following four main categories:
- Payment crypto
- Utility tokens
- Central Bank Digital Currencies
As the name suggests, these are coins created to facilitate transactions. Bitcoin was the first digital payment coin and remains the best-known. It was developed to replace the fiat system by offering a more reliable, decentralized, un-manipulatable, and uncensorable digital means of payment. Although it faced much resistance from governments and different authorities, countries like El Salvador and the Central African Republic (CAR) have declared it a legal tender, meaning it can be used for payment like any other form of money. Other popular examples of payment cryptos are DOGE, BCH, and LTC.
Tokens run on other blockchain networks through smart contracts. They are meant to offer solutions to problems in specific crypto project ecosystems. Unlike coins, most don’t have a maximum cap, meaning their values are expected to fall as more of them are created. Ethereum, being the first smart contract network, facilitated the idea of tokens by offering a pioneering platform on which they could run. Tokens have different utilities and are meant to serve various industries. Here are some of the most prominent types of tokens:
- Utility tokens: Meant to offer access to services on their platforms. For example, the FUN token enables players to access different types of games on the FunFair platform. Other utility tokens include Binance Coin, Brickblock, Timicoin, Sirin Labs Token, Basic Attention Token, LINK, and Golem.
- Security tokens: Similar to traditional finance, security tokens are a type of share or stock. They represent ownership or interest in an asset. The only difference is that they are digital. Keep in mind that not all crypto tokens fall under this category, but many do. They are issued to raise finance for a project, with a promise to pay back the investor a profit. Most DeFi projects these days are launched with security tokens. Sia Funds and Bcap (Blockchain Capital perfectly fit in this group.
- Exchange tokens: These are native to a crypto exchange. Marketplaces like Binance have also developed their in-house tokens for different purposes. Some popular exchange tokens are Binance Coin or BNB token, HT for Huobi exchange, KuCoin Token, Gemini USD, FTX Coin for FTX Exchange, and CRO for Crypto.com.
- Governance tokens: Tokens can also be used for governance. Decentralized Autonomous Organizations, which are digital cooperatives, give native token holders rights to vote based on the number of coins held. These votes influence major decisions necessary for the success of the network. As of today, AAVE, YFI, UNI, COMP, SNX, and MKR are the most significant governance tokens, with a combined market cap exceeding $4.1 billion.
- Non-Fungible Tokens (NFTs): NFTs are crypto assets with unique and immutable identifiers, meaning each unit is different and can’t be replicated or subdivided. They are used to clarify authenticity and ownership in blockchain. NFTs could be in the form of tokenized art or music. Just like virtual coins, they can be sold in the NFTs marketplace. Some of the most popular ones are Bored Ape Yacht Club, Mutant Ape Yacht Club, Opepen Edition, Moonbirds, and Meebits.
Cryptocurrencies are sometimes marred by uncontrolled volatility, which diminishes their purpose as a currency. Stablecoins were meant to solve this problem by offering stable prices. They are coins whose value is pegged to that of another stable currency, such as the US dollar or the Euro. Due to their controlled volatility, they are a saving vehicle and reliable means of value transfer. Tether, USDT, is the third largest crypto with a market cap of over $70.4 billion as of writing this and the highest profile stablecoin. It’s pegged on the US dollar, meaning the value of one USDT should always equal $1. To achieve this, every USDT is backed by a real USD in cash reserve or equivalent. Though primarily associated with fiat money, stablecoins are not controlled by the government or any traditional financial institution. Keep in mind that some stablecoins may be backed by their own currencies. This is risky and could lead to a collapse, like in the case of TerraUSD in 2022. Other popular cryptocurrencies in this category are USD Coin (USDC), Binance USD (BUSD), True USD (TUSD), and Origin Dollar (OUSD).
Central Bank Digital Currencies (CBDCs)
Although virtual currencies were initially met with huge resistance from governments, things are slowly changing. Some countries are warming up to the idea of digital coins. CBDCs are a form of crypto issued by various nations’ central banks. They are mostly pegged to the local currency of the issuing country and are regulated by the central bank. CBDCs are still a new concept that is yet to be fully implemented. They include the Sand Dollar by the Central Bank of the Bahamas, the Digital Rupee launched by the Reserve Bank of India, and the Digital Ruble by the Bank of Russia.
Wrapping it Up
We hope you now understand the different types of cryptocurrencies. Feel free to explore them for further familiarity with how they work. This knowledge may also help you mitigate risk through diversification in your crypto investment journey. Here at dappGambl, we always keep sharpening your blockchain and Web3 understanding. If you found this article helpful, feel free to share it with your friends and family. You may also continue browsing our site for more.
There are thousands of digital coins. However, they can be broadly categorized as payment cryptocurrencies, stablecoins, central bank digital currencies, and tokens.
Coins are digital currencies native to a blockchain such as Bitcoin or Ethereum. They are mostly used as payment methods. On the other hand, tokens are digital currencies running on third-party networks created to serve specific purposes within their ecosystem.
Altcoins are all cryptos that were created after Bitcoin. BTC is the main coin. So all other virtual currencies that were developed to either improve on BTC’s weaknesses or offer alternative use cases are altcoins.
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