Types of cryptocurrencies

Bitcoin and altcoins

In 2009, the first successful cryptocurrency, Bitcoin, was launched. This coin and the ideas proposed in it were relatively quickly supported by traders and investors. The success of the project led to the emergence of alternative payment systems:

• In April 2011, as a result of a fork (split) of Bitcoin network chains, a new project – Namecoin – was launched.
• 5 months later, another digital payment system appeared, which became an alternative to Bitcoin – Litecoin (LTC).

Today, all cryptocurrencies, except Bitcoin, are called altcoins.

Decentralized and pseudo-decentralized

Cryptocurrencies operate on the principle of a distributed ledger. This allows digital assets to be classified as decentralized means of payment with these features:

• The wallet owner has access to a complete database with information about all transactions made.
• There is no main (control) server in the network.
• Completed transactions cannot be canceled, and the user cannot be blocked or forcibly deprived of his funds.

But not all cryptocurrencies are fully decentralized. For example, in the EOS network, transactions are confirmed not by ordinary users, but by a pool of 21 nodes (servers). All investors’ savings are entrusted to a team of 2 dozen people. Theoretically, they can collude and carry out any transaction on behalf of wallet owners. Therefore, the degree of centralization of a cryptocurrency project is an important criterion. We can distinguish 2 groups of digital assets.

Types of cryptocurrencies depending on generation

As information technology in distributed networks has evolved, the underlying protocols and methods of transaction confirmation have also improved. Bitcoin is a popular cryptocurrency, but due to the peculiarities of the system, the use of the coin in everyday transactions is limited:

• The rate of mining new blocks remains low.
• A lot of electricity is consumed to run the network.
• Due to the limited block size, there may be a queue of unconfirmed transactions.

Many of the shortcomings of BTC and similar first-generation projects were eliminated after the introduction of the smart contract system. In 2017, an even more advanced, third generation of blockchain technology appeared, the main idea of which is to achieve maximum speed and security of transactions.

Blockchain 1.0.

The first generation usually includes Bitcoin and those cryptocurrencies that appeared in 2011-2013. The main idea of digital finance of this period is decentralization. For the first time, users were able to transfer and store assets without the participation of intermediaries (banks or payment systems). But the scope of the projects was limited to electronic transfers. The problem with scalability and speed of transaction processing pushed developers to implement new, more advanced technologies. Examples of first-generation cryptocurrencies: BTC, LTC, NMC, STC.

Blockchain 2.0.

A new stage in the development of digital technologies was the introduction of smart contracts – agreements whose execution takes place within a chain of blocks. For example, a developer of a computer game puts it up for sale. A customer who wants to download the program deposits funds into a cryptocurrency wallet and signs a smart contract. After one party transfers the source code of the application (game) through the blockchain, the system automatically records the fulfillment of the terms of the transaction and transfers the developer’s remuneration for the program. These transactions are carried out automatically, which excludes fraud or unauthorized intervention of third parties.

Blockchain 2.0 technologies have accelerated the processing of digital transactions and helped to introduce them in different spheres: offline commerce, application development, and public administration.

The second generation includes Ethereum and its forks, as well as the types of cryptocurrency issued on its blockchain under the ERC-20 standard.

Blockchain 3.0.

The growing capitalization of digital currencies has made developers think about transferring blockchain technologies to other spheres. In particular, ideas related to DLT technologies – distributed ledgers – are being discussed. Cloud storage is usually hosted on dedicated servers that can be taken offline or locked down. If information (documents, videos, music) is distributed among the computers of all network users, each community member can access it and synchronize it with the data they already have. But the realization of this technology requires:

• High transaction confirmation speed, an order of magnitude faster than the time it takes to mine blocks in Bitcoin or Ethereum.
• Protection of personal data and anonymity of users.
• Low network costs. Blockchains 1.0 are not suitable for these purposes because of the high power requirements for calculating new blocks.
• Compatibility between different digital projects.

As Blockchain 3.0 technologies have evolved, several promising developments have emerged. The most successful third-generation projects as of 2021 included Cardano, Polkadot, and Kusama.

Varieties of tokens

Records in distributed registers can perform not only an economic function, but also be used as a unit of accounting in individual digital projects. According to their purpose, such varieties of cryptocurrencies are distinguished:

• Payment tokens. They are used as a means for settlements.
• Service tokens. Issued as a unit of settlement within a certain community (platform).
• Exchange tokens. Used as fuel for exchange operations, they bring traders additional bonuses, discounts and dividends.
• DeFi (which stands for Decentralized Finance).
• Application tokens (App Coins).
• Stablecoins.
• Non-mutually exchangeable tokens.

Currencies Coin

Digital coins fulfill an important function – they are used as a means of payment. This category of cryptocurrencies is called currencies coins. The most famous payment coins are BTC, BCH, XMR, XRP, LTC, DOGE, RVN and others.

Platforms Coins

To a separate class can be attributed those types of crypto, which provide the entry of smart contracts into distributed registries of platforms. The list of these assets includes ETH, NEO, and ATOM.

Cryptocurrency Exchanges

Cryptocurrency exchanges issue their own tokens that act as securities of the trading platform. Holders of these digital assets can receive:

• A portion of the profits that went to the exchanges for paying exchange transaction fees to customers.
• The right to participate in the management of the platform.
• A discount on commissions and fees.
• Increased deposit and withdrawal limits.

In 2021, the most popular exchange tokens were BNB and CRO.

Security Tokens

Companies can raise seed capital through digital technology. Investors are provided with investment tokens that entitle them to receive dividends. Security Tokens are usually backed by the startup’s authorized capital. This type can be compared to securities of real economy companies: stocks or bonds.

App Coins

Application tokens (appcoins) are a type of cryptocurrency that gives the holder the right to use the services of a platform or service. They are compared to keys for activating applications installed on computers or mobile devices. An example of an appcoin is often referred to as BZZ, which provides the holder with the ability to pay for file storage on the Swarm distributed network.

Stable Coins

Most cryptocurrencies are not backed by other assets. Their price is determined by the supply and demand ratio. But some tokens, called stablecoins, are tied to stocks of fiat money, gold, or commodities. For example, the Tether cryptocurrency is 100% backed by real U.S. dollars, which keeps the USDT/USD exchange rate near the 1:1 mark.

DeFi

A separate class of tokens is used in decentralized systems. This list includes:

• P2P lending protocols secured by digital assets.
• Decentralized exchanges.
• Digital equity issuance platforms.

In 2021, one of the most traded DeFi tokens, according to our website, is Uniswap, issued by a decentralized exchange of the same name.

NFT

Not only money can be created in electronic form, but also intangible assets: text documents, images, movies. Non-fungible tokens (NFT) are smart contracts that confirm ownership of digital objects. Copyright registration for music, drawings, text documents, applications is possible in this way.

Web 3

Decentralization is possible not only in payment systems, but also in information exchange. The third generation of Internet technologies (Web 3.0) is usually understood as distributed methods of information storage, P2P communication systems and concepts of data transmission between different electronic devices (“Internet of Things”). In all such networks, tokens are used as a unit of payment. An example of cryptocurrencies used in the Web 3 sphere is IOTA, which is used to pay for data transfer between devices connected to the Internet of Things. NOIA and ICP coins fall into the same category.

ERC-20

The most widely used token standard as of 2021. Cryptocurrencies compliant with the ERC-20 standard are smart contracts on the Ethereum blockchain. The list of tokens of this type includes USDT, BNB, and EOS.

By type of emergence

Different cryptocurrencies can differ in the way of issue (issuance). In general, there are 3 types of appearance of new coins:

• Mining. Extraction of koins by performing cryptographic calculations.
• Forging. Analog of mining in networks that use Proof-of-Stake transaction confirmation. New tokens are accrued in proportion to the share of the person who participated in the creation of the block.
• ICO. One-time generation of all coins, which are distributed between developers and investors (contributors).

Minedrift

In Proof-of-Work networks, users provide their hardware (processors or video cards) to perform calculations for block generation. As soon as a new record is added to the chain, the miners who participated in its creation are rewarded with a certain number of coins. Extraction of new blocks is carried out in Bitcoin, Litecoin, Bitcoin Cash and other projects based on the Proof-of-Work method.

Forging

In some networks, transaction approval is not done by computation, but by the Proof-of-Stake method. The chances of forming a new block are proportional to the number of calculated units of cryptocurrency. The probability of success in this case does not depend on the computing power required to make entries into the blockchain. Coins are awarded to those users who participated in the creation of a new block.

ICO

The issuance of tokens can be carried out by their creators automatically. In this case, all units of account are immediately credited to users’ wallets. The distribution of assets can be made in proportion to the contributions of participants. This process resembles the initial public offering on stock exchanges, in which traders take ownership of securities, in return for making contributions to the startup capital of the company. In particular, THETA, EOS, MINA, ICP and many others were issued during the ICO.

Frequently Asked Questions