What are the different types of Bitcoin

Popular Bitcoin softforks

“Soft” updates to the blockchain do not require a software reboot. Therefore, some users who do not follow the news of the crypto market may not be aware of the next change to the network. A few of the biggest updates to BTC functionality can be highlighted.

Segwit

This update to the Bitcoin protocol is launched to solve the problem of malleability and increase the speed of transactions. For this purpose, the developers increased the number of transaction records, but kept the block size (1MB). Signatures were separated into a separate segregated witness structure. This allowed to increase the network capacity by two times at once.

Segwit introduced two new types of scripts for sending and receiving coins and the bech32 encoding scheme. Transactions became faster. The activation of softfork caused controversy in the community. Some users still have not accepted it. However, full support for all nodes is not required. In 2022, 90% of wallets and platforms have adopted Segwit.

Lightning Network

A test version of the protocol launched in 2018. Lighting Network is a layer 2 solution that represents a network of payment channels between clients. The developers aimed to increase the bandwidth of Bitcoin. This was achieved by deploying smart contracts in the add-on.

With Lightning, Bitcoin users can make micropayments with a commission of 1 satoshi. This data is not recorded in the public registry until the participant decides to close the channel. After that, all transactions are merged and confirmed on the main network as one. This reduces the amount of information stored.

The Lightning Network is a necessary compromise to reduce fees, increase transaction speed, and preserve the decentralization and security of the underlying blockchain. Theoretically, there is no limit to the scaling of a second-level blockchain. Its developer Joe Kenjiki is confident that the blockchain can process millions of transactions per second.

In the fall of 2022, Lighting Network works with Blue Wallet, Wallet of Satoshi, Muun, and Phoenix. Microtransfers are supported by Kraken, Bitfinex, OKX, OKCoin exchanges. According to the 1ml service, the network is managed by more than 17k nodes and has a capacity of 4.9k BTC.

Lighting Network is being integrated into their platforms by large companies. For example, MicroStrategy has included in its plans to develop an authentication wallet using the protocol.

The main types of cryptocurrencies

In the fall of 2022, more than 13 thousand coins are traded on the market of digital assets. With the development of technology, this list will continue to grow. Cryptocurrencies can be divided into several groups:

• Decentralized and pseudo-decentralized.
• Depending on the generation.
• According to the type of appearance.
• Depending on function.

Decentralized and pseudo-decentralized

In a traditional banking system, all monetary transactions are under the control of a regulatory authority. Funds in the account can be blocked for violating the rules. In a decentralized ecosystem, restrictions cannot be imposed due to the absence of a controlling server. Bitcoins exist on the principle of a distributed network. Each user has a copy of the register – this ensures that the network is independent from the actions of individuals.

Decentralized cryptoassets have these features:

• Any user can obtain information about the transactions performed.
• Transactions cannot be canceled or adjusted.
• More than 50% of the computing power must be possessed to attack the network.

However, these characteristics do not apply to all cryptocurrencies. For example, some tokens (the most popular is BNB) operate on the Proof-of-Stake Authority (PoSA) consensus algorithm. Transactions are validated by trusted validators rather than regular users. The algorithm selects 21 nodes. Theoretically, validators can collude and modify transactions. Pseudo-decentralized varieties of BTC have other features:

• Controlled issuance. Mining is not available, only developers can issue new tokens.
• It is possible to cancel transactions. The chain is managed by a group of individuals who adjust transactions if necessary.
• There is a risk of account blocking. The most liquid stablecoin – USDT is managed by Tether Limited. The user’s wallet address can be added to a blacklist at the request of law enforcement.

Depending on the generation

As decentralized assets evolved, the technology improved. In 2023, several generations of digital currencies can be distinguished. More details about each are described in the table below.

Varieties of tokens

Unlike fiat money, records in a distributed registry can perform different functions. Digital assets can be divided into such categories:

• Currencies Coin. These coins are used for settlements. The most famous cryptocurrencies are BCH, XMR, LTC, BTC.
• Platforms Coins. This type includes coins that play a central role in decentralized projects (ETH, ATOM).
• Cryptocurrency Exchanges. Cryptocurrency exchanges issue native tokens that give holders benefits (bonuses, commission discounts, participation in new coin giveaways, and others). The most popular in 2023 are BNB, HT, and UNI.

By type of appearance

Cryptocurrencies are distinguished by the method of issuance. Coins are issued in these ways:

• Minedrift. To get digital currency, you need to perform complex cryptographic calculations. Bitcoin, Litecoin, Bitcoin Cash and other assets are mined in this way.
• Staking. New tokens are accrued in proportion to the validators’ shares. This is how Solana, Cardano, Toncoin work.
• ICO. Developers release the entire volume of the asset at once. Coins are distributed among investors and partners. Through ICO tokens THETA, EOS, MINA, ICP and others are released.

Frequently Asked Questions