Major Types of Cryptocurrency

In early 2009, an anonymous developer (or group) launched the cryptocurrency known as Bitcoin. This developer went by the name Satoshi Nakamoto. In the years since, the technology that makes Bitcoin possible has taken on a life of its own, and numerous other cryptocurrencies have sprung up to compete with it. To an outside observer, today's cryptocurrency market might appear to be little more than a group of similar offerings all competing for the attention of investors.

There's quite a bit of variance between today's cryptocurrencies. They rely on different versions of the original blockchain technology that powers Bitcoin, and not all of them are designed to function like fiat currencies. Making sense of it all requires careful study and a fairly extensive understanding of how cryptocurrencies work under the hood.

As a guide for those not immersed in the intricacies of crypto-technology, here's a look at the four major types of cryptocurrency, and what they're good for. 

 

4- types of cryptocurrency 

1. Proof of Work (PoW) 
2. Proof of Stake (PoS) 
3. Tokens 
4. Stablecoins

 

1.    Proof of Work (PoW):

To get started, the first type of cryptocurrency is the one that began with Bitcoin, which relies on blockchain technology that uses a concept known as proof of work (PoW) to process transactions. To understand what that means, though, you first have to understand what blockchain is.

Put simply, blockchain is a distributed ledger system. On a blockchain network, every participating computer (called nodes) maintains a complete copy of the system's ledger. It's a bit like sharing a copy of a check register with multiple people – except that no individual member can add something to that register alone.

To add a transaction, nodes compete to solve a complex cryptographic problem that represents the data to be added. The first to solve the problem then broadcasts the answer to the rest of the network for verification. This process is what has commonly become known as mining because the node that gets the right answer first gets a reward from the network. It's a secure and self-policing way of keeping airtight records. 

The security of blockchain technology, besides making cryptocurrencies possible, is also making its way into other industries of all kinds. Walmart is using it to manage its produce supply chain, Maersk is using it to track shipping containers as they travel the globe, and even the diamond industry has adapted it to track precious stones as they move through the value chain.

Cryptocurrencies using PoW:

Right now, the two major cryptocurrencies that rely on proof of work also happen to be the biggest, in terms of market value: Bitcoin and Ethereum. Together, they have a market capitalization of around $150 billion, a figure that dwarfs all other competition. As the legacy technology of the cryptocurrency world, PoW has proven stable and resilient, powering the two aforementioned currencies to unheard-of values in the past few years.

 

2.    Proof of Stake (PoS):

The major problem with PoW systems is the fact that they don't scale well. To overcome that problem, a different consensus model for blockchain was developed that allows smaller pools of nodes to validate transactions. It's known as proof of stake (PoS), and it ensures security in a fundamentally different way than PoW.

In a PoS system, not every node must validate every transaction. Instead, participating nodes have to use their own cryptocurrency holdings as a deposit to join a transaction validation group. That deposit is where the concept of proof of stake gets its name. Any node that tries to cheat or pass bad data into the ledger automatically forfeits their stake as a penalty. Those that play by the rules receive interest on their deposits as a reward for their work. In a PoS blockchain, that's the incentive system that keeps things secure and operating fairly.

Cryptocurrencies using PoS:

Right now, there are several cryptocurrencies that rely on PoS blockchains. The most notable among them are Eos, Dash, and Tron. Although they are tiny when compared to the PoW behemoths, that's about to change in a big way. That's because as mentioned earlier, Ethereum's about to join their ranks within the coming year. It's also worth noting that the vast majority of new and planned cryptocurrencies rely on PoS, as it's seen as the future of scalable blockchain technology.

3.    Tokens:

The two cryptocurrency types we've covered so far have been distinguished from one another by the technology that powers them. That's not the only kind of difference you'll find in the market, though. There are also differences in the purposes of the various offerings on the market. That brings us to the next major cryptocurrency type: tokens.

Tokens are distinct from traditional cryptocurrencies in that they're not intended to be used as general-purpose currency. They're also created on top of existing blockchains, such as Ethereum, and do not exist as stand-alone systems. In a way, the simplest way to understand the concept is to think about the chips you use to place bets in a casino. While they represent cash or other assets of value, they may only be used in the specific casino who issued them.

For example, online music streaming service Musicoin facilitates direct payment from listeners to artists using a token called Music. The token itself is built using the Ethereum blockchain (which is home to the majority of tokens), and cannot be converted directly into fiat currency. Instead, artists paid in this way must convert their tokens into standard cryptocurrencies like Bitcoin or Ethereum before cashing out their earnings.

Major Tokens:

Oddly enough, there are so many tokens currently in existence that it would be impractical to list them all. To the general public, however, there are two worth mentioning – BAT and Tether. BAT, which stands for Basic Attention Token, is used as a payment system within the recently-released Brave web browser. The idea is to compensate users for viewing online advertising as a means of changing the current equation which has led to rampant use of ad blocking technology.

Tether, on the other hand, is a token whose sole purpose is to remain at a value that's on par with the US dollar at all times. It's also a member of the next group of cryptocurrencies we're about to discuss: stablecoins.

 

4.    Stablecoins:

As the name suggests, stablecoins are cryptocurrencies created for the sole purpose of providing reliable value storage. They came about because standard cryptocurrencies like Bitcoin and Ether (the Ethereum coin) can fluctuate wildly in value over a short span, making them difficult to manage. That's the reason that some crypto-investors have become multi-billionaires overnight, only to see their net worth evaporate almost as quickly.

Stablecoins represent something of a hybrid between tokens and standard cryptocurrencies, in that they are built on existing blockchains but may be exchanged for fiat currency. Within the market, they play a vital role in allowing day-to-day, repetitive transactions that are free from value swings. Most stablecoins achieve this feat by pegging their value to one or more fiat currencies, and keeping reserves of those currencies as a guarantee of the token's value.

Major Stablecoins:

Besides Tether, which represents almost 90% of stablecoin trading volume, there are a few more examples in the market today. The most well-known among them include Paxos, Gemini, and TrueUSD.

There is, However, another stablecoin on the way that has grabbed the spotlight in recent months. It’s Libra, Facebook-backed cryptocurrency that sparked controversy when plans for its debut became the subject of a congressional hearing this past year. Still, if Libra can clear the regulatory hurdles, it might become the dominant stablecoin almost overnight- changing the face of cryptocurrency market in the process. 

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(All the material in this article are only the views of the author, and couldn’t be taken as “Financial Advice”)