What Are The Types Of Cryptocurrency: Different Tokens Explained
The most popular cryptocurrency created in 2009, Bitcoin, has opened the doors of new technologies in the financial world. The cryptocurrencies are traded on Blockchain, which is a public digital ledger. The system does not require any third party, i.e. bank or government, to verify the transaction. Instead, they are approved via the proof-of-work algorithm. Lately, the second-largest cryptocurrency, Ethereum, has shifted to the proof-of-stake algorithm with the principal goal of reducing the use of high computational power.
New developments are frequently seen in digital currencies in the race to establish a business in blockchain technology and web3. Here are the types of cryptocurrencies:
Utility Tokens
Utility tokens are not for direct investments because they don’t hold ownership, but they work as a coupon or voucher for an existing protocol on the blockchain that is used to access that protocol. In simple words, the holder of the utility token gains the right to an equivalent token value. As a result, he can access the service or product in the ecosystem at a discounted price or free of cost. Utility tokens are not investment products and can lose value entirely at the holder’s expense.
Example: Basic Attention Currency (BAT) from Brave is a utility token that can only be distributed via the Brave browser or through programmes with a built-in BAT wallet, like Twitter.
Security Tokens
These securitised digital currencies obtain value from an external asset that can be exchanged under a monetary guideline as security. They, consequently, are utilised for securitised tokenisation of properties, bonds, stocks, genuine domains, property, and other certifiable financial standards. They can be used when investors require immediate settlement, open management, asset division, etc.
Equity tokens and asset-backed tokens fall under the umbrella of security tokens. These resemble conventional stocks in appearance and operation, except that ownership and transfer are carried out digitally. Dividends from managerial and issuer choices and actions are due to investors. Short-term loans with fixed interest rates are represented by debt tokens.
Example: Sia Funds, BCAP (Blockchain Capital)
Payment Tokens
You must involve an intermediary to complete the purchase whenever you make any payment online. In contrast, payment tokens are used to buy and sell goods and services online without a third party or intermediary, unlike traditional finance. You can make payments with major cryptocurrencies, whether they fall under utility or security. Nevertheless, all utility tokens cannot be payment tokens.
Example: Ethereum, Bitcoin
Exchange Tokens
Cryptocurrency exchanges launch their native token for various purposes. For example, they can be used as a reward or incentive to its users. The ever-expanding blockchain ecosystem includes cryptocurrency exchanges and marketplaces for buying, selling, and trading cryptos.
Example: Binance Coin, Gemini USD
Non-Fungible Tokens (NFTs)
NFT tokens are created with unique identification codes and metaverse on a blockchain. Unlike cryptocurrencies, they cannot be traded equitably. They represent identities, artwork and real estate. Many celebrities have come across to launch their NFT collection, and people owning NFTs can gain several benefits. NFTs are primarily stored on the Ethereum blockchain, though they can also be used on other blockchains.
Example: Bored Ape Yacht Club, SuperRare
Decentralised Finance Tokens (DeFi)
DeFi tokens are digital currencies that use smart contracts (an agreement between two entities that is automatically executed by computer code) to run on automated, decentralised systems that aim to remove the involvement of third-party from financial transactions.
Example: Maker (MKR), SushiSwap (SUSHI),
StableCoin
Cryptocurrencies known as stablecoins try to tie their market value to an outside standard. As a means of exchange, stablecoins perform better than more volatile cryptocurrencies. Stablecoins can be linked to the value of a commodity, like gold, or a currency, like the U.S. dollar.
Example: Gemini Dollar, USD Coin
Asset-backed Tokens
Any physical asset, for example, gold, real estate, or crude oil, can back asset-backed tokens’ value. First, you have to digitally tokenise the value of the physical asset in a token then it becomes an asset-backed token. Bitcoin is not an asset-backed token.
Example: PAX Gold, Tenset
Privacy Tokens
Like all cryptocurrencies, privacy tokens are recorded on the blockchain, where everyone can access them. However, they still provide additional security to protect the wallet owner’s identity and the transaction amount’s anonymity.
Example: Monero (XMR), Zcash
Governance Tokens
In decentralisation, ownership is addressed by governance tokens. They award token owners specific privileges that influence how a system is run. This could include concluding which new features and products to add, how to allot monetary assets, and which collaborations or integrations to look for, and that’s only the tip of the iceberg.
Example: AAVE, Decred
There are four major types of cryptocurrencies: utility, payment, security and stablecoins. We have listed ten common types of cryptocurrencies. Among them, payment tokens are significant and likely to be investors’ first choice. Other cryptos can be used as per the requirements of financial backers. Before investing, it is vital to do your own research and take the risk as per your potential, as the cryptocurrency market is highly volatile.
