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There was a time when the quantity and types of cryptocurrency could be counted on one hand. That is no longer possible nowadays. The cryptocurrency market has expanded beyond limits. In this post, I’ll go over the three major types of cryptocurrency. Hence, by the end of this guide, you should be able to identify the different types of cryptocurrencies with ease.
However, before diving into the main varieties of cryptocurrencies or even attempting to trade some of them, it’s critical to first grasp what cryptocurrency is. If you are already confident in your understanding in this area, please proceed to the next section.
Hope that made sense… If yes Let’s get started!
What is a Cryptocurrency?
The prefix crypto- stands for “cryptography,” which is a technology that protects and conceals information from intruders. You may have heard of cryptography in history class; it was used by the Aalies to send and receive secret messages during World War II.
Cryptography is used in a variety of ways by computer specialists nowadays. And cryptocurrencies are one of them!
Decryptionary defines cryptocurrency as
For the time being, you can ignore how different types of cryptocurrency are created and instead concentrate on what they do.
What Do Cryptocurrencies Do?
People no longer have to rely on banks to handle their money and personal information (the same goes for credit card firms).
On a laptop, there are two types of cryptocurrency: fiat money and crypto coins.
We no longer require banks to process our transactions. Instead, bitcoin transactions are performed on the blockchain network—a decentralized database.
It is decentralized because it is run by several distinct individuals and firms, rather than just one, as banks are. Nobody has control over the transactions or the cryptocurrencies involved. This means that you don’t have to rely on a single company (such as a bank) to handle your money.
If this is your first encounter with blockchain technology, you should read my other guide “Blockchain Explained”!
Anyway, let’s get started with the three primary types of cryptocurrency.
Three Major Cryptocurrency Types
The blockchain connects the three major types of cryptocurrencies. The first blockchain was Bitcoin.
However, several new blockchains were formed after Bitcoin, and they are known as altcoins. Altcoins such as NEO, Litecoin, and Cardano are excellent examples. Finally, I must introduce you to tokens/dApps, the third and most important type of cryptocurrency. Civic (CVC), BitDegree (BDG), and WePower are a few examples (WPR).
The concept of Bitcoin was first revealed in 2008. The White Paper was published online by Satoshi Nakamoto. However, it was eventually established that Satoshi Nakamoto was not the genuine name of this individual. Even now, no one knows the true identity of Bitcoin’s founder!
Nobody could have predicted that Bitcoin would become what it is today. Nobody expected it to be the start of a massive technological revolution, but it was. It was the birth of other cryptocurrencies, and thus the beginning of a new era.
You’re presumably aware of what happened afterwards. For many years, the primary purpose of Bitcoin was to exchange products and services on the dark web. Have you ever heard of the Silk Road? That’s exactly what I’m referring to.
Bitcoin had significant growth in 2013-14. Then it slowed a little. However, in 2017, the Bitcoin market soared up, up, and up some more. It went a lot further this time.
Bitcoin hit a price of $20,000 in December 2017. As a result, anyone with 50 Bitcoins or more became a millionaire. 50 Bitcoins would have cost you $10,000 in January 2015. That’s a $990,000 profit! Isn’t that crazy?
Well since 2017, Bitcoin has recorded new milestones on higher price level—as high is $52,000.
What exactly is it?
It is a form of digital cash that can be transferred to others. This could be a present, a service, or a product. Basically, it’s similar to the money we keep in our bank accounts (USD, EUR, etc.). But it’s not physical; it’s digital.
However, that isn’t the only thing that distinguishes it. It’s also decentralized, which means it doesn’t rely on a bank or a third party to handle it, as I stated in my description of a cryptocurrency earlier.
Each transaction in Bitcoin takes place directly between users – this is known as a peer-to-peer network. All of this is made possible via the blockchain. Bitcoin literally pioneered the use of blockchain technology to enable users to transmit and receive Bitcoin without the involvement of a third party.
You do not need to identify yourself because you do not require a third party. You can make payments without exposing your identity.
What is the Process?
When someone sends Bitcoin, the transaction is validated and recorded on the blockchain network (the shared database). Everyone can see the information on the blockchain, but only the owner of each Bitcoin can decode it. Each Bitcoin owner is given a ‘private key,’ and this private key is used to decrypt their Bitcoin.
But who verifies/processes the transactions if the banks don’t?
Remember how I said that blockchains are run by a variety of individuals and companies rather than by a single company or person? People and businesses who run the blockchain, on the other hand, do it using computer power. They run special pieces of software on systems that process blockchain transactions.
Running these systems consume a significant amount of electricity. So, how then do the people and businesses that run the nodes pay their electrical bills? Welcome to the world of mining.
The nodes are compensated for verifying transactions with new Bitcoin. This is the process by which new Bitcoins are created. It’s similar to gold mining, where miners are paid with gold. The miners in Bitcoin mining are the nodes; they mine for new Bitcoin.
When a new block of transactions is added to the blockchain, miners/nodes use a method known as PoW to verify the block (Proof-of-Work). The first miner to verify the block in PoW is rewarded with fresh coins.
Other algorithms are employed in other blockchains, but we’ll get to that in a moment.
There are currently over a thousand altcoins in existence! Don’t be alarmed by that figure; the vast majority of altcoins are simply modified versions of Bitcoin. That is how the term “altcoins” came about.
It’s crucial to note, however, that not all altcoins are simply different versions of Bitcoin. There are several of them that are diametrically opposed to Bitcoin and serve entirely different purposes.
Some cryptocurrencies utilize algorithms that are not the same as those used by Bitcoin. Factom, for example, is an altcoin that employs PoS (Proof-of-Stake). There are no miners in PoS. Stakeholders, on the other hand, exist.
Stakers, like miners, authenticate transactions in exchange for incentives. Instead of racing to verify a block before everyone else, they are chosen one at a time to have their turn. This uses a lot less electricity because there aren’t thousands of miners trying to validate the same block. Instead, each block has only one ‘staker.’
Examples of Altcoins
Ethereum and NEO are two examples of altcoins that are vastly different from Bitcoin. You are aware that Bitcoin is a digital currency, correct? Ethereum and NEO, on the other hand, were never intended to be used as digital currencies. Instead, they were designed to be massive platforms for developing blockchain-based apps.
Yea, you can create your own applications on Ethereum and NEO. This is the most common way for new cryptocurrencies to be created. They are built on blockchains that allow for app development, such as Ethereum and NEO.
This is all possible because Ethereum, which debuted in 2015, introduced a new technology to the crypto world. “Smart contract” was the name given to this type of technology. Depending on certain events, a smart contract can execute transactions automatically.
Understanding Smart Contracts
When a smart contract is constructed, certain ‘things’ (also known as conditions) are written into it. A condition might be something like, “WHEN Peter deposits 120 Ether into the smart contract, THEN John’s house will be given to Peter.”
Smart contracts eliminate the need for a third party. But while Bitcoin eliminates the need for a third party in direct payments, smart contracts eliminate the need for a third party in a variety of situations, such as the sale of a property, the selling of electricity, or the selling of stock on the stock exchange.
Of course, electricity cannot be embedded in a smart contract, can it? Instead, you insert a token into the smart contract, which legally represents the electricity. One of the great features of smart contracts on Ethereum, NEO, and other altcoins is the ability to tokenize real-world assets and store them on the blockchain.
#3. Tokens (for dApps)
The third major type of cryptocurrency is a token – the same kind we just discussed! They are distinct from the other two major types of cryptocurrency in that they do not have their own blockchain.
They are utilized in dApps (decentralized applications), which are the programs I mentioned earlier that can be built on blockchains such as Ethereum and NEO. Tokens are used since dApps are designed to employ smart contracts.
Their tokens, however, do not have to represent anything in particular. They can instead be used to make purchases through the dApp. Either that or they can be utilized to obtain specific benefits, such as reduced costs and voting fees.
Tokens always have a monetary value that can be sold for, which is why some individuals purchase them. Instead of purchasing tokens to use on the dApp, some people purchase them with the intention of subsequently selling them for a better price.
Furthermore, because dApps are built on other blockchains (such as Ethereum and NEO), a token transaction is still confirmed by Ethereum or NEO nodes. This means that a transaction fee is still paid in Ether or NEO, rather than the token.
So, in order to make a transaction on a dApp (i.e. utilize a token), you must have some Ether or NEO (or whichever currency the dApp is built on) to pay for transaction fees.