The blockchain/cryptocurrency industry is really taking off now, and the number of cryptocurrencies and tokens is steadily increasing as more entrepreneurs found crypto projects. In fact, as of 2021 there are more than 4,000 cryptocurrencies and tokens currently in existence. In order to understand them and generally what they do and what they are used for, cryptocurrencies and tokens have been categorized into different types. The different types of cryptocurrencies and tokens are:
- Payment/Value Tokens And Cryptocurrencies
- Central Bank Digital Currencies (CBDCs)
- Privacy Coins
- Governance Tokens
- Utility Tokens
- Security Tokens
- Non-Fungible Tokens (NFTs)
The Difference Between Cryptocurrencies And Tokens
In order to understand their properties, it’s necessary to know the difference between the two most common blockchain-based digital assets: cryptocurrencies and tokens. The primary difference between them is that cryptocurrencies usually have their own blockchains and crypto tokens are usually built on an already existing blockchain.
For example, the native cryptocurrency of the Ethereum blockchain is Ether (ETH). However, there are many other crypto tokens that use the Ethereum blockchain.
There are seven main types of cryptocurrencies and tokens, described below:
Payment / Value Tokens And Cryptocurrencies
Payment / Value Tokens And Cryptocurrencies describe crypto assets that can be used to store value and to pay for everyday items. Examples of this type are BTC, ETH, and LTC. You may have read in the news that bitcoin (BTC) is like “digital gold”. This statement implies that BTC has a similar property to gold in that it can be considered a good store of value. The traditional protector against inflation has been gold, however some experts have even started to claim that bitcoin is now displacing gold as an inflation hedge.
More companies are starting to accept crypto assets like BTC and ETH as payment. Fast food chains, big tech firms like Microsoft (XBox), and drink companies like Coca-Cola and Starbucks have begun accepting bitcoin. This signifies that the use of crypto assets to pay for items in stores is starting to be taken seriously by more brands as they compete for customers.
Stablecoins eliminate volatility by pegging the token to a traditional asset like a fiat currency. For example, USDT and USDC are pegged to the U.S. dollar meaning that 1 USDT will remain at a value of 1 USD and 1 USDC will remain at a value of 1 USD. With the developments occurring within the world of decentralized finance, crypto holders can earn much better interest rates than through a traditional bank by staking stablecoins on DeFi protocols like Aave and Compound.
Central Bank Digital Currencies (CBDCs)
CBDCs are like stablecoins, but are issued by central banks. They are a digital version of the country or region’s fiat currency. The first CBDC to be fully deployed was developed by the Bahamas and is commonly known as the Sand Dollar. China’s government has now begun deploying the digital yuan in cities across China. Many other countries are considering or are in the process of developing their own CBDCs.
Although CBDCs will maintain a level of centralized control that cryptocurrencies like BTC were designed to avoid, they could contribute to increased adoption of digital currencies around the world considering the influence that central banks have on the banking systems of the countries in which they operate.
Privacy coins aim to obfuscate the value of payments as well as their senders and recipients. By rendering the value of payments and those involved in the transaction as unintelligible, these coins provide a higher level of privacy and anonymity. Monero and Zcash are examples of privacy coins.
Monero allows users to spend their money safely since other people cannot see their balance or track their activity. Zcash is advertised as a privacy-protecting digital currency that offers confidentiality to protect users’ privacy and financial history. Privacy coins take a different approach from most cryptocurrencies, since most cryptocurrencies make transaction details public through the blockchain.
Governance tokens allow token holders to vote on changes to the platform’s processes in relation to decentralized finance. An example of a governance token is Uniswap’s UNI token. UNI provides holders with the ability to contribute to protocol development and development of the overall Uniswap ecosystem.
Yearn.finance also has a governance token. Holders can join governance forums and vote on proposed changes to the yearn ecosystem. Governance tokens are a way for crypto project founders to provide community members and holders of their tokens to take a more active role in determining the overall direction of the project.
Utility tokens provide and unlock access to services, and they are often created using the ERC-20 standard. A utility token is issued to fund the development of a crypto project, and later those utility tokens can be used to purchase a good or service offered by the person or people who founded and developed the cryptocurrency project. An example of a utility token is Filecoin. The team behind the Filecoin project raised $257 million by selling tokens. Holders of these tokens are given access to Filecoin’s decentralized cloud storage platform.
Security tokens are tokens distributed to investors through a Security Token Offering (STO). Security tokens provide rights similar to those provided by financial instruments, so they must follow financial market regulations. An example of a security token is Siafunds which are tokens used for revenue sharing. A fee from storage related transactions is distributed to Siafunds holders.
Due to the fact that Security Token Offerings are subject to financial rules and regulations, they have become a popular alternative to ICOs due to the fact that they are seen as providing more protection to investors than ICOs.
Non-Fungible Tokens (NFTs)
NFTs are designed to be unique and rare and have often been created using the ERC-721 standard. They have become a popular way of selling digital art, video clips, games, and collectables. To be exact, An NFT is a digital asset (token) that represents a real world object such as a piece of art, music, an in-game item, or a video.
An example of an NFT is the collage, Everydays: The First 5000 Days, by the digital artist known as Beeple (real name Mike Winkelmann) which sold for $69 million through an auction at the well-known auction house Christie’s.
Cryptocurrencies And Tokens Are Growing In Value
At the time of writing the global cryptocurrency market cap was $1.50 Trillion, and in April 2021 it reached $2 Trillion. The question on everyone’s mind is, where will it go from here?
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