Different Types of Crypto: A Comprehensive Guide

Different types of crypto: How can you distinguish between coins? Cryptocurrency has revolutionised the financial landscape, offering an alternative to traditional fiat currency. As the crypto market continues to expand, it’s essential to grasp the nuances of various digital assets.

In this article, we’ll explore the different types of cryptocurrency, their features, and their use cases.

Coins vs. tokens: Unravelling the basics

Before diving into specific types, let’s clarify the fundamental distinction between coins and tokens.

Coins

Coins are native digital currencies that exist on their own dedicated blockchains. They are the fundamental units of value within their respective ecosystems.

For example, Bitcoin (BTC) is the original and most well-known cryptocurrency, and operates on its own blockchain. It serves as a decentralised store of value and a medium of exchange.

Ethereum (ETH) powers the Ethereum network. It not only acts as a digital currency but also fuels smart contracts and decentralised applications (apps built on the blockchain, rather than the internet).

When using a coin’s blockchain, transaction fees (such as mining rewards or gas fees) are denominated in that coin. For instance, Bitcoin miners earn BTC as their reward, while Ethereum gas fees are paid in ETH.

Coins operate within decentralised networks secured by multiple computers (nodes). These networks validate transactions and maintain the blockchain’s integrity.

Tokens

Tokens, on the other hand, rely on existing blockchains (like Ethereum) to function. They represent assets, utilities, or rights within a specific ecosystem. Tokens can be fungible (interchangeable) or non-fungible (unique).

For example, Axie Infinity is a popular play-to-earn (P2E) game. In this game, players collect and battle adorable creatures called Axies.

The game has a token called AXS (Axie Infinity Shards). It gives holders of the token to vote on things like upgrades to the game, and can be used in the NFT marketplace.

There is also another token associated with Axie Infinity called Smooth Love Potion (SLP). Players can earn SLP by participating in battles, completing quests, and breeding Axies. And they can purchase SLP on exchanges.

The value of SLP and AXS can fluctuate based on supply and demand dynamics, making them interesting assets for both gamers and investors.

Other tokens

Another example is the token associated with Uniswap, a decentralised exchange (DEX) protocol built on the Ethereum blockchain. It allows users to swap various cryptocurrencies in a peer-to-peer way.

The utility token associated with Uniswap is called UNI. UNI holders can participate in providing liquidity to Uniswap pools by depositing their tokens. In return, they earn a share of the trading fees generated by the platform.

UNI also serves as a governance token, allowing holders to propose and vote on protocol upgrades, fee adjustments, and other decisions.

Users who stake UNI tokens may receive additional rewards, such as UNI airdrops or access to exclusive features.

Another example is BAT (Basic Attention Token). The Brave browser ecosystem uses it to reward users. They also use it to pay content creators for engagement.

Different categories of cryptocurrencies

Utility Tokens

Utility tokens power decentralised applications (DApps) and grant access to specific services or features.

For example, Ethereum (ETH) is fuel for the Ethereum network, enabling smart contracts and DApps.

The Sandbox is a virtual metaverse where players can play, create, own, and govern their experiences. The utility token is SAND. SAND allows users to purchase and own virtual land within the Sandbox metaverse. This land can be developed, customised, and monetised.

With SAND, players can create and publish their own games, experiences, and assets within the Sandbox world. The community actively participates in governing the metaverse through decentralised decision-making.

SAND is the primary currency for in-game transactions, including buying and selling virtual assets, participating in events, and collaborating with other creators.

Payment cryptocurrencies

These aim to replace traditional payment methods. For example, Bitcoin (BTC) is the original cryptocurrency, often referred to as “digital gold.” This works so well as a payment cryptocurrency that it is legal tender in El Salvador, and some other regions.

XRP is another cryptocurrency designed for payment purposes.

Ripple is the company behind the XRP cryptocurrency. It operates a payment settlement system and currency exchange network that facilitates global transactions. XRP consistently ranks among the top 10 cryptocurrencies by market capitalisation.

Ripple aims to replace traditional systems like SWIFT by providing a faster and more efficient settlement layer between major financial institutions.

The standard fee for conducting transactions on Ripple is set at 0.00001 XRP, significantly lower than the fees charged by banks for cross-border payments.

Stablecoins

Stablecoins maintain a stable value by being pegged to an external asset (usually the US dollar). An example is USD Coin (USDC).

Memecoins

Memecoins (like Dogecoin) and Shiba Inu were created as a joke, however, amazingly, some of the biggest memecoins have become fully-fledged cryptos with buying power and utility.

USDC is a type of cryptocurrency that aims to maintain a 1:1 peg with the U.S. dollar. In other words, the value of one USDC coin is intended to be as close as possible to the value of one U.S. dollar.

USDC keeps this “sort-of” stability because it is fully backed by U.S. dollar assets. For every USDC in circulation, there is an equivalent amount of U.S. dollars held in reserve. These reserve assets are held in segregated accounts with regulated U.S. financial institutions, ensuring transparency and accountability.

Exchange Tokens

These tokens are native to specific exchanges and offer benefits like reduced fees or voting rights. For example, Binance Coin is used within the Binance ecosystem.

Central Bank Digital Currencies (CBDCs)

CBDCs are the digital version of a country’s national currency. They are issued by central banks. These are still in the experimental phase and there is a lot of controversy that surrounds them.

CBDCs allow central banks to more effectively implement monetary policies, including interest rate adjustments and quantitative easing (money printing to manipulate economic outcomes).

CBDCs make traceability easier, making it harder for illicit activities such as money laundering and tax evasion.

However, many normal citizens are very dubious of CBDCs. Because CBDC transactions are highly traceable, this could potentially compromise user privacy.

More or less, a government could take money away from a citizen by pressing a button, or "freeze" their accounts. CBDCs raise concerns about surveillance and government monitoring of financial activities.