Let's Better Understand the Different Types of Cryptocurrency and Tokens

All hail to this brave new crypto world! You may or may not have heard of Ethereum, but surely you know something about Bitcoin. But, what if I tell you that there are many other types of cryptocurrency out there? Ranging from web3 tokens, ICO tokens, ERC20-tokens, DeFi tokens to stablecoins, you’ll be surprised what this dynamite crypto space has to offer.

With the altcoin season on the bull and Bitcoin prices continue to surge, especially when Elon Musk changes his Twitter bio to #bitcoin. The crypto market like a colossus and the industry will continue to blossom into something even more substantial.

So, if you’re curious about what’s next after Bitcoin, read on as we dissect the different types of cryptocurrency. Perhaps, you’ll also find some insights to diversify your investment portfolio.

What Is Cryptocurrency?

Just like the type of fiat currency (your usual dollar bill), cryptocurrency is decentralized, relying only on the peer-to-peer community computer network made up of users’ machines or “nodes.” That means it is independent and not governed by a central bank or monetary authority. Also known as virtual currency or digital currency, cryptocurrency is often recognized as a medium of exchange for transactional purposes.

By contrast to U.S. dollars, cryptocurrency ownership is usually recorded in a blockchain software that uses a few vital components. In the case of Bitcoin, it’s a ledger distributed across every node in the network, encrypted transactions, timestamp server, proof-of-work consensus, and the network of running nodes itself.

Sounds too complicated?

Such a setup extends the capability of cryptocurrency beyond just regular money, as you’ll see in the case of crypto tokens. But more importantly, being the first currency built differently, Bitcoin started a big decentralization trend where governments and traditional banks no longer have a say in your privacy.

The Difference Between Coins and Tokens

There are three types of cryptocurrency out there. That includes bitcoin, altcoins, and tokens.

Bitcoin

In 2008, an anonymous developer known as Satoshi Nakamoto published a whitepaper describing the first electronic cash independent of governments or banks— Bitcoin (BTC). Unlike traditional online payment, it promises a lower transaction fee, and it’s completely decentralized.

There are no physical bitcoins, but only the balances kept on a decentralized public ledger system, known as a blockchain. These balances of Bitcoin tokens are subsequently kept using public and private keys to decrypt the encryption. To put it in simpler understanding, the public key is like your bank account number for you to send or receive bitcoin. In comparison, the private key is a secret key for you to authorize a bitcoin transmission.

As a cryptocurrency, Bitcoin is accepted as a means of payment for products sold or services provided that works just like fiat currency. Although it’s decentralized, the most intriguing part of bitcoin is its competitive exchange rate against the dollar attracting potential investors and traders. Despite it not being legally tendered, Bitcoin remains a popular type of cryptocurrency and has inspired many creators to launch their cryptocurrencies, collectively referred to as altcoins.

Altcoins

In the beginning, Bitcoin was the only cryptocurrency, but later, other projects started to emerge. Hence, the born of altcoins. Have you heard of Ethereum, Litecoin, Ripple, Bitcoin Cash, or Monero? All of them and many others were born out of their native platforms, native blockchains, and all of them were slightly different from the Bitcoin blockchain.

These newly-built coins like Monero were mostly developed for the single-purpose use case, to serve as a digital currency that somehow could be better than Bitcoin – at least according to the developers of these projects.

To put it simply, they were made to compete with Bitcoin by changing the rules to appeal to different users. And although some of them do challenge Bitcoin after all these years, ironically, the good old 10-year-old grandpa still heavily dominates the market. Simultaneously, all the other types of crypto coins are popularly styled now as altcoins or alternative coins.

Tokens

Now, crypto tokens are normally developed to kickstart the crypto-related ecosystem. You know, it almost works like bonus miles. You can’t buy a loaf of bread for accumulated miles, but you can buy a plane ticket, and the more miles you have, the better it is for the airline’s ecosystem. The same approach works with crypto tokens!

No worries, you’ll find some practical examples later in the article. For now, just understand that crypto tokens don’t necessarily have their native blockchains and can be easily developed on top of other platforms. Compared to crypto coins that play a currency’s role, tokens often serve a particular function like voting for changes or rewarding people for participating in the network.

The Types of Crypto Tokens

Based on which functions crypto tokens serve, they can be segregated into several categories:

Exchange Tokens

One way for a crypto trading platform, exchange, to differentiate itself from its competitors is the variety of currency pairs and trading types. These are such as OTC, margin trading or futures trading, and, indeed, native exchange tokens.

These tokens are value-adding because users can use them to pay fees, buy and sell other cryptocurrencies or power certain operations such as community voting for new coin listings.

Arguably, the best known and most liquid of all exchange tokens is the BNB native token for the Binance exchange. Still, there are, of course, also other exchange tokens, such as Huobi Token (HT), KuCoin Shares (KCS), Bibox Token (Bix), etc.

DeFi Tokens

DeFi was the latest trend last summer. Still, the DeFi exchange rose to $50B amid Bitcoin’s bull. So, does that mean it’s a potential channel to disrupt the crypto niche? If yes, how so?

Believe it or not, the crypto niche is still centralized. Take Binance for an example; it still belongs to a group of people that contradicts Satoshi’s vision.

What defines DeFi is its aim to steer away from the traditional crypto platforms. The DeFi projects aim to enable users to borrow and lend within a peer-to-peer network, leverage the loans, and “farm” tokens for simply being active.

Those “farmed” tokens or tokens produced on top of those platforms are DeFi tokens that include but are not limited to Chainlink (LINK), Uniswap (UNI), Aave (AAVE), Dai (DAI), and more.

ERC-20 Tokens

One significant difference between ERC20 tokens and all the other token types is that ERC20 tokens are created on top of the Ethereum blockchain.

The truth is, ERC20 is not even a token but more of a token standard. Say a company decides to launch a dApp, a decentralized app, on the Ethereum platform. For their token to work, they need to produce it in agreement with the ERC20 standard that defines a set of rules.

Governance Tokens

The decentralized protocols boast the on-chain governance that allows governance token holders to influence a decision through the in-place voting systems. As Dapps are on the rise, governance token plays an essential part to create a synergy where stakeholders and developers can shape the future of a protocol through the most transparent discussion and debate. For example, COMP token gives its community holders the ability to vote on key changes to Compound. That means, if you hold COMP, you have a say to favor or vote against the proposed changes or an upcoming proposal.

Security Tokens

Now, this type of token could be the next big thing in crypto as soon as the regulators worldwide come to their senses and decide how to define a cryptocurrency. Security tokens are responsible for a phenomenon known as “tokenization” – the process that helps turn real-world assets, such as real estate, into digital tokens.

Say, as an investment, you want to purchase a fraction of an apartment in New York, but not a whole apartment because it’s too expensive. You can do so by buying digital assets that can be easily divided.

Security tokens had been a buzz word for quite some time now, but it takes a good deal of proper regulation and standardization to put them to use. Hence, we haven’t heard much of them.

ICO Tokens

Approximately three years ago, ICO (Initial Coin Offering) made its appearance, and it took off. Crypto projects, sometimes of questionable provenance, were looking to raise money, and for that, often created a new coin as a way to fundraise. To put it in simpler terms, an ICO is a source of capital for startup companies.

Any interested investors can buy into the offering and receive a new crypto token issued by the company as an exchange. Through the fundraising campaign, companies will accumulate enough funds to keep the development process. Whereas these tokens would typically be exchanged for BTC and ETH. Mainly because they are easier to exchange for other currencies, and the market liquidity is usually higher.

Today, ICO has dwindled into thin air as the market is changing.

Web3 Tokens

Compared with the traditional centralized web owned by a few giant corporations, the web3 tokens bring the new internet standard to the table.

Did you know that there are more than 700,000 miles of submarine cables in use today? Google has 63,605 miles and 8.5% of all cables to its name; Facebook – 57,079; Amazon – 18,987; Microsoft – 4,014.

Web3 tokens are tokens developed on top of those crypto platforms that aim to stop this trend. And they reward users of their platforms with web3 crypto tokens for contributing to the development of the other trend.

For example, with the decentralized project Filecoin, the network’s users store other users’ data for the reward in Filecoin tokens.

The threeFold token is awarded to participants who authorized their node in the ThreeFold ecosystem that stands for the Internet free of global corporations.

Utility Tokens

Utility tokens refer to an asset integrated with a blockchain that allows users to purchase a good or service in the future. Unlike security tokens, utility tokens are not a direct investment but rather sustain the platform’s economy through the service provided.

For example, Binance Coin (BNB) is a utility token boast on its payment method for the fees related to trading on its exchange. When you use this utility token, you can receive discounts when paying for the trading fees, using it for travel expenses, gift cards, and more. Ultimately, the utility coin is to boost the development and the ecosystem of the platform.

Do note that utility tokens are generally more versatile. That means they’re flexible to be integrated for many purposes.

Top Ranking Cryptocurrencies

So what are those the best cryptocurrencies that are worth your time and investment? Here’s what we think:

1. Bitcoin (BTC)

• All-time High: $41,962.36
• Circulating Supply: 18,616,043 BTC
• Max Supply: 21,000,000 BTC

The year 2020 was indeed a roller-coaster ride for everyone, even for the crypto market. Bitcoin’s prices continued to surge more than 200% and exploded to their all-time high. Though the sudden spike is reminiscent of 2017, it’s indeed different.

Four years ago, from 2021, Bitcoin was merely seen as an investment for retail investors to profit from the exchange rate. This time, some major institutional investors have decided to join the market. For example, a multimillion business intelligent company —MicroStrategy- has announced over $1 billion worth of Bitcoin purchases in 2020. While Elon Musk, the founder of Tesla, shows curiosity by inquiring about moving large transactions to Bitcoin.

Today, Bitcoin is trading on an average of $33,000 to $35,000.

2. Litecoin (LTC)

• All-time high: $375.29
• Circulating Supply: 66,394,765 LTC
• Max Supply: 84,000,000 LTC

Litecoin is one of the earliest altcoins that have managed to stay in the market through the years. Charlie Lee created the cryptocurrency to provide fast, secure, and low-cost payments. Though it’s very similar to Bitcoin still, there are some differences. That includes the hashing algorithm used, hard cap, block transaction times, and a few other factors that differ from Bitcoin. While the main difference is the Bitcoin network can never exceed 21 million coins, whereas Litecoin can accommodate up to 84 million coins.

The highlight for Litecoin is it allows up to 56 transactions per second and the transaction fees are extremely low. Thus, making it suitable for micro-transactions.

3. Ethereum (ETH)

• All-time high: $1,467.78
• Circulating Supply: 114,486,822 ETH
• Max Supply: No Max

ETH has been actively riding the bull waves alongside Bitcoin. Not only it kickstarted the DeFi hype this summer, and it is slowly transforming to the new consensus algorithm in Ethereum 2.0. But why should you even care?

On a global scale, the annualized carbon footprint of Bitcoin equals the carbon footprint of New Zealand, 36.95 Mt CO2. That is all because the Proof of Work consensus forces Ethereum to deal with the scalability issues.

Once they upgrade and host even more DeFi projects, it will be hard to imagine someone who can stop Ethereum’s inventor, Vitalik Buterin, on his road to market dominance.

4. Chainlink (LINK)

• All-time high: $25.65
• Circulating Supply: 404,009,556 LINK
• Max Supply: 1,000,000,000 LINK

Chainlink aims to be the intermediaries that boost cross-network interactions by relying on the oracles. That means you can build a DApps that can interact and receive data using smart contracts to interoperate with the off-chain data sources.

Unlike the other projects, Chainlink is not rivaling its competitors. In fact, it’s used to complement the crypto ecosystem in building a sustainable, decentralized, and trustless system that is beneficial for developers and the public as a whole. The partnership with Google Cloud, Intel, T-System, and more helps Chainlink secure its trust from the public. Thus, its ranking is stable and it’s rated as one of the best cryptos to invest in 2021.

5. Tether (USDT)

• All-time high: $1.21
• Circulating Supply: 26,601,641,890 USDT
• Max Supply: No Max

Tether, widely known as USDT, is a stablecoin that mirrors the price of the U.S. dollar. What does it mean? It has a stable value because it’s pegged to the USD and removes the volatility from the equation. This stability is achieved via maintaining a sum of dollars in Tether’s reserves that is equal to the number of USDT in circulation.

Or, at least, this is what they say because USDT is rumored to be pegged not only to the U.S. dollars but other reserves, too, such as cryptocurrencies.

According to Tether, all of the tokens are 100% backed by their reserves. While these reserves include the traditional currency, and cash include other assets and receivables from loans made by Tether to third parties.

If you consider yourself a long-term investor, USDT could be something for you. Many experts forecasted that it’d yield good returns in three to five years as a stable asset.

Conclusion

Now you know almost everything you need to know about different types of cryptocurrency existing out there! While talking about multiple cryptocurrencies existing in the market, there are nearly 5,000 different coins out there. When cryptocurrency is more widely being adopted by the mainstream, there’ll be even more altcoins and tokens. Ultimately, understanding these fundamentals will be great to help me deciphers a better choice for your future investments.