What are the Main 4 Types of Cryptocurrencies?
There are thousands of cryptocurrencies out there, and more are being launched every day. While they both rely on the same premise of a consensus-based, decentralized, and immutable ledger to digitally transfer value between trusted parties, there are subtle and not-so-subtle differences between them.
This article will shed light on the situation and help divide cryptocurrencies into four broad categories:
Payment Cryptocurrency
The first major cryptocurrency was the payment cryptocurrency. Bitcoin, perhaps the best-known cryptocurrency, was the first successful example of a cryptocurrency for digital payments. The purpose of payment cryptocurrencies is, as the name suggests, not just as a medium of exchange, but purely peer-to-peer electronic money to facilitate transactions.
Since this type of cryptocurrency is intended to be a universal currency, it has a blockchain in general that supports this purpose. This means that smart contracts and decentralized applications (dapps) cannot run on these blockchains.
These payment cryptocurrencies also tend to only be able to create a limited number of digital coins, which naturally makes them deflationary. As fewer and fewer digital currencies can be mined, digital currencies are expected to increase in value.
Examples of payment cryptocurrencies are Bitcoin, Litecoin, Monero, Dogecoin and Bitcoin Cash.
Utility Tokens
The second major type of cryptocurrency is utility tokens. A token is any crypto asset that runs on another blockchain. The Ethereum network pioneered the concept of piggybacking other crypto assets on its blockchain.
In fact, Ethereum founder Vitalik Buterin envisions his cryptocurrency as an open-source programmable currency that would enable smart contracts and decentralized applications to disintermediate traditional financial and legal entities.
Another major difference between tokens and payment cryptocurrencies is that tokens, like ether on the Ethereum network, are not capped. As a result, these cryptocurrencies are inflationary — meaning that as more and more of these tokens are created, the value of the digital asset can drop, much like fiat in a country constantly running under cash pressure. Currency is the same.
Utility tokens serve a specific purpose or function in a blockchain called a use case.
For example, a use case for Ether is to pay transaction fees to write things on the Ethereum blockchain, or to create and buy Dapps on the platform. In fact, in 2021, the Ethereum network was modified to consume or destroy a portion of the ether used in each transaction to adjust for use cases. You will hear these types of tokens referred to as infrastructure tokens.
Service Tokens
Some cryptocurrency projects issue service tokens that grant holders access to the network or allow them to run something on the network. One such service token is Storj, an alternative to Google Drive, Dropbox or Microsoft Onedrive. The platform rents out unused disk space to those who want to store their data in the cloud.
These users will pay for the service using Storj’s native utility token. To earn these tokens, people who store data must cryptographically pass random file checks every hour to ensure the data is still in their possession.
Finance Tokens
Another example of a token is Binance’s Binance Coin (BNB), which was created to offer holders discounts on trading fees. Because this type of token grants access to a cryptocurrency exchange, you sometimes hear it referred to as an exchange token.
Tokens are most often sold through initial coin offerings (ICOs), which connect early-stage cryptocurrency projects with investors. Those tokens that represent ownership or other rights over another security or asset are called security tokens, which are a form of fractional ownership. More generally, exchange tokens and security tokens belong to a broad category of financial tokens related to financial transactions, such as lending, trading, crowdfunding, and gaming.