‘Cryptocurrencies’ can be confusing to learn whether you’re an enthusiast or an investor.
The term ‘Cryptocurrency’ is used for a broad range of blockchain related technologies and concepts. Each type of ‘cryptocurrency’ has a different, but not mutually exclusive, category based on usage, utility, and, in some cases, the sector where it will be used.
The different types of online currencies
Any currency that has a non-physical representation and resides on a set of computer systems (software, network and database) is called digital currency. These currencies have existed for approximately two decades with the core purpose of enabling online purchases.
Unregulated digital currency used by a particular online community, such as a mobile game where users buy a proprietary ‘coin’ to make in-app purchases, is called virtual currency.
If a virtual currency is used as a formal medium of exchange, using cryptography to secure the transactions and verify asset transfer, then it’s called cryptocurrency. Bitcoin is the most famous example of a cryptocurrency, and it regulated by the base code it was built upon that controls creation of additional units to ensure scarcity.
Categorizing as either Coin or Token
On a high level, all digital assets can be categorized as either a ‘coin’ or a ‘token’.
If the cryptocurrency can operate independently, has its own blockchain network, unique rules, and governance structure, it is classified as a ‘coin’. The coin is the incentive mechanism used to reward all the participants in the system. Bitcoin, for example, rewards one miner with 12.5 newly created coins per 10 mins (as of Oct 2017) and Litecoin rewards 25 coins per 2.5 mins.
If the cryptocurrency depends on the platform or blockchain network of another cryptocurrency to operate then it is called as a ‘token’. Each transaction of a token is also a transaction in the parent platform, but the parent platform has its own coin. OmiseGo, TenX, BAT are examples of tokens operating on Ethereum network, but Ether is the official coin on Ethereum’s network.
Categorizing all non-bitcoin cryptocurrencies
An altcoin is a cryptocurrency other than Bitcoin, the first cryptocurrency, that has its own independent network and its own set of rules for participants. If a cryptocurrency is forked from Bitcoin then the new cryptocurrency is also an altcoin, for example Bitcoin Cash. ZCash, however, is an altcoin that is completely independent of Bitcoin.
Meta-coins or Colored coins, on the other hand, are coins that leverage an existing coin’s infrastructure, enabling them to further enhance features without modifying the parent’s source code. Zerocoin, for example, was developed to add privacy features to Bitcoin. Since these coins are also used to create custom tokens on top of colored coins and hence another name is 2nd layer cryptocurrencies.
2nd layer cryptocurrencies face the problem of which blockchain to follow in the event of a fork. There’s potential in 2nd layer cryptocurrency UCash to exist in multiple blockchains, remaining blockchain agnostic and inclusive. This would be a cryptocurrency first and mean that the end-user would not be impacted in the event of a hard-fork of the parent blockchain.
Cryptocurrency categorization as per mineability
An important participant in most cryptocurrencies is the role of a miner. Miners are on the supply side in the market, and are therefore putting downward pressure on the price due to inflation. Not every cryptocurrency is “mineable,” though Bytecoin, Siacoin, and Dogecoin are popular examples of mineable cryptocurrencies.
Very few cryptocurrencies are pre-mined, where the entire supply is generated with the first block of the blockchain. In these instances – such as cryptocurrency Ripple pre-mining 100 billion ripples – all the coins are owned by the foundation who built the cryptocurrency.
Most of the tokens and meta-coins are non-mineable cryptocurrency. While miners will mine the coins of the parent network, they cannot mine for tokens and meta-coins. These tokens become stores of value because they have a fixed supply, such as Counterparty, a non-mineable token on top of Bitcoin.
Categorizing cryptocurrencies as per usage -amp; utility
Fund transfers, online and international payments, is the biggest and most obvious use case of cryptocurrencies due to their inherent security and ‘trustless’ state.
In contrast, the primary use-case of some cryptocurrencies is partial to full anonymity, zero traceability, and privacy of the transactions.
Given data breaches in traditional banking and the necessity of transaction auditability, the anonymity combined with traceability and privacy makes cryptocurrency an attractive option for traditional banking.
All forms of cryptocurrency, though, require a platform to operate on.
Ethereum, WAVES, Tezos (yet to be launched) and to an extent even Bitcoin are Blockchain platforms which give the ability to deploy blockchain-based applications (DApps).
These applications can be applicable to any industry and sector. These platforms also enable the creation of tokens on top of them and operate as public blockchains networks, using a coin as an intrinsic incentive mechanism.
Cryptocurrencies and DApps have created the potential to ‘digitize’ or ‘tokenize’ any physical asset. One of the more popular use case is cryptocurrencies backed by physical assets like an escrowed USD account where, for instance, 1 token always equals $1 USD.
Some niche cryptocurrencies, like pepecash or dogecoin, were made to mock a subculture. Now, however, they have become serious businesses with millions of dollars in transactions taking place on their network.
Given that cryptocurrency can digitize an asset, regulators are debating whether a particular token is a utility token or a security since the definition will bring that particular token under existing security laws.
Broadly speaking, utility tokens can be purchased to get access to a particular set of services or the entire product. These tokens don’t come with any equity in the corporation or voting power, and the process is much like paying to access paywalled content on a website. CIVIC token is one of the more popular utility tokens.
Cryptocurrency in a new era
Now that the cryptocurrencies are gaining mainstream attention, even traditional institutional investors are investing in cryptocurrency market. Similar to traditional investments, the tokens are categorized as per the sector or vertical in which they will be used.
As blockchain continues to grow in use cases and complexity, knowing the base definitions of different cryptocurrencies, coins, tokens, and other digital asset classes will help when applying them to a real-world application or investment decision.
If blockchain purists are to be believed then this is the start of new era of internet technologies and blockchain disruption can already be seen in every industry.