There are currently over 20,000 cryptocurrencies in the crypto market! Most of them have a specific use or aim to solve a problem through the use of blockchain technology. This article will look at the use case of six popular types of digital currencies and explain what the main differences are.
Payment coins
Payment coins are used as a form of digital money to pay for goods and services, as well as to transfer value from one party to another. They act as a 100% digital alternative to fiat currency, such as the U.S. dollar. You can use payment coins to buy food, cars, massages, and plane tickets. This means cryptocurrencies can be a store of value and facilitate payments as they have legitimate market value.
Payment coins still have a long way to go before they are as fast or reliable as established payment networks such as Visa, but they are improving every day.
Did You Know?
Bitcoin can only natively process up to seven transactions per second, which pales in comparison to the Visa network’s 1,700. The Lightning Network aims to solve this by performing certain transactions outside of the main Bitcoin blockchain and broadcasting only key information. This vastly increases the speed of transactions while significantly lowering transaction costs.
Examples of payment coins
Bitcoin, Litecoin, and Digibyte are some good examples of payment coins. Bitcoin is the most well-known, however, due to its slow transaction times and high transaction costs, it is not widely used for everyday transactions. Litecoin and Digibyte are less well-known than Bitcoin, however, can process transactions at much higher speeds and with tiny transaction costs, making them ideal for everyday use.
Stablecoins
Stablecoins are pegged to real-world assets and fiat currencies, such as the U.S. dollar, the Euro, or the Yen, which don’t change much in value. This is in contrast to other digital currencies that can surge in value or crash without notice. Stablecoins provide a safe place to keep your money without being subjected to price volatility. They also provide an option of value transfer for individuals and financial institutions in regions of economic turmoil and unstable fiat currencies.
Stablecoins have several advantages over government-issued currencies, such as the U.S dollar or the Euro. Stablecoin transfers are cheaper, lightning-fast, and can be used anywhere in the world, independent of banks.
Examples of stablecoins
Tether and USD coin (USDC) are two of the most well-known stablecoins and account for a large portion of the trading volume in crypto markets worldwide. USDC is used by many institutions in the United States. USDT, on the other hand, is issued by Hong Kong-based company, Tether, and is favoured by traders and investors worldwide because of the superior amount of trading pairs on different exchanges.
Smart contract platforms
Smart contract platforms provide a robust and secure framework for carrying out smart contracts. We use regular contracts every day. For instance, a work contract guarantees that you are paid a certain amount of money to perform a specific set of duties. If you buy a house, you will sign a contract that guarantees you ownership of the house and land in a certain condition in exchange for an agreed-upon sum of money.
Smart contracts function in a similar manner but they are more sophisticated. Unlike regular contracts, they do not rely on a centralized third party to verify the contract. Instead, smart contracts use decentralized and incorruptible computer software to implement the instructions contained within the contract.
Smart contracts can be used in a variety of ways, but a simple example would be a bet between two parties. Two friends, Mike and Sarah, are betting on which football team will win the World Cup. Mike thinks that Spain will win; Sarah is backing Germany. Both Mike and Sarah pay an amount of money, which is stored securely on the blockchain until the conditions of the contract are settled. If Spain wins the World Cup, Mike receives all of the money; if Germany wins, Sarah receives it. If neither team wins the World Cup, both Mike and Sarah will get their money back.
Figure 1 – How smart contracts work
Examples of smart contract platforms
Ethereum and Solana are great examples of smart contract platforms. Ethereum is a decentralized network that is secured by thousands of nodes (computers running the Ethereum blockchain network) around the world that cross-reference each other’s version of the blockchain to verify whether transactions or smart contracts are legitimate. Ether (ETH) is the currency that powers the Ethereum ecosystem of decentralized applications (dApps). It is rewarded to miners for securing the Ethereum network. Each time a transaction or smart contract is made, it is paid for in Ether. Solana was released in 2020 and is considered by some to be an “Ethereum-killer” because of its much faster transaction speeds and lower transaction costs.
DeFi coins
Decentralized finance (DeFi) provides financial services that are built upon secure and distributed networks. DeFi networks are not controlled by a single, central source, which means that they are faster, more sophisticated, and allow the user much greater control over their money.
Examples of DeFi coins
UniSwap and Chainlink are two of the most prominent services within the DeFi space. UniSwap is a popular decentralized cryptocurrency exchange that allows users to purchase crypto from other people, without having to trust a third party or store their coins on an exchange. Chainlink is an exciting, decentralized platform that helps make smart contracts even more powerful, by accessing off-chain (external to the blockchain) information and verifying it against data on the blockchain.
Important to Remember
It’s generally a good idea to diversify the crypto assets you keep your investments in and where you store them, to protect your investments in case of fraud or hacks.
Privacy coins
Privacy coins are crypto coins designed to maximise the privacy and anonymity of the user. There is a common misconception that coins like Bitcoin are anonymous. On the surface, this is true, however, because address details and transaction volume are stored on public ledgers, anyone with the right skill set can easily trace transactions back to wallets or crypto exchanges where users initially bought the coins from. Privacy coins either have private ledgers or have more complex algorithms to obscure addresses and transaction volume, thus vastly improving privacy.
Examples of privacy coins
Monero and Zcash are great examples of highly effective privacy coins. Monero is the most widely used privacy coin and is regarded by many as the gold standard because of the complex algorithms it uses to obscure addresses, balances, transaction amounts, and transaction histories. Zcash uses different, but equally powerful, technology and allows users to either make public or private transactions.
Some governments around the world have concerns about private, untraceable currencies that provide a platform for digital payments, such as Monero. Because these payment networks are private there is an argument that these digital coins can be used in exchange for illegal goods and services. Privacy coin advocates argue that cash can be used in the same way and that the government should not have access to our private data or spending habits. Privacy coins are often the target of government regulation. Many exchanges are not allowed to list Monero, and other privacy coins, altogether.
NFT
Non-fungible tokens (NFTs) are unique digital collectibles, such as original pieces of art, books, and games. NFTs are deemed to be valuable because they prove ownership of a unique or scarce asset that others may want. NFT platforms allow users to mint (create), buy, and sell NFTs. They can be bought on NFT marketplaces, such as Foundation and the Enjin Marketplace, and can be stored on Ethereum-based digital or hardware wallets, just like other cryptocurrencies.
Did you know?
American digital artist, Beeple, sold his NFT artwork ‘The First 5,000 Days’ for $69 million USD in March 2021. It sold through Christie’s auction house, which marked the first time a major auction house had ever sold an NFT.
Examples of NFT projects
Two crypto projects that provide the infrastructure for NFT platforms are Decentraland and Enjin. Decentraland is an immersive virtual world, also known as the Metaverse, that users can inhabit and explore. Players can create, buy, and sell unique digital assets (NFTs), such as land, houses, avatars, characters, and costumes. Enjin is a sophisticated platform that is built around gaming. The platform aims to make it easier to create, buy, and sell unique digital tokens across gaming platforms. The Enjin platform currently supports over two billion NFTs and is growing every day.
Summary
This article was written to give you a better understanding of the different types of cryptocurrencies. It has highlighted the main categories in the crypto market, however, there are plenty of others. If you would like to learn more about smart contracts, DeFi, stablecoins, or NFTs, there are plenty of resources on each topic located on Swyftx Learn.
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