Drixx Academy/A Detailed Overview of the Different Types of Cryptocurrencies/

A Detailed Overview of the Different Types of Cryptocurrencies

Edwin Munyui
Head of Content
April 16, 2021

Drixx - A Detailed Overview of the Different Types of Cryptocurrencies

The global financial ecosystem is gradually integrating cryptocurrencies within its existing infrastructures - a reality that most people would have dismissed a decade ago. Today, you can make payments through crypto assets such as Bitcoin and Ether amongst other coins. Unlike traditional payment networks, it only takes a matter of minutes to transfer crypto assets from one wallet to another, regardless of the geographical positions of both parties.

The latest developments are now showing that crypto can be used beyond payments as was intended by Bitcoin’s creator, Satoshi Nakamoto. Innovations within this nascent ecosystem have sprung up to feature different types of cryptocurrencies, some of which propose a fundamental value while others are mere gambles or scams by opportunistic creators.

So what are the categories? You might have heard of cryptocurrency coins, altcoins and tokens - in most cases, these terms are used to mean the same thing. However, there is a difference between the three as we will highlight in upcoming sections.

Cryptocurrency Coins

Cryptocurrency coins are digital assets backed by a native blockchain, whose purpose is to enable payments between two or more transacting parties. Bitcoin was the first cryptocurrency coin to debut and continues to be the dominant monetary crypto asset. Some of the distinguishable features of cryptocurrency coins are similar to that of fiat money. They include being used as a means of payment and store of value. Notably, Bitcoin is yet to achieve a legal tender status as most jurisdictions have not yet accepted cryptocurrency coins as a formal means of payment.

Altcoins

So if Bitcoin is a cryptocurrency coin, what is an Altcoin? Both basically fall under the whole umbrella of crypto assets - however, altcoins are the cryptocurrencies which came after Bitcoin. The launch of BTC as a digital asset inspired more blockchain development as innovators took up the challenge of solving the shortcomings of Bitcoin’s blockchain. It was this evolution which saw the rise of Bitcoin forks such as Litecoin and other blockchain ecosystems like Ripple. Both projects also launched their native crypto assets LTC and XRP, respectively. The two were the pioneer altcoins - a number that has since grown to over 2,000.

An honorable mention in the altcoin list is Ether which resides on the Ethereum blockchain - diehards have touted this ecosystem as the ‘future of finance’. The development of Ethereum’s blockchain began in 2014 with the mainnet going live a year later. While it took a while before the crypto community understood the value of Ethereum, it is now a fundamental pillar in building decentralized crypto products and applications. In fact, this blockchain set the stage for the development of tokens as the next generation of cryptocurrencies.

Tokens

Cryptocurrency tokens are non-native blockchain assets whose fundamental value stretches beyond monetary functions such as payments. This type of crypto assets are built on other ecosystems such as the Ethereum blockchain, which hosts ERC-20 tokens amongst others. As for Ethereum-built tokens, they are mostly decentralized - however, there are other crypto tokens which operate within centralized networks. The next section breaks down the different types of tokens and their value proposition in crypto.

Security/Equity Tokens

Security tokens were the hallmark of the 2017 Initial Coin Offering (ICO) boom - crypto projects opted to crowdfund by creating tokens that investors could buy. In doing so, the investors had an opportunity to be part of the much hyped crypto projects while innovators were able to raise funds. You can think of it as investing in regular stocks, only this time you own tokens instead of shares. No wonder they came to be dubbed as ‘equity tokens’.

While some stakeholders cashed in big from security tokens, most of the investors lost a significant amount of funds after the 2017 bull-run ended. These types of tokens proved to be unsustainable with regulators such as the SEC classifying them as unregulated securities. Even popular names like Telegram took a hit after it was sued by the SEC for issuing an unregistered security. The suit claimed that Telegram had raised around $2.9 billion worth of capital by selling gram tokens to a total of 171 initial buyers across the globe. The firm was fined $18.5 million and agreed to return $1.2 billion to investors, after which they would abandon the Telegram Open Network (TON) blockchain operations.

Nonetheless, a good number of ICOs that had raised money went dark, leaving investors with tokens that would never increase in value, or even become completely worthless immediately after the listing.

Utility Tokens

Utility tokens are cryptocurrencies that have a fundamental value such as powering a blockchain ecosystem. Notably, some ICOs had also branded themselves as utility tokens to avoid regulation - most failed to keep up the show as roadmap deadlines caught up. That said, you can compare utility tokens to casino chips whose role is to facilitate the games being played. A good example of a utility token is Ether which powers activities within the Ethereum blockchain. Though considered an altcoin, Ether plays the role of a utility token by enabling the payment of gas fees (transaction fee) on Ethereum.

Exchange tokens such as the Binance ‘BNB’ coin can also be classified as utility tokens. This particular token is used to participate in project launches and enable cheaper transactions on Binance exchange - users who set it as the default token for payment transactions enjoy significant cuts in fees. Most exchanges today have their own native tokens which play a similar role to the BNB coin. Interestingly, this type of utility tokens are gaining massive traction as speculative assets and are enriched with additional utility by savvy exchange owners - an indication of the current growth in crypto.

Social Tokens

Just as the name suggests, this type of token is more of a social cryptocurrency that enables interaction within a community or access to an individual. Community social tokens are built around a group of people and can be used for functions such as paying for perks or membership within a specific community. The bigger the community gets, the more valuable a social token becomes - they basically act as incentives for participation.

As for individual social tokens, they represent an individual - a community can then subscribe to some of the features offered within such a token. They include incentives such as voting on life decisions or meeting one-on-one with the individual, depending on the number of tokens held.

A good example of an individual social token is $ALEX which was created by a cryptopreneur known as Alex Masmej - he wanted to move to Francisco to start a career in crypto development. He built the $ALEX individual social token as a means of crowdfunding $20,000 for his expenses. In return, he offered all $ALEX buyers a 15% share of his annual income. Assuming his salary after college is $100,000, around $15,000 will be distributed amongst $ALEX token holders. Other incentives include the ability to govern the token, contributing to some of Alex’s life decisions and one-on-one meetings.

Derivative Tokens

Derivative tokens get their value from underlying assets such fiat currencies, real estate, agricultural products or precious commodities like gold. The crypto ecosystem has quite a number of derivative tokens with the most popular ones being stablecoins - they derive their value from the U.S dollar (pegged to the dollar). Ideally, stablecoins like the USDT should be backed on a 1:1 basis against the USD, although this currently is not the case as per the latest audit.

On the other hand, real-asset backed tokens are integrated into the crypto ecosystem through tokenization. This simply means recording the metadata of a particular commodity on blockchain to facilitate on-chain trading as opposed to relying on traditional markets alone. A tokenized bar of gold can be exchanged by two users operating within a decentralized market as long as the change of record is made on the blockchain network. Similarly, other types of commodities and property can be tokenized and traded as derivative tokens.

DeFi Era

Even if you are a newbie in crypto, you probably have come across the term Decentralized Finance (DeFi) - this concept gained traction in summer 2020 following the launch of liquidity mining. It also led to the emergence of Ethereum-built tokens such as governance tokens which are highlighted in the next section:

Governance Tokens

Governance tokens are fundamentally built to facilitate the decentralization of DeFi projects. They act as incentives which give holders voting rights over a particular protocol’s development - some of the issues that voters can contribute to include the protocol design, token distribution, adding new features and reward payout mechanisms.

The first DeFi governance token to launch was COMP, which facilitates the governance of its decentralized lending and borrowing platform Compound. Following its premier, other DeFi projects including decentralized exchanges such as Uniswap also launched their own governance tokens - it is now almost standard for any DeFi project to launch a governance token.

Non-Fungible Tokens (NFTs)

Non-fungible tokens (NFTs) are currently a hot topic amongst the crypto community and creatives who have seen value in these upcoming tokens. They are simply cryptographic tokens that represent tokenized assets and digital collectibles on a blockchain platform. NFTs stand out because of their distinguishable value which means that each token is different from another - unlike fungible tokens and cryptocurrencies where for example, any 1 BTC is equivalent to another unit of BTC from the perspective of it’s value and usability.

This type of token has proven to be a building block for storing digital art,collectibles, identity and more that are mostly used in gaming but we’ll most likely have additional use cases further down the road. You can read more about NFTs and the emerging marketplaces on the Drixx Academy blog.

Final Thoughts

Cryptocurrency development is still in its early stages and may take a while before being fully integrated with the larger financial ecosystem. This being the case, it is likely that more token categories will pop up to suit various market needs. There is also a possibility that some of the existing tokens will eventually disappear as the dominant ones gain more traction. Nonetheless, the crypto ecosystem is poised for greater growth at the current rate of innovation.

Disclaimer: The information presented here is for educational purposes only and should not be construed as investment advice. Cryptocurrency trading involves high risk. Drixx will always strive to do it’s best in educating customers and providing high quality products but will not be held responsible for their trading and investment decisions, losses or profits.