Cryptocurrencies have gained a lot of attention in the past decade. With so many different conversations regarding thousands of projects out there in the industry, sometimes it’s hard to tell all the different types of cryptocurrency. So how do we choose? And what makes a crypto coin or token valuable?
The first thing that you need to know about cryptocurrencies is they’re basically digital currencies stored on blockchains. They have no physical bills (like dollars) and aren’t backed by any real-life commodities such as oil or precious metals.
Instead, people use them because they believe the blockchain technology behind them will make them more secure than traditional fiat currencies. The idea itself isn’t new – people had been talking about creating decentralized forms of money since before Bitcoin was released.
Below I will explain different types of cryptocurrency and how they work. Before we continue, I assume you already have some basic knowledge about crypto and blockchain.
If you don’t know much about them, you can learn more from our another article right here: https://university.despace.io/cryptocurrency-for-dummies-and-beginners
You can skip the above article link if you already have a basic understanding of crypto.
The crypto industry keeps evolving at a rapid pace. Prior to the Ethereum era, most cryptocurrencies were just copies of Bitcoin, but they were designed to be faster with cheaper transaction fees. However, things started to change since Ethereum became mainstream in 2017.
Nowadays, you see plenty of different types of cryptocurrency. Here is the list of them in 2022:
The first category is digital gold. Popularized by Bitcoin itself, the use case of this type of cryptocurrency is to be a long-term investment tool. Think of it like physical metal, where the valuation will grow over time simply because the supply growth gets lessened.
In the crypto space, the perfect example of digital gold is Bitcoin. The new Bitcoin supply gets harder to mine due to its halving mechanism every approximately four years. The idea here is that as long as the demand remains consistent, the lower amount of new supply will make Bitcoin more attractive as a store of value in the long term.
A lot of crypto fanatics claim that Bitcoin will become the perfect safe haven since fiat currencies are consistently getting devalued over time.
One of the most important types of cryptocurrency is smart contract token. They are basically the native token of blockchains that can be utilized to deploy smart contracts or decentralized applications (dapps).
Ethereum is the most famous blockchain where you can deploy smart contracts. Actually, there are two famous and different Ethereum blockchains. One is called Ethereum and the other one is called Ethereum Classic. However, most people deploy their smart contracts on Ethereum (not Ethereum Classic). If you want to learn their differences, check our guide on ethereum vs ethereum classic.
So, on Ethereum chain, each smart contract deployment and interaction will require Ether (ETH) to be used as fees. When there are more dapps being developed on Ethereum, there will be more transactions of Ether as well since all smart contract interactions with these dapps will have to use Ether as the fee.
Besides ETH, some of the most popular smart contract tokens include Solana (SOL), Avalanche (AVAX), and Cardano (ADA).
The third category is stablecoin. Basically, stablecoins are cryptocurrencies with a 1-to-1 valuation to fiat currencies. They are designed to have stable prices no matter what happens to the crypto market fluctuation.
The most popular stablecoins are Tether (USDT), USD Coin (USDC), and BUSD (Binance USD). They are able to hold their value 1-to-1 to the US Dollar because they have cash reserves and/or short-term treasuries to back up each token that they issue on blockchains.
So, whenever a client wants to redeem his stablecoins for actual dollars, they would use those cash reserves to pay the client. This is how these stablecoins can maintain their peg to the dollar.
There are also other types of stablecoin where they don’t have actual cash reserves or treasuries to back up the coin valuation. The most popular one is called algorithmic stablecoin, and the most popular example of this is DAI. Algo stablecoins usually use other crypto as collaterals. In the case of DAI, users can use ETH as collateral to get the equivalent dollar amount in DAI.
Another popular category in the industry is DeFi token. These tokens are basically the native cryptocurrency of decentralized finance applications (DeFi). For example, Uniswap is the most popular decentralized exchange on Ethereum blockchain and its native token, UNI, can be considered a DeFi token.
There are various kinds of DeFi apps besides exchanges, including liquidity protocols where you can lend or borrow, such as Aave. The native crypto of the Aave protocol is called AAVE, where you can vote for governance proposals.
Examples of popular DeFi tokens: Uniswap (UNI), Pancakeswap (CAKE), Trader Joe (JOE), Aave (AAVE).
Blockchain gaming took off in 2021 when it finally became mainstream. It’s predicted that blockchain games will continue to evolve despite the hard time they got in 2022’s bear market.
Usually, gaming and metaverse tokens are packaged into a dual token mechanism, where the main or primary token is utilized as governance, while the second token is used as in-game currency to interact with the game assets or NFTs.
An example of this => in Axie Infinity game, Axie Infinity Shard (AXS) is the main governance token and Smooth Love Potion (SLP) is the secondary token.
Another example => in Star Atlas game, Star Atlas DAO (POLIS) is the main governance token and Star Atlas (ATLAS) is the secondary token.
Speaking about governance, the idea is that cryptocurrency projects are supposed to be decentralized. That’s why many projects believe they need a voting mechanism where the token holders will be able to vote for governance proposals via a decentralized organization (DAO) mechanism.
Many governance tokens have multiple use cases, and they can intersect with other categories. In DeFi protocols, many of their native cryptocurrencies are also governance tokens. In blockchain games, the primary tokens are usually governance tokens as well.
Examples of popular governance tokens: Compound (COMP), MakerDAO (MKR), ApeCoin DAO (APE).
Centralized exchanges (CEX-es) play a huge role in cryptocurrency adoption, especially because you always need a CEX for fiat on/off ramp. Many of the most successful centralized exchanges have their own tokens, such as Binance with BNB, Huobi with Huobi Token, or FTX with FTT.
The use cases of these centralized exchange tokens vary from one platform to another, but usually, they are used for trading fee discounts (you pay more trading fees when you don’t hold these tokens while you make the trades).
In the past few years, these tokens have also expanded their use cases. BNB, for example, is not just a token to get trading fee discounts on Binance platform. It’s also used to pay gas fees on Binance’s own blockchain (BSC) as well as to participate on Binance Launchpad.
Launchpad tokens are tokens that you stake to participate in launchpad platforms. You stake them because you want to buy tokens from new projects that are exclusively sold on those launchpads.
For example, if you want to buy new tokens from project XYZ, and this project XYZ only sells their tokens on launchpad ABC, you have to stake ABC tokens to the launchpad, before you can buy XYZ tokens.
One of the most common examples of this is BNB on Binance Launchpad, or Dao Maker (DAO) on the Dao Maker platform.
Launchpad tokens became very popular in 2021 at the peak of the bull market because everybody wanted to make money from new token sales.
However, the activity has been going down a lot in 2022’s bear market, and many analysts believe that launchpad tokens will need to constantly change their participation process if they want to survive long-term competition in the industry.
Rebase token is a different type of crypto where the total supply is constantly modified algorithmically in order to maintain the price to a certain point. The basic idea is similar to algorithmic stablecoin, where the price always has to be at a certain price, but rebase tokens automatically mint or burn their supply depending on the current price.
So, while the price is not volatile, a rebase token’s supply can be quite volatile since the algorithm will constantly adjust its supply. The algorithm is usually hard-coded pre-deployment.
A very good example of rebase token is Ampleforth (AMPL), where the supply is always modified every day to keep the price as close as possible to $1.
Synthetic tokens are basically tokenized crypto that follows the price of their underlying assets without the need for physical exposure to those assets in the first place.
A good example of this is wBTC (wrapped Bitcoin) which is tokenized Bitcoin on the Ethereum blockchain. The price of wBTC is 1-to-1 to the real Bitcoin, but it lives on the Ethereum blockchain. They are able to do this because there are real Bitcoins being held as collaterals.
Synthetic assets are possible (and popular) thanks to the possibilities made by smart contract mechanisms. They are programmable assets by default, and the reason why they exist is to give you exposure to DeFi interests while maintaining the price of the underlying asset.
For example, you won’t be able to use real Bitcoin to earn interests on Ethereum’s DeFi lending app. But with synthetic tokens that are pegged to Bitcoin, you can.
If you feel confused, you are not alone. In fact, the list above does not cover all the less-popular categories. I won’t mention those that are not mainstream enough. The above list has pretty much covered all the most popular categories for you to start with.
And yes, there are so many different types of cryptocurrency because of how open the industry is. The blockchain technology itself is pretty much open source, many developers just copy-paste from one another, and add new functionalities to keep up with the latest trends.
There are over 10,000 crypto out there, and it will only keep increasing. As cryptocurrency keeps receiving new adoption every day, you will see more and more types being invented every day.