If you are exploring the world of blockchain and cryptocurrencies, then the various types of cryptocurrency might have attracted your attention. We talk about the different types of cryptocurrencies and Digital Assets in this article. These are as follows:
Cryptocurrencies witness price volatility, which makes them inconvenient to many users. Stablecoins are cryptocurrencies that intent to maintain price stability. Different types of stablecoins exist, which include fiat-based stablecoins. A fiat-based stablecoin is pegged to a fiat currency. Such projects devise mechanisms to keep the price of the coin stable in reference to the corresponding fiat currency. Tether (USDT) is an example of fiat-backed stablecoins. 1 USDT is backed by 1 USD.
Commodity-backed stablecoins intend to maintain the stability of price. Towards this, such projects peg their cryptographic token against a commodity. These projects create mechanisms to keep the price of the token as close to the price of the commodity. Often, such projects use a precious metal like gold for this. PAX Gold (PAXG) is an example of such stablecoins. Each PAXG is backed by one fine troy ounce (t oz) of a 400 oz London Good Delivery gold bar.
A crypto-based stablecoin intends to offer the stability of price. Such stablecoins devise mechanisms to hold their value to a pegged asset. These stablecoins don’t use a fiat currency or commodity as collateral. They use another cryptocurrency as collateral, and they normally use Ethereum or Ether (ETH) for this. MakerDAO is a crypto-backed stablecoin.
Algorithmic stablecoins maintain their price stability with the help of computer algorithms. Such stablecoins hold their value to assets like USD, gold, etc. The algorithms issue more coins when the price increases. These algorithms buy the stablecoin off the market if its price reduces. Empty Set Dollar (ESD) is an example of algorithms stablecoins.
Smart Contract Tokens
The term “smart contract token” refers to cryptographic tokens created in DApps (Decentralized Apps). Entrepreneurs and developers create DApps on Ethereum, which is a popular blockchain smart contract platform. These DApps execute smart contracts. Users of a DApp use cryptographic tokens specific to that DApp. On Ethereum, you execute a smart contract to create a cryptographic token. Other smart contracts transfer such tokens from one address to another.
Services tokens belong to the category of utility tokens. Utility tokens are cryptographic tokens created on a decentralized blockchain platform like Ethereum. Utility tokens provide access to a platform or service to users. Services tokens are utility tokens that provide access to a service available on a decentralized public blockchain.
Rebase tokens work on the concept of “elastic supply”. The supply of Bitcoin is limited. However, that’s not the case with elastic supply tokens. The issuers of this kind of token have a mechanism to automatically adjust their supply. These adjustments take place in a routine manner, and the term “rebase” refers to this adjustment.
A rebase token might have a target price. The adjustments intend to bring the price closer to this target price. Ampleforth (AMPL) is an example of an elastic-supply token.
Some cryptocurrencies focus more on privacy than others. These cryptocurrency projects use various technology solutions to hide the identity of the people that transact using them. These projects conceal the transactions too, and they make it hard to relate users to transactions. Such cryptocurrencies use technology solutions like ring signatures, stealth addresses, etc. Monero (XMR) is an example of privacy tokens.
A platform token is a type of utility token. Utility tokens provide access to users to services or products that are available on a decentralized public blockchain. Some utility tokens allow users to access a platform on a blockchain. These are called “platform tokens”. By the word “platform”, we refer to an application. These platforms are often DApps running on the Ethereum blockchain network.
Payment tokens are cryptographic tokens used for payment transactions. Like other cryptographic tokens, these are generated using cryptographic algorithms on a decentralized blockchain. Sending digital currencies from one address to another is the primary use case of payment tokens. Bitcoin can be considered as a payment token since that was its primary use case.
Medium of Exchange Tokens
“Medium of exchange tokens” are cryptographic tokens with the object of exchanging something of value. The user community of the crypto token decides what constitutes “value” to them. Users of these tokens trade them with other users. They trade these tokens inside the ecosystem of the issuing blockchain project.
Several blockchain/cryptocurrency projects create marketplaces using a blockchain network. Most of them use Ethereum for this since it’s a popular blockchain platform. Marketplace tokens are cryptographic tokens that facilitate transactions on such marketplaces. An example is WAX (WAXP).
Quite a few blockchain-cryptocurrency projects use blockchain networks to provide logistics services including transportation. Logistics tokens are cryptographic tokens used for facilitating transactions on such platforms. Most of these projects build these platforms on Ethereum. AMO Coin (AMO) is an example.
Several entrepreneurs have set up cryptocurrency-backed lending and borrowing platforms using blockchain. Users holding Bitcoin, Ethereum, Dash, or other popular cryptocurrencies can get loans on such platforms. SALT Lending is one such platform. Such platforms might not have their own cryptocurrencies.
Multiple blockchain/crypto projects operate in the IoT (Internet of Things) space. They facilitate transactions between users involving the IoT world. Users could mean consumers or companies here. IoT networks have a large number of devices, and these networks witness a large number of transactions. Blockchain networks operating in this space need to demonstrate sufficiently high performance and scalability. Quite a few blockchain projects operating in the IoT space have designed their technology solutions to cater to these requirements. An example is IOTA (MIOTA), which uses the DAG (Directed Acyclic Graph) technology.
Identity verification and identity management are important use cases for blockchain. Many blockchain/crypto projects have built digital identity verification and management systems. They use cryptographic tokens to facilitate transactions on those systems. Many of them have built their platform on Ethereum. Some have their own blockchain network, whereas, a few use NEO. SelfKey (KEY) is an example of identity tokens. This project uses the Ethereum network.
Public blockchains like Ethereum offer a high degree of decentralization. Communities of users or developers make decisions about these projects. E.g., they decide whether an enhancement proposal concerning a project will be taken up. These decentralized communities often make these decisions by voting. Governance tokens are cryptographic tokens that give voting rights to stakeholders in such communities. Maker (MKR) is an example of governance tokens.
Enterprise Solutions Tokens
Some blockchain projects involve public blockchain networks, however, they are for enterprise use cases. An example is Stellar. This open blockchain network provides enterprise solutions in the banking and financial services sector. This blockchain network connects banks and financial institutions to expedite huge financial transactions. The cryptographic token on the Stellar network is Stellar Lumen (XLM). We call such cryptographic tokens “enterprise solutions tokens”.
Derivatives are secondary investment contracts that derive their value from an underlying asset. In the traditional world of finance, these assets can be commodities, currencies, stocks, or bonds. In the crypto world, the underlying asset is a cryptocurrency, e.g., Bitcoin (BTC). Crypto derivatives don’t necessarily have their individual cryptographic tokens.
The term “DeFi” stands for “decentralized finance”. This refers to conventional financial tools, however, these tools run on a decentralized blockchain. Several entrepreneurs and developers have created DeFi tools on the Ethereum blockchain network. The cryptographic tokens used in these DeFi tools are called “DeFi tokens”. Uniswap (UNI) is an example of DeFi tokens.
Decentralized Exchange Tokens
Decentralized exchanges (DEXs) are cryptocurrency exchanges that operate without any intermediary organization that clears transactions between two crypto traders. DEXs use smart contracts instead of intermediaries. They can expedite transactions costing less than a centralized exchange. Some DEXs provide a cryptographic token to liquidity providers. Such tokens are called decentralized exchange tokens. An example is SUSHI, the crypto token of the SushiSwap DEX.
A key promise of blockchain is decentralization. Many entrepreneurs and developers have used public blockchain networks like Ethereum to create decentralized applications (DApps). These applications have their user communities. These user communities decide the future course of the corresponding blockchain/crypto projects.
You can think of these user communities as decentralized organizations since they don’t have central administrators. These organizations operate without intermediaries. Smart contracts on these platforms contain the operating rules. They operate autonomously. This is why these organizations are called “Decentralized Autonomous Organizations” (DAOs).
DAO tokens give stakeholders in these organizations the right to participate in the governance process. Maker DAO is an example of DAO tokens.
Collectibles & NFTS
NFTs (Non-Fungible Tokens) are cryptographic tokens that are unique. You can’t interchangeably use two different NFTs even if they are from the same blockchain/crypto project. That’s different from a cryptocurrency like Bitcoin or Ethereum. You can trade one Bitcoin for another. The use of NFTs lies in creating digital collectibles. Examples of NFTs are digital kittens in the CryptoKitties game that became famous. This game is a DApp that runs on the Ethereum blockchain network.
Centralized Exchange Tokens
Centralized cryptocurrency exchanges are popular in the cryptocurrency market. They enable crypto users to trade fiat currencies for cryptocurrency. Users can trade one cryptocurrency for another. Binance, FTX, Huobi are examples of such centralized exchanges. Many of these exchanges have their native utility tokens. These tokens enable users to access their platforms and services. These are called “centralized exchange tokens”. FTT, the native token of FTX is an example.
Automated Market Maker Tokens
AMMs (Automated Market Makers) are decentralized exchanges (DEXs). There are different kinds of DEXs, and an AMM depends on a mathematical formula to determine the price of an asset. The formula can vary from one AMM to another. Most DEXs are DApps running on the Ethereum blockchain, and AMMs are DApps too. DApps need their native cryptographic tokens to facilitate transactions. These tokens are called “Automated Market Maker” tokens. UniSwap is an example of an AMM.
State Channels Tokens
Some of the prominent public blockchain networks don’t scale very well. Examples are Bitcoin and Ethereum. Blockchain experts and developers pursue several solutions and ideas to improve this situation. “State channel” is one such technology solution. Developers are executing several state channel projects, and many of them are on the Ethereum blockchain network. The native cryptographic tokens of these projects are called “state channels tokens”. SpankChain is one such project with its crypto token.
Several blockchain/crypto entrepreneurs have created decentralized cloud storage platforms using blockchain. These decentralized storage platforms intend to reduce the dependency on the centralized cloud computing giants. Some of these platforms also allow users to make money by renting out their unused computer storage. The native cryptographic tokens on such decentralized storage platforms are called “storage tokens”. Filecoin (FIL) is an example.
Store of Value Tokens
A “store of value” token is any cryptographic token that users consider a “store of value”. A “store of value” is an asset. Users might save that asset. They might retrieve it later, and they might exchange it for something else. Users would like that asset to have predictability, i.e., they should be able to predict its value with reasonable accuracy. You can consider Bitcoin and Ethereum as “stores of value” since they have held their value over a long time.
Yield Farming Tokens
The term “Yield farming” refers to a set of practices and methods that generate rewards from cryptocurrency holdings. Crypto users using this set of methods essentially lock up their cryptocurrencies, and they get rewards. Several platforms allow yield farming. Many of them run on the Ethereum blockchain network. The native cryptographic tokens of such platforms are called “yield farming tokens”. The “Synthetix Network Token” (SNX) is an example.
Different kinds of cryptographic tokens exist. They differ based on the use case, technology, and several other factors. We reviewed several types of cryptocurrency and tokens here.