Discovering The Four Main Types of Cryptocurrencies

Introduction

Cryptocurrency is one of today's most popular subjects in finance and technology. The number of individuals investing in cryptocurrencies has increased significantly in recent years, but many individuals are still unaware that there are several types of cryptocurrencies possessing different characteristics. Cryptocurrency plays a vital role in the blockchain ecosystem as they are used to facilitate transactions and interactions on the blockchain, providing a secure, decentralised, and transparent way to exchange value without the need for intermediaries. Today we will learn the four main types of cryptocurrencies, so let’s dive in!

What is a Cryptocurrency?

A cryptocurrency is a digital asset designed to work as a medium of exchange. It uses cryptography to secure and verify transactions, as well as to control the creation of additional units of the currency. Most cryptocurrencies are decentralised, meaning they are not issued or regulated by any central authority such as a government or bank. This allows users to remain anonymous while they transact with one another.

The most popular and widely used cryptocurrency is Bitcoin, created in 2009. Since then, hundreds of other cryptocurrencies have been created, each with its own unique features and use cases.

Types of Cryptocurrencies

Cryptocurrencies can be divided into four distinct categories: native tokens, non-native fungible tokens, semi-fungible tokens, and non-fungible tokens. Each type of cryptocurrency has its own unique features and use cases.

Native Tokens

Native tokens are digital assets that are created natively on a blockchain network. They are specific to each blockchain and are used to power the network, encourage users, and enable transactions. Native tokens are also known as cryptocurrencies, cryptocurrency assets, or blockchain tokens.

Ethereum and Solana are the two most well-known blockchain networks that use native tokens. Ether (ETH) is the native cryptocurrency of Ethereum, while Sol (SOL) is the native token of Solana (SOL). Both coins have distinct use cases and attributes, yet they are also critical to the operation of their respective blockchains.

Native tokens are used for a variety of purposes within their respective blockchain ecosystems. Here are some common use cases:

1. Transaction Fees: On the blockchain network, native tokens are utilised to pay transaction costs. Users pay a tiny fee in the native currency when they transmit transactions, which is subsequently dispersed to the network's validators or miners.
2. Governance: Native currencies are utilised to assist blockchain network governance. Holders of the native token have the ability to vote on proposals to enhance the network, modify protocol rules, or distribute funding to specific projects.
3. Incentives: Native tokens are utilised to entice users to join the network. Validators on the Solana network, for example, are paid with Sol tokens for confirming transactions and ensuring the network's security.
4. Staking: Inside the network, native tokens can be staked to receive incentives or voting rights. Staking entails storing a specific quantity of native tokens in a smart contract, which aids in network security and transaction validation.

Fungible Tokens

Unlike native tokens, non-native fungible tokens are digital assets that are created using a smart contract and follow a particular token standard set by the community. It can be used to represent a wide range of different assets or values, such as utility tokens, security tokens, and stablecoins. One key difference is that non-native fungible tokens cannot be used for network transaction fees.

For example, USDC is a non-native fungible token following the ERC20 standard, which means it was created on the Ethereum blockchain. USDC is backed by US dollars, held in reserve by a regulated financial institution. This makes USDC a stablecoin, meaning its value is pegged to a stable asset, in this case, the US dollar.

Non-native fungible tokens are used for various purposes within the blockchain ecosystem. Here are some common use cases:

1. Trading: Non-native fungible tokens are utilised for cryptocurrency trading and exchange on various blockchain networks. For example, USDC may be traded on decentralised exchanges (DEXs) such as Uniswap, Sushiswap, or Curve.
2. Payments: Payments and remittances are made using non-native fungible tokens. USDC may be transmitted promptly and cheaply to anybody in the globe.
3. Staking: To gain incentives, non-native fungible currencies can be staked on some blockchain networks. To generate interest, USDC may be staked on the Ethereum network, for example.
4. Collateral: In the blockchain ecosystem, non-native fungible tokens can be used as collateral for loans or other financial instruments.

Non Fungible Tokens

Tokens that are non-fungible are digital assets that represent a single object or piece of content. In contrast to fungible tokens such as USDC, each NFT is unique and cannot be duplicated or replaced. When NFTs are used to symbolise objects such as one-of-a-kind art creations, limited edition clothing, or exclusive access to material, their uniqueness is what gives them their worth.

NFTs are often constructed utilising blockchain technology, which allows for the safe and transparent tracking of ownership and validity. Each NFT is assigned a unique identifier, which can be verified on the blockchain to ensure that it is an original and authentic item.

Non-fungible tokens have a variety of use cases within the blockchain ecosystem. Here are some common use cases:

1. Digital Art: NFTs are frequently used to represent digital art like photographs, movies, or animations. Each NFT symbolises a one-of-a-kind work of art that may be sold or exchanged on blockchain markets.
2. Collectibles: NFTs can also represent collectibles like sports memorabilia, trading cards, or rare goods. Each NFT symbolises a distinct object that may be purchased, sold, or exchanged on blockchain exchanges.
3. Gaming: In gaming, NFTs are used to represent in-game things such as guns, armour, or virtual real estate. Each object might have its own own set of characteristics, such as rarity or power, which makes it collectable.

Semi Fungible Tokens

Semi-fungible tokens (SFTs) are digital assets that possess some of the characteristics of both fungible and non-fungible tokens. SFTs, like non-fungible tokens, are distinct and have certain characteristics that set them apart. SFTs, unlike non-fungible tokens, may be broken into smaller units and exchanged for other tokens of the same type.

Semi-fungible tokens are widely used to represent a fraction of an asset's ownership or to monitor unique but interchangeable things such as concert tickets, gaming goods, or sports trading cards.

The ERC-1155 token standard on the Ethereum blockchain is an example of a semi-fungible token. This standard enables the production of semi-fungible tokens, which can represent many units of an asset, each with its own set of qualities or features.

Semi-fungible tokens are utilised in the blockchain ecosystem for a number of applications. Following are some examples of common applications:

1. Fractional Ownership: Semi-fungible tokens represent fractional ownership of real estate, artwork, or collectibles. This allows for more efficient and accessible ownership of assets previously reserved for high-net-worth individuals or institutions.
2. Gaming: Semi-fungible tokens are used in gaming to symbolise one-of-a-kind items that can be swapped or sold. These things may be replaced by other items of the same category, resulting in a more dynamic and varied gameplay experience.
3. Supply Chain Management: Semi-fungible tokens may be used to monitor unique products such as medications, luxury goods, or raw materials in supply chain management.

Conclusion

In conclusion, the world of blockchain technology has given rise to a variety of token types that serve different purposes within the ecosystem. Native tokens such as Ethereum and Solana are used to power their respective networks, while non-native fungible tokens like USDC are used as a means of exchange or store of value. Non-fungible tokens represent unique assets such as digital art and collectibles, while semi-fungible tokens have characteristics of both fungible and non-fungible tokens. Understanding the differences between these token types is essential for individuals and organizations looking to participate in the blockchain ecosystem, as it enables them to leverage the benefits of each type of token to achieve their specific goals. If you'd like to learn more about blockchain, do consider signing up for Metacamp's blockchain course!