You’ve probably heard of Bitcoin and Ethereum. You might have also come across terms such as NFTs (non-fungible tokens) and stablecoins online. But what are these?
They’re all different types of crypto. What initially started as a medium of exchange in Bitcoin has now become an entire world on its own. Crypto is now pushing the evolution of the internet itself in Web3 and the metaverse.
Let’s look at how these differ from each other and what their real-life applications are.
While Bitcoin is the most popular crypto asset, it doesn’t tell the entire story. Crypto has branched into a vast ecosystem providing various products and services.
Cryptocurrencies like Bitcoin have paved the way for these digital assets, and you can now find an array of uses and features from various crypto instruments across different platforms.
In short, no. Cryptocurrencies like Bitcoin act as a medium of exchange as an alternative to traditional fiat currencies, but it doesn’t stop there. Different types of cryptocurrency serve other use cases depending on the market’s demand.
These assets aren’t permanent; old crypto assets can be removed or deleted, and users can create new ones depending on supply and demand. As a result, the crypto world is ever-expanding and evolving.
To understand how this all works, it helps to know more about the different types of crypto and examine their features and purposes.
Cryptos can be divided into different categories according to their features and applications:
The most common type of crypto, cryptocurrencies are decentralized digital assets, people can use them as a medium of exchange without the intervention of traditional financial institutions like banks or governments.
Cryptocurrencies exist on blockchains, which are digital ledgers that store cryptocurrency transactions across a worldwide network of computers. Each computer is a node with copies of the blockchain’s transactions to verify and validate. This is the system used in place of a regulatory body where every user governs the blockchain in a framework, making it almost impossible to duplicate or change.
Bitcoin (BTC) is currently the world’s most popular cryptocurrency and the largest one by market capitalization. However, thousands of cryptocurrencies are in global circulation, with new ones released regularly. Some examples of cryptocurrencies are Ripple (XRP) and Litecoin (LTC).
Stablecoins are also cryptocurrencies. However, they're digital currencies whose value is "pegged" to another asset, usually the U.S. dollar. A stablecoin aims to maintain a 1:1 ratio with USD, meaning each stablecoin equals $1. Stablecoins, as the name implies, aren’t meant to fluctuate in value.
Most well-known cryptocurrencies, including Bitcoin, are unstable assets due to their constant volatility. One bitcoin might have a different value today than next week. As a result, investors can’t rely on them to achieve long-term investments. For example, one bitcoin today may be valuable enough to purchase a house. However, it’s so volatile that its value might fall to a level where the same bitcoin won’t be enough to buy a pack of gum a day later, and vice versa. Volatile cryptocurrencies are likely an optimal exchange method at this point in time.
Stablecoins aim to combat this volatility by providing an alternative that’s more suited to everyday use. The most common stablecoins available are Tether (USDT), USD Coin (USDC), DAI, and Binance USD (BUSD).
It should be stated that there’s a risk that some may depeg from the asset, which they attempt to mirror. This has happened several times before, most notably with the UST cryptocurrency in 2022.
Smart contract platforms are blockchains designed to create and run unique digital agreements. They contain code pieces that make them self-executable, which means they automatically activate when their predetermined conditions are met.
Smart contracts are “programmable assets,” meaning that a smart contract’s creator can tweak the contract according to its specific use case. Some smart contracts exist as cryptocurrencies, while others have more detailed features. Ethereum (ETH), Solana (SOL), and Binance (BNB) are the most common examples of smart contract-enabled blockchains.
Different blockchains use various scaling solutions to expand their products and services. As the blockchains become more popular, more individuals want to use them, leading them to be congested and expensive. This is why scaling solutions must exist. The most common are rollups, sidechains, and plasma chains.
A rollup is a scaling approach used by platforms like Ethereum. It entails combining a set of transactions into one. The final rollup is transmitted to the Ethereum blockchain as a single transaction. Arbitrum and Optimism are examples.
Sidechains, meanwhile, are separate, "secondary" blockchains that link to a primary blockchain. These auxiliary blockchains connect using a two-way peg and have their own consensus mechanisms. Polygon is a common example.
Finally, plasma chains are blockchains connected to a primary or "parent" blockchain. They’re essentially scaled-down versions of the parent blockchain and are known as "child" chains.
Plasma chains are linked to the parent blockchain, while sidechains are alternate blockchains of the main network. All scaling solutions exist to speed up transactions and increase interoperability among blockchains.
DeFi (decentralized finance) is a new financial framework that offers financial services without traditional intermediaries like banks or exchanges. It intends to provide existing services like loans, interest rates, and remittances using smart contracts and blockchain technology. It also expedites transactions, enables borderless payments, and lowers transaction fees.
Think of DeFi as a bank within a blockchain, where the people gain money from performing actions that were historically restricted to insiders like banks and market makers. You can access DeFi services through platforms like crypto exchanges, which are similar to stock exchanges but for crypto. Many of the DeFi protocols have their own tokens, which can be utilized for utility within their protocol. Some of the most common platforms for DeFi are UNI, CURVE, RUNE, and NEXO.
An NFT (non-fungible token) is a type of crypto that represents real-world items like art, music, real estate, and collectibles in digital form. Because NFTs are tokens, they don’t run on their own blockchains. Instead, they’re built on other blockchains and use smart contracts, which ensure honest agreements between two parties. In contrast, blockchain technology ensures NFT transactions are preserved and protected from being modified or deleted.
Some popular NFT collections include Bored Ape Yacht Club (BAYC), CryptoPunks, and Invisible Friends.
The centralization of mainstream games prevents in-game assets like items, costumes, avatars, and experience (XP) from being utilized in other games. Crypto gaming allows users to use these assets across different crypto games. Gamers can also earn cryptocurrency through gaming. Players can engage in "play-to-earn" games where they buy in-game characters, increase their attributes, and sell them for more money.
Crypto gaming offers an entirely new dimension to the crypto market. It introduces monetary benefits while gaming and enhances interoperability across games. The Sandbox, Axie Infinity, and Decentraland are some popular titles in the crypto gaming industry.
Blockchains need proper infrastructure to operate, such as nodes, software, hardware, storage, and security. In short, infrastructure is an amalgamation of code pieces that make up any blockchain.
While blockchains may have a common blueprint in terms of these components, they differ in infrastructure as each blockchain network serves a particular use case and offers different features and functionalities. The most common types of crypto infrastructure include:
Crypto exchanges are online platforms where users can buy and sell cryptocurrency. They’re marketplaces where users can learn about cryptocurrency market prices and participate in crypto transactions. Users must sign up to a crypto exchange to trade cryptocurrency. Although different platforms offer distinct services, some allow users to convert cryptocurrency into traditional fiat currency and vice versa.
In contrast to traditional stock market exchanges, which have set trading hours, cryptocurrency exchanges are active 24/7. The crypto market is, therefore, always operational. The most common crypto exchanges include Binance, Coinbase Pro, FTX, and Kraken.
dApps, or decentralized applications, primarily function on Ethereum’s network and work like regular applications, except they don’t withhold user information and data. Since these apps are decentralized, creators and developers can’t sell user data and don’t hold the power to make decisions within dApps once they’re created. For example, a blockchain developer can’t ban a user as long as the dApp and its use fall within the blockchain’s algorithm on which it’s been built.
Many dApps have their own tokens that govern the incentives of their applications. If users act in a way that benefits the system, they’re rewarded in the dApp token, and they must spend the token to unlock some type of value. An example includes the AUDIO token that exists on the Audios dApp. Users earn AUDIO for listening to their favorite artists and can spend it to unlock exclusive features with musicians on the app.
In crypto, everyone can view all transactions that occur from a single wallet and track over time. At any point, you can see how many individuals have and who sent money to whom. What if you don’t want people to see your balance or don’t want users to see to whom you send money?
In situations where this anonymity is preferred or even required, you could achieve a similar effect using a privacy coin. So how does it work? Each privacy coin uses a different strategy to anonymize its transaction data and wallet balances. These strategies usually involve temporary addresses and splitting up of each transaction into many smaller ones. Critical information is stored in an encrypted manner.
Privacy coins have come under fire because they more easily support criminal activity such as money laundering and have real-world use cases. For instance, a company wants to pay a supplier; if it were to pay via stablecoins or bitcoin, the supplier could trace back how much money the company has in its wallet, giving the supplier leverage when negotiating deals.
Currently, the largest privacy coins by market cap are Monero and Zcash.
Let’s quickly recap.
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