Types of cryptocurrency: 5 categories and how they work

The cryptocurrency market features thousands of unique projects, each with distinct functionalities and technologies. A vast majority of cryptocurrency protocols boast their own digital currencies, such as metaverse tokens for digital experiences and memecoins that foster online communities.

While the crypto industry continually presents new opportunities, the diverse applications of blockchain technology can make it challenging to navigate. Many cryptocurrencies extend beyond traditional currency roles, offering a variety of decentralized services.

Understanding the different sectors within the blockchain ecosystem can be useful for making better informed decisions when engaging with the Web3 landscape. As you explore these categories, consider how they align with your interests and goals.

Let’s dive into the various types of cryptocurrencies available in this growing landscape.

Payment cryptocurrencies allow users to store and transact value on a decentralized network, free from centralized intermediaries like banks or governments. This type of cryptocurrency aims to provide faster, cheaper and more secure transactions than traditional methods.

These cryptocurrencies create infrastructure for transferring, recording and securing financial transactions between individuals around the world.

Litecoin (LTC) is an example of a payment cryptocurrency. Founder Charlie Lee designed the protocol to be a cheaper, faster alternative to Bitcoin’s BTC cryptocurrency.

Store of value (SoV) cryptocurrencies arez assets that are supposed to retain value over time compared to fiat currencies. 

They offer several advantages over traditional assets like land or precious metals:

• Accessibility and portability: Cryptocurrencies are easily transferable, offering convenience to holders.
• Lower storage costs: Storing cryptocurrencies typically incurs lower expenses than maintaining physical assets.
• Limited supply: Cryptocurrencies like Bitcoin have a fixed supply, enhancing their appeal as stores of value. Bitcoin’s limit of 21 million coins makes its supply easy to verify.

A popular example of an SoV coin is Bitcoin (BTC): a peer-to-peer electronic cash system enabling direct online payments without financial institutions.

Many find this crypto asset attractive based on its limited coin supply and predictable issuance schedule.

Memecoins focus on viral internet trends and pop culture references, serving primarily as digital payment tokens. Popular examples like Dogecoin (DOGE) and Pepe (PEPE) have attracted millions of followers, including celebrities.

Often created as light-hearted social experiments, memecoins typically have limited utility compared to other cryptocurrencies and are seen as a fun contrast to the seriousness of traditional crypto.

While primarily speculative, memecoins are also used to tip online creators and foster communities across social media platforms.

Stablecoins are designed to mirror the value of fiat currencies and other assets, such as gold. They combine the efficiency and portability of blockchain-based cryptocurrencies with price stability mechanisms, making them popular for cross-border remittances and traders who are looking for less volatile digital assets to park their capital in.

There are three main types of stablecoins:

Fiat-backed stablecoins: Aim for a 1:1 value peg with their underlying currency, requiring issuers to hold equal cash or cash equivalents in reserve. Examples include:

• Tether (USDT): The largest stablecoin, pegged to the U.S. dollar.
• USD Coin (USDC): Another stablecoin targeting a 1:1 peg with the U.S. dollar.
• Tether Euro (EURT): A stablecoin that mirrors the Euro’s price.

Crypto-collateralized stablecoins: Backed by other cryptocurrencies locked in smart contracts, often requiring over-collateralization. Users deposit more crypto than the value of the stablecoins they receive. Examples include:

• MakerDAO’s DAI: Backed by crypto and worth three times the amount of DAI in circulation.
• Liquity’s LUSD: Backed solely by ETH.

Algorithmic stablecoins: Maintain a value peg without collateral by using smart contracts to adjust supply based on market demand. Price stability has not always been reliable.

It's important to recognize that stablecoins carry risks, including issuer and operational risks. The collateral backing these tokens could be held by institutions that might become insolvent, and algorithmic stablecoins could fail due to bugs or other issues.

Privacy coins enhance transaction anonymity by obscuring details about the sender, receiver and amount spent. They use specialized mechanisms to secure transactions, making tracking them difficult and enabling anonymous transactions on privacy-focused blockchains.

Although each privacy coin has its unique methods, all aim to offer greater privacy than traditional cryptocurrencies.

Popular examples include:

• Monero (XMR): Preserves user anonymity through a type of cryptography called ring signatures.
• Zcash (ZEC): A privacy-focused Bitcoin fork that offers complete anonymity using the Zerocash protocol and a “shielded” ledger.

Infrastructure cryptocurrencies are tokens that enhance the technology supporting other cryptocurrencies. They are mainly linked to blockchain networks offering smart contract functionality, which enables developers to create self-executing agreements for various applications. 

These projects typically focus on building a foundational layer for application development or improving blockchain efficiency through Layer 2 scaling solutions.

The introduction of smart contracts on the Ethereum blockchain allowed anyone to create decentralized applications (dApps) for the first time. 

Smart contracts now power virtually all Web3 applications across various top blockchains, benefiting from customization and interoperability. 

The rise of decentralized finance (DeFi) and use cases like decentralized physical infrastructure networks (DePIN) highlight this trend.

Popular cryptocurrencies associated with application development include:

• Ether (ETH): A decentralized platform for financial services, games and apps.
• Solana (SOL): A blockchain designed for scalability, offering faster transaction settlement times.
• Avalanche (AVAX): A high-speed Layer 1 blockchain for dApps and custom networks.

Initially, applications on Ethereum and similar blockchains relied on the main network for transaction processing and data storage. While secure, this approach results in low throughput, leading to high gas fees and slowdowns during busy periods.

As blockchain adoption increases, scaling is essential for enhancing transaction capacity and lowering costs. 

Various solutions have been developed, including:

• Optimistic Rollup: Bundles transactions together and processes them off-chain to help increase the efficiency of Layer 1 platforms like Ethereum, assuming all transactions are valid unless challenged.
• Zk-Rollup: Uses zero-knowledge proofs to quickly validate transactions, adding extra security and assurance.
• Data Availability Service: Prevents slowdowns by alleviating strain on blockchains.

As Web3 develops, robust communication infrastructure becomes more important. This includes connecting blockchains with real-world data and facilitating communication between Layer 1 and Layer 2 networks.

Oracles connect real-world data to the blockchain, enhancing decentralized applications (dApps) and scaling Web3. 

They deliver vital information, such as financial data and social media feeds, and provide real-time crypto prices from centralized exchanges like Kraken to decentralized exchanges like dYdX and Uniswap.

Examples of blockchain oracles include:

• Chainlink (LINK): links blockchains to external data sources.
• Pyth (PYTH): supplies real-time market data to financial dApps across various networks.

With the rapid growth of Web3, the number of blockchains is expanding, and developers are creating custom blockchains called “appchains” to optimize performance.

This complexity necessitates effective communication between networks. Cross-chain messaging and bridges enable assets and data to move seamlessly between blockchains.

Examples of cross-chain infrastructure tokens include:

• Axelar (AXL): Connects dApps across different blockchains.
• Celer (CELR): Focuses on cross-chain interoperability for DeFi, GameFi, NFTs and more.
• LayerZero (ZRO): Helps developers build omnichain dApps.

Financial cryptocurrencies offer tools for managing and exchanging assets within the crypto ecosystem. Often linked to DeFi protocols, they provide similar functionalities to traditional finance but in a more transparent and accessible way.

Cryptocurrencies associated with centralized or decentralized exchanges are classified as financial cryptocurrencies. They typically offer lower trading fees and may serve as governance tokens, granting holders voting power over platform operations.

Crypto financial markets integrate traditional financial services with smart contracts and blockchain technology, creating decentralized exchanges services, lending platforms and cross-chain transfers.

Decentralized exchanges (DEXs) allow users to trade cryptocurrencies directly without relying on traditional order books. Instead, they utilize liquidity pools to facilitate efficient asset swaps. Popular platforms like Uniswap (UNI) and Curve (CRV) incentivize users by rewarding them for providing liquidity, creating a community-powered decentralized trading environment.

Decentralized money markets enable users to lend their crypto for rewards or borrow against their holdings without intermediaries. This accessibility means that anyone with internet access can benefit from these services, provided they meet the collateral requirements. Examples include Aave (AAVE) and Compound (COMP), which determine rewards based on supply and demand.

Bridges play an important role in connecting different blockchains, enabling the seamless transfer of assets and data between them. For example, a bridge can burn USDC on Ethereum and mint it on Arbitrum, allowing easy network movement. Notable bridges include Stargate Finance (STG) and Synapse (SYN).

In traditional finance, asset managers invest capital for institutions or high-net-worth individuals. DeFi democratizes investment strategies, enabling anyone to optimize their holdings through smart contracts.

DeFi platforms streamline various services, helping traders make better informed decisions when using multiple platforms.

Popular types include:

• DEX aggregators: Scan multiple DEXs for the best trade execution.
• Yield aggregators: Automatically move assets between lending protocols to maximize returns.

DeFi has expanded financial services and introduced innovative products beyond traditional markets, including liquid staking and Real World Assets (RWAs).

Liquid staking
A drawback to crypto staking is that staked funds are locked and cannot be used for other purposes.

Liquid staking addresses the limitation of locked funds in traditional staking, allowing users to:

• Earn staking rewards while retaining access to staked assets.
• Use "liquid staking tokens" across DeFi platforms for lending, borrowing and trading.

A popular service is Lido Finance (LDO), where users can deposit ETH and receive stETH, which functions like regular ETH until they redeem their initial stake.

Real World Assets (RWAs)
RWAs refer to real and financial assets that are tokenized for trading on blockchains. This area has gained interest from banks and financial institutions, leveraging blockchain's transparency and efficiency to streamline their services.

RWA projects aim to create digital equivalents of traditional assets, such as:

• Real estate contracts.
• Health records.
• Financial agreements.

Notable platforms advancing RWA tokenization include:

• Avalanche (AVAX): partners with financial firms to tokenize funds.
• Centrifuge (CFG): facilitates credit lines and compliance through blockchain technology.

Service cryptocurrencies provide tools for utilizing and sharing data on blockchain networks. They leverage the transparency and security of distributed ledgers to enhance traditional sectors like healthcare and energy.

As an example, some service cryptocurrencies enable users to create digital identities and link real-world records to the blockchain, while others allow individuals to track and trade their energy production through peer-to-peer networks.

DePIN is transforming how infrastructure services like WiFi and cellular data are delivered. By using blockchain technology, DePIN networks incentivize users to build and maintain their own infrastructure rather than relying on large corporations.

Users can purchase specialized devices to collect and store data, providing coverage and earning crypto rewards. Smart contracts facilitate smooth operations, removing the need for centralized control.

Much of our information is stored online as data, and decentralized file storage projects leverage blockchain technology to secure it while protecting against failures of centralized servers.

Platforms like Filecoin (FIL) and Storj (STORJ) allow users to store files on decentralized networks, offering enhanced security and transparency. Users can also contribute their unused storage space and earn native tokens (FIL, STORJ, etc.) to expand the network's capacity.

Web3 projects enable the decentralized exchange of digital resources such as computing power, energy and data.

Computing Power
Decentralized networks allow global access to computing power from CPUs and GPUs, which can be used for building Web3 applications, creating AI models or hosting decentralized services. 

Notable examples include:

• Akash (AKT): an open-source cloud computing marketplace that accelerates app deployment in areas like blockchain and machine learning.
• Render (RENDER): a network connecting users needing GPU power with operators who have idle GPU capacity to rent.

Energy
Energy Web (EWT) focuses on improving renewable energy distribution efficiency by connecting industry participants and transparently monitoring resource distribution, enhancing market efficiency.

Data
Several projects are dedicated to organizing and distributing on-chain and external data.

• The Graph (GRT): Indexes data from various blockchains for easy access and visualization.
• Ocean Protocol (OCEAN): Empowers users to list and monetize diverse data sets while preserving ownership and privacy.

Media and entertainment cryptocurrencies aim to reward users for creating and engaging with content, games, gambling and social media. For example, Basic Attention Token (BAT) promotes fair value distribution between creators and consumers.

These cryptocurrencies also support digital worlds known as the "metaverse," accessible through virtual and augmented reality technologies. 

Additionally, non-fungible tokens (NFTs) fall under this category, allowing holders to prove ownership of unique digital items, including in-game characters and digital art.

NFTs gained popularity primarily for digital art, with collections like Bored Ape Yacht Club (BAYC) and Cryptopunks making headlines. However, they extend beyond art, serving as proof of ownership on the blockchain for various items, such as concert tickets, Rolex certificates, subscriptions and virtual land.

NFTs represent ownership of a piece of media rather than the media itself. Some collections, like BAYC, have associated crypto tokens; for instance, Apecoin (APE) allows holders to influence the project's future, showcasing another use case for cryptocurrencies beyond payments and value storage.

The metaverse is a shared digital space where users interact and engage in virtual experiences akin to the physical world. Decentraland's MANA token and The Sandbox's SAND token serve as utility tokens, enabling holders to purchase land, engage with user-generated content and participate in governance.

Emerging trends include virtual real estate investment, digital fashion and social experiences that merge gaming, art and commerce. The metaverse also explores decentralized social networks and innovative content creation.

For more insights on the digital worlds powered by blockchain technology, check out our article, What is the metaverse

Blockchain gaming is in its early stages, with emerging trends showcasing its potential. The composability of blockchains allows characters and games to interconnect, enabling players to use the same profile across multiple games.

Platforms like Enjin facilitate the management of in-game items, reducing high fees and fraud associated with virtual goods.

These games reward players for in-game achievements with assets that can hold real-world value. 

[Call out box] For more insights on play-to-earn gaming, check out our article What are play-to-earn crypto games

Now that you’ve explored the various types of cryptocurrencies in the ecosystem, are you ready to take the next step?

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