Types of cryptocurrency

Overview of cryptocurrency categories 🔍

  • Different types of cryptocurrency offer different functionality based on their unique use case.

  • Cryptocurrencies offer a way to transact in a more peer-to-peer and decentralized way compared to traditional solutions.

  • Most cryptocurrencies can be placed into one of five categories. Each category can also have numerous sectors within it.

Today’s cryptocurrency market consists of tens of thousands of unique projects. Nearly all of these projects boast their own distinct functionalities and technologies.

From currencies outside of government control, to metaverse tokens powering digital worlds and uniquely-themed memecoins developing vibrant online communities, the crypto industry continues to deliver new possibilities.

But, the vast amount of ways to apply blockchain technology can make it challenging to develop a clear understanding of the space.

Many cryptocurrencies are created for purposes far beyond our traditional understanding of "currency." Instead, they are created to help build an incentive structure for decentralized platforms to operate.

While this can sound abstract, it is important to understand that cryptocurrencies play an important role in how these blockchain powered system operate in a peer-to-peer way.

With a clearer understanding of the different sectors that make up the blockchain ecosystem, you can start to make more informed decisions as you enter the Web3 space.

Let's take a look at the various types of cryptocurrencies this growing space has to offer.

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How can cryptocurrencies be categorized? 🤔

All cryptocurrencies can generally be categorized within one of the following five categories.

Click the links below for more information on each:

Crypto research firm Messari pioneered this crypto classification structure, which organizes cryptocurrencies based in the different sectors of the crypto economy.

Just as the traditional economy is divided into categories like healthcare, manufacturing, and transportation, so too is the emerging Web3 economy. 

Understanding a cryptocurrency's category provides a helpful starting point for understanding what a cryptocurrency does and how it can be used.

A primer on cryptocurrency 🌍

As the first truly decentralized and widely adopted cryptocurrency, Bitcoin served as the foundation for the crypto industry.

The Bitcoin white paper, written by the pseudonymous author(s) Satoshi Nakamoto, laid out the vision of a “peer-to-peer electronic cash system.”

In the years that followed, there were many attempts at copying the success of Bitcoin for this purpose. While most failed to reach the same level of adoption, other cryptocurrencies set off on a different mission from the start. 

Rather than building a peer-to-peer electronic cash system, other cryptocurrency projects now function as decentralized, peer-to-peer information sharing systems.

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Although the ability to transfer value remains an important part of that information system, these systems enable a wider range of possibilities. Today, many different cryptocurrencies help to offset the reliance we have on centralized companies (like tech or banking businesses) with greater accessibility, transparency, and efficiency.

Powered by smart contracts, decentralized applications can operate autonomously while ensuring a reliable source of truth — all without reliance on a central authority.

This shift is fundamentally altering our understanding of how society can function.

By using auditable code rather than placing trust in fallible intermediaries, cryptocurrencies can deliver a more transparent and reliable way of sharing information.

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To learn more about the various decentralized applications (dApps) delivering this functionality, check out our article What is a decentralized application (dApp)? 

Ultimately, different cryptocurrencies serve different roles within the Web3 economy.

Understanding what they do, how they work and what purpose they serve can be helpful as you start your crypto journey.

Kraken let's you buy hundreds of different cryptocurrencies that are transforming the way we connect and transact.

Learn more about them below and get started with your Kraken account today.

Payment cryptocurrencies 🪙

Payment cryptocurrencies offer a way to store and transact value using a distributed network of computers rather than a centralized government.

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Some payment cryptocurrencies aim to offset our reliance on government issued currencies, while others focus on creating efficiencies (making faster, cheaper, more secure transactions) compared to traditional methods.

Cryptocurrency networks aiming to disrupt the traditional payments industry do not typically have many of the more specialized features seen in other cryptocurrency projects. Instead, these assets are solely focused on providing an infrastructure to define, transfer, record, and secure financial transactions between individuals. 

Some might consider bitcoin (BTC), the original cryptocurrency, as an example of a payment cryptocurrency. After all, its creator Satoshi Nakamoto designed it as an alternative to the traditional financial system and described it as a "peer-to-peer electronic cash system" in the Bitcoin white paper.

The majority of other payment cryptocurrencies available seek to improve upon Bitcoin in various ways, from scalability to speed. 

The four most common sectors in the payments cryptocurrency category include:

  1. Stores of value

  2. Memecoins

  3. Stablecoins

  4. Privacy coins

Store of value 🏔️

Store of value (SoV) cryptocurrencies are primarily seen as assets that may hold value over time relative to fiat currencies.

Generally speaking, cryptocurrencies offer several advantages over traditional store-of-value assets such as land or precious metals.

One key perk is their accessibility and portability, making them incredibly convenient for holders to transfer.

Moreover, safeguarding cryptocurrencies typically incurs substantially lower storage and maintenance costs compared to physical SoV assets.

Additionally, the limited maximum supplies of certain crypto assets like Bitcoin may also help to boost their appeal as potential stores of value.

While it’s impossible to know the true maximum supply of gold, Bitcoin’s hard supply limit of 21 million coins is easy to verify thanks to its transparent, computer-coded rules.

To learn more about the scaricty of Bitcoin, check out our article How many bitcoin are there? Bitcoin supply explained.

Popular examples of store of value coins include: 

  • Bitcoin (BTC) -  a peer-to-peer electronic cash system that allows online payments to be sent directly from one party to another without going through a financial institution.
  • Bitcoin Cash (BCH) - a fork of the Bitcoin blockchain that allows for larger blocks of transaction data to increase transaction throughout, reduce fees and enable microtransactions.
  • Litecoin (LTC) - a coin that allows for faster transaction confirmations and improved storage efficiency compared to Bitcoin — the cryptocurrency that inspired its creation.

All of these coins, any many others, have a fixed and clearly defined maximum supply — which make them an attractive store of value for those concerned about inflation or the scarcity of their assets.

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Memecoin 😜

Memecoins represent a vibrant cryptocurrency sector centered around viral internet memes and pop culture references.

They primarily serve as digital payment tokens, with some leading examples boasting millions of dedicated followers, including A-list celebrities.

Unlike other cryptocurrencies, developers often create memecoins solely as light-hearted social experiments with limited utility.

Many see memecoins as a refreshing departure from the seriousness that often surrounds traditional cryptocurrencies.

Coins such as Dogecoin (DOGE) and Pepe (PEPE) are some of the most notable examples of memecoins, but thousands of memecoins exist across multiple blockchain networks.

While these coins primarily exist for purely speculative purposes, they are also commonly used to tip creators on the internet and build communities across social channels.

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If you are interested in learning more about memecoins and their place witin the crypto economy, you can check out our article What is a memecoin?

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Stablecoins ⚖️

Stablecoins typically mirror the price of fiat currencies (like the U.S. dollar or the Euro).

Stablecoins can offer the efficiency and transparency benefits of cryptocurrency while providing price exposure to more established forms of value. 

Thanks to their accessibility and efficiency, stablecoins are often used in cross-border remitance payments.

They are also commonly used by traders looking to convert their crypto holdings to a stable asset during periods of price volatility, without need to convert their assets back to cash.

The three primary types of stablecoins include:

  1. Fiat-backed
  2. Overcollateralized
  3. Algorithmic

Fiat-collateralized stablecoins 💰

Fiat-backed stablecoins aim to maintain a 1:1 value peg with their underlying currency, such as USD or EUR.

This necessitates that each stablecoin issuer should hold at least an equal amount of cash and/or cash equivalents (like US government bonds) in reserve to back each unit of the stablecoin in circulation. However, many issuers have historically failed to uphold this requirement.

It is ultimately the responsibility of the stablecoin issuer to back the value of each minted token with sufficient reserves.

Users can mint new stablecoins by depositing their corresponding value and redeem tokens for the underlying reserve assets.

Popular examples of fiat-collateralized stablecoins include: 

  • Tether (USDT) - the largest stablecoin by market cap today which tracks the value of the U.S. dollar.
  • USD Coin (USDC) - a stablecoin that aims to maintain a 1:1 with the U.S. dollar for secure and fast digital transactions.
  • Tether Euro (EURT) - a stablecoin that aims to mirror the price of the Euro by holding collateral reserves on a 1:1 basis equal to the amount of EURT in circulation.

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Crypto-collateralized stablecoins 📀

Crypto-collateralized stablecoins are backed by other cryptocurrencies locked in smart contracts.

These types of stablecoins often involve overcollateralization, requiring users to deposit cryptocurrency exceeding the value of the stablecoins they receive. This is done in an attempt to secure the peg during volatile crypto market fluctuation, but this is not always effective

To redeem the locked cryptocurrency, users have to return the stablecoins to the smart contract, plus a small fee.

Popular examples of crypto-collateralized stablecoins include: 

  • MakerDAO’s DAI - a stablecoin backed by an amount of crypto worth approximately three times more than the amount of DAI in circulation, according to Dai Stats
  • Liquity’s LUSD - a crypto-collateralized stablecoin that is solely backed by ETH.

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Algorithmic stablecoins 🤖

Algorithmic stablecoins use predefined rules that aim to maintain a value peg to other assets. Because of this, stablecoins don’t rely on any collateral to back their value.

Instead, algorithmic stablecoins use smart contract code to adjust the supply of the stablecoin based on market demand. 

Through these supply and demand dynamics, traders are incentivized to help the algo stablecoin’s price stability through arbitrage price opportunities.

While there have been many attempts to create algorithmic stablecoins, their price stability hasn’t always been reliable. 

For example, Terra’s UST, which amassed a market cap of nearly $20 billion, suffered an implosion due to faulty mechanics in UST’s stabilization mechanism. Nevertheless, there are projects using different algorithms that address the various risks of algorithmic stablecoins.

Algo-stablecoin's method of adjusting the supply to follow market demand is similar to how government-issued currencies operate today. But rather than placing trust in a central bank, users can verify the rules of the algorithmic stablecoin themselves.

It’s important to note, stablecoins possess a number of inherent risks, namely issuer, counterparty and operational risks.

The assets collateralizing the token may be held by financial institutions or other third parties which could become insolvent or face other failures which could result in a loss of the collateral associated with the token.

Further, algorithmic stablecoins could suffer a failure, bug, exploit or other issue which may cause the algorithm to fail.

Privacy 🥷

Privacy coins are designed to improve transaction anonymity by obscuring certain details about the sender, receiver, and amount spent.

Privacy coins typically employ specialized mechanisms to enhance the security of transactions, making tracking them significantly challenging. This has led to the development of several privacy-oriented blockchains which allow users to transact anonymously. 

While each coin has its own methods, they all aim to obscure the flow of value, offering a level of privacy exceeding traditional cryptocurrencies.

Popular examples of privacy coins include: 

  • Monero (XMR) - a coin that enables private transactions on its blockchain by preserving user anonymity using a technique called ring signatures
  • Zcash (ZEC) - privacy-focused Bitcoin fork that make transactions completely anonymous by implementing the Zerocash protocol to enable a “shielded” ledger option

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Infrastructure cryptocurrencies 🏗️

Infrastructure cryptocurrencies refer to the tokens of crypto projects primarily focused on improving the underlying technology that other cryptocurrencies use to operate.

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Infrastructure tokens are most often associated with blockchain networks that provide developers with smart contract functionality — code that allows blockchain developers to create self-executing agreements that serve as the basis for different applications. 

Infrastructure projects include those focused on providing a base layer for application development as well as those looking to improve blockchain efficiency via secondary scaling solutions — also known as Layer 2 solutions.

For example, the crypto asset that powers the Ethereum blockchain, called Ether (ETH), may be considered an infrastructure cryptocurrency, as it plays a fundamental role in the creation and use of decentralized applications (dApps) built on top of Ethereum.

The three most common sectors in the infrastructure cryptocurrency category include:

  1. Application development
  2. Scaling
  3. Communication

Application development 📱

When the solidity programming language was launched on the Ethereum blockchain, it gave anyone the ability to build their own smart contract-based application on the Ethereum blockchain.

Smart contracts power many Web3 applications across a growing number of blockchains thanks to their customization and interoperability.

The widespread adoption of decentralized finance (DeFi) highlights this trend, and new use cases, like decentralized physical infrastructure (DePIN), are gaining traction.

Building these blockchain-based applications requires developers to pay miners and validators for "blockspace".

This is where native cryptocurrencies come in that are used to facilitate transactions and support network growth.

Popular examples of cryptocurrencies associated with application development include: 

  • Ether (ETH) - a global, open-source platform for financial services, games and apps that is trustless, decentralized and secure.
  • Solana (SOL) - a blockchain platform that aims to increase user scalability through faster transaction settlement times and a flexible infrastructure.
  • Avalanche (AVAX) - a high-speed, low-latency Layer 1 blockchain for decentralized applications (dApps) and custom blockchain networks.

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Scaling 📐

Initially, applications built on Ethereum and blockchains like it depended entirely on the main network for all transaction processing and data storage.

While this approach is highly secure, the blockchain’s throughput (the number of transactions per second it is able to process) is relatively low.

This can lead to excessive gas fees and network slowdowns during periods of high activity, making it unusable for many.

As blockchain adoption grows, it is important for these networks to scale, and higher transaction capacity and lower costs are essential. 

Over time, many scaling solutions have been developed in an effort to increase blockchain throughput capacity while driving down transaction fees.

Projects are employing various technologies to achieve this, including:

  • Optimistic rollup – Bundle transactions for more efficient processing on top of layer 1 (L1) platforms like Ethereum. This 'optimistic' approach assumes transactions are valid by default. On-chain processing only happens if the validity of transactions are challenged.
    • An example of this is Optimism (OP), which uses optimistic rollups to decrease the time and cost of transactions on the Ethereum blockchain.
  • Zk-rollup – Similar to optimistic rollups, ZK-Rollups aim to improve speed and reduce costs on top of L1s. However, they use a technique called zero-knowledge proofs to instantly validate transactions and data, offering an additional layer of security.
    • An example of this is Polygon (MATIC), which offers services that helps to provide cheaper and faster transactions and more streamlined developer experience.
  • Data availability service – As crypto adoption continues to grow, blockchains tend to be overloaded with data. Data Availability (DA) layers take some of this strain away, preventing blockchains from getting bogged down (known as “state bloat”). 
    • An example of this is Near Protocol (NEAR), which is a Web3 development protocol that allows developers to create and launch their own decentralized applications.
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If you are interested in learning more about layer 2 scaling and the role this plays, you can check out our article What are Layer 2 solutions?

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Communication 📞

As Web3 continues to develop, robust communication infrastructure becomes vital.

This includes connecting blockchains with ‘real-world’ data, as well as efficient communication between Layer 1 and Layer 2 networks.

Oracles 🤖

Oracles help bring real-world data to the blockchain in an effort to expand the utility of decentralized applications and services. 

To truly scale Web3, bringing real-world data (like financial data and social media feeds) to the blockchain becomes crucial, and oracles serve as the perfect data translator for dApps.

For example, oracles are vital in DeFi as they constantly feed real-time crypto prices from centralized exchanges like Kraken into decentralized exchanges (DEXs) like dYdX and Uniswap.

Examples of blockchain oracles include:

  • Chainlink (LINK) - a popular oracle that enable blockchains to communicate with each other as well as external “real-world” data sources.
  • Pyth (PYTH) - an oracle delivers real-time market data to financial dApps across dozens of blockchain networks
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To learn more about oracles and the important role they play within the crypto ecosystem, check out our article What are blockchain oracles?

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Cross-chain messaging 💬

Web3's growth isn't just about applications – the number of blockchains themselves is rapidly expanding. 

Developers are building custom blockchains referred to as “appchains" in order to optimize their platform’s performance. Additionally, many scaling solutions act as blockchains, like Arbitrum (ARB), Optimism (OP), and Celestia (TIA)

As more and more sophisticated blockchain networks emerge, communication between them becomes increasingly important and complex. Cross-chain messaging, like bridges, allow assets and data to move between blockchains and simplify the sharing of information across networks.

Examples of cross-chain infrastructure tokens include:

  • Axelar (AXL) - protocol that allows developers to connect decentralized applications (dApps) that exist on different blockchains.
  • Celer (CELR) - blockchain protocol focused on cross-chain interoperability and access to DeFi, GameFi, NFTs and other blockchain services 
  • LayerZero (ZRO) - a interoperability protocol that empowers blockchain developers to build omnichain decentralized applications (dApps).

By monitoring multiple blockchains in real time, these platforms help make reliable communication across chains possible.

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Financial cryptocurrencies 🏦

Financial cryptocurrencies offer tools for managing and exchanging assets within the crypto ecosystem.

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Financial cryptocurrencies offer tools for managing and exchanging assets within the crypto ecosystem.

These specific tokens can be further subcategorized under decentralized finance (DeFi) protocols, with the aim to deliver the same functionality of traditional finance in a more transparent and accessible way. 

For example, any cryptocurrency natively linked to a centralized or decentralized exchange may be considered as a financial cryptocurrency. These may provide holders with lower trading fees when using the platform.

They may also serve as governance tokens which grant voting powers to holders over how the platform should operate. 

The three most common sectors in the financial cryptocurrency category include:

  1. Financial markets
  2. Asset management
  3. Structured/exotic products

Crypto financial markets 🪢

Crypto financial markets aim to bring traditional financial services – including exchanges, money markets (like lending and borrowing), and cross-chain transfers – directly to the blockchain ecosystem.

Decentralized exchanges (DEX) 🤝

DEXs are used for the exchange of cryptocurrencies, including spot and derivative (like perpetual futures and options) trading.

Uniswap (UNI) and Jupiter (JUP) are the leading spot trading platforms in DeFi. 

Instead of a traditional order book, they use liquidity pools that allow traders to swap assets without relying on a centrally-managed orderbook. Curve (CRV) also focuses on spot trading, but with an emphasis on exchanging assets with similar prices (like USD stablecoins) while minimizing slippage.

Spot trading platforms aim to incentivize liquidity providers by rewarding them a share of the trading fees, enabling a decentralized and reliable trading environment.

Beyond spot markets, some decentralized exchanges offer sophisticated crypto derivatives trading.

For example, platforms like dYdX (DYDX), Woo (WOO), and GMX (GMX) allow traders to use perpetual futures contracts, which traders can roll over in perpetuity.

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Decentralized money markets 📑

Decentralized money markets allow individuals to lend their crypto assets and earn rewards, or borrow against them – all without the need for centralized intermediaries.

Anyone with an internet connection and smart device can technically use DeFi protocols, meaning even unbanked citizens in developing countries have an opportunity to access crypto-based financial services.

Examples of decentralized money markets include:

  • Aave (AAVE) - a decentralized non-custodial liquidity protocol where users can participate as depositors or borrowers.
  • Compound (COMP) - a money market platform which algorithmically derive interest rates based on the supply and demand of different cryptocurrencies.

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Bridges 🌉

Bridges allow individuals to transfer assets across different blockchains and to access layer 2 networks. They achieve this using various methods, including cross-chain messaging, or by holding reserves of the same asset on multiple chains.

For example, a bridge connecting Ethereum, Arbitrum, Optimism, and Avalanche will likely hold a certain amount of USDC (among other assets) on each one of those blockchains.

If someone transfers 100 USDC from Ethereum to Arbitrum, the bridge would burn 100 USDC on Ethereum and mint 100 USDC on Arbitrum, effectively moving value across chains.

While traditional finance lacks a direct equivalent, fintech apps offer a similar ease of use. Just as these apps let you move funds between different platforms, DeFi bridges connect blockchain ecosystems. 

Examples of popular DeFi focused bridges include:

Stargate Finance (STG) - a composable liquidity transport protocol that allows users to transfer assets cross blockchains

Synapse (SYN) - a protocol that facilitates interoperability between blockchains with its asset bridge, token swap, liquidity pools and staking opportunities

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To learn more about bridges and the important role they play in connecting the DeFi ecosystem, check out our article What are blockchain bridges?

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