Blockchain and cryptocurrency was first launched back in 2009 with Bitcoin, and was fairly limited in what it could do.
However, as time passed and blockchain technology got better and better, cryptocurrency has found other uses.
So what’s the difference between something like Bitcoin and Ethereum? Well, they are two different types of cryptocurrency with two different uses.
There are thousands of other cryptocurrencies in circulation, each with its own unique selling point.
Let’s take a look at the main types of cryptocurrency and their uses.
Digital Currencies
Crypto as a digital currency was the very first implementation of the blockchain technology.
Bitcoin was the first cryptocurrency and it was created to be sent and received directly to users on its network as a method of payment that doesn’t require a trusted central authority, like a bank. Bitcoin is also a store of value, kind of like digital gold, though it was created to be a digital currency.
Since then, many other different cryptocurrencies have come about as payment methods. Most of the other cryptos are designed like Bitcoin, where they are peer-to-peer, decentralized, methods of payment, but also have their own features.
Litecoin tries to differentiate itself from Bitcoin by allowing more transactions per second on its network, having more coins in circulation, and using a different method of securing its blocks.
Another crypto called Monero ($XMR) was created in order to be a private digital currency. Cryptocurrencies like Bitcoin and Litecoin are somewhat anonymous, since people can only know you by your wallet address, but every transaction that has ever taken place on these blockchains is visible to anyone on the network (public ledger). So, anyone can see that you spent $5 for coffee this morning, only if they know your wallet address (and the receiving address.) With Monero, there is no public ledger and no one is able to follow any transactions that happen on its blockchain because its main feature is its user’s privacy.
Some of the most popular cryptos whose sole purpose is to be used as digital currency and payment methods are Bitcoin, Litecoin, Monero, Bitcoin Cash, Ripple ($XRP), and Nano ($XNO).
Stablecoins
Stablecoins are another type of cryptocurrency that is being used as a digital payment method.
The difference between a stablecoin and a currency is that a stablecoin is pegged to consistently stay the same price to some real world currency, mostly the United States dollar. Stablecoins can keep their price in line with the U.S. dollar by making sure they have enough reserves to cover the amount of digital tokens in circulation.
The main idea behind stablecoins is to protect users from the volatility of cryptocurrency. For example, someone could send you 1 Bitcoin worth $50,000 for some product or service, but the next day could see that same Bitcoin being worth $40,000. On the other hand, it could also increase wildly. But if someone sends you $50,000 worth of the most popular stablecoin,
Tether ($USDT), you can expect that same Tether will continue to be worth $50,000 no matter what the overall crypto market looks like.
Just like with any type of cryptocurrency, there are many different stablecoins with their own advantages and disadvantages.
Tether, the most traded cryptocurrency, claims that it is backed by many different assets, but critics believe they haven’t been entirely truthful about their claims. Tether has also been losing market value to other stablecoins like USD Coin ($USDC) because others have been able to prove their backing reserves. Without a reserve to cover the number of digital coins a stablecoin is entirely worthless.
There are many different stablecoins like Tether, USD Coin, Gemini Dollar, Dai, or Binance USD ($BUSD).
Software Platforms
Software platforms are blockchains that are designed for developers to build decentralized applications (dApps) on. These dApps use
smart contracts in order to run. Popular apps that are built on software platforms are decentralized finance (DeFi), games, decentralized exchanges (DEX), NFTs, or their own cryptocurrencies.
The second most popular cryptocurrency by market cap, Ethereum, is a software platform that is a host to many big dApps and cryptocurrencies. It’s also the platform that NFTs started on, which is arguably the reason why Ethereum is where it is today.
A big downside to Ethereum is that it requires a gas fee on any transaction. A gas fee is paying the miners to validate your transaction. With Ethereum’s high number of transactions, that gas fee can get quite expensive. At its peak, Ethereum’s gas fee was at an average of $70 per transaction! The reason it is so expensive is because Ethereum uses a proof-of-work consensus method, which means that a large number of computers are using a lot of energy in order to validate blocks. Energy costs a lot of money.
But Ethereum isn’t the only platform to develop dApps on. There are others like Cardano, Solana, and Algorand that look to increase the number of transactions and the speed at which they are processed, and in order to keep costs down, use a proof-of-stake consensus method. Proof of stake is when users are randomly selected to validate blocks as long as they lock in their cryptocurrency. This keeps costs per transaction down, and is also the reason that
these cryptocurrencies are some of the best for the environment.
Polkadot is another software platform that allows developers to build their very own blockchains that can be used to create dApps on. These custom blockchains will connect to Polkadot’s blockchain in order to be able to freely exchange data with each other. You can learn more about
Polkadot and how it works.
Utility Tokens
The dApps that are built on the software platform blockchains usually have their own token, which is used for things like keeping the app running through staking, governance, providing some kind of service, or to exchange within the app itself.
For example, Decentraland is a
play to earn game that has a token called MANA, which is used to buy land in the game, or things for your avatar. Like any other cryptocurrency, you can also hold MANA as an investment in hopes that the game blows up and so does the price.
Polygon is another popular token built on Ethereum. Polygon’s job is to be a scaling solution for Ethereum by improving the speed of transactions and lower costs per transaction. It allows Ethereum based projects to exchange data with each other. Its token $MATIC is used to vote on the future of the project, to keep the blockchain secure, and to pay transaction fees.
Basic Attention Token ($BAT) is a utility token that is given to users whenever they see an ad on the Brave browser. BAT can then be given to creators as a tip whenever a user is satisfied with the creator’s content. Brave’s main focus is privacy and security for its users, but it also wants to put the money back into the creator's hands. Using the Brave browser is one of the
best ways to earn free cryptocurrency, especially during a bear market.
Chainlink ($LINK) is another type of token that is used to connect blockchains to non-blockchains. It allows blockchains access to real world information, like sports stats, weather, or stock prices, easily. LINK is used to pay network fees and is used as collateral for its smart contracts. It is built on the Ethereum platform.
Uniswap is a token that is used to govern a decentralized exchange. Decentralized exchanges are owned and operated by any big companies, but instead has its future suggested and voted on by the users who are holding its token. Uniswap is another dApp built on the Ethereum blockchain and automatically can exchange other cryptocurrency tokens that are built on the Ethereum blockchain.
There are many different kinds of tokens and uses for tokens. These are just some of the most popular, but there are hundreds of others designed just like the ones mentioned above.
Memecoins
Memecoins are cryptocurrencies that were basically created as a cultural joke. They can have many different uses, but the main use is to try to ride the popularity of something and get rich quick.
Dogecoin was the first memecoin ever created. It was created in order to parody Bitcoin, and was a complete copy of another cryptocurrency, Litecoin. Dogecoin became infamous on the internet for its community. Once, the community donated enough Dogecoin to send the Jamaican bobsled team to the 2014 Winter Olympics in Sochi. It also exploded in price due to Elon Musk constantly tweeting about the memecoin, but crashed the price when he mentioned Dogecoin on Saturday Night Live. Still many people got rich on Dogecoin, but more people lost money.
Trying to bandwagon off of the popularity of Dogecoin was Shiba Inu, which was built on the Ethereum blockchain. Shiba rocketed in price due to its passionate community. However, it differs from Dogecoin in that being built on Ethereum, allows developers to create apps with it, like Shibaswap, a decentralized exchange, or ShibaVerse, a metaverse world built with Shiba.
After that the floodgates opened and memecoins were created for everything and anything including Floki Inu, named after Elon Musk’s dog, Dogelon Mars, or even a token created and named after the Netflix show, Squid Game. This particular cryptocurrency was a huge
rugpull scam, where the creators of the token did not allow anyone but themselves to sell the token. When the token started to blow up in price, the creators dumped the entire supply and ran with everyone’s money.
Summary
Currencies are used as a digital payment system, and popular cryptocurrencies include Bitcoin, Litecoin, and Monero.
Stablecoins are meant to protect crypto users from volatility by remaining pegged to a real world asset like the U.S. dollar. Popular stablecoins are Tether, USD Coin, and Dai.
Software platforms are blockchains that allow developers to build apps on them, which can be used for anything from decentralized finance to play to earn games. Most of these apps take advantage of smart contracts. Ethereum, Cardano, and Algorand are some popular cryptocurrencies in this category.
Utility tokens are the tokens that are used by the apps built on software platforms like Ethereum. These tokens are mainly used to keep their blockchains secure and for governance. Popular utility tokens include Polygon, Chainlink, and UniSwap.
Memecoins are created as a joke and don’t really serve too much of a purpose, although they can be useful in some ways. The most popular memecoins are Dogecoin and Shiba Inu Coin, but there are hundreds or thousands of memecoins.
Now that you know all about the different types of cryptocurrencies, you can learn the
best investing advice for beginners in crypto.
