Cryptocurrencies can be categorized into different types such as coins and tokens, with the former being the native cryptocurrency used in blockchains and the latter representing denominations of cryptocurrencies created to be used within a certain application. Ether is an example of a currency as it is used on the Ethereum blockchain, while Tether is a token created to be used on Ethereum and not its own blockchain. Ethereum is a platform for application development, while Bitcoin was launched as a general-purpose currency for everyday purchases. Utility tokens are created to finance transactions and other costs within a certain application, while governance tokens give holders voting rights on decisions that affect the cryptocurrency’s future. Cryptocurrencies are also created to minimize volatility in the market, and investors can benefit from them by investing in the dApp market.
Welcome to the Encyclopedia of Cryptocurrencies.
Bitcoin was initially developed to function as a universal currency for day-to-day transactions, to replace fiat currencies issued by governments worldwide potentially. The notion of Bitcoin serving this purpose is not as far-fetched as it may seem, given the increasing prevalence of electronic payments through online transactions and credit/debit cards, rendering paper currency increasingly obsolete. Moreover, several digital coins were issued in the 1980s and 1990s, but none gained significant traction until Bitcoin emerged. As it stands, Bitcoin is the primary cryptocurrency aimed at either supplementing or replacing government-issued currency for routine transactions.
The obvious question that arises is why numerous other cryptocurrencies were created, given that Bitcoin already exists. The answer lies in the fact that only a handful of cryptocurrencies were created to compete against Bitcoin as a universal currency. Instead, all other currencies and tokens, with the exception of Bitcoin, were created to serve specific purposes.
Support for Distributed Applications
Although Bitcoin is the largest and oldest blockchain network, Ethereum, founded in 2015 by a team that included Bitcoin project programmers, has surpassed it in terms of transaction volume. Unlike Bitcoin, which was designed solely for digital currencies, the Ethereum blockchain was created to support executable applications that interact with Ether, its own cryptocurrency. These executable applications are commonly referred to as “smart contracts” despite the fact that they aren’t technically contracts.
Ethereum was created as a platform for application development, serving as an operating system for developing apps that benefit from the blockchain’s unique properties, such as immutability, transparency, and anonymity. It already supports a wide variety of distributed apps that provide numerous functions, and it is the preferred platform for most decentralized financial applications since DeFi apps must interact with blockchain-based currencies.
While Ethereum has its own cryptocurrency, Ether, it was not intended to replace traditional government-issued currencies like the euro or Swiss franc. Ether is primarily used to pay transaction processing fees on the Ethereum network. That being said, Ether’s value is not negligible, as it is critical to Ethereum blockchain apps, which are growing in number and processing a larger volume of transactions each day. As more users engage with dApps on the Ethereum network, the value of Ether is expected to rise, making investing in Ether similar to investing in the dApp market.
Minimizing Volatility
Bitcoin and other digital currencies are risky investments. Prices soar to new heights and then plummet, all too frequently. Huge price fluctuations present investors with both possibilities and threats.
They also make it tough for individuals who want to use their bitcoins in daily life.
Suppose a restaurant that takes a variety of cryptocurrencies, including an invented one called DiningCoin. Dinner for two on Monday might cost up to 16 DiningCoins. On Thursday, the same lunch may cost 11 DiningCoins due to market swings.
If the restaurant accepts DiningCoins from clients while paying staff salary, rent, and food expenditures in Bitcoin, monthly overheads may fluctuate unexpectedly depending on the relative worth of the two currencies. The value of the restaurant’s inventory would fluctuate on a daily basis, and the owner would have to learn how much the items would cost in the next week.
Coins Versus Tokens
The phrases “coin” and “token” are sometimes used interchangeably, although there is a distinction.
As cryptocurrency units, “coin” and “token” signify the same thing.
The distinction is technical. The native currency utilized in blockchains is coins. Since it is utilized on the Bitcoin blockchain, Bitcoin is a currency. Because it is utilized on the Ethereum blockchain, Ether is a currency. Tether is a cryptocurrency. The inventor of the coin designed it to be utilized on Ethereum rather than its own blockchain. Cardano is classified as a currency since it is used on its blockchain, but Uniswap is classified as a token because it is used on the Ethereum blockchain.
Notwithstanding this technical distinction, coins and tokens often refer to the same thing: value units recorded on a blockchain. These are both digital currencies.
Utility Tokens
Several cryptocurrencies are designed to fund transactions and other fees associated with a specific application. They are referred to as utility tokens.
The connected blockchain assigns a charge whenever a DeFi application executes a transaction. The Ethereum creators referred to this as a gas tax, and the term stuck.
These fees must be charged to dApp users by blockchain application developers.
Utility tokens are frequently sold to investors before the project’s debut in a procedure known as a pre-sale. Raised money is used to drive project development, and investors earn if the dApp is popular and the token price grows.
Governance Tokens
If you purchase a large amount of stock in a public business, you may be granted a place on the board of directors, where you will be able to vote on important decisions affecting the firm’s future. You may gain a vote in the cryptocurrency world by acquiring governance tokens.
A governance token can be issued by a DeFi project to give stakeholders a say in the project’s development. When critical choices must be taken, such as raising or reducing gas prices, the owners of those coins have the right to vote, and the owners with more coins have more votes.
If a group of coin owners has complete power, they may be referred to as a decentralized autonomous organization or DAO.
Non-Fungible Tokens
Cryptocurrencies and tokens do not exist in the real world. The phrases “coin” and “token” allude to monetary units rather than physical items. Unlike government-issued notes and coins, which have unique serial numbers, each Bitcoin is identical to all others. Each Ether is identical to all other Ether currencies. Coins are fungible, which means they are identical and may thus be traded regardless of where they came from.
In the blockchain, the ability to generate unique tokens began with Ethereum’s ERC-721 standard, which specifies a single token type, and ERC-1155, which defines collections of many tokens. They are known as Non-Fungible Tokens, or NFTs, since they are unique and cannot be exchanged for one another.