Understanding the Different Kinds of Crypto Coins
It can be overwhelming if you’re new or just considering joining the fast-growing global community of crypto. All of the technical terms and jargons alone may cause information overload and make it harder to decide where to start. And even when one has decided to invest, it can also be difficult to decide which cryptocurrency they’d like to invest in considering that there are now thousands to choose from.
In this article, we’ll break down the different kinds of crypto coins to try to aid you in making more informed choices as you venture into the fresh and exciting world of decentralized finance.
The thing about tokens
Before we begin our rundown, let’s clear one of the most common misconceptions amongst newer crypto users: that tokens and coins are the same.
Coins and tokens are often conflated with each other because they are both digital assets stored and exchanged in the blockchain but they are different. Yes, all coins are considered tokens but not all tokens are coins.
Their most distinct difference is that coins are the native assets of a blockchain. They are specifically created to operate in a blockchain of their own whereas tokens are created to function in an already existing one. For example, Ether (ETH) is the native asset of the Ethereum blockchain, but tokens like Basic Attention Tokens (BAT) and several others also operate within the same blockchain. There are many other functions that separate tokens from coins, but let us save that for another day.
Now with that out of the way, let’s start from the very beginning: Bitcoin.
It was in 2009 that an anonymous developer — or a group of developers (no one knows, truly) — that goes by the pseudonym Satoshi Nakamoto developed and introduced Bitcoin as a response to the great recession of 2007.
The premise of Bitcoin, as carried on by the cryptocurrencies that came after it, is simple enough: the creation of a peer-to-peer payment system that is decentralized, meaning it is neither owned nor controlled by a central authority like banks or the government, and open-source, where records are public and everyone is welcome to join without the paperwork required by the traditional finance system.
Bitcoin introduced the first blockchain, a digital public ledger that records crypto transactions, each one assigned a unique code called hash. Every single transaction is recorded in a block containing its unique code and that of the one that precedes it, hence the name blockchain.
Bitcoin has since been known as the premier, most popular, and largest cryptocurrency with a market cap peaking at $1000Billion in April of 2021. Its scarcity and its ability to store market value independent from financial markets makes it commonly referred to as “digital gold”. And its massive success, coupled with its potential in the future of finance, prompted the creation of the next item on our list: altcoins.
Trying to define terms and phrases in the world of crypto can sometimes be a head-scratcher, but this one’s really easy: altcoins are, basically, every cryptocurrency that is not Bitcoin. Its name is a shorthand for “alternative to Bitcoin” and they were created after Bitcoin’s enormous success to address the premier crypto’s shortcomings.
Like Bitcoin, though, each altcoin employs the same technology, having a blockchain of their own that is mainly used for digital peer-to-peer payments. Some of the most popular altcoin blockchains in the market today are Ethereum, Cardano, Litecoin, Ripple, and EOS.
So here’s where we get more technical: how does one choose from the many existing coins in the market if all of them operate on blockchains of their own? You might want to consider the algorithms they use to operate their respective blockchains.
Proof of Work vs Proof of Stake
Proof of Work (PoW) and Proof of Stake (PoS) are the most commonly used models by which blockchains are managed. They are consensus mechanisms that secure a blockchain’s operation. And while both models have been successful at maintaining blockchains, they do have differences you might wanna consider.
Proof-of-work (PoW) is the original consensus mechanism used to validate a blockchain and add new blocks. In a PoW model, computers compete with each other to solve mathematical puzzles to verify the legitimacy of transactions in a network and the first to solve one is incentivized with coins from the network. This process, due to its laborious nature comparable to digging minerals off the earth, gave birth to the term “mining”. And the more miners there are in a network, the stiffer the competition is. With the PoW model, cryptocurrency transactions are processed securely from peer to peer without the need for an interceding party.
Some notable examples of blockchains that employ PoW are Bitcoin, Litecoin, and Dogecoin. Ethereum, however, has decided to move from Proof of Work to Proof of Stake.
The Proof-of-stake (PoS) consensus mechanism was created as an alternative to PoW. Here, instead of miners, block creation is given to what are called validators. Instead of awarding crypto to those who work to solve puzzles, this system awards those who choose to support a given blockchain network by committing their assets in it, or staking. If in PoW, you get more crypto the harder you work and the more puzzles you solve, in PoS you are awarded more the more crypto assets you choose to keep in the blockchain network.
Some notable examples of blockchains that use the PoS models are Cardano, Avalanche, Polkadot and Solana.
Although it started out as a joke, Dogecoin, which was inspired by the doge meme, became a massively successful cryptocurrency that created millionaires over the course of a few years. This, along with the Shiba Inu token, is a prime example of a memecoin.
Simply put, memecoins are crypto inspired by memes — usually funny pieces of media that are massively shared online. Many of these coins and tokens come with unlimited supply. Because of this, and the fact that their marketability is motivated by their relevance in the realm of pop culture, their value can be extremely volatile.
Some more notable examples of memecoins are Akita Inu, Samoyed Coin, Monacoin, and Dogelon Mars.
Cryptocurrencies in general are known to be volatile because of their novel nature and completely digital design. This volatility is one of the reasons many are still dissuaded to start participating in the crypto ecosystem. This is because unlike fiat money whose value is pegged to that of gold, crypto’s value isn’t anchored to the physical world. To address this issue, i.e. to create digital currencies that are more stable than existing ones, come stablecoins.
Stablecoins are crypto whose value is tied to another currency, like the US dollar, or an external and material reference, like gold. This however, as recently sampled by LUNA’s plunge, doesn’t make them immune to downturns. And because their price is pegged to real-world financial values, this also means that when the traditional finance system gets down, chances are so will they.
More notable examples of stable coins are Tether, USD Coin, Binance, Dai, TrueUSD.
Choosing a coin to invest in
Every cryptocurrency has strengths and pitfalls. Ultimately, we must try to weigh our options as well as we could and proceed with caution once we’ve picked a coin. Especially when you’re just learning the ropes, be discerning and avoid investing money you are not comfortable to lose. Cryptocurrency is still very young. This makes it exciting, but this also means it has a lot of growing to do. We must find the sweet spot where we get to be part of its future without sacrificing our futures in the process.