In early 2009, the digital money we now know as Bitcoin was issued by an unknown developer (or group).
Satoshi Nakamoto was the nickname this programmer used.
In the years since bitcoin was created, the underlying technology that made it possible has taken on a life of its own, and a large number of alternative cryptocurrencies have emerged as direct competitors to bitcoin.
To someone from the outside looking in, the current cryptocurrency market may seem like no more than a collection of services that are vying to capture the attention of potential investors.
What Are The Major Types Of Cryptocurrency?
A huge amount of diversity exists in the cryptocurrency market today.
They use a variety of blockchain technology that was initially developed to power bitcoin, and not all of them are intended to operate in the same way as traditional currencies.
To understand everything, you need to do some diligent research and have a very comprehensive understanding of how cryptocurrencies work behind the scenes.
The following is an overview of the four most prominent types of cryptocurrency, with each serving as a guide for individuals who are not well-versed in the complexities of crypto-technology.
1. Proof Of Work (PoW).
To turn things around, the first type of cryptocurrency is the one that was introduced by bitcoin.
This type of cryptocurrency is based on blockchain technology and relies on a principle referred to as proof of work (PoW) to conduct transactions.
However, to understand its importance, you must first understand what a blockchain is.
A distributed ledger system is what blockchain refers to in its most basic form.
Each computer that is part of a blockchain network is referred to as a node and is responsible for keeping its own copy of the distributed ledger.
This is similar to when you share a copy of a check register with multiple people, except that no member can automatically add anything to the register.
To add a transaction, nodes in the network must compete to solve a difficult cryptographic challenge that represents the data to be added.
The person who is the first to solve the problem will pass the solution on to the rest of the network so that it can be investigated.
Mining refers to the process of trying to become a node on the network that first searches for the correct answer in order to receive a reward from the network.
This technique has become widely known.
It is a safe and self-policing method that ensures complete and accurate record keeping.
In addition to making it possible to use cryptocurrencies, the security provided by blockchain technology is increasingly being adopted by a wide variety of other businesses.
Even the diamond business has adapted it to follow precious stones as they move through the value chain.
Walmart uses it to manage its food supply chain, Maersk uses it to track shipping containers as they travel the world, and even the diamond industry tracks shipping containers to use it.
The Advantages Of PoW.
The work being mentioned in the proof of work is the process.
The proof phase involves the subsequent process of verification carried out by the rest of the nodes in the network.
This is what ensures that the entire ledger remains accurate and those accurate entries are agreed upon by all parties.
Because the only known means for compromise would require a single actor to control more than half of all nodes, it is a system that is intrinsically secure and reliable (this makes it possible for them to make changes at will).
The Disadvantages Of PoW.
The large amount of computing power required for a PoW blockchain system to work is the most significant drawback of using such a system.
Since each node needs to participate in every transaction, simply increasing the number of nodes in the network does not improve its overall speed or throughput.
Because of this, proof-of-work systems do not scale very well and are only moderately efficient.
The blockchain network alone consumes about the same amount of electricity as the city of Las Vegas, according to the findings of a study, which may present a challenge to its ability to maintain its current position as a major cryptocurrency market player.
Cryptocurrencies using PoW.
Bitcoin and Ethereum, the two most important cryptocurrencies in the world, are the most valuable cryptocurrencies in the market right now.
Both these cryptocurrencies are based on the concept of “proof of work”.
They have a market valuation of around $150 billion between them, which is significantly higher than any other competitor.
PoW, which serves as the legacy technology of the cryptocurrency industry, has shown itself to be stable and resilient, leading the two cryptocurrencies mentioned above to unimaginable valuations over the past several years.
2. Proof Of Stake (PoS).
One of the most important issues with proof-of-work systems is that they don’t scale very well.
To address this issue, a novel consensus architecture was designed for the blockchain, allowing transactions to be validated by more manageable groups of nodes.
Proof of Stake, also known simply as PoS, is an alternative method of Proof of Work (PoW) to ensure the integrity of a cryptocurrency.
It is not necessary for every node in a PoS system to validate every transaction. Instead, in order to join a transaction verification group, participating nodes are required to use certain cryptocurrencies they already hold as deposits.
The term “proof of part” comes from “proof of part”, which refers to this deposit.
As a form of punishment, bets tied to any nodes that attempt to defraud or insert false data into the ledger are immediately lost.
Customers who do their best to avoid breaking the rules are rewarded with higher interest rates on their deposits.
In a blockchain that relies on proof-of-stake transactions, it is the incentive system that ensures that everything remains secure and functions in the same manner.
The Advantages Of PoS.
The main advantage of a Proof-of-Stake-based blockchain is the increased processing speed, as you might have guessed.
Since participating nodes are able to break into smaller clusters to operate on individual transactions, cryptocurrencies that use it are able to use parallel transactions, meaning their processing costs are significantly reduced.
It is impossible to stress the importance of this fact.
Even Ethereum, widely regarded as one of the most important proponents of the proof-of-work consensus model, is currently in the process of transitioning to a proof-of-stake blockchain.
They see this as the only way to avoid the ultimate bottlenecks that would bring the PoW system to a virtual standstill as the system continues to evolve.
The Disadvantages Of PoS.
PoS blockchains have several drawbacks, the most important of which are that, in principle, they are not as secure as PoW systems, and over time, they run the risk of becoming significantly less decentralized.
On the subject of safety, the possibility of a person losing their stake as a penalty is only effective as a deterrent if the participant stands to gain more by violating the rules than they lose by doing so.
The incentive to behave ethically would be removed if, for example, a node succeeds in linking a fake transaction to the blockchain with a value that was greater than their stake.
The second issue is related to the proportion of PoS cryptocurrency held by each node.
The higher their assets, the higher their potential number of transactions, and the more interest they will be able to collect.
This can lead to a snowball effect, in which the already most powerful nodes become even more powerful over time, eventually dominating the entire network.
It is possible that the lack of centralized control, which is one of the primary selling points of cryptocurrencies, will become a point of vulnerability for cryptocurrencies based on proof-of-stake at some point in the not-too-distant future.
Cryptocurrencies Using PoS.
There are many cryptocurrencies now that run on proof-of-stake-based blockchains.
Eos, Dash, and Tron are three of them that stand out. Even though they are relatively small compared to the giant PoW, this is about to change in a significant way.
This is due to the fact that, as discussed earlier, Ethereum is getting ready to join its ranks within the next year.
It is also important to note that Proof-of-Stake (PoS) is the foundation for the vast majority of new and upcoming cryptocurrencies.
This is because PoS is widely considered to be the most promising type of scalable blockchain technology.
3. Tokens.
The two types of cryptocurrencies that we have discussed up to this point can be distinguished from each other based on the technology that underlies them.
However, this is not the only form of differentiation you will find in the market.
There are also disparities in the purposes served by the various products and services currently available in the market.
Tokens are the next big kind of cryptocurrency, so let’s talk about them now.
Tokens differ from regular cryptocurrencies in that they are not designed to act as currency that can be used for different types of transactions.
Additionally, they are built on top of already existing blockchains, such as Ethereum; They do not exist as independent systems in themselves.
As an analogy to this idea considers the chips used for betting in casinos. In a sense, this is the easiest way to understand what’s going on here.
Despite the fact that they can be exchanged for cash or other valuable assets, they can only be used in the casino that issued them.
For example, the online music streaming service Musicoin enables listeners to pay musicians directly using a token called simply Music.
The token itself was created on Ethereum’s blockchain, which is home to the vast majority of tokens, however, due to the nature of how it was created, it cannot be immediately exchanged for fiat cash.
Instead, in order to withdraw their profits, artists who are compensated in this way are first required to convert their tokens into regular cryptocurrencies such as bitcoin or Ethereum.
The Advantages Of Tokens.
You probably already have some ideas about the many different ways to use crypto tokens.
Because they can be used to represent assets or units of value, they are ideal for single-purpose apps that are built on top of existing blockchains to provide liquidity to markets that are currently not liquid.
A prime example of this concept is found in the real estate market.
The token can be used to represent real estate holdings, allowing owners to trade shares of the property in the same way that they would trade stocks or bonds.
Tokens are also being used in commodity markets including energy trading and other similar activities.
The Disadvantages Of Tokens.
Using crypto tokens as a direct means of trading works quite well in practice.
On the other hand, problems usually arise when one tries to get value from the ecosystem to which the token belongs.
Since tokens cannot be immediately traded for fiat currency, it is difficult to determine their exact value at a particular point in time.
This is something that was noted earlier.
Furthermore, they are dependent on whatever happens with the primary blockchain, regardless of how it might affect them.
If there is an attack on that blockchain, it will have an effect on all connected tokens.
Additionally, if the blockchain that all related tokens belong to, undergoes a technical adjustment (such as Ethereum’s transition to PoS, discussed earlier), this could have far-reaching implications for those tokens.
Major Tokens.
Surprisingly, there are so many coins currently in circulation that it would be impractical to list them all in this article.
However, in the eyes of the general public, only two are worth noting: BAT and Tether.
Within the recently launched Brave web browser, a cryptocurrency known as BAT, which is an abbreviation for Basic Attention Token, can be used as a payment mechanism.
As a means of changing the current dynamic, which has resulted in the widespread adoption of ad-blocking technology, the plan is to provide a financial incentive for people to view the ads displayed online.
Tether, on the other hand, is a token that was created with the singular intention of always having a value that is equivalent to the United States dollar.
Stablecoins are the next kind of cryptocurrencies we’re going to eliminate, and Litecoin is a part of that group.
4. Stablecoins.
Stablecoins are digital currencies designed from the ground up to serve as a reliable medium of exchange and storage of value, as their name suggests.
They came into existence due to the fact that traditional cryptocurrencies like Bitcoin and Ether (the coin representing Ethereum) can experience huge price fluctuations in a short period of time, making them challenging to handle.
Because of this, some people investing in cryptocurrency became multi-billionaires overnight, only to see their wealth vanish almost as soon as they were created.
Stablecoins are a type of cryptocurrency that can be traded for fiat money but are similar to tokens in that they are built on top of existing blockchains.
This makes them somewhat of a hybrid between a token and a traditional cryptocurrency.
They fulfill an extremely important function for the market by making it possible for day-to-day, regular transactions that are unaffected by price changes.
Most stablecoins are able to tie their value to one or more fiat currencies and maintain reserves of those fiat currencies as value insurance for their tokens.
The Advantages Of Stablecoins.
The characteristic volatility of cryptocurrencies is one of the primary hurdles that must be overcome before they can be fully integrated into the economy of the wider world.
Because of this, it is challenging for banks to deal with cryptocurrencies, for stores to accept them as payment for goods and services, and for consumers to use cryptocurrencies as a vehicle for savings.
As a default storage medium for investors, cryptocurrency exchanges increasingly use stable coins such as Tether, which is pegged to the United States dollar.
It is similar in concept to the symbolic form of a traditional currency.
Due to the need to liquidate the holdings to avoid losses, it will be very difficult for investors to acquire and sell them when crypto-assets are not available.
The Disadvantages Of Stablecoins.
The fact that holders of stablecoins are forced to rely on organizations that manage stablecoins to maintain real cash reserves to guarantee the value of their coins is a primary concern associated with the use of stablecoins.
In particular, some concerns have been raised regarding the procedures Tether employs with respect to its currency reserves.
Because stablecoins are not guaranteed by any government, there is nothing to stop one from disappearing into thin air as a result of poor governance.
Major Stablecoins.
There are a few more examples available in the market today besides Tether, which accounts for almost 90 percent of the total amount traded in stablecoins.
Paxos, Gemini, and TrueUSD are the three most well-known exchanges in this group.
However, there is another stablecoin on the horizon, and it has been gaining a lot of attention over the past several months.
It’s called Libra, and it’s a cryptocurrency backed by Facebook that caused an uproar earlier this year when a congressional hearing was held to discuss the company’s plans to launch a cryptocurrency.
Nevertheless, if Libra succeeds in overcoming regulatory hurdles, it has the potential to become the dominant stablecoin almost immediately, which will fundamentally change the nature of the cryptocurrency market.
Conclusion.
It should be clear at this point that there is more to the cryptocurrency than is initially visible to the naked eye.
It is a diverse market consisting of four main divisions that are discussed in this article, apart from coins and some types of cryptocurrency’s that blur the lines between them.
It is also important to point out that this market is one that is experiencing almost constant change.
Consider the fact that none of the things you read about in this article existed before 2009;.
In fact, most advances, such as stable coins and proof of stake, are much more recent than that. This is proof that blockchain technology is relatively new.
Because of this, it is not hard to imagine that the four types of cryptocurrencies described in this article will not be the last of their kind.
In fact, there is a very good chance that they will be replaced in the coming years with more modern variants.
Despite this, it is important to understand the current situation.
This will lay the groundwork for an understanding that will make it easier for you to understand the changes that are almost certain to happen in the not-too-distant future and will prepare you well to embrace the cryptocurrency future that is currently taking shape in front of our eyes.
