Every kind of crypto
|— Cryptocurrency isn’t homogenous – there are over 6000 different coins and tokens in the cryptosphere|
— Coins and tokens run on different consensus protocols – this is the system by which each currency validates its transactions. The two principal protocols are proof-of-work and proof-of-stake
— Before deciding which coin or token to buy, it’s important to do your own research by reading up on the rules of how each one operates
Bitcoin might have been the first crypto – but it’s far from the only one. Since then, thousands of coins and tokens have emerged, all using blockchain as a foundation. But what exactly is the difference between coins and tokens, what different varieties are there – and why do we need them?
To really understand what’s going on, and why, let’s take a step back and look at why Bitcoin emerged to begin with.
Why did Bitcoin Happen?
The Financial Crash
If you were around in 2008, chances are you’ll remember that year being dominated by the collapse of the financial system. The crisis brought global trust in banks, reserves and governments to an all time low, as the world pondered a way of doing things better – yet still came up short.
A New Financial Infrastructure
There are two key limitations with using money, and they explain succinctly why we need(ed) banks. The first is trust: in a world where we transact daily with people we will never meet, how can anyone be sure that a transaction between two strangers will be honoured? And second comes the question of logistics: what infrastructure can we use for actually moving that value around?
For both of these questions, we rely on banks. As a trusted middleman, they oversee processes and ensure both sides of every transaction are honoured, keeping track of the global ledger as money is moved around to ensure the value of our money remains the same. Banks are also entry points (nodes, even) to the global payment infrastructure through which we move our money around. It’s clear than that any feesible alternative to traditional banking would need to not only provide an infrastructure for transferring value, but a failsafe way of keeping track of the ledger of transactions – and thanks to the financial crisis, all of this needed to be done without using an entity capable of manipulating, corrupting or gaining from that system.
How Bitcoin Changed Everything
In the tumult that followed the financial crisis, Bitcoin emerged with one central promise: to enable individuals to transfer value between one another, without the need for a cental entity. It was a first step, a revolution and the first step in a much bigger journey, but the important part is this: in its simplest form, crypto was simply a way of transferring value.
We’ve Come a Long Way Since Then
As explained here, most cryptos have their own blockchain with their own rules. These rules are created depending on the specific goals that each crypto wants to achieve.
So what different types of crypto are there? Cryptocurrencies are commonly divided in 3 groups:
- Crypto tokens
This one is pretty easy. If you haven’t checked it yet, this video is exclusively dedicated to Bitcoin. Put briefly, Bitcoin’s goals are about purchasing goods and services and storing value. And its blockchain rules are based on the Proof of Work protocol.
Simply standing for “alternative coins”, this group includes all the cryptocurrencies other than Bitcoin. Today, there are more than a thousand Altcoins in existence. They can be distinguished in 2 subgroups.
- Bitcoin-derived coins: they are alternate versions of Bitcoin with minor changes. Their goals are often to solve any limitations that Bitcoin has. One of the most successful is Litecoin, which aims to improve transaction speed.
- Native coins: they are very different from Bitcoin, in terms of rules, protocols and goals. Among the many rule variations existing between blockchains, there is the choice of validation protocol, between Proof of Work (PoW) and Proof of Stake (PoS). Some famous native altcoins with PoS protocols are TRON (TRX) or TEZOS (WTZ).
Compared to the other two groups, they are completely unique in the fact that they do not have their own blockchain. Instead, they only exist on other blockchains. Wait! What? Have we not just said “one blockchain = one crypto”? Yep. But we also warned you: rules and exceptions. There are several blockchains that allow the existence of tokens on their network. The most famous one is Ethereum.
Consensus Protocols: Proof of Work VS. Proof of Stake
In the Bitcoin network, the verification and validation of transactions is made according to the Proof of Work consensus protocol. But some more recent blockchains are based on another consensus mechanism for verification and validation called Proof of Stake. Here are the main differences.
Another main difference is what PoS allows you to do with your coins: staking. It provides you with the option to generate passive income. By owning such coins, you can delegate some of your assets to a validator. The validator is rewarded with fees and shares parts of it with you. In other words, PoS allows you to grow your assets without doing anything. You don’t even need to be a validator.
Ethereum and its tokens
The Ethereum blockchain was launched in 2015 and ushered in a new era for crypto, what was possible and what we, the users, expected.
Ethereum’s native currency is known as Ether (ETH) and it is part of the Altcoin category. Ethereum quickly became the number two cryptocurrency in terms of market capitalization. While being a decentralized and open-source blockchain, it has made its way to the top by having unique goals and features.
The Ethereum blockchain went far beyond simply storing and transferring value – it was designed to be used as an application layer on which others can build on and create their own platforms. Since it’s open source, anyone can create their own crypto tokens on the Ethereum blockchain (ERC20 tokens) and each token can be programmed with its own rules.
This open source blockchain was the foundation of a number of important developments: the booming DeFi system we see today, that allows thousands of services and platforms to spring up and be used composably, is built on the Ethereum blockchain. It is also the base for the vast marjority of NFTs (ERC-720 tokens), another ecosystem that spring up and is continuing to expand thanks to Ethereum’s revolutionary technology.
The world of Ethereum is a far cry from Bitcoin’s initial function of simply transferring value, changing the face of crypto, enabling new types of transaction between individuals, and raising the bar for what we, the users, can do as part of a global distributed community. And we’re not finished just yet.
A crypto for every use
As you now know, crypto is not just a single unit – there are thousands of different cryptos – some coins and some tokens – and each one exists on its own blockchain, with its own rules, functions and capabilities. That’s why it’s really important to do your own research before buying. Or “DYOR” as the common crypto slang term advises you, so that make sound investment decisions.
Once you enter the crypto universe, your options are limitless. You can easily exchange – or swap – one crypto asset for another, without using fiat. It’s also possible to travel with crypto, to ask for a loan in fiat using your crypto as a collateral, or to raise money for your company using coins. Only you have the power to decide what you want to do with your crypto. The only condition is to own some. Ready?
Knowedge is power.
Trust yourseld and keep on learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block episode all about the different coins and tokens available, and what they mean for you.