Not every currency is cut from the same cloth. There are differences between the blockchain technology they use and their intended use case. There are currently, as of March 2019, 2103 different cryptocurrencies listed on the CoinMarketCap price and trading data portal. The first 1781 have a known market capitalisation and circulating supply. The smallest market cap is that of CJs, at $59 divided between 1712 tokens in circulation. At the opposite end of the scale is Bitcoin with a market capitalisation of over $68 billion divided between 17,583,875 units of the cryptocurrency in circulation.
It’s fair to say there are a lot of different cryptocurrencies. They are all based on blockchain technology, the decentralised, P2P digital ledger system. Blockchain is, however, more of a group of technologies and different routes to the same destination. It’s not one tightly defined technology replicated for each use case.
Blockchain’s role is the technology solution to the cryptocurrency need for transactions to be processed via the P2P network without reliance on any central authority. Blockchain then maintains the accurate and secure record of those transactions preventing issues such as ‘double spend’. But there are differences in the methodology blockchains used to achieve that end result.
The over 2000 different cryptocurrency coins and tokens currently in existence represent that range of blockchain structures. Some are very similar to each other while others are really quite different. There can be many small differences between different cryptocurrencies but they can also be grouped together under a handful of main categories. Here we’ll explain the main groups that cryptocurrencies can be split between and categorised are. Some are based on differences in the blockchain approach used while others distinguish on the basis of use case.
Proof-of-Work Blockchain Cryptocurrencies
Cryptocurrencies are called cryptocurrencies because the blockchain technology that supports them uses cryptography to process transactions and maintain their historical record securely. Cryptography is a way to encode data that can be decoded only by solving complex mathematical puzzles. The answer to these puzzles is called a hash. Groups of cryptocurrency transactions are confirmed and locked into the blockchain’s ledger when the hash of the group, or block, is solved.
The task of finding the hash is given to commercially incentivised participants in the P2P network. These special nodes are called ‘miners’. They provide computational resources to the solving of the hash and compete against each other to be the first to do so. The successful miner is rewarded for solving the hash first with a payment of newly minted cryptocurrency units. This compensates them for the overheads involved in being a miner such as investing in hardware with sophisticated chips and the significant amounts of electricity consumed. The idea is the miner is also left with a profit, which incentivises participants in the P2P network to become ‘miners’.
PoW, as the approach the Bitcoin blockchain uses, was the original blockchain consensus algorithm. Other examples of prominent cryptocurrencies that use the proof-of-work methodology include Ethereum, Litecoin, Monero and zCash.
A drawback of PoW blockchains is that the mining process is energy intensive, which can be considered an inefficiency.
Proof-of-Stake
The other common blockchain technology methodology used by cryptocurrencies is called proof-of-stake. A proof-of-stake blockchain doesn’t rely on miners. But there are still nodes that validate blocks of transactions. They are referred to as stakers. Stakers don’t compete against each other to be the first to solve a block’s hash. They are randomly selected from the P2P network and invited to validate a block. So the more units of a PoS cryptocurrency you have the more likely you are to be invited to be a staker for a block. It’s a bit like jury duty.
Stakers are also remunerated for their contribution to the blockchain network and receive a fixed allocation of cryptocurrency coins for any block they verify. Staking is more energy efficient than mining as there are not numerous stakers competing against each other to be the first to solve a block’s hash.
The downside to a proof-of-stake system is that it opens the door to the theoretical possibility of an ‘oligarchy’ forming around a cryptocurrency. If a few holders have a large percentage of the coins in circulation they will inevitably be regularly selected by the blockchain as stakers, further consolidating a position of control over the crypto.
NEO and Dash are the most prominent cryptocurrencies to have selected to use blockchains that utilise the proof-of-stake methodology.
Not All Cryptocurrencies Run on Decentralised Blockchains
It is important to add that there is a category of cryptocurrency that is not based on a decentralised P2P network. There are also private blockchains and Ripple is an example of a major cryptocurrency run on a private, centralised blockchain. Designed to be used within the traditional banking system for faster payments processing Ripple’s blockchain is controlled by a central authority – Ripple Labs, the company behind the cryptocurrency.
‘Currency’ Cryptocurrencies and ‘Utility’ Cryptocurrencies
As well as the kind of blockchain methodology they employ, cryptocurrencies can also be categorised by use case. The two main types of cryptocurrency by use case are ‘currency’ and ‘utility’ cryptocurrencies. The former are cryptocurrencies like Bitcoin and Litecoin which are intended to be eventually used instead of or alongside traditional fiat currencies in a future, evolved monetary system. So instead of buying your coffee or apartment in dollars you might do so in Bitcoin.
The other type of cryptocurrency is ‘utility’ cryptocurrencies. Ethereum, the smart contracts platform, is the most prominent example of a utility cryptocurrency and NEO, Ripple and EOS are further examples. Utility cryptos can only be ‘spent’ within the environment of their native blockchain. They are used to pay for bandwidth of the blockchain platform, which will have a particular function. That’s a smart contracts platform in the case of Ethereum, NEO and EOS and a payments processing platform in the case of Ripple but could be anything that blockchain technology can be applied to.
Altcoins
Altcoin is a term that refers to any cryptocurrency that is not Bitcoin, the first to be launched.
Dapp Tokens
Dapp, decentralised application, tokens differ from other kinds of cryptocurrency in that they don’t have their own blockchain. These are tokens associated with decentralised applications built on smart contracts blockchains such as Ethereum or EOS. They are something like ‘sub-blockchains’ of the main platform blockchain and don’t have their own infrastructure.
All ICO tokens fall into this category, though are sometimes converted into stand-alone cryptocurrencies post-ICO if the company then builds its own blockchain. Tokens used to play Ethereum-hosted games like CryptoKitties also come under this category.