Cryptocurrency Explained
In short, these are virtual or digital currencies. They make it possible to make transactions without an intermediary. They use cryptography to secure the personal information of the users of a network. Blockchain enables it to be decentralized because all the data of transactions is stored across the nodes (participants) of the network making it very transparent. If someone alters a transaction, it has to be verified by the other nodes making it almost impossible to change the blockchain which also grants security.
To acquire such currency a user must mine it, buy it, or get rewarded for doing work on the blockchain (participating in consensus mechanisms). Some of these digital assets are used for transactions between people, while others are created to provide more services like creating apps by using them on a blockchain. That’s why we will show you the major types of these digital currencies to make you more competent and aware of what you are looking for when choosing between different tokens and coins to buy.
Payment Cryptocurrencies
Their main goal is to compete with traditional fiat money by providing easier or more secure payment methods. Because of that their functions are limited compared to the other types of tokens. These functions include defining, transferring, recording, and securing transactions on the network. The oldest and also the most famous example of this category – Bitcoin – is often classified in the payment category. Its competitors aim to improve its cons like slower transactions and smaller scalability. To sum up, the goal of these coins is to offer an alternative method of traditional payment.
Infrastructure Cryptocurrencies
They are also known as utility tokens. Suppose someone wants to make a decentralized app (a decentralized application’s backend code runs on a distributed computer network) on a blockchain (not all blockchains can be used for that). In that case, he must buy such decentralized infrastructure tokens to be able to build his app and make it run on the network.
The most famous example of this category is Ethereum whose tokens are called ether. To create or use a Dapp that uses Ethereum’s blockchain its users must purchase ether. Usually, networks with such tokens also use smart contracts because they make it easier to create decentralized apps (Dapps). Depending on the blockchain that is used the utility tokens that must be purchased are different.
Financial Cryptocurrencies
This type is usually used to help users manage or exchange other crypto assets (one example is helping to trade in DEXs). In previous articles, we mentioned initial coin offering (ICO) and how it works. Financial tokens are used for ICO because they make the whole process of funding easier. Also, the more complex examples of these coins enable borrowing, lending, market lending and even getting rewarded if you predict correctly certain events or price levels.
Service Cryptocurrencies
Possessing such tokens or coins can offer its owners access to an app or decentralized exchange and also tools helping to manage their digital assets. Usually, they are used to give users a digital identity and to link their personal records to the blockchain. They can be used for many other activities such as cloud storage of data like Storj. These tokens find great application in the healthcare industry.
Media & Entertainment Cryptocurrencies
As the name shows these tokens are used in video games, social platforms, or gambling. They are used to reward the users of the apps and their developers. Usually, they are applied in digital worlds which can be entered via virtual and augmented reality technologies. Another possible use of these tokens is getting rewarded for watching videos. Everyone hates watching an ad in the middle of a video game or while watching a video. However, if people are incentivized to do so, they will enjoy that ad more and may pay more attention to it which will lead to more equitable benefits for the creators of the ad and the watchers of it.