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A Fast Look at the Three Types of Cryptocurrency

March 19, 2018

There are three types of what we call "cryptocurrency": Bitcoin, altcoins, and tokens. They all enable bankless transactions to be processed on a shared ("decentralized") database called a blockchain. Let's look at what defines each of the three types of cryptocurrency.

 

Bitcoin

 

The first blockchain-enabled technology of any kind, not just for a peer-to-peer digital currency, but for anything, ever, was Bitcoin, invented by "Satoshi Nakamoto" in 2008. When the Bitcoin platform launched in 2009, senders and receivers of Bitcoin started completing secure transactions in private without using a third party.

Bitcoin transactions are verified and then stored on a shared “blockchain” database that grows bigger over time as each new block is added. Bitcoin’s transaction verification protocol completely solved the double spend prevention problem that had plagued all previous attempts at creating a cross-border bankless digital currency.

 

The stroke-of-genius cryptological protocol breakthrough that makes Bitcoin possible is very complex and difficult for the average layperson to grasp. But, suffice it to say here, the blockchain is public and encrypted, so everyone can see it, but only the owner of each bitcoin can decrypt it in a way that they can see what it means to them, using their own unique ‘private key’.

 

Miners use their node on the Bitcoin network to verify each blockchain block using a Proof of Work algorithm (PoW). The first miner to verify a single new block is rewarded with newly minted bitcoins.

 

Bitcoin was first used to trade goods and services on Silk Road. At that time, a single bitcoin was worth less than one US penny. By 2014, the use of Bitcoin started to expand outside of the dark web.

 

In 2017, the market for Bitcoin went mainstream, with the price of a single bitcoin reaching $19,000 in December 2017. Anyone holding more than 50 bitcoins became a millionaire. Bitcoin is trading now at around $8000.

 

Altcoins

 

New blockchains were developed to create what we call "altcoins" such as Cardano, Ethereum, Litecoin, and NEO. There are now 1000+ altcoins listed on coinmarketcap.com. Most are alternate versions of Bitcoin with minor changes, still using a PoW (proof of work) algorithm and mining protocol.

 

Some altcoins, though, are very different, like Ethereum and NEO, which use PoS (Proof of Stake). With PoS cryptocoins, miners are replaced by stakers who, like miners, verify transactions for rewards, but, unlike miners, are selected one at a time to take their turn processing a block. Instead of thousands of miners processing a single block in a race to win the reward coins, there is just one ‘staker’ per block. This saves a tremendous amount of energy and requires many fewer computers compared with PoW.

 

Tokens

 

The Ethereum and NEO altcoin platforms are so efficient and flexible that developers use them to build non-currency dApps (decentralized applications) for transacting “tokens”.

 

The "smart contract" is the most significant and far-reaching dApp. A smart contract automatically executes a transaction when certain conditions have been met. A sale is made, moving something of value from the seller to the buyer. The item moved from the seller to the buyer can be almost anything, such as a house, a stock on the stock market, electricity, or a coupon. A dApp might also be used one day to move votes to one candidate or another.

 

Well known tokens include EOS (EOS), Tron (TRX), VeChain Thor (VET and THOR), OmiseGo (OMG), ICON (ICX), Populous (PPT), Binance Coin (BNB), RChain (RHOC), Status (SNT), Maker (MKR), DigixDAO (DGD and DGX), Aeternity (AE), Waltonchain (WTC), Augur (REP), and Veritaseum (VERI).

 

 

 

By: BGN Editorial Staff

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