So, the world of crypto can get quite confusing.
Once you realize there’s more to it than Bitcoin and miners, it can quickly begin to seem extremely daunting.
Wait, what’s an Ethereum? Isn’t that the same thing as Ether? What about Litecoin? So now there’s ERC20 Tokens??? Why 20? What does that mean??
Well, the 20 doesn’t actually mean anything. I can answer that one right away.
But to tackle the ever-growing world of cryptocurrencies, it’s important to get into the different types.
Yes. There are various cryptocurrencies. Bitcoin is not the end all be all.
Let’s begin nice and slow, shall we?
Coins vs. Tokens
These are not the same thing. To put it simply, coins have their own blockchain. For example, everyone’s favorite, Bitcoin, has its own blockchain. Ether has its own blockchain; it is called Ethereum. Tokens, on the other hand, are also stores of value (representations of assets/utilities) but they operate on pre-existing blockchains. Tokens are created and distributed through the ICO — Initial Coin Offering.
An ICO is similar to its traditional banking counterpart — IPOs. In the crypto world, they act as funding opportunities. If a company wants to create a new coin or token, it will launch an ICO.
If you’re interested in a deeper understanding of this concept, this video does a good job.
Altcoins (Alternative Cryptocurrency Coins)
These are coins that are alternative to Bitcoin in particular. The majority of altcoins are a fork of Bitcoin like Namecoin, Peercoin, Litecoin, etc.
These are not derived from Bitcoin’s open-sourced protocol (they are not modified versions of Bitcoin’s source code) All Altcoins have their own blockchain. They operate separately.
A hard fork is when a group of developers disagrees with the direction that the blockchain network is taking — especially if the updates reduce the rewards given to the miners.
If they decide to fork, the developers first copy the Bitcoin protocol code. Then, they make their changes and decide when the fork will become active.
Below is a more in-depth look at different types of Altcoins — there’s a lot more than the ones here. I’ve just picked and chosen the most significant.
- All payments are recorded on the public ledger (the Blockchain)
- Can send money anywhere in the world at any time
- Transaction fees are considerably less than traditional banks
- Both parties have proof that the payment happened
- Only ever be 84 million Litecoin — no inflation will decrease the value
- Similar to Bitcoin simply because both are cryptocurrencies that rely on the cryptographic integrity of the network
Litecoin wants to become the silver to Bitcoin’s gold. The largest difference between the two is their cryptographic algorithms.
A cryptographic algorithm, also called a cipher, is a set of mathematical instructions used to encrypt/decrypt data. Bitcoin uses SHA256 and Litecoin uses Scrypt.
Hey, remember miners? With Bitcoin, many have chosen to now use Application-Specific Integrated Circuits (ASICs). These are hardware systems made specifically to mine Bitcoin.
The massive computing power used has made mining Bitcoin super inaccessible to the average user. Scrypt, on the other hand, hasn’t reached that level yet.
Another difference is how many coins each can produce. Both are actually infinitely divisible (the minimum quantity transferable of Bitcoin is 1 one hundred millionth or one satoshi)
This divisibility thing isn’t very popular among users. So, wallets like Coinbase and Trezor display Bitcoin values as Fiat currencies (currencies like the Euro or Dollar)
Bitcoin will never exceed 21 million coins. Litecoin will never exceed 84 million coins.
One of the key differentiating factors of this cryptocurrency is its governance and ownership structure.
Bitcoin is decentralized, open sourced, and run by a community that agrees on changes (the use of soft forks). Ripple, on the other hand, is kind of weird.
It is owned by a private company, uses an internal ledger and consensus to make changes.
Wait, if it’s owned by a private company then how is it a crypto? Doesn’t that mean it isn’t decentralized?
It’s kind of confusing, but it is still considered decentralized because it operates on a peer-to-peer distributed network.
Another difference is in transaction time and fees. In Bitcoin, users may pay miners to prioritize their transactions. Ripple has a mandatory minimum transaction cost.
This cryptocurrency aims to create a more scalable coin with quicker transactions. Nano transactions are only verified when a problem occurs — running a node on this network requires much less energy than a network with a proof-of-work model like Bitcoin’s blockchain. They’ve also designed an acyclic graph algorithm called Block-Lattice Infrastructure.
This video does a pretty good job of explaining the algorithm if you’re interested 🔽
This subsection of Altcoins has it’s own sub-sub sections.
Blockchains aren’t particularly scalable. IOTA solved this using DAG and Tangle tech.
DAG — Directed Acyclic Graph is a storage system where individual items link to each other.
Directed = link between items always have a direction
Acyclic = cannot create loops inside the structure
Each square represents a transaction/site which includes transaction details. Each site connects to at least two other transactions called “edges.” These validate the transactions.
Towards the end of the tangle, you’ll find transactions without edges — these are unconfirmed transactions and are rightfully labelled “the tips of the tangle.”
How do you add a transaction to the tangle? The transaction must be attached to one of the tips. An algorithm will select two tips at random and make sure that they don’t conflict with each other.
If the two are not compatible, say one of the tips is for a fake transaction, it’ll be ignored, and a new tip will be chosen. If they are compatible, the transaction is added.
This concept is what allows IOTA’s tangle to be super scalable.
The more it’s used, the faster it gets. The tangle can handle a nearly unlimited amount of transactions per second.
How do you know if you can trust the transactions? In proof-of-work blockchains, users look at the number of confirmations to determine if a block should be trusted.
IOTA uses a weight. This is how much work a node has done for the transaction. This weight is cumulative of connected transactions.
The sum continues to grow with each validating site until the end of the tangle is reached.
Another comparison to draw is with storage — blockchain users must have their own copy of the chain before they can add new blocks/transactions.
With the IOTA tangle, only a small part is needed by each user to create and verify sites. Moreover, IOTA doesn’t have any miners. This means that there aren’t any fees associated with actually sending money.
The scalability of the Tangle will also pose new infrastructure issues. In a world with billions of devices, humans and machines communicating clearly will need higher software and hardware standards.
In reality, IOTA serves Machine-2-Machine transactions by creating a new fee-less economy. It is important to note that IOTA is typically considered an altcoin but in reality, it is an extension of the blockchain network.
IOTA has created a self-sustainable economy based on demand.
Walton Chain (WTC)
This crypto exchange and blockchain project was named after Charlie Walton — the inventor of Radio-frequency ID. RFID is a better version of a barcode — it is a tag attached to objects that doesn’t require line-of-sight for a sensor to read it.
RFID tech is used for things like auto pay at toll booths, tracking animals with microchips etc.
The goal with WTC is to combine RFID and blockchain tech to manage supply chains. It provides product history information and decentralizes the network for access.
THIS IS SO COOL!
In this case, the RFID reader is a node on the chain and the tag used is the device that needs to be connected to the chain. Information is stored here.
Walton Coin is the actual crypto. It’s been set to a total of 100 million coins in the genesis block.
The IoT Chain (ITC) combines DAG tech and the blockchain to power low computing power operated IoT devices. It makes use of asymmetrical encryption — private key.
It uses thousands of nodes and a distributed ledger to meet the storage needs. Because it is decentralized, there is no need for a centralized server cluster. The system also makes use of PBFT (Practical Byzantine Fault Tolerance) to reach consensus and the DAG tech expedites transactions.
PBFT is the skill that a distributed network has to reach a consensus despite having unreliable nodes that fail or send false information. This system reduces the influence of these corrupt nodes.
WTC also uses SPV (Simple Payment Verification) instead of using a complete blockchain to verify payment. This technique was outlined in Satoshi Nakamoto’s whitepaper. It essentially allows a client to verify a transaction without downloading the blockchain in its entirety.
Security and Privacy Altcoins
This is a private and untraceable cryptocurrency that is a fork of Bytecoin. Only the user controls his/her funds (i.e. businesses are able to keep supplies secret)
Monero is extremely scalable and it’s market is stable. Block reward won’t ever drop below 0.3XMR (currency Symbol: XMR).
It makes use of Ring Signatures which ensure that a sender doesn’t know when a recipient spends funds from transaction.
“Transaction Mixing” ➡️ the sender randomly chooses several users’ funds to appear in the transaction as potential sources so no one knows which funds were the real source. The “Mixin Number” is the number of senders added.
Check out Project Kovri. It is currently still in development as an application that will hide internet traffic on Monero.
Monero vs. Bitcoin ▶️ Bitcoin users have a public address where funds are received and anyone may see what those funds are. On Monero, a user’s funds are not associate with his or her public address ➡️ funds are not publicly visible.
When sending funds, they go to a randomly created and temporary destination address. This “stealth address” is what’s recorded in the public record.
This crypto boasts having untraceable transactions thanks to CryptoNote. This is an algorithm that powers Bytecoin’s infrastructure and allows for complete anonymity because users’ addresses can’t be viewed by anyone.
Bytecoin also uses Ring Signatures (similar to Monero)
Bytecoin vs. Bitcoin ▶️ Bitcoin uses SHA-256 algorithm and miners with ASIC equipment have a massive advantage.
This creates a lot of centralization (corporations with enough money to invest in ASIC miners have the upper hand). In reality, this sort of defeats the purpose of the chain in the first place.
Bytecoin wants to eliminate centralization by using a modified PoW algorithm called Egalitarian proof-of-work. This allows for users with regular CPU/GPUs to mine.
This is a second-tier network (peers with other networks) that uses Masternodes. Anyone may host this, but the user must stake 1000 Dash.
Owners of Masternodes participate in the Dash decision making process. Whenever a block is mind, 45% of the generated Dash goes to the miner of the block.
A notable feature of Dash is its services like InstantSend and PrivateSend.
InstantSend: normal payment on Dash is under 2.5mins unlike Bitcoin’s 10mins
Privatesend: makes it harder for anyone to figure out where you sent your money/where it came from
Solar Energy Altcoin
Solar energy producers earn SolarCoins when they present solar renewable-energy certificates. This is a global incentive program in which producers must register with SolarCoin’s foundation.
The rate of reward, for example, could be 1 solarcoin per mwh hour produced. This system is independent from any government institution and is still decentralized.
SolarCoins may be traded for any other currency. The goal is to issue 98 billion coins in the next 35 years.
Many people want to be able to trade their excess solar energy locally. Power ledger enables this by acting as an energy trading platform. With it, excess energy can now be sold to neighbors directly.
The platform consists of an app and some hardware. The unit, called Sparks, is supported by a blockchain called power tokens. These Sparks are stores of value for the energy and is the mechanism for trading.
·On the Steem platform, users receive money for their content dependent upon the number of upvotes they get and their activity with upvoting others. New Steem is generated everyday.
The goal of the platform is to create a free, global digital entertainment system with distributed and decentralized technology. The cryptocurrency used is Tronix (TRX) on the P2P network called Tron.
Tron wants to enable all users to host digital entertainment content on the blockchain-based network. Global audiences will pay the creators of the content to access their stuff. Their current offering is called Exodus.
This is a free P2P platform for the distribution and storage of content. Exodus doesn’t currently make use of blockchain tech but instead a web-based file system that is distributed.
The next phase of Exodus, which plans to use blockchain tech, is called Odyssey. The next two phases, Great Voyage and Apollo, plan to let creators cultivate their brand by using individual initial coin offerings (ICOs)
TRK can be purchased on Liqui and Binance through crypto exchange and is storable on digital wallets that support Ethereum like MyEtherWallet.
This is one of the bigger cryptos around. Ether, like Bitcoin, is open source. Ether’s blockchain is called Ethereum. One of the coolest things about Ethereum are the smart contracts. These don’t just record transactions that occur but also programs them!
It allows your money to invest, save and spend autonomously.
Smart contracts remove the middlemen by allowing exchanges without lawyers or notaries. A large driver of Ether are big corporates like Barclays — they use smart contracts to trade derivatives. They can be programmed using Solidity (a relatively new programming language)
These are small computer programs stored inside a blockchain that facilitate the exchange of values on Ethereum. When run, it executes whatever parameters are set when certain conditions are met, handling the enforcement, management, performance and exchange.
For example, it can be programmed to hold all received funds for a project until it reaches its goal total. If the total is met, the funds are released to the end receiver.
Moreover, tampering with these contracts is near impossible. In a traditional point of view, banks may use these in the future to offer loans by programming the code to only release a loan should a loaner meet certain metrics.
Ethereum allows developers to deploy their own decentralized applications (called DApps). Instead of having to create a separate blockchain for each application, Ethereum allows these DApps to run on one platform.
The Bitcoin blockchain works to track ownership of currency while Ethereum is focused on running the programming code of DApps. Miners on Ethereum are rewarded in ether and sometimes gas.
The Ethereum Virtual Machine (EVM) lets anyone run any program regardless of programming language.
Some of the greatest pros of the decentralized Ethereum platform are:
- Immutability: third party cannot change data
- Corruption Proof: principle of consensus makes censorship impossible
- Secure: using cryptography protect from hacking
- Zero Downtime: apps never go downs
On the flipside, some of the downsides are:
- Can’t Fix Mistakes: if a mistake exists in the code and the contract has been deployed, the only way to stop exploitation is by getting a network census and rewriting the underlying code
- Goes Against the Purpose of Blockchain: by laying out a hard fork and rewriting the rules, Ethereum set a risky precedent
- The hard fork that occurred has now resulted in a split where two parallel blockchains exist
- Ethereum Classic: for uses who disagree with changes to the blockchain even when hacking occurs
- Ethereum: users who agreed to rewrite a portion of the blockchain and return stolen money
Many are unaware that Bitcoin also supports smart contracts — however, it is much more limited.
This fancy sounding crypto I mentioned at the beginning of the article is just an umbrella term of sorts for tokens that operate on the Ethereum blockchain . There are thousands of them. Anyone, really, can create their own cryptocurrency. I did.
Project Article ➡️ coming soon 😊
Project Video 🔽
Woah. That was a lot.
Congratulations to those of you who made it all the way down here — you’ve definitely exhibited a true interest in cryptocurrencies. Here are some of the highlights of the article 😏
- Coins have their own blockchains, tokens operate on existing blockchains
- Altcoins are vast and various — there are general altcoins and also crypto that focuses on specific issues like security or energy
- Ethereum is one of the other large players — makes use of smart contracts
I hope you enjoyed this comprehensive look into the various types of cryptocurrencies! If you did, give it some 👏s and give me a follow.
Feel free to connect with me on LinkedIn as well.
Types of Cryptocurrencies was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.