Why are there so many cryptocurrencies?
Even if you are new to cryptocurrencies, you’ve likely heard of bitcoin. But people make a common mistake when they think that bitcoin is the only cryptocurrency. In fact, there are over 1,500 different cryptocurrencies, with more and more being created each day. You might be asking,
“Well since we have bitcoin, why do we need other cryptocurrencies?”
Bitcoin has proven its value as a medium of exchange, but there are actually a lot more functions a token can have than simply acting as money. Here are the different types of cryptocurrencies that are out there right now, each serving a specific function.
We’ve already touched on the first, and most obvious, application of cryptocurrency, and it’s right there in the name. A secure currency that can be easily transmitted for payment or as a store of value was the original application.
Don’t think that bitcoin is the only currency-based coin. Projects like Litecoin and Bitcoin Cash have the same goal as bitcoin, but they have tweaked the bitcoin protocol in order to make some improvements. For example Litecoin confirmation times are four times faster than bitcoin’s.
While the first cryptocurrencies were intended to act as currency, other projects have utilized blockchain technology in order to create different types of coins. One of the most notable types of tokens are known as platform tokens.
Platform tokens are a little bit less restrictive than their currency counterparts. With the utilization of smart contracts, these blockchains allow developers to build their own decentralized applications (dApps) using the currency.
A major characteristic of blockchains are anonymity. But some coins, like bitcoin, could be traced and with forensic analysis and could possibly be linked to an individual. For this reason bitcoin is consider semi-anonymous. Some currencies have decided to seize on that semi part, with the goal to make the use and transmission of cryptocurrencies completely private.
These privacy tokens use a variety of methods, all having the same results. Your coins are virtually untraceable. Examples of privacy tokens are Monero, Zcash, and Dash, all of them highlighting privacy as a major plus for their currency.
With the rise of cryptocurrency exchanges, we are actually seeing a new type of token that has been created. These “index coins” derive value from the exchange they are representing. An incentive mechanism is introduced in some way, like reduced fees if you pay with that exchange’s token.
Outliers & Overlaps
Not every coin falls perfectly into every category. Some are actually hybrids of multiple different types of coins. And most of them maintain a monetary value, so most have a currency application.
I guess what I’m saying is there are a lot of gray areas, and the boundaries or goals of each coin is still evolving. So there’s a lot of room for interpretation, and these classifications are definitely pretty loose.
WTF IS is our series where we explore some of the most frequently asked questions about blockchains, cryptocurrencies, and the technology surrounding these fields. Looking to get acquainted with blockchain? Then WTF IS is the perfect series for you!
If you enjoyed this video and series idea, please give us a “Like.” And don’t forget to subscribe to our channel so you can stay tuned for more installments of WTF is and other series! Feel free to reach out too if you have ideas for us to cover!