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How are cryptocurrencies divided?

There are already several thousand cryptocurrencies today, but not all of them have the same purpose and character, although all are labeled the same - as cryptocurrency. This article will look at different cryptocurrency types and explain how they work.

The initial division begins with Bitcoin as the first and largest cryptocurrency and is, therefore, separated from all other cryptocurrencies. These are collectively referred to as altcoins, ie alternative cryptocurrencies to Bitcoin. Although some cryptocurrencies work on a similar principle and source code as Bitcoin, most altcoins slightly differ. Whether it is because of the algorithms they are made of or protocols on which they work. They can also differ in their nature or platform. This divides them into two categories, which we will introduce in more detail in this article. These are coins and tokens.

But first, we must note that cryptocurrencies are divided on the basis of various parameters. In this article, we will show the difference between coins and tokens. However, cryptocurrencies can be divided based on several characteristics. Such as:

Based on the method of mining

  • – Proof of work, proof of stake

Based on their recoverability

  • – Bitcoin is mined gradually, but there are also coins that have already been pre-mined

Based on their anonymity

  • – Likewise, cryptocurrencies can be divided according to the level of anonymity they provide their users

Based on their purpose

  • – Cryptocurrencies could be divided based on the purpose for which they were created. There are cryptocurrencies that are supposed to serve as a means of exchange, but on the other hand, we have those that are focused, for example, on the optimization of processes in companies,

gaming

  • ,

streaming

  • , and the like.

If you thought that there is only Bitcoin, I recommend you to take a look at the Coinmarketcap page. On this page are almost all cryptocurrencies that are listed on stock exchanges. The crypto world is no longer just about Bitcoin.

Cryptocurrency coins

Coins are a type of cryptocurrencies that function on their own blockchain, such as Bitcoin, Litecoin, but also some cryptocurrencies that are formed by hard forks, by literally splitting itself, such as Bitcoin Cash or Ethereum Classic. Coins usually function as transactional cryptocurrencies , which are designed as currency for the purchase and sale of goods and services. Their purpose is to streamline and decentralize current money so that it is more transparent and does not need intermediaries.

Some coins can even be anonymous, as in the case of Monero. Although coins are generally mined, there are exceptions. So recoverability is not a clear indicator of whether it is a coin or not. In other words, the cryptocurrency that is mined is always a coin, but not the other way around , because there are coins that are not mined. For example, XRP, whose network is not based around mining, but on the synchronization and comparison of data of individual nodes.

Cryptocurrency tokens

Tokens are cryptocurrencies that do not have their own blockchain but function on the blockchain of another cryptocurrency. Most often on the Ethereum blockchain, on which most ICO projects are created, or also Neo, Eos, and others.ICO stands for Initial Coin Offering and it is the process by which most tokens are created, essentially it is the initial donation. Tokens represent the currency of the project to which they belong, but they are also assets that can be exchanged for other cryptocurrencies or assets.

Platforms, therefore, create space for new cryptocurrency projects, such as decentralized applications, in which tokens act as currency, and this way they fuel said applications. Creating a token is logically easier than creating a coin because there is no need to create a new blockchain . This is mainly made possible by the implementation of smart contracts, which operate autonomously and do not need any third party or intermediary. It is also worth mentioning that tokens may have a different role in a given project. We can divide them into utilities, payments, or asset tokens. Each token type is something specific within the project ecosystem.

In general, not only within the realm of cryptocurrencies, the term token refers to a string of letters and numbers that may not contain real data, but is based on or refers to them.

For example, a token might look like this: 947153d332beaf39dec6ebae8883bfb84eda47abccccbc2d61436d8d1e81584d

In the banking world, we all know from first-hand experience, we perceive the token as a unique cluster of characters with no meaning and single-use purpose. In this case, it is connected to the client’s card via a payment intermediary. At the moment when the customer pays with his card, the merchant only receives the token through which the payment is made, but does not see the data associated with the customer’s card. After all, this data does not even play a role in the creation process of the token. If someone hacks the system, the customer’s data is safe because it is owned by a bank or card company.

Jakub is a crypto trader and founder of Trader 2.0 project, which helps hundreds of traders from central Europe to understand cryptocurrency trading and its challenges. Jakub not o...

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