Nowadays, there’s no need to explain what Bitcoin or Ethereum are — those are the very first things you learn when entering the crypto world. But there are hundreds and thousands of other cryptocurrencies — and no one even knows how the heck many are out there really. Some say about 2000, some say 5000+. But why are there so many — and how are they all different?
Let’s imagine ourselves as naturalists watching cryptocurrencies in their natural habitat. The first goal for scientists like us is to describe and classify them. So, what are the signs cryptocurrencies are different?
There are two major types of cryptocurrencies. Those built on their own blockchain are called coins, and those using someone else’s blockchain are referred to as tokens. Bitcoin, Ethereum, Ripple, and many other altcoins use their own blockchain infrastructure. Their blockchains are used by the rest of the currencies called tokens.
Altcoins are all cryptocurrencies (coins and tokens) besides Bitcoin.
One type of cryptocurrencies are mostly often used as digital money. They are the closest analog to regular, so-called fiat money (like US dollars or Euro) — you may spend them on different services, send them to your friend, etc. Those are Bitcoin, Litecoin, Monero, and others.
The rest of the cryptocurrencies are used as a currency within certain projects. They are issued by these projects and give their holders the right to participate in them. For example, Ether coins are used within the Ethereum ecosystem — they digitally represent real assets. If you want to sell your car securely without intermediaries and commissions, you may use smart contract technology based on Ethereum blockchain. In this bargain, Ether coins will be an equivalent of your car.
Currencies used within certain projects have their own price, too. Some people don’t use them within these projects but buy and sell them to profit as from any other currency.
Ethereum coins are based on their own Ethereum blockchain. But there are other tokens based on this blockchain. It means that Ethereum shares its infrastructure so that other projects can use it for their purposes. For example, the NOW token issued by ChangeNOW is based on both Ethereum and Binance blockchains. If you have NOW tokens, you may use them within the ChangeNOW ecosystem to vote for different cryptocurrencies. If any of them gets enough votes, we add it to the list of currencies available for exchange at ChangeNOW.
In Bitcoin, transactions may take up to 10 minutes and more. In Litecoin, they take seconds. This has been achieved through improved blockchain algorithms. Litecoin transactions are also cheaper, so you can send smaller amounts — which is just pointless in Bitcoin with its costly transactions.
For some cryptocurrencies, mining is the way new coins or tokens are issued. Since blockchain is the history of all transactions of a cryptocurrency, when new transactions occur, they have to be verified and added to this list. This is a costly process of solving cryptographic equations that requires a lot of electricity. Miners do this work. If you are a miner and you finish it faster than your rivals, you receive coins as a reward. This is mining that uses Proof-of-Work algorithm. Bitcoin and Monero are among those using this technology.
In other cryptocurrencies, a part of the coins or tokens may be already issued (premined) before the ICO — a moment when a new currency is introduced to the public. The rest of the coins or tokens may be mined.
Another way to verify transactions uses the Proof-of-Stake algorithm. Here, all stakers are selected one by one to verify each block. This means that each block is verified by only one staker — thus, much less electricity is used. Stakers are chosen by the network depending on their share of cryptocurrency — the more currency you have, the more is the chance you’ll be selected to verify a block (in Proof-of-Work algorithm, you win if you have a greater computing power). Cryptocurrencies that use PoS algorithm are NEM, Factom, and others.
There are many other algorithms different cryptocurrencies use to verify transactions.
In Bitcoin, the history of all transactions is written in blockchain and can be read by anyone, so the system is rather transparent. In Monero, you cannot see the digital addresses of senders and the receivers, same as the value of the transaction. This is why they are called privacy coins. Besides Monero, there are ZCash, Horizen, and many others. Such coins are commonly considered to be the most convenient for illegal use.
Most cryptocurrencies are rather volatile — they grow and lose in price quickly. This is why stablecoins have appeared — a type of cryptocurrency pegged to fiat (regular) currency, gold, or another crypto. This is designed to minimize the volatility of the stablecoin price. The most popular stablecoins are Tether, Paxos Standard Token, USD Coin, and others.
Lack of agreement between certain cryptocurrency users. When problems in using a currency occur, users propose many different ways to solve it. Sometimes disagreement between them becomes so dramatic that an existing cryptocurrency splits in two independent ones. This is called a hard fork of a cryptocurrency. As an example, in August 2017, transactions in Bitcoin became too slow and costly because of the limitations on block size. A man called Amaury Séchet proposed to increase the limit of the block size from 1 Mb up to 8 Mb. This is when his product, new cryptocurrency Bitcoin Cash, was hard forked from Bitcoin.
New projects and their needs. If you want to build your own betting platform (like Augur) or a network to sell computing power (like Golem), you would consider using blockchain technology and creating your own cryptocurrency. When we launched ChangeNOW, we realized we need our own token to push some of the processes forward. This is how the NOW token was born.
New technological solutions. As you can see, there are dozens and hundreds of variations in cryptocurrency kinds. You may always create a new faster operating, more stable in price, and more secure cryptocurrency — the market is open. Make sure your solutions find support in crypto society — and go for it. Who knows, maybe you’ll become a creator of the new Bitcoin?