Sample Classification Essay: Types of Cryptocurrencies
People created monetary mediums to easily complete transactions without the need to carry large amounts of gold and bartering items. This led to the wide use of paper money, coins, and other physical currencies. These items are small and easy to carry which allows individuals to travel long distances and transact. With the introduction of the digital age and reliance on the Internet, individuals began utilizing online money transfers to complete cashless transactions. Most banks have online services that allow account owners to check their balances and send money online. Various remittance services have also begun offering cashless transactions for their users. This widespread use of online and cashless transactions allowed digital money like cryptocurrencies to become popular among Internet users. Individuals can use cryptocurrencies to purchase certain items online as well as exchange them for real-world money. However, as the crypto industry grows, hundreds of new cryptocurrencies emerge. The high number of cryptocurrencies in the market can make it difficult for individuals to understand the industry. This classification essay will provide a simplified categorization of cryptocurrencies by classifying them into crypto coins and crypto tokens.
Cryptocurrencies are digital currencies that individuals can purchase online and exchange for other mediums. Individuals can exchange cryptocurrencies for crypto coins and tokens, or convert them into real-world money. The value of cryptocurrencies depends on the market which makes them extremely volatile. However, crypto transactions are decentralized which means that there are no institutions that regulate the exchanges and the government does not receive taxes from the transactions. They are bank-free methods of wealth exchanges between individuals inside a network (Tardi 2021). In the cryptocurrency world, a network of computers records and approves each transaction (Northeastern University n.d.). The public or the market operates these networks which allow cryptocurrencies to remain decentralized but still have secure transactions.
Cryptocurrency transactions are peer-to-peer contracts similar to online payment systems. To store and own any cryptocurrency, an individual must have a virtual crypto wallet. Crypto wallets are e-wallets that individuals can simply download online or purchase in certain stores. These e-wallets have strict security measures, such as unique seed phrases, to avoid hacking attempts. Cryptocurrency transactions tend to be anonymous and do not require the receiver to know the identity of the sender and vice versa. As mentioned earlier, computer networks approve transactions. The computer networks serve as ledgers or “blockchain” that records all the transactions within a crypto network. Cryptocurrencies utilize different blockchains which means that Bitcoin (BTC) has a unique virtual ledger from Binance Coin (BNB). This variation allows cryptocurrencies to operate separately from others and utilize different approaches like proof-of-work and proof-of-stake models. These models affect the market’s ability to mine or create cryptocurrencies. Still, the varying cryptocurrency models will allow individuals to anonymously transact within a network.
Most virtual currencies are unregulated digital money that their developers can control while a virtual community trades and exchange them within a network. According to Malik (2016), virtual currencies have two different types, which are open and closed types. The closed virtual currencies are digital money that only possesses value inside a “closed system”. A closed system can be an online video game or an application that utilizes a particular currency. Individuals can purchase closed virtual currency with real-world money but cannot exchange virtual money for real-world money. Alternatively, open virtual currencies are digital money that allows two-way transactions and possesses value outside of a system. Individuals exchange real-world money with open virtual currencies and vice versa. Most cryptocurrencies are open types since they have equivalent value to fiat money, such as the US dollar. While the open and closed types are effective for classifying virtual currencies, individuals cannot utilize them in the classification of cryptocurrencies.
While all cryptocurrencies are decentralized and open virtual currencies, they have differences regarding their developers, blockchains, and purpose. Some cryptocurrencies are for monetary exchanges while others are unique tokens for online games that players can convert into fiat money. Different cryptocurrencies utilize different blockchains that separate them from each other. It is also important to note that cryptocurrencies like Ethereum (ETH) and Binance Coin (BNB) have systems that allow “smart contracts”. These smart contracts allow other cryptocurrencies to transact under Ethereum’s and Binance’s blockchains. Individuals can refer to the cryptocurrencies under these blockchains as crypto tokens (Liquid 2021) while they can refer to ETH and BNB as crypto coins. This difference allows a simplified classification of cryptocurrencies into crypto coins and crypto tokens.
Crypto Coins
Crypto coins are cryptocurrencies that have their own blockchains. Cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and Binance Coin (BNB) are some of the popular crypto coins today. These currencies own blockchains that allow smart contracts and provide an opportunity for crypto tokens to increase in value. Individuals can directly exchange crypto coins with fiat money through various services. Individuals can also mine crypto coins through different models such as the proof-of-work and proof-of-stake systems. However, crypto coins have a limited supply and miners will eventually retrieve them all. This limited supply makes crypto coins scarce which adds to their value. In essence, crypto coins are blockchain-owning currencies that users can mine and directly exchange for fiat money.
1. Bitcoin (BTC)
The most popular crypto coin is Bitcoin (BTC) which Satoshi Nakamoto released in 2009 as open-source software for peer-to-peer transactions. The creation and release of Bitcoin allowed unsafe decentralized financial systems that do not connect to any banking systems (Miller 2015, as cited in Malik 2016). The unsafe characteristic of Bitcoin (BTC) during its early stage led to various security issues during 2010 and 2011. Bitcoin exchanges became prone to hacking, digital theft, and fraudulent transactions which resulted in Bitcoin’s lowest value of 0.01 BTC per USD. However, with the continuous effort of the creators, including the acquisition of a European bank license, Bitcoin reached a value of 1 BTC per 100 USD in 2013 (Malik 2016). As of writing, 1 BTC is equivalent to 56,700 USD making it the largest and most expensive crypto coin in the market.
2. Ethereum (ETH)
Next to Bitcoin (BTC) is Ethereum’s crypto coin Ether or ETH. Etheruem started in 2015 and is currently the second-largest crypto coin with a current price of 1 ETH per 3,600 USD. Unlike Bitcoin, Ethereum provides a platform that allows smart contracts for crypto tokens to operate on its blockchain. Due to this, developers of NFT projects utilize the Ethereum blockchain to fund and maintain their works. According to Investopedia, Ethereum aims to provide easily accessible decentralized financial products which include NFT games, services, and other projects. It is important to note that users with crypto tokens under the Ethereum blockchain will need to convert the tokens into crypto coins or ETH before they can exchange them for fiat money. These transactions allow crypto coins to continuously grow and increase in value.
3. Cardano (ADA)
Another good example of a crypto coin is Cardano’s ADA. Cardano is unique from other crypto coins as it pioneered and utilizes the proof-of-stake model. The proof-of-stake model allows stakeholders to verify crypto transactions instead of a large network of powerful computers. In this model, users will need to deposit crypto coins to become participants in transaction verifications and crypto mining. Proof-of-stake is a less expensive and energy-saving alternative to the traditional proof-of-work model of Bitcoin. While the proof-of-work model is effective in securing transactions and preventing hacking, the hardware requirements limited the market majority’s capability to participate in mining. The innovative proof-of-stake model allowed Cardano to gain an advantage over the competition and become a valuable crypto coin. As of writing, 1 ADA is equivalent to 2 USD with most crypto investors having bullish expectations.
4. Binance Coin (BNB)
Binance coin (BNB) is another crypto coin that is currently experiencing an uptrend in its value. The Binance coin (BNB) is initially a utility crypto coin for travel services, entertainment, investment, and other online payments. The Binance coin (BNB) was initially a crypto token under the Ethereum blockchain. However, its continued growth allowed it to establish the Binance blockchain and become a crypto coin. Binance’s current success is due to the increasing popularity of NFT video games and projects. Individuals in the Binance platform can use Binance coin (BNB) to purchase NFTs or invest them in NFT games. The current popular games in the Binance blockchain are Cryptoblades, My Defi Pet, and Crypto Zoon. These games have unique crypto tokens under the Binance blockchain that produces regular transactions in the network and contributes to the growth of the platform. As of writing, 1 BNB is equivalent to 400 USD and is continuously increasing. The Binance platform has also become one of the most popular sites that crypto enthusiasts use to store and trade different cryptocurrencies.
Crypto Tokens
The crypto token group is the second classification of cryptocurrencies. Unlike crypto coins, crypto tokens rely on other blockchains and smart contracts to complete transactions. To own crypto tokens, individuals must first purchase crypto coins and convert them into tokens. This makes crypto tokens reliant on crypto coin values. Developers of NFT projects can easily create crypto tokens and release them under a blockchain. Since the market dictates cryptocurrency prices, crypto tokens can have varying values depending on their reception. However, since any developer can create a crypto token under a blockchain, scammers can easily enter the market and trick users to buy their cryptocurrency. This makes crypto tokens less safe than crypto coins with established blockchains and network models.
1. Utility and Meme Tokens
There are thousands of crypto tokens available across different blockchains in the crypto market. One blockchain can cater to hundreds if not, thousands of crypto tokens. The Ethereum blockchain provides smart contracts for tokens like Tether (USDT), Wrapped Bitcoin (WBTC), and Augur (REP). The Binance platform includes the tokens PancakeSwap (CAKE), Dogecoin (DOGE), and Cryptoblades (SKILL). Crypto tokens have varying usage and some even allow cross-platform exchanges. For example, the Tether (USDT) token is a stable cryptocurrency that maintains a value of one dollar per USDT. This type of token is popular for users that want to maintain the dollar value of their cryptocurrencies and avoid the volatile trends in the market. Tokens like CAKE act as “stocks” for their accompanying service (PancakeSwap). PancakeSwap is a cryptocurrency converter service that allows users to exchange tokens for other tokens. Crypto tokens like the Dogecoin (DOGE) and Catecoin (CATE) were initially meme tokens that had no specific purpose than to exist in the blockchain. However, the meme tokens established a community that utilized the currency to donate to charities and sponsor events. The wide utility of crypto tokens has many uses as individuals can create tokens for specific purposes and allow the market to establish its monetary value.
2. Non-Fungible Tokens
There are crypto tokens like Cryptoblade (SKILL), Smooth Love Potion (SLP), and Splinterlands (SPS) that individuals mainly use for NFT gaming. NFTs or non-fungible tokens are digital art pieces that users can purchase using crypto coins and crypto tokens. The value of NFTs is dependent on the market similar to real-world art pieces. NFT game developers utilize this system to develop play-to-earn games. In NFT games, players can purchase NFTs (which are mostly the in-game characters) and use them to earn tokens like SKILL and SLP. Players can then withdraw and convert these tokens into crypto coins and eventually exchange the coins for fiat money. NFT games like Axie Infinity allowed players to earn around 200 USD per month during their peak. However, the market’s volatility has caused a downward trend in certain tokens including Axie Infinity’s SLP.
It is also important to note that NFT games have high investment costs and high risks. During Axie Infinity’s peak, players had to spend around 900 USD to purchase enough NFTs and start the game. The high investment cost was due to the game’s high-profit potential and quick return on investment. However, the entry price has decreased and as of writing, players will only need to spend around 450 USD to enter the game. This high investment cost leads to high risks since investors may become victims of fraudulent transactions and rug pulls. Rug pulls happen when a developer suddenly disappears after receiving money from investors and buyers. The anonymity that cryptocurrency transactions provide allows individuals with ill intentions to perform scams and rug pulls (Urian 2021). The threat of rug pulls is high in the cryptocurrency market since any developer can release a token and control its initial price and volume. Experts suggest that individuals should perform extensive research about an NFT developer before they consider investing and purchasing crypto tokens.
Conclusion
Since all cryptocurrencies are decentralized open virtual currencies, they have varying usage which can lead to complex and overlapping categories. The crypto coin and crypto token categories provide a simpler classification of cryptocurrencies. Crypto coins, such as Bitcoin (BTC), Ether (ETH), and Binance coin (BNB) own blockchains that allow users to mine the currencies. This cryptocurrency category allows owners to directly exchange coins for fiat money. Crypto tokens, on the other hand, are cryptocurrencies that rely on crypto coin-owned blockchains. This category has various uses from utility payments to NFT game profits. Tokens are reliant on crypto coins and developers have an easier time creating them. As the cryptocurrency industry grows, new categories may develop as new forms of cryptocurrency emerges.
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References
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Conway, Luke. 2021. “The 10 Most Important Cryptocurrencies Other than Bitcoin.” Investopedia. Accessed October 11, 2021. https://www.investopedia.com/tech/most-important-cryptocurrencies-other-than-bitcoin/
Deepika, Puneet, Rajdeep Kaur. 2017. “Cryptocurrency: Trends, Perspectives, and Challenges.” International Journal of Trend in Research and Development, Vol 4(4). Accessed October 12, 2021. http://www.ijtrd.com/papers/IJTRD9620.pdf
Halaburda, Hanna. 2016. “Digitial Currencies: Beyond Bitcoin.” SSRN. Accessed October 12, 2021. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2865004
Liquid. 2021. “Crypto Coin vs. Token: Understanding the Difference.” Accessed October 12, 2021. https://blog.liquid.com/coin-vs-token
Malik, Vladimir. 2016. “The History and Future of Bitcoin.” Bankovní institut vysoká škola Praha Katedra financí a ekonomie. Accessed October 11, 2021. https://is.ambis.cz/th/txwrv/The_future_and_the_history_of_Bitcoin.pdf
Northeastern University. n.d. “Guide to the Rise of Cryptocurrency, Digital Currency and Bitcoin”. Accessed October 11, 2021. https://onlinebusiness.northeastern.edu/masters-in-finance-msf/knowledge/guide-to-the-rise-of-cryptocurrency-digital-currency-and-bitcoin/.
Oliva, Gustavo, Ahmed Hassan, Zhen Ming Jiang. 2020. “An Explanatory Study of Smart Contracts in the Ethereum Blockchain Platform.” Empir Software Eng 25. Accessed October 12, 2021. https://link.springer.com/article/10.1007%2Fs10664-019-09796-5
Perkmann, Maximilian. 2021. “Proof-of-Stake: Will Cardano and Eth 2.0 Be the GREEN-Revolution?” Medium.com. Accessed October 12, 2021. https://medium.com/coinmonks/proof-of-stake-will-cardano-and-eth-2-0-be-the-revolution-8ba59953e075
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Tardi, Carla. 2021. “Decentralized Market”. Investopedia. Accessed October 11, 2021. https://www.investopedia.com/terms/d/decentralizedmarket.asp
Urian B. 2021. “Rug Pull NFT Games | How to Avoid Being Scammed and Go for Legitimate Games Like ‘Axie Infinity,’ ‘Splinterlands,’ and More.” Tech Times. Accessed October 12, 2021. https://www.techtimes.com/articles/264470/20210823/rug-pull-nft-games-how-to-avoid-being-scammed-and-go-for-legitimate-games-like-axie-infinity-splinterlands-and-more.htm
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