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Investor Insights Blog|Cryptocurrency Types Explained

Cryptocurrency Investing

Cryptocurrency Types Explained

cryptocurrency types

The term cryptocurrency refers to a digital medium of exchange that is secured by cryptography, or the mathematics-based method for coding and encoding data.

The digital ledger – or means by which transactions of cryptocurrencies are stored, secured, verified, and processed – is referred to as the blockchain. A blockchain is a digital ledger, or digital record, of all transactions across a peer-to-peer network that is decentralized: participants can send and receive transactions reliably without a need for a central clearing authority.

While the use of blockchain technology is most commonly associated with various types of financial transactions, it is also used for fund transfers, settling trades, voting, identity verification, network security, and many other important applications.

While there are more than 20,000 cryptocurrency types in existence (as of December 2022), some are significantly more popular than others. Here are some of the more well-known types of cryptocurrencies and how they started.

Popular Cryptocurrency Types

1. Bitcoin (BTC) (XBT)

In the wake of the financial crisis of 2008, the pseudonymous Satoshi Nakamoto published the white paper “Bitcoin: a Peer-to-Peer Electronic Cash System” and introduced the first fully functional and reliable blockchain-based decentralized payments system that can also be used as a store of value, just like gold.

The Bitcoin network (capital “B” refers to the network and technology, lowercase “b” refers to the actual currency, bitcoin) is open-sourced, fully decentralized, fully transparent, and completely public. Anyone in the world can view the source code – it does not require a central authority to verify or process transactions – and anyone can view the bitcoin ledger at any time.

The bitcoin blockchain is also immutable, meaning it cannot be changed or modified in any way – making it an effective means for transacting between two or more parties. Each bitcoin can be divided up to eight decimal points into satoshis, and there will only ever be 21 million bitcoin created.

[Related: Do you have to pay taxes on Bitcoin?]

2. Ethereum (ETH)

Conceived in 2013 by developer Vitalik Buterin but not officially created until 2015, Ethereum is also a blockchain-based peer-to-peer network intended to function as a mechanism for transactions. It differs from bitcoin in that it functions as both a computing platform and a cryptocurrency.

The Ethereum network provides an open-sourced digital infrastructure for developers to create and run applications, or smart contracts, using different types of tokens that operate within the network. The native cryptocurrency to the Ethereum network is ETH and is used on the network to process transactions made through using the various applications created on the Ethereum network.

Also differing from the Bitcoin blockchain is the way that the network is maintained and how transactions are processed. The mechanism by which a specific blockchain network is maintained is called the consensus mechanism. Where Bitcoin uses a Proof of Work consensus mechanism to secure the bitcoin network and process transactions, the Ethereum network (as of 9/15/2022) uses the Proof of Stake consensus mechanism.

3. Ethereum Classic (ETC)

Ethereum Classic (ETC) is the original Proof of Work Ethereum blockchain that was created to function as both a cryptocurrency and an open-sourced computing network. Ethereum Classic (ETC) was formed in 2016 when the current Ethereum blockchain forked and created two blockchain networks: Ethereum (ETH) and Ethereum Classic (ETC).

Since Ethereum Classic preserves the old code of the Ethereum blockchain in its original form, it is often regarded as the “original” Ethereum crypto.

4. Litecoin (LTC)

Litecoin (LTC) is the second-oldest cryptocurrency, created from a fork from the Bitcoin protocol in 2011 to make a blockchain network that would be able to accommodate a wider range of transactional requirements. LTC, created by former Google engineer Charlie Lee, is one of the first “altcoins” — a name given to cryptocurrencies other than bitcoin.

5. Stellar (XLM)

The Stellar network is an open-source payment network that serves as an intermediary blockchain for global financial systems. The native cryptocurrency to the Stellar blockchain is called the Stellar Lumen (XLM).

Assets can also be tokenized on the Stellar blockchain and are issued and redeemed by anchors, who are trusted entities that issue digital credits on the Stellar network in exchange for deposits of the asset with the trusted entity.

The native Stellar crypto wallet is LOBSTR, where you can purchase lumens directly in the network. XLM is distinct from many other cryptocurrencies in that it’s more of a utility to facilitate trades like bitcoin than an asset in and of itself.

6. Zcash (ZEC)

Zcash (ZEC), previously known as “Zerocoin,” was created in 2013 using an experimental (at the time) privacy extension to Bitcoin that involved advanced mathematical techniques called “zero-knowledge proofs,” or ZKPs.

ZEC is a privacy-preserving cryptocurrency that allows partially anonymous value transfer using the mentioned zero-knowledge cryptography. The protocol provides the option for transactions to be either shielded, in which case they will be completely anonymous, or transparent, in which case they will be visible on the Zcash blockchain ledger.


Video: How Many Cryptocurrencies Are There?

7. Chainlink (LINK)

Chainlink was created in 2017 by Sergey Nazarov and Steve Ellis, who co-authored a whitepaper introducing the Chainlink protocol and network with Cornell University professor Ari Juels in the same year. Chainlink is a decentralized oracle network (DON) that has a native token called LINK that is an ERC-20 token that lives on the Ethereum Network. The Chainlink DON serves to provide interoperability capabilities to blockchain networks, allowing them to communicate with one another.

8. Uniswap (UNI)

Originally founded in 2018, Uniswap is a decentralized peer-to-peer cryptocurrency exchange that uses a decentralized network protocol built to function within the Ethereum network. UNI gave rise to the ecosystem of decentralized financial services known as DeFi, or decentralized finance. The protocol facilitates automated transactions between cryptocurrency tokens on the Ethereum blockchain through the use of smart contracts. Its associated token UNI is an ERC-20 token that functions only on the Ethereum blockchain.

9. Bitcoin Cash (BCH)

Bitcoin Cash (BCH) was created in 2017 by Roger Ver as a fork of the Bitcoin blockchain. Bitcoin Cash is intended to solve the scalability and transaction volume limitations faced by the bitcoin network, making a more suitable form of currency for everyday usage vs. providing a reliable store of value like bitcoin.

10. Decentraland (MANA)

Introduced in early 2020, Decentraland is a 3D virtual world browser platform that is built to operate using the Ethereum network. Its associated ERC-20 token cryptocurrency is called MANA, which is used within the browser by users to buy virtual plots of land in the platform as NFTs.

11. Yearn Finance (YFI)

Created in early 2020 by developer Andre Cronje, Yearn Finance is a decentralized finance (DeFi) protocol that allows users to deploy tokens into a smart contract vault on the Ethereum network that has an ERC-20 token called YFI. The Yearn Finance protocol automatically allocates those funds into other smart contracts (DeFi platforms) with the highest interest rates (yields), where the interest is paid by other DeFi users that utilize the YFI protocol to borrow funds from the same smart contract vaults.

12. Maker (MKR)

The Maker Protocol was originally created in 2014 as an open-sourced lending and credit protocol. The Maker (MKR) token was later introduced in 2017 is an ERC-20 token native to the Maker Protocol, a decentralized finance (DeFi) project which is also known as the Multi-Collateral Dai (MCD) system as it allows users to leverage assets to generate Dai – the Maker Protocol native stablecoin, designed to maintain a stable value relative to the U.S. dollar.

Maker acts as a governance token, allowing holders to vote on the development of the Maker Protocol and proposals affecting the use of Dai.

Video: Investing in Cryptocurrency with Your Retirement Account

13. Aave (AAVE)

First deployed on Ethereum in 2020, the AAVE protocol is an open-sourced non-custodial liquidity protocol that allows for generating interest in cryptocurrency markets of users who supply and borrow assets on the protocol. AAVE is an ERC-20 token that is native to the AAVE protocol and serves as a governance token where holders of the token may vote on the implementation of future development proposals.

14. Compound (COMP)

Introduced via the Ethereum network via the COMP ERC-20 token, Compound (COMP) is a decentralized, blockchain-based protocol running on the Ethereum network. The Compound protocol works as a decentralized application that enables decentralized finance (DeFi) features directly on the Ethereum blockchain and provides governance privileges to holders of the COMP token where users may either request loans or earn interest by lending cryptocurrencies they own – all through autonomous smart contracts.

15. The Graph (GRT)

Founded in 2018 by Yaniv Tal, Brandon Ramirez, and Jannis Pohlmann, The Graph (GRT) is an open-source and decentralized indexing protocol for blockchain data and is designed to enable querying on the Ethereum network. The Graph network also enables developers to build various APIs known as subgraphs for separate queries.

16. Livepeer (LPT)

Launched in 2017 on the Ethereum network, Livepeer is an Ethereum-based protocol with its own native ERC-20 token LPT. Livepeer is a protocol that distributes video transcoding work throughout its decentralized network.

17. USD Coin (USDC)

Founded in 2018, USD Coin (USDC) is a digital stablecoin pegged to the United States dollar that can be created on most layer 1 blockchains. USD Coin is managed by a consortium called Centre, which was founded by the company Circle.

[A layer 1 blockchain in cryptocurrency refers to a blockchain network that functions independently of others. A layer 2 cryptocurrency, on the other hand, refers to tokens that function and operate on top of a layer 1. Example: Compound (COMP) is an ERC-20 token (layer 2) that exists on the Ethereum Blockchain network, which is a layer 1].

18. Dai (DAI)

Released in 2017, Dai is the first decentralized, collateral-backed stablecoin cryptocurrency built on the Ethereum network intended to maintain a one-to-one peg to the U.S. dollar, and is native to the Maker protocol.

Cryptocurrency with tax advantages?

Did you know you can invest in these cryptocurrency types within your IRA, potentially paying zero taxes on any profits? Learn about the potential tax advantages, how to get started, and more about digital currency in a self-directed retirement account.

1

What investments can I make using a self-directed IRA?

With a self-directed IRA, your investments are up to you, within the bounds of the IRS rules and guidelines. The IRS does not provide guidance on what investment types are permitted, but dictates only what is NOT permitted. Examples of prohibited IRA investments include collectible (such as artwork, stamps, rugs, antiques and gems), certain coins and life insurance. See IRS Publication 590 for more information about prohibited investments.

Prior to making any investment decisions, please consult with the appropriate legal, tax, and/or investment professionals for advice. As a self-directed IRA custodian, ETC will not provide investment advice or risk assessment of any investment. The digital currency market may experience a high degree of volatility and clients should consult with an investment professional before any investment is made.


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