If you’re new to the cryptocurrency world, you’ve probably heard that term “crypto assets” once or twice, and the chances are, you associated it with Bitcoin. While you’re not wrong, there is far more to crypto assets than Bitcoin.
Now, almost everyone is aware that cryptocurrencies are electronic money, and that their transactions are recorded often on a blockchain – check our previous article on blockchain explained here – or a similar distributed ledger technology (DLT). However, that only scratches the surface of this powerful technology.
A cryptocurrency investigator or a professional approaching crypto needs to deepen their knowledge of the different types of crypto assets to effectively identify criminal activity involving those assets on the blockchain.
Crypto coins vs crypto tokens
Before we start our crypto assets demystification journey, one of the fundamentals to acknowledge is the difference between cryptocurrency coins and tokens.
Despite the fact that some people use both terms interchangeably, cryptocurrency coins and tokens are not the same thing. While both store value and can be used to make transactions, coins are the native asset of a blockchain. Tokens on the other hand, are created by platforms and applications built on top of an existing blockchain.
In other words, one blockchain can have only one coin attached to it as the native asset, and multiple tokens built on top.
- Coins: can include Bitcoin, Ether and other alternative coins which we’ll come to later.
- Tokens: programmable assets that exist within the blockchain.
In essence, tokens represent value, but they are not exactly valuable on their own unlike coins.
Alternative coins (Altcoins)
Altcoin is a term that refers to any other type of crypto coin or token that is not Bitcoin and in some perspectives, not Ethereum either.
Developers who have different views, new use cases or simply want to improve upon the shortcomings of Bitcoin create new altcoins. Altcoins use sophisticated code and process large amounts of data to carry out their function.
A number of altcoins contribute to the development of the cryptocurrency industry and growth in popularity. For example, investors that prefer to diversify their investments find opportunities in those Bitcoin alternatives.
Below, we’ll delve deeper into the definitions of the most common types of altcoins.
Types of altcoins
2011 saw the creation of Litecoin, one of the very first altcoins. Charlee Lee, former Google employee, identified a number of shortcomings and claimed a lack of fairness in the emerging altcoins at that time. Lee successfully released Litecoin which went live in October 2011.
While Bitcoin best serves as a store of value for long time purposes, Litecoin enables cheaper everyday transactions as well as a mining alternative.
As we explore the different types of altcoins here, we’ll learn that some fit in more than one category.
Payment Token
Payment tokens are intended to be used as currency, allowing parties to exchange value. Bitcoin is the main inspiration for this type of altcoin.
Although most coins and tokens can be exchanged, payment tokens standout because they’re widely accepted by a large number of merchants.
Stablecoins
Stablecoin is a cryptocurrency with a fixed price that is linked to another stable asset. Stablecoin, unlike traditional cryptocurrencies, can be pegged to assets such as fiat currencies that can be traded on exchanges, such as the US dollar or the Euro. Some stablecoins can be linked to other assets, such as precious metals like gold and even other cryptocurrencies.
Popular stablecoins are
- Tether (USDT)
- USD Coin (USDC)
- Dai (DAI)
Security Tokens
Stocks, bonds and other types of security assets are the traditional equivalent of security tokens. A security token is a digital asset that reflects ownership or other rights and allows value to be transferred from an asset or bundle of assets to a token. The creation of security tokens is referred to as tokenization.
Tokenization is another innovation of blockchain technology. It is the act of converting an asset into a digital token that can be processed on the blockchain. A token on the blockchain holds the rights and the value of the original asset.
Anything can be tokenized; you can create a token that signifies the ownership and registration of an apartment, a car or any kind of asset.
Non-Fungible Tokens (NFTs)
Ownership records of any asset type recorded on the blockchain resemble this type of token. Photos, videos and audio are popular NFT assets. Creating an NFT takes minutes and is available to everyone with little to no coding experience.
Advocates of NFTs claim that NFTs reduce fraud and provide a public claim of ownership. The NFT space is still rife with fraud though but benefits from interest and involvement of brands, celebrities and public figures.
Utility Tokens
Ever purchased in-app currency? Maybe to buy goods in your favorite game or add credit to your favorite app on Apple or Play store? That’s exactly what utility tokens are about. They are designed to enable a specific purpose on an application or a platform. Utility tokens give their holders access to the goods and services of the platform on which they are built.
Battle Infinity tokens (IBAT) give users access to the Battle Infinity gaming platform. They can be used to advertise within the network, and can be bought, sold and traded. Lucky Block tokens (LBLOCK) give users access to regular yield, prizes and crypto giveaways on the Lucky Block platform.
There is a large number of utility tokens available and they create an attraction not only for the users of their platforms but also investors looking for profits.
Governance Tokens
In many traditional businesses, the decision-making process is centralized and controlled by a board of directors or a small group of individuals. The board of the largest firms typically has ten to 20 members. They have a great deal of influence over how the business runs.
Each member of the platform on which those tokens are built, is given voting power. This voting power grows stronger as the number of tokens in possession of the owner rises. Owning one governance token can accredit you one vote for example, which can be used to contribute to executive decisions and platform direction.
Governance tokens aim to decentralize the decision making process and bring equity and transparency to governance models, contributing to the creation of decentralized autonomous organizations (DAOs). In reality, the system rewards governance token hoarders with more voting power. Even paying people to promote a certain plan is an option for wealthy members.
The question of conflicts of interest is another challenge for the effectiveness of this type of token. Some people place more emphasis on immediate gain with the intention of selling their tokens for a profit, while others place more value on the principles the DAO is based on.
AAVE is the native token of the Aave platform. Compound is the counterpart for the Compound Protocol. A number of other governance tokens exist and are widely used.
Privacy coins
Cryptocurrency is pseudonymous, not anonymous. While the identity of a cryptocurrency user is protected, their activity remains public thanks to the distributed public ledger technology used by blockchain. Privacy coins take blockchain transactions to a higher level of anonymity by employing encryption to conceal a user’s wallet balance and address.
This encryption does not make the transactions or the users fully anonymous. It sets challenges that make them harder to track. Fiat transactions offer a similar form of privacy. Even with the availability of the serial number of each fiat note in the transaction, it can be challenging to track cash transactions.
Popular privacy coins
- Monero (XMR)
- Zcash (ZEC)
- Secret (SCRT)
Money has always been more than a medium of exchange. We use it to store and assess value, calculate profit, buy stock and become part of a sophisticated economical world. Blockchain technology introduced numerous forms of money, or value, that can be exchanged. While cryptocurrency is relatively recent, it has come this far through the hard work and experience of every investor, researcher and developer.
Right now, financial institutions, NEObanks, crypto exchanges and payment processors are using some of these tokens and others. With this new technology comes a new kind of institutional risk. These companies are using blockchain data and blockchain analytic tools to mitigate risk like BitRank VerifiedⓇ from Blockchain Intelligence Group.
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Written By: Omar Marzouk
Writer, Content marketing at Blockchain Group
