Ever since Bitcoin came into existence, the concept of cryptocurrency become big talk and big companies like Apple, Facebook, Google, Tesla are pointing their views about the future of cryptocurrency. As of now there are 5000 plus cryptocurrencies in the world. Each cryptocurrency has its own purpose. In this article we are going to classify the various categories and classification of cryptocurrencies.
If a protocol is changed so that the old protocol version is no longer valid, call that a hard fork. This could be problematic, because if the older, now-invalid protocol is still running, it could lead you to scratch your head and say, “what the fork?” It could cause confusion and even possibly a loss of funds, because the old and new protocols running together are butting heads and making mysteries.
An example of a hard-fork problem—with Bitcoin, for instance, a hard fork is a must when making changes and protocol updates to the Blockchain. The new protocol is cool with the changes, but the old protocol becomes a hot mess, not understanding the new activity going on.
Since the old protocol rejects the new changes because it doesn’t recognize them, that causes a traffic jam or worse. The old protocol will claim that the changes and updates are not valid, even if they are. What you then get are two blockchains, one old and one new. As these chains grow, so can your problems.
The hard-fork challenge, then, is to get all the nodes on the old protocol to switch to the new protocol all at once, and at the same time. This sounds easy, but technically it’s easier said than done.
Unlike a hard fork, a soft fork is totally cool with the new changes and keeps working. The old version accepts the newer version. Harmony! The newer, updated blocks become longer, and it becomes obvious that the older (shorter) blocks are obsolete and unusable. This recognition eliminates confusion over which protocol is now the real deal (it’s the newer, valid one.)
When a soft fork is implemented, there has to be a “majority vote” on whether to accept it into the established fold. If not, the new soft fork fails, and the rest of the chain simply goes on it with its life with no interruption. Hard-and-soft forking can cause all kinds of unintended consequences. When members of the Ethereum community rejected a hard-fork change and decided to keep going with the non-forked version of Ethereum, that old-school system was renamed Ethereum Classic.
When Bitcoin hard-forked in order to add more functionality, a portion of the Bitcoin Cash community was left behind and was cut off from the rest of the network.
Proof of Authority (PoA)
In a blockchain operated under Proof of Authority (PoA), a few specific nodes are granted the right (or authority) to approve a miner’s ability to create a block. This is a faster alternative to the proof-of-work model, but more centralized.
Proof of Work (PoW)
Proof-of-Work is basically is the consensus algorithm used in the blockchain that the nodes ensuring the verifier that the mining process is valid and accurate.
Bitcoin’s blockchain technology uses a concept known as proof of work (PoW) to process transactions.
On a blockchain network, every participating computer (which is called nodes) maintains a complete copy of the system’s ledger, so that no individual member can add something to that register alone.
To add a transaction, nodes compete to solve a complex cryptographic problem that represents the data to be added. The first to solve the problem then broadcasts the answer to the rest of the network for verification. This process is what has commonly become known as mining because the node that gets the right answer first gets a reward from the network.
The proof part is the follow-up process of verification by the rest of the network. That’s what keeps the complete ledger both valid and agreed upon by all parties.
Proof-of-Work is essential for ensuring the safety of the blockchain since no central authority protects transaction information. By using Proof-of-Work, everyone is involved in the verification of newly added data on the blockchain which cannot be altered by hackers.
Cryptocurrencies using PoW: Bitcoin and Ethereum
Proof of Stake (PoS)
Proof-of-stake (PoS) is a method implemented in cryptocurrencies for the purpose of stopping users from double-spending.
The major problem with PoW systems is the fact that they don’t scale well. To overcome that problem, a different consensus model for blockchain was developed that allows smaller pools of nodes to validate transactions. It’s known as proof of stake (PoS), and it ensures security in a fundamentally different way than PoW.
In a PoS system, not every node must validate every transaction. Instead, participating nodes have to use their own cryptocurrency holdings as a deposit to join a transaction validation group. That deposit is where the concept of proof of stake gets its name. Any node that tries to cheat or pass bad data into the ledger automatically forfeits their stake as a penalty. Those that play by the rules receive interest on their deposits as a reward for their work. In a PoS blockchain, that’s the incentive system that keeps things secure and operating fairly.
Miners are at the forefront in proof-of-work. With more computing capacity, that’s driven by energy, they have likelier chances of connecting new blocks to the blockchain. In proof-of-stake however, it’s quite literally based on “proof” of how much “stake” a person has.
The most notable among them are Eos, Dash, and Tron.
While the concept of a blockchain was invented by the creator of Bitcoin, Bitcoin has no monopoly on blockchain technology. Other people can create their own cryptocurrencies and their own blockchains, and that’s generally what cryptocurrencies are.
However, as you get interested in cryptocurrencies more, you will find out that hundreds of other cryptocurrencies serve as alternatives to Bitcoin.
These cryptocurrencies are known as altcoins.
Each altcoin has its own, unique offering, from faster payment times to more efficient cross-border transactions, providing a diverse array of benefits that could be better suited to individuals’ needs than the popular head of the family, Bitcoin – depending on what you’re after.
Some altcoins offer more services than Bitcoin, and they have features that are flawed in Bitcoin.
Some of the most prominent altcoins today are Binance Coin (BNB), Cardano (ADA), Chainlink (LINK), Ethereum (ETH), Litecoin (LTC), Polkadot (DOT), Tether (USDT), Uniswap (UNI), etc.
As the name suggests, stablecoins are cryptocurrencies created for the sole purpose of providing reliable value storage. Like main stream coins like Bitcoin and Ethereum it won’t fluctuate in value.
Stablecoins represent something of a hybrid between tokens and standard cryptocurrencies, in that they are built on existing blockchains but may be exchanged for fiat currency.
The most well-known among them include USDT, Paxos, Gemini, and TrueUSD.
Tokens are distinct from traditional cryptocurrencies in that they’re not intended to be used as general-purpose currency. They’re also created on top of existing blockchains, such as Ethereum, and do not exist as stand-alone systems. In a way, the simplest way to understand the concept is to think about the chips you use to place bets in a casino. While they represent cash or other assets of value, they may only be used in the specific casino who issued them.
For example, online music streaming service Musicoin facilitates direct payment from listeners to artists using a token called Music. The token itself is built using the Ethereum blockchain (which is home to the majority of tokens), and cannot be converted directly into fiat currency. Instead, artists paid in this way must convert their tokens into standard cryptocurrencies like Bitcoin or Ethereum before cashing out their earnings.
BAT and Tether are notable Tokens
Central Bank Digital Currencies (CBDCs)
Cryptocurrencies that are created or backed by a central bank. The People’s Bank of China (PBoC) is currently developing its digital yuan, and it is expected that most countries will digitise their national currencies in the future.
Decentralized apps (dApps)
Speaking of decentralized, you should probably know about dApps. These are open-source applications built on a blockchain intended for real-world use. Ethereum is considered the mother of dApps. Ethereum was founded on the idea of enabling developers to create new applications on top of their blockchain.
There is no one-size-fits-all definition for dApps. But as BlockGeeks puts it, all dApps have a few things in common: they are open-source, decentralized, incentivized (validators need to be rewarded with cryptographic tokens) and have a protocol (the community agrees on a cryptographic algorithm that can be widely adopted).
Decentralized finance (DeFi)
Decentralized Finance or DeFi is a blanket term for decentralized alternatives to traditional (centralized) finance. DeFi includes banking, money management, payment processing, insurance, etc. It products and services enable democratized access to a historically exclusive industry.
Start paying attention, and you’ll see this term thrown around on Twitter. You should probably know what it stands for.
Non-fungible tokens (NFTs)
NFTs stand for “non-fungible tokens”.
Non-fungible tokens enable virtual transactions between collectibles like art, music and trading cards using smart contracts.
Meme Coin or Joke Coin
Meme is a project that combines that innovations of Non-Fungible Tokens (NFT) and DeFi. Token holders can stake MEME coin in farming contracts which allow users to earn reward points.
Reward points are used to redeem crypto arts in the form of NFTs. If you missed out on farming these arts, you can purchase them from the secondary market on OpenSea.
Some major Meme Coins are Dogecoin and ShibaINU Coin.