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Cryptocurrency

What are the types of cryptocurrencies?

Cryptocurrencies have become one of the hottest topics in the financial market in recent years. They are digital currencies that are based on blockchain technology and allow fast and secure…

Date: 2024-04-01 Author: Łukasz Michałek
What are the types of cryptocurrencies?

Cryptocurrencies have become one of the hottest topics in the financial market in recent years. They are digital currencies that are based on blockchain technology and allow fast and secure transactions without intermediaries. There are many types of crypto, which differ in technology, mining algorithm, privacy and method of issuance. In this article we will analyze the different types of cryptocurrencies and discuss their advantages and disadvantages. This will allow you to better understand the specifics of the market. You are welcome!

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Stablecoins vs classic cryptocurrencies

Stable cryptocurrencies, also known as stablecoins, are digital currencies that are pegged to fiat currencies such as the US dollar or the euro. Their purpose is to reduce market volatility, which is a common problem with other crypto – such as Bitcoin or Ethereum. Stablecoins are usually issued to increase their stability, and their value is closely tied to the value of the currency they are pegged to. As a result, their exchange rate should be less sensitive to market fluctuations, and investors should feel more secure investing in such currencies.

On the other hand – classic cryptos are currencies whose rate can fluctuate a lot over a short period of time. They are often seen as riskier options than stablecoins, because their value is sensitive to many factors, such as:

  • media news,
  • market trends,
  • regulatory developments.

Nevertheless, Bitcoin or Ethereum, are popular among investors and traders because they offer a better chance of profit in the short term.

Blockchain-based cryptocurrencies

Blockchain is a distributed, decentralized database that allows information to be stored and transmitted in a secure and unalterable way. Blockchain-based cryptocurrencies are created through a cryptographic algorithm that ensures the security and integrity of transactions. Each transaction made in a blockchain-based cryptocurrency is authenticated and confirmed by the network nodes, i.e. the computers of the users who participate in the process. Each transaction is recorded in blocks, and then – the blockchain is copied to all network nodes so that each user can access the current state of the transaction.

Blockchain-based cryptocurrencies are characterized by a decentralized structure, meaning that they are not controlled by any central entity, such as a central bank. This allows users to make transactions without going through financial institutions, reducing costs and speeding up the process of transferring funds.

Blockchain also enables the creation of smart contracts, or computer programs that automatically perform certain tasks depending on the conditions met. Smart contracts can be used for various purposes, such as:

  • fulfillment of contract terms,
  • distribution of remuneration,
  • resource management.

Blockchain-based cryptocurrencies are used in various fields, from finance to gaming and social services. Among the most popular blockchain-based cryptocurrencies are:

  • Bitcoin,
  • Ethereum,
  • Litecoin,
  • Ripple,
  • Monero and many others.
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Proof of Work vs Proof of Stake: differences and advantages

Proof of Work (PoW) and Proof of Stake (PoS) are two different algorithms used to verify transactions and mine new units of blockchain-based cryptocurrencies. Here is a description of the differences and advantages of each of these algorithms:

Proof of Work (PoW) based cryptocurrencies:

With PoW, the process of verifying transactions and mining new units of cryptocurrency is performed by special devices, called diggers. These devices solve mathematical problems to confirm transactions and add new blocks to the blockchain. PoW-based cryptocurrencies, such as Bitcoin and Ethereum, require high computing power, leading to high electricity costs and higher equipment costs needed to mine crypto.

Proof of Stake (PoS) based cryptocurrencies

With PoS, the process of verifying transactions and mining new units of cryptocurrency is done by holding and keeping a certain amount of cryptocurrency in your digital wallet. Thus, the more cryptocurrency you hold, the greater the chance of mining new units. PoS-based cryptocurrencies, such as Cardano and Tezos, require less computing power and are more energy efficient, leading to lower costs and less electricity consumption.

What are the advantages of PoW:

  • Security: PoW is considered more secure because it requires a lot of computing power, making it harder for malicious people to attack the network.

  • Dispersion: PoW provides more distributed mining because many people can mine simultaneously.

What are the advantages of PoS:

  • Green: PoS is greener because it requires less computing power, which leads to less electricity consumption.

  • Cost-effective: PoS requires less cost because you don’t have to buy expensive cryptocurrency miners and use a lot of electricity.

All in all, the choice between PoW and PoS depends on the preference of a particular project. PoW is still popular with the big cryptocurrency players, but PoS is gaining popularity as a greener and more economical solution.

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Private cryptocurrencies vs. public cryptocurrencies

Public and private cryptocurrencies differ primarily in the way they function and their accessibility to users.

  • Public cryptocurrencies, such as Bitcoin and Ethereum, operate on an open-source basis, meaning that their source code is available to anyone and can be used by anyone who wants to create an application based on a particular cryptocurrency. Transactions on the public network are fully transparent, which means that any person can see every transaction that takes place on the network. Public cryptocurrencies are based on a decentralized structure, meaning that there is no single person or institution controlling the network and processing transactions.

  • Private cryptocurrencies, on the other hand, operate on a closed-source basis, meaning that their source code is private and inaccessible to the public. Transactions on a private network are more confidential, as network participants must be authorized and authenticated before making transactions. Private cryptocurrencies are based on a centralized structure, meaning that there is one person or institution controlling the network and processing transactions.

Centralized vs. decentralized cryptocurrencies

  • Central and decentralized cryptocurrencies differ in fundamental ways. Central cryptocurrencies are those that are issued and controlled by a single organization or central authority. Central cryptocurrencies tend to be more stable and more predictable compared to decentralized cryptocurrencies, as they are controlled by a single organization that can make regulations and changes to ensure network stability and security. However, the same makes central cryptocurrencies more vulnerable to hacking attacks and other security issues because the entire network is controlled by a single organization.

  • Decentralized cryptocurrencies, on the other hand, are based on blockchain technology and have no central authority, meaning that decisions about the network are made by its participants. Decentralized cryptocurrencies are less susceptible to hacking attacks and other security issues because they are controlled by multiple nodes in the network, rather than a single organization. However, decentralized cryptocurrencies are less stable and less predictable because there is no single organization that decides how they operate. As a result, there is more risk for users, who could lose their funds if the price of the cryptocurrency suddenly drops or the network is attacked.

If a user wants a more stable and predictable cryptocurrency, then central cryptocurrencies may be a better choice. However, if the user wants more privacy and security, decentralized cryptocurrencies are more suitable for this purpose.

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Łukasz Michałek
Łukasz Michałek
Founder of the rapidly developing cryptocurrency channel "Biblia Kryptowalut" on YouTube. He also co-creates the Arena Trading group with Marek. Łukasz is fascinated and passionate about blockchain technology and cryptocurrencies, which constitute the central element of his activity in the cryptocurrency industry.
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