There are thousands of cryptocurrencies that exist today. All of them may have similarities, but they also have differences that help them stand out from the rest. But many newcomers in the crypto community have no basic knowledge in these whatsoever.
So how do cryptocurrencies differ from each other? What are the things that users and investors need to look for when using or trading cryptocurrency? In this article, we discuss three major factors that contribute to each cryptocurrency’s identity.
Cryptocurrencies function based on the original design of their creator. They validate transactions, tokenize real-world assets, or even represent the holder’s votes for various issues. However, the most common function of cryptocurrencies is for payment.
Bitcoin and many other altcoins function as payment currencies or alternative currencies. They intend to replace fiat money in facilitating all transactions.
For example, if the US dollar can be used to pay for bills, then payment currencies are designed to pay for bills. In this case, both the US dollar and payment currencies serve as a store of value.
Becoming a medium of exchange is the primary function of cryptocurrency. However, some functions go beyond facilitating transactions. For one, staking deals with creating new currencies.
In the Proof-of-Stake (PoS) setup, members stake their cryptocurrency as a requirement to become block validators. The more coins they stake, the more percentage of the transactions that the network will validate will be assigned to them.
Some use cryptocurrencies to tokenize other assets due to their better liquidation potential. These assets can be physical properties such as real estate and artworks, or digital such as in-game items and virtual lands.
Referred to as security tokens, cryptocurrency exchanges sell these assets through security token offerings (STOs).
Aside from the ones mentioned above, there are also cryptocurrencies that function as governing tokens. These are popular in what we call a decentralized autonomous organization (DAO).
With the never-ending development of blockchain technology, more and more use cases are being discovered, thus resulting in more functions being introduced today.
Another main difference in cryptocurrencies is their selection of a consensus protocol. Any blockchain-based ecosystem considers this critical as it determines how consensus will be maintained.
The most popular consensus protocols are Proof-of-Work (PoW) and the aforementioned Proof-of-Stake (PoS). PoW relies on the network’s computing power for consensus.
Popular cryptocurrencies that use PoW are Bitcoin, Litecoin, Bitcoin Cash, and more.
Issues with speed and the so-called tragedy of commons cause criticism toward PoW. Wherein, the network fails once there aren’t enough incentives for those who will maintain the ecosystem. Others have implemented Delayed Proof-of-Work (DPoW), or the above-mentioned PoS.
As mentioned above, PoS requires members to stake a portion of their held coins to become block validators. Some of the most notable examples of PoS-based currencies are Ethereum, Binance Coin, and Stellar (XLM).
One popular variant of PoS is the Delegated Proof-of-Stake (DPoS). The same PoS mechanic works, but here block validators delegate specific candidates to the network. Some popular examples of these are EOS, Tron, and Tezos.
There are many other consensus algorithms that exist. Examples include Proof-of-Authority (PoA) which is used by VeChain, Proof-of-Weight (PoWeight), which is implemented by Algorand, Proof-of-Reputation (PoR), which is a variant of PoA), and many more.
Some cryptocurrencies implement at least two protocols in their system. For example, some would use PoW and PoS together for consensus to synergize their strengths and make up for the weakness of each other.
One sterling example is Decred. It uses the Blake-256 hash function instead of the popular SHA-256 used by Bitcoin. For its PoS implementation, it requires members to purchase tickets with their DCR. The network uses these tickets to maintain consensus.
Creating new coins vary from one crypto to another. Many cryptocurrencies can be minted through mining or staking.
As mentioned above, one of the most common algorithms is Proof-of-Work. Blockchain networks that use this algorithm create new coins as a reward to miners for discovering new blocks.
On the other hand, PoS systems award new coins to block validators. Ethereum, one of the most popular blockchain systems that use this protocol, has an unlimited supply. This means that stakers can continue to mint new ETH as long as the network stands.
In the DPoS setup, members who want to become block delegates or producers need to stake — in other instances burn — a specific amount of coins. If a majority of the network has voted for them, they can then become delegates and take a share in the block reward.
Staking is not the only way to mine or obtain cryptocurrencies. Creators’ premine a good number of leading cryptocurrencies for various reasons. In this case, the most common way for members to get a hold of these coins is to purchase them from exchanges.
Some of the most popular examples of premined currencies are Ripple (XRP), Tether (USDT), IOTA, and Binance Coin (BNB).
These three factors, namely function, consensus, and minting, are just some of the things that set one cryptocurrency apart from another.
However, it should be noted that there are also blockchain networks that have more than one official cryptocurrency. Some of these differ in functions and created through different minting processes.
One example is Crypto.com, which is a crypto payment solution system that offers VISA cards and a cryptocurrency wallet. It has CRO token and MCO token, which has two distinct functions that perform within the Crypto.com system.
Moreover, there are also crypto tokens that make use of two different blockchains. One such cryptocurrency that uses this technology is Tael, which uses the Ethereum blockchain on top of having its own blockchain based on Hyperledger.
In CoinQuora’s Blockchain 101 section, we discuss more topics regarding blockchain technology.