Even to a millennial layman, the word ‘cryptocurrency’ may sound like a futuristic mumbo-jumbo that combines everything one doesn’t know about currencies with everything one doesn’t understand about technology. It is easy to be overwhelmed by the sheer number of digital currencies in existence. What started off with Satoshi Nakamoto as a revolution for money, has now also expanded into sectors like energy, data storage, privacy, social media, content ownership, logistics, and more.
There are already over 1,000 digital assets on CoinMarketCap, forming over half a dozen cryptocurrency categories. In this article we will dive into the following ones:
As always, please do your own research. This article does not constitute investment advice.
Digital assets in the “currencies” cryptocurrency category are simply digital assets that can be used for payments or as a store of value. The largest and most well-known one is definitely Bitcoin. Bitcoin is the most established digital asset in existence, having recently crossed the 10-year milestone since its inception.
Being created by a pseudonymous founder, and having a purely decentralized architecture and deflationary nature, has elevated Bitcoin to a “Digital Gold” gold status. It has also recently started sparking the interest of large institutions, with institutional trading platforms like Bakkt announcing their launch. What started out as being called a “Ponzi scheme” by many, has now turned into a robust network with a very bright future.
There are a few subcategories to the “Currencies” category, the two most important being privacy coins, and scalable payment coins, two fundamental features that Bitcoin is currently lacking.
On the privacy side, we have currencies like Monero, ZCash, and Dash, which aim to obfuscate transactions and balances to protect the identity of the digital currency owner. Most people wouldn’t be comfortable with the idea of uploading their bank statement to the internet and making it visible for everyone. However, that’s precisely what is happening with digital currencies like Bitcoin that don’t have any privacy features.
Secondly, on the scalability side, we have projects like Bitcoin Cash, Litecoin, Nano and IOTA. As soaring transaction fees have shown in December 2017, the Bitcoin network can’t handle a large influx of new transactions very well. While second layer solutions like Lightning Network are still being developed, some investors may choose to diversify into coins that claim to have solved the scalability problem. Bitcoin Cash, for example, aims to solve Bitcoin’s scalability issue by increasing the block size. IOTA aims to solve it by developing an entirely new architecture which it calls the “Tangle”.
Investors that believe that payments will be the main application of blockchain technology and cryptocurrencies should keep an eye on “Currency” type digital assets. It might even make sense to create an investment basket with currency like digital assets that cover the niches of privacy, and fast payments.
Similarly to the internet back in the 70s prior to the introduction of the World Wide Web, the blockchain ecosystem is currently also a landscape of fragmented and separate networks. However, as the World Wide Web has shown, in order to leverage the full potential of these networks they need to be connected in an efficient and fluid manner.
An individual aiming to execute a smart contract on Ethereum, currently couldn’t do so by for example making use of his BTC. The individual would have to move his Bitcoin to a cryptocurrency exchange, then swap his BTC for ETH (which involves fees and loss of value due to the spread), and finally, use the ETH to utilize the smart contract. This is cumbersome and inefficient, and one of the several points that prove that blockchain technology is still in its very early stages.
The keyword for the endeavor that aims to solve this problem is “Blockchain interoperability”, and it constitutes a cryptocurrency category on its own. Several projects have combined raised hundreds of millions of dollars from investors in order to address this issue. At the time of writing, there are no working solutions yet since said projects have not launched a working mainnet yet.
Cosmos Network, BlockCollider, and AION are some of the most notable examples of blockchain interoperability protocols. In the case of Cosmos Network, it allows multiple blockchain interactions by connecting independent chains (zones) with one another via a central Cosmos Hub. Interestingly enough, their native tokens are named ‘atoms’ and rewards go by the title ‘photon’.
Similarly to stocks or forex, cryptocurrencies and digital assets can also be traded on dedicated exchanges. Cryptocurrency exchanges belong to the most profitable business models that can be started in the space, right next to mining farms. It is estimated that the top 3 exchanges bring in an average of $500 Million in profit per quarter.
Interestingly, a handful of the leading cryptocurrency exchanges also have their own native token. Tokens in the “exchanges” cryptocurrency category are usually used as a discount coupon for trading fees, as a voting mechanism to list new tokens, and in some cases they even pay dividends.
At CoinDiligent we have written an expensive report about cryptocurrency exchange coins, so if you are looking to invest in this cryptocurrency category then we definitely encourage you to check it out. In essence, the most popular cryptocurrency exchange tokens are the Binance token (BNB), Huobi token (HT), Kucoin Shares (KCS), Republic Protocol (REN), and 0x project (ZRX).
One of the downsides of the current internet infrastructure is that it is centralized and can be easily shut down or censored. Blockchain enables to decentralize the storage of cloud objects, thus increasing security and coming one step closer to the internet that Tim Berners-Lee initially envisioned.
Two of the most notable players in this space are Storj and Golem Network. Both have their own utility token in order to incentivize participants in the network and ensure stable connectivity. However, while Storj is exclusively focused on decentralized file storage on the cloud, Golem is building a supercomputer that is powered by thousands of users that can contribute their unused computing power (of their PC for example) in exchange for micropayments.
Many countries don’t classify cryptocurrencies as actual currencies, so they can be used in some cases by gamblers to bypass regulatory bodies and legislations that monitor real-world gambling. Furthermore, aside from just regulatory benefits, blockchain technology has the potential to make gambling more transparent and fair.
The problem with online gambling nowadays is that it is hard to verify if the odds are actually set to what the game operator claims they are, or if they are maliciously tweaked against the user and the game is unfair. With a game running on a public blockchain, like for example Dice, it can be easily verified by the player if the game is actually fair or if the operator is not honoring his word. Furthermore, payments can be automated with smart contracts and the jackpot can be verified using a simple block explorer.
This allows gamblers to verify that the game operator actually has enough funds to cover the jackpot reward, and it enables players to receive their reward immediately and prevents them from having to wait until the game operator actually distributes their reward.
Some interesting projects operating in this cryptocurrency category are Fun Fair, which is building a blockchain-based casino, and Etheroll, a provably fair dice gaming site built on the Ethereum blockchain.
For a textbook definition, a smart contract is a self-executing digital contract that can be automatically enforced in a digital platform according to pre-set rules and parameters. Smart contracts have seamlessly endless applications, including decentralized exchanges, identity storage platforms, decentralized exchanges, automated lending, prediction markets, and so much more. At the time of writing, the most popular smart contract platform is Ethereum.
Ethereum is the platform used for most active smart contracts at the moment and has tens of thousands of developers building upon it. However, critics claim that its current use cases do not justify its $30 Billion market capitalization. Ethereum can currently only process about 20 tx/s, and when this ceiling is hit, transaction costs quickly spiral out of control, essentially rendering the network useless for its intended purpose.
Throughout late 2017, several alternative smart contract platforms have come to life, aiming to solve Ethereum’s shortcomings. Some of these platforms include Zilliqa, EOS, and Quarkchain. Zilliqa is a particularly interesting example because its team claims to have solved the scalability problem with a novel approach called “Sharding”. Zilliqa is launching its mainnet in late 2018 and may prove to be the first true contender for Ethereum if the team delivers on its promises.
Interestingly, cryptocurrency and blockchain technology were of considerable interest during this year’s Game Developers Conference in San Francisco. DMarket, a global marketplace that works on blockchain technology hosted a gaming panel to explain their vision of transforming gaming items into real world assets using blockchain.
Gamers never really had the chance to properly achieve monetary gain out of the in-game assets they unlock or achieve, blockchain may be about to change this and could spark a whole new career line. The significance of cryptocurrencies in this transaction is best explained in the words of Jared Psigoda, CEO of BitGuild:
“Gamers, in particular, understand cryptocurrency because virtual money has been a part of gaming for the last 10 years. For example, dating back to the World of Warcraft, there was a one-hundred million dollar market for buying digital gold. This was the main currency used in World of Warcraft to buy in-game assets, like dragons. However, it would take gamers a tremendous amount of time to acquire digital gold, so they would use real money instead to buy in-game assets.”
There are several projects that are aiming to exploit this precise market, which has turned “Gaming” into its own cryptocurrency category. Some examples of projects leading this trend are Decentraland, Enjin, and GameCredits.
While Enjin and GameCredits are focused on providing a platform for in-game assets and payments, Decentraland takes it one step further by creating a tool for building blockchain-based virtual worlds, where assets like land and real estate have real monetary value.
Social media is plagued by the issue that it’s creators earn fortunes by discriminately selling the data of its users, who never get to see a single dollar of all the value they created. Several entrepreneurs have detected that Blockchain technology may be the answer to this problem, which has lead to several projects starting their own social media and content related cryptocurrency, spawning a new cryptocurrency category.
What if social media users had the possibility of earning a reward for every like, retweet or follow they get? This is precisely what blockchain platforms like Steemit have built. Steemit is a social network built on Steem Blockchain where users are rewarded in STEEM for every upvote that their content gets. This upvote system functions in a similar fashion to Reddit or Stack Exchange, and hence incentivizes users to create high-quality content.
This entire trend is still in its very early stages, but as the cryptocurrency space continues to grow and if newcomers see the value in platforms like Steemit or Basic Attention Token, they may become serious contenders to corporations like Facebook or Google.
Due to its transparency, immutability, and efficiency of transferring assets, the FinTech world seems to be magically attracted to Blockchain. Blockchain applications in the FinTech world range from tokenizing real-world assets like stocks or real estate, to large remittance payments. Projects like Ripple, Ravencoin, PolyMath and Stellar lumens are all aiming to get their piece of the pie in the FinTech world, which has turned FinTech into a cryptocurrency category of its own.
Ripple is a real-time gross settlement system (RTGS) exchange and remittance currency network. It works on a shared public database and is not computation intensive like Bitcoin. Any type of asset, from fiat money to metals can be exchanged through the Ripple Protocol (XRP), avoiding traditional banking handicaps like long waiting times and high transaction fees. As the project’s “partners” section shows on its homepage, it seems to have grabbed the attention of several large banks. Ripple is partnered with giants like Santander and Moneygram.
On the other hand, we have projects like Ravencoin and PolyMath which aim to kick-start the security token trend and revolutionize Wall Street. In short, security tokens are a blockchain representation of real-world assets like stocks and real estate, they come with benefits like increased liquidity, faster settlement speed, and easy ownership transfer.
Ravencoin (RVN) is a fork of the Bitcoin blockchain which is focused on the issuance and transfer of tokenized assets. Ravencoin never had an ICO or premine and was launched in a similar fashion to Bitcoin. The maximum supply of RVN is 21 Billion and coins can only be generated through PoW mining. Every time an asset is generated on the Ravencoin blockchain, 500 RVN are permanently burned. Over time, this will drastically reduce the total supply of RVN if the protocol is successful, which should result in an increase in the price per coin.
Supply chain management is a crucial process for businesses that handle large inventories. Due to the transparent and immutable nature of blockchains, supply chain management was also one of the first aspects that piqued the interest of Enterprises in this new technology.
An example would be tracking the exact supply chain that a Salmon went through from being caught, until being served on a plate in a restaurant. Before blockchain implementations, there was no way of accurately following the exact path of this product, thus making fraud easier. With a blockchain-based supply chain, consumers can accurately verify where the Salmon was caught and at what time, how long it took until it was brought to shore, how it was transported and more.
Among Enterprise Resource Planning giants, SAP has been exploring ways for implementing Blockchain as a Service (BaaS) into their existing products. SAP, in partnership with IBM, is also adopting blockchain capabilities for joint venture accounting (JVA) in the oil and gas industry for smooth reconciliation and settlement between operators and non-operators.
Blockchain startups like VeChain Thor, Waltonchain, and Ambrosus, aim to solve this problem in more innovative ways. VeChain Thor, for example, is a blockchain solution designed to digitize the supply chain with IoT devices and accurate tracking through smart contracts. In this system, brands and customers will be able to track products in real time with the use of RFID labels on products, from where customers can also access manufacturing history. VeChain founder Sunny Lu has also been teasing partnerships with automobile giants like Renault and BMW, which if executed properly could be a significant leap forward for the space.
One of the main characteristics of cryptocurrencies is that they can be highly volatile. While this may be an attractive quality for day traders and investors, it is rather undesirable for merchants and users that want to use these digital assets as a means of payment or store of value. Price fluctuations of 10% a day are part of the norm in cryptocurrencies, while large currencies like the USD rarely fluctuate more than half of that amount in an entire year.
This is where stablecoins step in. Stablecoins are cryptocurrencies that are always worth the same, for simplicity, this is $1 in most cases. These tokens achieve this by being backed by real-life assets like fiat or gold, by being collateralized with digital assets like Ethereum, or by having an algorithmic central bank that regulates the creation and destruction of new coins in an effort to keep the price constant.
At the time of writing, the most popular stablecoin is Tether (USDT), which despite banking issues and heavy criticism, is currently sitting on a $1.7 Billion market capitalization. USDT has lost its $1 peg on a few instances, usually when Tether has banking problems which stop arbitrage from functioning properly. On October 15 2018, amid concerns that USDT is not actually 1:1 backed by fiat, the stablecoin lost 15% of its value in less than 24 hours.
Some interesting fiat backed alternatives to USDT are TUSD by TrustToken, USDC by Coinbase and Circle, and the Gemini Dollar (GUSD) by Gemini Exchange. DAI by MakerDAO is also a stablecoin to keep an eye on, it differs from the ones already mentioned in that it is not collateralized by fiat, but by Ether.
As the cryptocurrency ecosystem continues to evolve, some cryptocurrency categories will inevitably disappear, and other new ones will flourish and potentially change the face of the entire space. There are currently many cryptocurrency categories which may turn out to never have needed blockchain in the first place, these will slowly fade out of existence and only leave a tiny mark in this historic technological shift.
We will be constantly updating this list of cryptocurrency categories to stay up to date with the changes in the space, if you think that an important category is missing, please do let us know in the comment section below.
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