There are many different sorts of cryptocurrencies assets available today. Each of these categories has a name and certain particular situations in which it may be advantageous or even necessary to employ it. Though it might be intimidating, it’s quite easy to become lost amid the various kinds of assets.
What is a stablecoin?
A stablecoin is a type of cryptocurrency that is linked to a “stable” reserve asset, such as gold or the US dollar. In comparison to unpegged cryptocurrencies like Bitcoin, stablecoins are intended to lessen volatility.
Due to the fact that the values of stablecoins are tied to a reserve asset like the US dollar or gold, they serve as a bridge between the worlds of cryptocurrencies and conventional fiat money. In comparison to something like Bitcoin, this significantly lowers volatility and produces a type of digital currency that is more suited for everything from daily commerce to conducting payments across exchanges.
The notion of combining the permanence of conventional assets with the flexibility of digital assets has proven to be quite attractive. Stablecoins like USD Coin (USDC), which are some of the most widely used means of storing and exchanging value in the crypto ecosystem, have seen value flow into the billions of dollars.
For instance, the USDC stablecoin is supported by assets denominated in dollars that have at least equal fair value to the USDC and are held in segregated accounts with US-licensed financial institutions. These accounts are publicly verified and attested to by a reputable independent accounting company.
The Ethereum blockchain is now used by USDC, along with many other stablecoins. Stablecoins inherit some of the most potent characteristics of non-pegged cryptocurrencies but are free from their volatility.
- Anyone may use stablecoins on the internet, anywhere in the world, at any time.
- They communicate quickly, inexpensively, and securely.
- They can be programmed and are digitally native to the Internet.
Fiat-backed, crypto-backed, commodity-backed, and algorithmic stablecoins are the four main categories, which may be distinguished by the underlying collateral structure.
What is an altcoin?
All cryptocurrencies except Bitcoin are referred to together as altcoins (BTC). Because the majority of cryptocurrencies are forks from one of Bitcoin or Ethereum (ETH), some people define altcoins as all cryptocurrencies other than those two. Some alternative currencies aim to set themselves apart from Bitcoin and Ethereum by offering new or extra features or objectives, while others employ alternative consensus processes to validate transactions and open new blocks.
The majority of altcoins are created and published by programmers who have distinct goals or purposes in mind for their currencies or tokens. Find out more about other cryptocurrencies and how they vary from Bitcoin.
Types of Altcoins
Altcoins come in a variety of types and tastes. Here is a quick description of some of the many sorts of alternative coins and the applications they are designed for.
Payment Token
Payment tokens are intended to be used as currency—to exchange value between parties—as their name suggests. The best illustration of a payment token is bitcoin.
Stablecoins
Since their inception, cryptocurrency trading and use have been characterized by volatility. By tying their value to a variety of commodities like fiat money, precious metals, or other cryptocurrencies, stablecoins seek to lower this overall volatility. If the cryptocurrency falters or has issues, the basket is intended to function as a reserve to redeem holders. Stablecoin price fluctuations shouldn’t go above a specific range.
Some well-known stablecoins include the USD Coin, MakerDAO’s DAI, and Tether’s USDT (USDC). With plans to roll out additional stablecoin settlement capacity later in 2021, payment processing giant Visa Inc. (V) stated in March 2021 that it will start settling some transactions on its network in USDC over the Ethereum blockchain.
Security Tokens
Tokenized assets provided on stock exchanges include security tokens. Tokenization is the conversion of an asset’s value into a token, which is subsequently distributed to investors. Any asset, including stocks and real estate, may be tokenized. The asset has to be kept and secured for this to operate. If not, the tokens wouldn’t have any value because they wouldn’t stand for anything. Because they are intended to function like securities, security tokens are subject to Securities and Exchange Commission regulation.
With the successful completion of a Securities and Exchange Commission-qualified Reg A+ token sale in 2021, the Bitcoin wallet company Exodus was able to convert 75 million shares of common stock into tokens on the Algorand blockchain.
Because it was the first digital asset instrument to provide equity in a US-based issuer, this was a historic occurrence.
Utility Tokens
Within a network, utility tokens are employed to deliver services. They might be used, for instance, to pay for services, cover network costs, or get incentives. A utility token is something like Filecoin, which is used to pay for network storage space and safeguard data.
ETH is a utility token as well. It is intended to be used as payment for transactions on the Ethereum blockchain and virtual machine. By minting and burning two utility tokens to put pressure on the price of the stable coin USTerra, which lost its peg to the dollar on May 11, 2022, the stable coin tries to keep it.
Utility tokens are supposed to be utilized on the blockchain network to maintain it; nevertheless, they may be bought on exchanges and retained.
Meme Coins
Meme coins, as their name indicates, are parodies or humorous interpretations of other well-known cryptocurrencies. They usually become well-known quickly and are frequently promoted online by well-known influencers or investors looking to make quick money.
Hundreds of these cryptocurrencies posted large percentage gains based just on speculation during the dramatic run-up in these sort of altcoins in April and May 2021, which many refer to as “meme coin season.”
Governance Tokens
Holders of governance tokens have particular privileges within a blockchain, such as the ability to vote on protocol modifications or participate in the decision-making of a decentralized autonomous organization (DAO). They are utility tokens because they are often native to a private blockchain and utilized for blockchain functions, but because of their use, they have become recognized as a distinct category.
What is a wrapped token?
Wrapped crypto tokens are cryptocurrencies used on the DeFi platforms that are linked to the value of another original cryptocurrency or other assets like gold, equities, shares, and real estate.
A newly minted token is issued to conduct transactions on other platforms, while the old asset is “wrapped” into a digital vault. Wrapped tokens create bridges across networks, enable interoperability in the cryptocurrency industry, and enable the usage of non-native assets on any blockchain.
They may stand in for anything, including fiat money, real estate, equities, commodities, arts and collectibles, and crypto assets. Wrapped tokens must be treated and handled by a custodian organization that will wrap and unwrap the asset since they are tied to another asset. We’ll see why the decentralized nature of cryptocurrency makes this a constraint as well.
The first wrapped Bitcoin tokens utilized on the Ethereum blockchain using smart contracts to provide investors with a guaranteed income were denominated in wBTC. In addition to Bitcoin, the list of wrapped tokens also contains other assets, mostly those that adhere to Binance Smart Chain BEP-20 and Ethereum ERC-20.
As strange as it may sound, ETH is not compatible with ERC-20 tokens even if they are produced on the Ethereum platform since it was created before them. Ether must be wrapped in order to adhere to other ERC-20 token requirements, exactly like Bitcoin. This results in the creation of an Ethereum platform tokenized version of ether.
To make access to DeFi apps easier, other blockchains including Cardano, Polkadot, and Solana have begun to experiment with wrapped tokens.
The bLuna, a wrapped Luna token that may be freely exchanged or used as collateral on other protocols on the Terra network, a platform that is both price-stable and growth-driven, is one of the more recent initiatives.
Types of wrapped tokens
Despite major differences from the more seasoned wrapped coins, it is generally accepted that stablecoins were the first class of wrapped tokens. A stablecoin like USDT (Tether), for instance, is supported by around $1. In contrast, Tether does not maintain an exact equal in actual dollars for each USDT it has; instead, it holds a variety of assets, including cash and cash equivalents as well as investments and receivables from loans.
Wrapped tokens come in two varieties: cash-settled and redeemable. Tokens with a cash settlement cannot be exchanged for the underlying asset. Redeemable tokens, on the other hand, let investors trade the wrapped token for the underlying asset. Wrapped tokens are hosted by other blockchains. The Monero or ZCash blockchains, for instance, hold wrapped privacy currencies.
Altcoins vs stablecoins: Key differences
Stablecoins and alternative coins mostly differ in their operation and intended use. Stablecoins are designed to offer some stability as a buffer against the excessive price volatility that altcoins are prone to. Note that the cash reserves for stablecoins are set.
Altcoins set themselves apart from Bitcoin by offering unique and extra features, particularly through opening up access to decentralized financial (DeFi) instruments. Smart contracts have made these features feasible, and they also allow for speedier transactions and cheaper costs when compared to Bitcoin.
Altcoins’ prices might fluctuate much like Bitcoin’s. By enhancing Bitcoin’s initial consensus algorithm, the best altcoins have the potential to take a significant market share. As a result, they may provide early investors tremendous returns on their investments (ROI).
The ROI is significantly lower with stablecoins. While stablecoin interest rates typically range between 5% and 20%, traders are drawn to stablecoins for a variety of reasons. Stablecoins provide a number of benefits, such as ease (users don’t have to on-ramp fiat) and the potential to include cutting-edge design innovations into the crypto currency.
Stablecoins are essential for cryptocurrency transactions that depend on speed for profitability, but not being as lucrative for investors.
