Cryptocurrencies, crypto-tokens and stablecoins. Why all matter?

Are you curious about different cryptocurrencies, tokens and stablecoins? Keen on learning why they’re key to the Ethereum ecosystem? Great! You’ve come to the right place. To learn blockchain development and be certified I recommend visiting Ivan on Tech Academy

Blockchain is currently #1 ranked skill by LinkedIn. Because of that, you should definitely learn more about Ethereum to get a full-time position in crypto during 2020.

In my first and second pieces, I’ve discussed Ethereum 2.0 and the best tools for developers. In my third and fourth articles, I’ve discussed quadratic voting and open governance models. Then, in my fifth piece, I’ve looked into Swarm’s infrastructure.

In my sixth, seventh and eight ones, I’ve dove-deep into consensus algorithms and the blockchain trilemma. Lastly, I’ve looked into blockchain sharding technology, which projects are making it thrive and I’ve done an intro to Plasma and Looms

To spice things up a bit this week, I’ve explained the importance of blockchain explorers and why tBTC matters for Ethereum developers. Today, I’ll look into the difference between cryptocurrencies, crypto-tokens and stablecoins. Why are all relevant? Why should Ethereum developers care?

An outlook of the crypto-space

The cryptocurrency sphere has different types of tokens and each holds a unique purpose. While some are used to trade and store value, like Bitcoin, others serve a more comprehensive role, such is the case of Ethereum. It allows for stablecoins, utility-tokens and NFTs to emerge with much grace. 

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Watch the video above to learn from two of the most knowleadgable guys in the crypto-space. Ivan discusses in-depth the need for multiple tokens with Richard Heart, founder of Hex. 

In this piece you’ll learn to differentiate between cryptocurrency types and to understand why the market needs tokens with alternative goals and inner-working mechanics. There are mainly three categories I’ll be discussing today:

  1. Cryptocurrencies
  2. Crypto-tokens
  3. Stablecoins

Hopefully by the end of the piece you’ll see the value of each cryptocurrency, token and stablecoin; through a non-maximalist pair of eyes, this is. 

Cryptocurrencies

Cryptocurrencies are digital assets designed to work as a medium of exchange. Cryptocurrencies use strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. It is an alternative currency (of which virtual currency is a subset) and uses decentralized control as opposed to centralised digital currency and central banking systems.

The decentralised control of each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.

A variety of governance models do exist. The main two are:

  • Decentralized governance models where the community participates in the decision-making process. This is achieved by either committing code to the software, or by simply transacting in the network. Some of the oldest cryptocurrencies that fall under this category are Bitcoin, Litecoin and Dodgecoin.
  • Centralized governance models which are usually represented by federated consensus. Normally, a party composed of trusted institutions, have the power to control the network, transactions and overall consensus mechanics. There are a variety projects that fall under this category including Stellar Lumens, Ripple and Bitcoin Cash.

Crypto-tokens

Commonly known as Tokens, crypto-tokens exist to serve an alternative purpose to traditional cryptocurrencies such as Bitcoin.

The purpose of crypto-tokens is to be protocols that help developers, businesses and people in general to build upon their virtual machines. Different projects use different programming languages for their code base. Usually, we can sneak-peak what’s going on by looking at each projects’ GitHub.

Crypto-tokens can represent a different number of assets. These can include financial assets including:

  • Money
  • Stock
  • Bonds

Physical assets including:

  • Gold
  • Silver
  • Oil
  • Land
  • Real-estate

Digital assets such as

  • Collectibles
  • Identity
  • Gambling tokens
  • Virtual products

Depending on the purpose upon the token model is built, each crypto-token can virtually represent anything you want. There are two main governance models that apply:

  • Decentralized governance models where the community participates in the decision-making process. This is achieved by either developing Dapps (decentralised applications), building upon the business (sales, PR, marketing, etc), sharing content, or by trading the asset. Some of the most valuable crypto-tokens that fall under this category are Ethereum, NEM and Tron.
  • Centralized governance models which are usually represented by federated consensus. Developers can only build upon the protocol with certain permissions. Different access levels exist and users cannot fully participate in the decision-making process as they’re subjected to the rules applied by the rule-makers. There are a variety of top-10 projects that fall under this category including EOS, Cardano and IOTA.

 

Stablecoins

Stablecoins refers to a class of cryptocurrencies which offer price stability and/or are backed by reserve asset(s). Stablecoins, like Tether (USDT) or tBTC (Bitcoin on Ethereum), offer the option to hold a synthetic asset that holds value by following a peg. 

There are alternative models that support a stablecoin’s price stability, usually backed by:

  1. Fiat-currencies such as the USD or GBP. Many cryptocurrency users and enthusiasts rely on mechanisms to store some of their value in a non-volatile cryptocurrency form while they perform trades. An example is Tether or Sai.
  2. Assets such as gold, oil, bonds or any other commodities deemed valuable which can endow stablecoins with a certain degree of stability. Holders of commodity-backed stablecoins can redeem their stablecoins at the conversion rate to take possession of real assets. The cost of maintaining the stability of the stablecoin is equivalent to the cost of maintaining the backing reserve of the exchange-traded commodity and the cost of legal compliance, maintaining licenses, auditors and the business infrastructure required by the regulator. An example is Tether gold (XAUT).
  3. Cryptocurrencies such as BTC and/or ETH. These are usually in bulk since the reserve cryptocurrency may also be prone to high volatility. Such stablecoins are over-collateralised, meaning a larger number of cryptocurrency tokens is maintained as reserve for issuing a lower number of stablecoins. An example is WBTC or tBTC.
  4. Seniorage, or algorithms, representing a programmable solution to the supply, price and volatility metrics. These stablecoins are fully digitalised and non-reliant on any types of collateral as their supply and target price are  controlled only by the program code. This is typically a smart-contract. These algorithms usually include a Distributed Autonomous Organisation (DAO) as a way of allowing token holders to vote on governance decisions. MakerDAO is an example of such a project.

Stablecoins, as other cryptocurrencies and crypto-tokens, also have alternative governance models:

  1. Decentralized governance models, like MakerDAO, where the supply is controlled by the market (users) and transactions.
  2. Centralized governance models, like Tether, where the supply is controlled by a company or small group of people.

Conclusion

Hopefully you now understand the key differences between cryptocurrencies, crypto-tokens – like our dear ETH – and stablecoins. 

Each has its own purpose and there is little room for maximalism in the discussion. Even though Bitcoin remains #king, we should always be aware network effects rule supreme. This is, any coin may become king, given enough network effects. 

Even though Bitcoin is the best store-of-value asset in existance (according to me), tokens like Ethereum allow for novelty features and purposes such as DeFi. 

Without projects making strides to completely change how we think and operate in a daily basis, I seriously doubt cryptocurrencies will become adopted worldwide. 

Resources

This article is not financial advisement. 

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