In cryptocurrency, every alternative digital currency on the market is called an altcoin. The term can be divided into “alternative” and “coin” and their functions can be similar to the original cryptocurrency or completely different.

Tokens based on the blockchain serve various purposes. Some are money, others provide an application feature, and others pave the way for the concept of digital currency to be implemented into the traditional financial system. In this one we look at the four different types of altcoins and what they do in the world of cryptocurrencies.

The four different types of altcoins

Protocol coins

Protocol coins are cryptocurrencies that were created to act like money. Bitcoin is an example of a protocol, as is Monero and Litecoin (which are based on Bitcoin’s original blockchain). Protocol coins are designed to provide:

• A unit of account or a measure of value
• A store of value
• A transmission medium

Ordinarily, protocol coins, which are anonymous and undetectable, are regulated by the government around the world. Some countries have banned cryptocurrencies entirely based on how protocol coins could be used illegally and for fraud or terrorism as the funds cannot be traced back to an individual. Other countries are trying to regulate and implement a responsible way for citizens to use and store Bitcoin and other cryptos. Some countries are pro-crypto and have adopted an attitude that encourages users and traders to look to digital currency for long-term investments. El Salvador was the first country, and is currently the only country to adopt Bitcoin as legal tender in the country, and the government is committed to buying Bitcoin all year round.

Utility coins

Utility tokens offer users a product or service and act as an access point to a network. Without owning the token, you cannot access the services that a blockchain or platform could offer. A utility token is issued by the network to fund the development of the network and can then be used by the owner or user to access the platform’s offering. Chiliz ($ CHZ) is an example of a utility token that allows users to join the Socios network – a platform for sports fans to buy and trade collectable digital tokens.

One of the most popular utility tokens we’ll see is the ERC-20 standard. Ethereum is a proton token itself, but the blockchain provides a platform for other networks to build on (known as the application layer) through smart contracts. So that other networks can build on Ethereum, they rely on ERC-20.

Stablecoins

Stablecoins are the holy grail between cryptocurrency and traditional finance. These are tokens that are tied to an underlying, pre-existing currency in a one-to-one ratio. Stablecoins are usually pegged to a fiat currency such as the US dollar. The blockchain-based stable currencies are designed to allow users to enjoy the properties of cryptocurrency without suffering from the volatility that crypto has experienced.

Coinbase’s USDC and Tether are examples of stablecoins, but there are many more. Stablecoins can be divided into three different types:

• Stablecoins supported by Fiat,
• Cryptocurrency-backed stablecoins and
• Unsecured stablecoins.

Central bank digital currencies

Central bank digital currencies, also known as CBDS, are cryptocurrency coins issued directly by a government or central bank without the unregulated nature of cryptocurrency as we know it.

There has been a massive surge in government and bank research into CBDCs, with over 50% of countries around the world testing digital currencies. At the moment there is one country that has officially introduced a CBDC and that is supported by the state. In 2002 the sand dollar was introduced by the central bank of the Bahamas and works with the Bahamian dollar.

Source: CBDC tracker

Not fungible tokens

There is another type of token that lives in the world of cryptocurrencies but doesn’t quite work like the other cryptocurrencies. Non-fungible tokens (or NFTs) are cryptocurrencies that have unique individual values ​​depending on the asset. With other cryptocurrencies, each token is identical to the other (one bitcoin is the same as another bitcoin), but with NFTs, each token has a different value and represents a different asset. NFTs used for digital assets such as art, music, collectibles, and more.

Because of their blockchain-based design, NFTs are great for providing authentic, immutable digital property that can be used in all areas of the online world. This means that you can buy a digitally created work of art knowing that you have complete ownership of that original piece and that no one can take it from you because of the blockchain record (even if it is a screenshot or a copy), which is not can be changed without verification. NFTs also provide users with the ability to record documents that cannot be changed, e.g.

Why should you care about the different cryptocurrency tokens?

If you were to buy shares in a company, you would probably look at what the company is offering before funding it. In the same way, if you want to invest in a cryptocurrency, it is a good idea to learn about the project behind the token, to see long-term use cases and features, to get some understanding of the possible future of the cryptocurrency.

The world of blockchain is growing exponentially, and we are likely to see countries implement cryptocurrencies into the traditional financial system in some way. Studying the industry a little beforehand can help you understand the benefits and potential pitfalls of the industry as it gains greater mass adoption.

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