Classification of cryptocurrencies: coins and tokens
To create and carry out transactions with cryptocurrency, a blockchain is needed, which requires infrastructure and economic incentives.
The main virtual crypto asset that ensures the functioning of the blockchain is called native. The latter is used to pay transaction fees and pay rewards to nodes. On platforms that allow you to run smart contracts, native cryptocurrency is used to pay for their execution. For Bitcoin and Ethereum, the native coin bears the same name as the project and trades under the tickers BTC and ETH, respectively.
Various crypto assets may appear as a result of a hard fork. These include, for example, Bitcoin Cash and Ethereum Classic.
Today, cryptocurrencies no longer necessarily require a separate blockchain: many crypto assets are created for use in various applications running on the same network. Such cryptocurrencies are called tokens. The CryptoSlate portal monitors the quotes of about 1300 tokens issued on the Ethereum network.
The issuance of tokens was made possible thanks to smart contracts, which became popular after the launch of Ethereum. Any user with programming skills can create their own cryptocurrency. The most well-known token standard is ERC-20.
What are the tokens
Virtual assets that are used for settlements and other purposes in projects and decentralized applications are called utility tokens.
Often tokens are used for project management. The community of asset owners can make decisions about the future direction of the project. Owners have the opportunity to put proposals to the vote and take part in polls. The weight of the vote is proportional to the number of coins.
Coins may provide certain rights or privileges. Tokens are used to raise funds in the Initial Coin Offering (ICO). In some projects, virtual assets provide the right to a portion of the project’s profits. Tokens that have a set of functions within an application or network are also called utility tokens.
Cryptocurrencies officially recognized as securities are called security tokens. As of October 2022, there are at least a few dozen such crypto assets.
Blockchain-based stablecoins are implemented. The value of these tokens is pegged to the price of a certain asset, such as the US dollar. Most often they are used for settlements and the accumulation of savings. Their issuers keep an appropriate amount of currency in reserves, which guarantees price stability and the safety of funds.
Smart contract platforms allow the issuance of wrapped tokens. The latter is tied in value to a cryptocurrency from another blockchain. For example, in order to use bitcoin on the Ethereum network, the WBTC token was issued. The binding is implemented due to the fact that the issuance of a token requires the locking of the corresponding amount of cryptocurrency, which acts as collateral. To unlock virtual assets, wrapped tokens are burned.
Modern networks issue non-fungible tokens (NFTs) . These are unique coins that represent certain digital objects (images, audio and video files). NFTs have become collectibles. The first non-fungible tokens are rarities and have a high value (for example, CryptoPunks ). NFTs can also perform other functions, such as being used as avatars or tickets to certain events.
There are cryptocurrencies that are derivative financial instruments. On the basis of such tokens, in particular, liquid staking is built. Unlike stablecoins, their price is regulated by market mechanisms. Some trading platforms issue leveraged tokens.
How the value of cryptocurrency is formed
When creating a blockchain, developers decide what the tokenomics of the project will be. The latter determines the issuance algorithm and the distribution of coins between users. The issue is the number of coins in circulation. In some projects, the initial output is zero, such as in Bitcoin. In such cases, the cryptocurrency can be issued continuously or periodically. A number of projects have a permanent emission.
The distribution of the initial issue of coins between users is determined by the developers. Usually part of the assets remains with the project team. Funds are reserved for advertising, development, and development of the project. Some of the coins are used to attract investments. They can be bought by large investors within one or more rounds. Many projects use a public token sale to sell virtual assets to everyone. In other cases, they practice the distribution of coins between active users – airdrop.
Cryptocurrency algorithms may require the blocking of some coins (for example, when staking). Since some of the assets are deposited in smart contracts, a certain amount of funds is not available. As a rule, the release of a cryptocurrency is limited to a maximum issue. For projects that constantly generate coins, their total number will never exceed this value. For example, the maximum supply of BTC is 21 million.
The value of the cryptocurrency is affected by halving. The mechanism is used in cryptocurrencies that pay a fixed block reward. The halving occurs periodically and leads to a decrease in this amount. The event reduces inflation, and if there is demand for the asset, it stimulates the growth of its value.
The price of a cryptocurrency is influenced by burning coins. The latter involves the withdrawal from circulation of a certain amount of assets. To destroy the coins, the owners send them to special addresses or smart contracts. At the same time, an abrupt increase in the value of the cryptocurrency is possible, and periodic burning increases its scarcity.
Cryptocurrencies, unlike fiat money, are not controlled by a specific organization or government. As a result, virtual assets are characterized by high volatility. Their value is determined primarily by market mechanisms. The value of a cryptocurrency depends on the relationship between supply and demand. If a significant amount of coins is sold on the market, and there are few people who want to buy, the value drops. When demand exceeds supply, the price rises.
The main indicator of the demand for a virtual asset is market capitalization. The latter is equal to the product of the volume of coins in circulation by the unit cost. At the time of writing, BTC’s capitalization exceeds $374 billion. The latter is calculated based on the issue of more than 19 million coins worth $19,513 each.