For some, the only cryptocurrency that they have ever heard of is Bitcoin. This concept makes sense. As we discussed in " Are Blockchains the Future of Secure File Management?," Satoshi Nakamoto pioneered the revolutionary blockchain concept through his proposed Bitcoin. And this cryptocurrency made headlines again and again.
For others, it's hard to keep all the cryptocurrencies straight. So, the number one is Bitcoin (of course). However, another top cryptocurrency is Bitcoin Cash, which is the Bitcoin blockchain that was forked in a different direction to allow for faster transactions? But wait, wasn't Litecoin also an early spinoff of Bitcoin designed to be smaller, faster, and just overall lighter … I mean liter? And these are just three of 8,000+ cryptocurrencies that exist!
While these different cryptocurrencies often fall into one of four major types, regardless of what they are for and how they work, these all rely on a manifestation of blockchain technology. Today we are going to talk about and the different categories of cryptocurrencies and the major ones as of this writing.
Kinds of Crypto
While theoretically there might be dozens of classes of cryptocurrencies, the vast majority fall into the following four categories:
Proof of Work
When Nakamoto first advocated the concept of blockchain for his Bitcoin, he proposed a proof of work concept. His concept was to take the previous block plus current transactions plus a nonce value to produce a particular result: "The proof-of-work involves scanning for a value that when hashed, such as with SHA-256, the hash begins with a number of zero bits." Those who try to complete this puzzle are known as miners. By being the first to solve these mathematics puzzles, miners are rewarded with a particular amount of cryptocurrency. On the flip side, every other computer that did not solve the problem just wasted its time and energy.
Originally, cryptocurrency mining could be done on home computers. However, as time went on, the math involved became more complex, requiring more powerful graphics cards and greater energy. Today, proof-of-work mining is happening on over a million computers, most of which are dedicated hardware specifically manufactures for proof-of-work mining. Overwhelmingly, these are at data centers and consortiums dedicated to this mining. And this only counts Bitcoin miners! There are many other proof-of-work cryptocurrencies, including Bitcoin and its spinoffs Bitcoin Cash and Bitcoin SV, Litecoin, Dogecoin, and more. Ethereum started as proof-of-work but is migrating to proof of stake.
Proof of Stake
Proof of work is a race to solve the equation and have a miner's block be selected as the next block in the chain, but in proof of stake, a miner is just chosen at random. Each miner has a percentage chance of being the next miner chosen based on their percentage of the particular cryptocurrency that they have, or rather that they have staked (continuing the mining metaphor). Thus, a miner with 1% of a cryptocurrency would have a one in one hundred chance to be randomly selected to write the next block. Once a miner is picked, they are then disqualified to write the next block.
Because mining is selected rather than won, the only computer working on a block is the one that was selected, as well as those that verify that the block is correct. This option saves an enormous amount of energy.
Tokens
Tokens can take many forms, especially as these are the majority of cryptocurrencies. Tokens are designed with a specific purpose and use, such as for video games where they can purchase upgrades and extra lives. These cryptocurrencies are often written on the foundation of existing blockchains like Ethereum.
Stablecoins
While most cryptocurrencies try to set themselves apart from currencies like the dollar, the Euro, or the Yen, the purpose of stablecoins are to create digital currencies that match fiat currencies. As such, a stablecoin like one Tether always has a value of one dollar. Some of these cryptocurrencies are backed by fiat currencies. While others, like the gold standard of yore, are backed with gold and other precious metals.
The Top Dog(e) of Cryptocurrencies
There are thousands of cryptocurrencies. Some are very specialized tokens that aren't intended to capture a major market share. Others are worthless dead coins that were a scam, joke, or failure. However, there is this handful that dominates the cryptocurrency industry:
Bitcoin (BTC)
The first and reigning champ, nothing comes close to Bitcoin. Started in 2009, Nakamoto's proof of concept has endured. Its rollercoaster of value has gone from a Bitcoin for pennies to each being over $50,000! Bitcoin has so transitioned from fringe to mainstream that it has been discussed repeatedly in the media. Bitcoin has truly become the standard, so much so that every other cryptocurrency is known as an altcoin.
In recent years, Bitcoin split in two, leaving Bitcoin and an altcoin known as Bitcoin Cash. This separation is known as a fork. Up until the fork, there was just Bitcoin. But after the fork in 2017, two different currencies shared this history. The reason for the forking paths was because the Bitcoin community was divided on whether or not to increase the size of the Bitcoin block from 1 MB. Purists wanted to keep the blocks small, as Nakamoto advocated. However, feeling limited by this cap, others wanted larger blocks to increase capacity. Having not gone far enough to satisfy its population a year later Bitcoin Cash forked again forming Bitcoin Cash (with a block limit of 32 MB) and Bitcoin SV (with a size limit of 128 MB)!
Ethereum (ETH)
While nothing compares to Bitcoin, the preeminent altcoin is now and has been for years Ethereum. While Bitcoin was intended purely to be a new global currency, Ethereum was created as a cryptocurrency that was also the foundation for decentralized applications and later smart contracts. Here is blockchain beyond cryptocurrency. Programs, artificial intelligence, and digital art that can be singularly owned—the nonfungible token (NFT)—can all be written upon the Ethereum blockchain and will endure as long as Ethereum remains.
Because of this juxtaposition, many people and organizations have launched tokens built on Ethereum. Many of these initial coin offerings (ICOs) have raised millions for start-up ideas without the need for third-party crowdsourcing platforms like Kickstarter or IndieGoGo. These tokens often can then be used for in-app benefits and/or traded for other Ethereum-based tokens.
Like Bitcoin, Ethereum also experienced a major fork—but this was so much more dramatic than an argument over block size: In 2016, one of the projects built on Ethereum, the decentralized autonomous organization (DAO) raised $150 million, at the time the largest crowdfunding campaigns ever. A month later, though, users exploited a vulnerability, allowing them to siphon off a third of the money raised. This spiriting away of $50 million was neither illegal nor a violation of terms. As such, a majority of Ethereum users' only recourse to get their money back was to hard fork Ethereum back to before this campaign. This decision was deeply controversial, going against the code-is-law philosophy that is foundational to the blockchain. As such, purists continued the unaltered Ethereum blockchain rebranded under the name Ethereum Classic.
Binance Coin (BNB)
As I mentioned in "Buying Bitcoin" back in February, financial companies like PayPal have begun to allow the limited purchase of cryptocurrency. However, before moves like this, we would have to go to currency exchanges to purchase cryptocurrencies like Bitcoin and Ethereum. Arguably the largest of these exchanges is Binance—which offers its native cryptocurrency, Binance Coin. One of the interesting aspects of Binance Coin that differentiates it from others is that it purposefully destroys a portion of its cryptocurrency every quarter. In total, Binance Coin has risen to be the number four currency.
Monero (XMR)
While Bitcoin used to be the coin of the realm for criminals everywhere, it did not offer the privacy protections they needed to get their money and hide. This exposure to the digital ledger is part of the concern that privacy advocates have regarding many cryptocurrencies. Monero embraces that concern head-on by obfuscating much of the transaction, such as the addresses involved, the amounts, and balances. Because of this feature, Monero advocates that it is untraceable. As such, while Monero is only the 25th most popular cryptocurrency, it is rapidly rising as the first choice for ransomware payments.
Dogecoin (DOGE)
What started as a joke based on a meme has surprisingly become a legitimate cryptocurrency. Dogecoin is in the number eight position. Part of its success stems from mentions by Elon Musk and the 45th President of the United States. However, another huge aspect is iconic the adorable Shiba Inu dog and the self-effacing and generous attitude of its community.
While a fundamental aspect of Bitcoin is an absolute cap of 21 million, Dogecoin has no such ceiling. There are over 130 billion Dogecoin in circulation today. A large part of this comes from proof-of-work mining. Every ten minutes, 6.5 Bitcoins are paid to whoever won the nonce race and crafted the block. With Dogecoin, it's every minute and the payout is 10,000 Dogecoin! (We'll talk more about Dogecoin in a future article.)
CLOSING
With thousands of cryptocurrencies to choose from and with prices from $0.12 for Dogecoin to $42,007.81 for Bitcoin,[1]many of us could use all the help we can get. Much like Astronomer Clifford Stoll incorrectly predicted of the internet, "The truth in [sic] no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works," cryptocurrencies are bringing in a new era. With China pushing for the digital yuan[2] and El Salvador adopting Bitcoin as legal tender, cryptocurrencies seem likely to soon be the new normal.
As such, now is the time to explore what cryptocurrencies are likely to mean to you and your business. And if you want to talk to a professional about all this, we are here for you. Just reach out to us.
[1] As of the time of this writing at 10:10 am EST on 28 Sept. 2021.
[2] While banning all other cryptocurrencies!