A cryptocurrency is a medium of exchange that is designed to work like a currency. Usually, cryptocurrencies use features found in strong cryptography, such as digital signatures to secure financial transactions, control the creation of additional units, and verify the transfer of assets. The first of them were created to be independent of a government-issued currency.
Cryptocurrencies use decentralized control as opposed to centralized electronic money and central banking systems. The decentralized control of each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database. Bitcoin, first released as open-source software in 2009, is generally considered the first decentralized cryptocurrency and has since seen over 400M+ transactions. Since then, over 4,000 altcoin (alternative coin) variants of bitcoin have been created.
The Three Main Types of Cryptocurrency
There are three basic types of cryptocurrency:
Traditional cryptocurrencies like Bitcoin just serve as a unit of exchange. Like usual fiat currencies, they have a limited inherent value that is attributed to people using it – its price can rise and drop.
Utility cryptocurrencies serve to build an infrastructure on the top of it. Ethereum is a good case in point: it allows developers to generate ‘Smart Contracts’, i.e. the code that can execute coin transactions without middlemen and third-party organizations. Smart contracts can drive decentralized applications and be applied in literally any sphere where communication without trust is required. Another similar cryptocurrency is Filecoin: it serves to create a decentralized data storage system.
Tokens (app or platform cryptocurrencies). This is a cryptocurrency equivalent of an application or a platform that is generated on top of a utility cryptocurrency like Ethereum. Tokens are typically used in the frames of some certain infrastructure for purchases or getting some certain rewards.
Cryptocurrency Explainer Video