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Understanding The Different Types of Cryptocurrency

Crypto assets were dreams and thoughts before 2009.

In the initial days of 2009, the very first cryptocurrency was launched, today is known as Bitcoin. Bitcoin was launched by an anonymous developer. After some time, the developer was known by the name Satoshi Nakamoto.

The technology that started Bitcoin has now started a life of its own.

After Bitcoin, a huge range of new cryptocurrencies has been launched. To the people who have zero or less knowledge of cryptocurrencies and their world, they might take the crypto market as something more than a simple group of similar offerings.

Check out these helpful hints for selecting the best crypto wallet.

Significant Categories of Crypto-Assets

There are differences found in today’s cryptocurrencies.

As we all know that cryptocurrencies use blockchains to record transaction data and other information, all types of cryptocurrencies depend upon the different versions of the original blockchain technology that provides power to Bitcoin.

And not all crypto-assets are developed in a way that they work and function like fiat currencies.

Below is a guide that will help you learn the major types of cryptocurrencies.

  1. Proof of Work (PoW)
  2. Proof of Stake (PoS)
  3. Stablecoins
  4. Tokens

Proof of Work (PoW)

The first-ever cryptocurrency Bitcoin depends upon the blockchain technology that depends upon the idea of the Proof of Work mechanism. This mechanism is used to process all the transactions made on this platform.

To understand the Proof of Work mechanism, you first need to understand blockchain properly.

In simple words, a blockchain is a public ledger system.

On the system of blockchains, all the participating networks known as nodes maintain a copy of the system’s ledger. You can take it as sharing a copy of the register with various people. The difference in PoW is that no person can add something to the register alone.

To add a new transaction, nodes have to compete and solve complex cryptographic puzzles that represent the data that have to be added to the ledger. The one who solves the problem first then makes the answer live to the remaining network for getting it verified.

This entire procedure is known as mining. The node that gets successful in providing the right answer first receives rewards and prizes and hence it is a beneficial way of earning passive income.

Proof of Stake (PoS)

The most significant issue with Proof of Work (PoW) systems is that these currencies are unable to scale properly.

To resolve that issue, a new and different algorithm was developed for blockchain that let the smaller pools of nodes authenticate and validate transactions accurately. This consensus mechanism is known as Proof of Stake (PoS).

This mechanism offers security in a different way than Proof of Work (PoW).

In the Proof of Stake system, it is not necessary to validate all the transactions.

As an alternative, all the participating nodes have to utilize their cryptocurrency holdings as an investment or deposit to join a transaction validation group. This is the point where the idea of Proof of Stake gets its name.

If any node tries to fraud or passes wrong data or information into the public ledger receives a penalty automatically. The validators that follow the rules receive prizes and interest as rewards for their amazing work.

The incentive system in the Proof of Stake system keeps all the data and stuff safe and secure by operating fairly and justly.

Stablecoins

Stablecoins are cryptocurrencies that offer reliable value storage.

The key purpose of these types of cryptocurrencies is to offer stable value to the coins. Their need occurred because standard crypto-assets such as Bitcoin and Ethereum had highly unstable values that made them unmanageable.

This is the major reason behind the wealth of many crypto investors to only see their entire wealth vanish in no time as cryptocurrencies are highly volatile.

These coins are developed on the existing blockchains but can also be exchanged or swapped for usual fiat currencies.

Tokens

Tokens are quite distinct from usual cryptocurrencies as they cannot be used for general purposes. These are designed on major blockchains like Ethereum. Tokens can be used in a huge variety.

These tokens are ideal for single-purpose applications. People can purchase real estate through these tokens as well as can swap property shares just like people do in trades and stocks.

Now, these tokens are also being used in commodity markets, for example, are being used in energy trading.

Conclusion

Now you must have an idea that there are more cryptocurrencies than only the ones we have heard about.

Cryptocurrencies have a huge and diversified market that is unceasingly increasing with every passing day. It will not be wrong to say that digital currencies are the future of finance.