By now, it’s hard to deny that we’re spoilt for choice in crypto, with all kinds of crypto available in the market. Almost every single crypto offers something unique and packs in different characteristics. But for education, we can broadly categorize crypto into 4 categories based on their functions.
Asset Tokens - A major function of crypto is primarily as a store of value. A vast majority of crypto is limited in number and deflationary in nature. In fact, this property of Bitcoin is the reason why Bitcoin is called “digital gold.” These crypto are units of value, often representing projects or ecosystems developed and maintained by communities or organizations.
This isn’t a restrictive definition, though. Apart from the soaring appeal of crypto as an alternate investment, there has also been an increase in the popularity of concepts like NFTs, which represent digital art. Then there are others like Paxos Gold, which aims to provide access to an asset class (in this case, gold) that was previously illiquid or had a high barrier to entry.
Medium of Transaction (Currency/Payment Tokens) - Of course, crypto can also be used as a medium of transaction. The crypto is inflationary in nature, being used exclusively for their utility as a medium of exchange. These vary - from digital versions of fiat currencies, like China’s digital Yuan, to stablecoins that are popularly used to transact in crypto exchanges - like USDT, USDC, DAI, etc., 2021 has been host to a consistent stream of news heralding adoption from major entities. Several companies globally have begun to accept Bitcoin for their products and services (the most high profile being Tesla, of course, even if temporarily). El Salvador making Bitcoin legal tender is perhaps the biggest example of crypto finding acceptance as a payment method.
Utility Tokens - crypto can be leveraged to power a wide range of applications and entities. The second biggest crypto by market cap - Ethereum, has managed to create a vibrant ecosystem, potentially disrupting multiple industries, with Defi (Decentralized Finance) being by far the most popular sector right now. With utility tokens, businesses allow their user base access to their digital services. For instance, exchange tokens like WRX provide multiple rewards for their users ranging from securing a 50% discount on the trading fees, access to airdrops, convert crypto dust into WRX, and also purchase their favorite NFTs on the WazirX NFT Marketplace.
Security Tokens - Security tokens are a special type of crypto that enables real-world assets like real estate and company stocks to be backed by a blockchain. These can be essentially perceived as digital versions of financial assets. They function similarly - backed by company shares/promises for future profit (including future dividends, market share appreciation, etc.). Tzero Equity token, 22X, and BCAP are popular examples of these types of tokens.
With this, I hope to dispel the myth that cryptocurrencies are a replacement for regular currencies. They have never been. They are the result of a global, hyper-collaborative community that banded together to create the first successful use case of decentralized technologies - an era-defining concept that we’re all fortunate to be experiencing in real-time. Crypto is an emerging alternative asset class with several powerful use cases and classifications. Therefore analyzing different types of crypto using the same criteria is fundamentally flawed.
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