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Cryptocurrency and its types: altcoins, stablecoins, CBDC

Cryptocurrency and its types: altcoins, stablecoins, CBDC

Every year, cryptocurrencies are becoming more and more popular as a means of payment, trade, and investment. This is evident from the growth in the number of new digital coins, reaching close to 17 thousand as of today and still increasing. In this article, we will tell you what cryptocurrency is, its main types, pros and cons.

Cryptocurrency is decentralized digital money created using cryptographic algorithms and mathematical calculations. Unlike fiat currencies, cryptocurrencies neither have a single issuing center, like central banks, nor require intermediaries. All digital coins are stored in blockchains, decentralized distributed public registries. They act as an account book, keeping track of all information about the movement of funds. - Most often, such information is publicly available, and anyone can find out what amount is in the particular wallet. Decentralization is provided by multiple duplicate information stored on different servers, allowing you to ensure protection from hackers or physical loss of the server. 

Therefore, in such characteristics as security, ease of use, and accessibility, they start to surpass ordinary fiat currencies, like the dollar or the euro. The only serious limitations are the low speed of money transfer from wallet to wallet and the refusal of most countries to legalize them as a means of payment.   

Cryptocurrency can be divided into three main categories: altcoins, stablecoins, and CBDC. Bitcoin stands apart from them since it doesn't fall into any of the categories. 

Bitcoin (BTC)

Bitcoin is the oldest cryptocurrency on the market. Almost 13 years ago, the unknown mysterious creator Satoshi Nakamoto (nobody knows who hides under this pseudonym yet) released a bitcoin whitepaper, a newsletter describing the project. The first transaction blocks appeared in the namesake blockchain. Bitcoin was intended as an alternative to fiat currencies, digital money that exists independently of intermediaries such as banks and governments.

Bitcoin transactions are recorded in a decentralized distributed registry and are protected from outside modification thanks to blockchain technology and complete decentralization. The issuance is strictly limited to 21 million coins. The concept of inflation does not apply to Bitcoin. On the contrary, every year the bitcoin supply in the market will decrease, which means that the rate of this cryptocurrency will only grow. Earlier we reported that at the end of 2021, 90% of all bitcoins have been already mined. Bitcoin is mined ("extracted") according to the PoW (Proof-Of-Work) algorithm and requires a lot of electricity and computing power. That is why Bitcoin is often called "digital gold". 

Market dominance: 40%.

Capitalization: $830 billion, at the highs exceeded $1 trillion.

Advantages: has the greatest value and capitalization, limited issuance.

Disadvantages: energy-consuming mining, expensive mining equipment, high network fees, and slow transactions.           

       

Altcoins

Altcoins are all other cryptocurrencies that appeared after bitcoin as an alternative to the oldest cryptocurrency. Altcoins use different blockchains, consensus algorithms and, accordingly, formats for mining coins. 

Many altcoins were created to meet a specific market demand, to solve a specific problem, or to bring a new service to market. They use different cryptographic signature technologies and have different levels of anonymity. 

The most popular altcoins:

Ethereum (ETH)

The second most capitalized cryptocurrency with its own blockchain and asset tokenization platform. Using smart contracts, it enables the creation of tokens and various decentralized applications (DApps). Ethereum is migrating to another PoS (ETH 2.0) algorithm due to the imperfection of the PoW algorithm and high commissions.

Market dominance: 19%.

Capitalization: $400 billion

Advantages: the most developed ecosystem with smart contracts.

Disadvantages: high online fees.

Cardano (ADA)

A popular cryptocurrency with a third generation blockchain platform for creating DApps, based on the Ouroboros protocol. It has been in the top 10 of most rankings for a long time. It has the status of a "green" coin due to the use of the PoS (Proof-Of-Stake) algorithm and has an architecture consisting of several layers.

Capitalization: over $43.6 billion

Advantages: low online fees, fast transactions, smart contracts, no need to buy mining equipment.

Disadvantages: scalability rates are lower than those of competitors. 

 Monero (XMR)

It is a completely anonymous cryptocurrency. Thanks to the ring signature technology, it keeps each transaction private, hiding the amount of the transaction and the address of the recipient and the sender. It strives for real decentralization by migrating to an algorithm rendering mining with FPGA and ASIC (special powerful and expensive equipment for coin mining) ineffective. It is still possible to mine Monero on CPUs (computer processors) and GPUs (discrete graphics cards), which makes mining accessible to almost anyone who possesses a computer.

Capitalization: about $4 billion

Advantages: anonymous operations, mining available to everyone.

Disadvantages: unlimited issue. 

Stablecoins

Stablecoins are a separate category of cryptocurrencies that are linked to certain physical assets: fiat money, precious metals, oil, or other assets. Usually, such coins are pegged to the value of the asset at a 1:1 ratio for ease of use. In the cryptocurrency market, they act as a buffer between digital and real assets. They are mostly bought by investors who want to either enter the cryptocurrency market or wait out the next spikes in digital money rates without losing their real value. 

The most popular stablecoins:

Tether (USDT) 

It is the first stablecoin on the market, appeared in 2015. It is pegged to the U.S. dollar. Despite the difficulties in confirming the security of the entire issue and periodic claims from regulators, Tether remains the most popular stablecoin on the market.

Capitalization: over $78 billion

Advantages: USDT pairs are on all exchanges.

Disadvantages: regulatory risks.

USD Coin (USDC) 

The second most popular stablecoin, issued in 2018 by Circle, is managed by the Centre consortium. USD Coin is fully backed by U.S. dollars and short-term U.S. treasury bonds. Circle stands proud that the stablecoin's reserve fund is audited monthly by five top U.S. accounting firms.

Capitalization: about $45 billion

Advantages: no claims from regulators.

Disadvantages: not used by all exchanges, few trading pairs.

Binance USD (BUSD)  

Stablecoin was issued by the Binance exchange together with the custodian Paxos, which is also the issuer of BUSD. These companies assure that stablecoin is 100% backed by U.S. dollars in the accounts of insured U.S. banks and audited regularly by Withum.

Capitalization: over $14 billion

Advantages: belongs to the largest cryptocurrency exchange.

Disadvantages: not much popular beyond the Binance platform.

Central bank digital currencies (CBDC)

CBDCs are a product of central banks, using which they try to compete with all cryptocurrencies. They almost completely copy the characteristics of cryptocurrencies, except for a few peculiarities. First, instead of decentralization, they offer centralization, i. e., only one organization can issue coins. The second thing is that there is no possibility to mine or perform DeFi in order to passively obtain new digital coins. Thirdly, CBDC is controlled by the state, and as a consequence, it can control transfers by imposing sanctions against countries, organizations or certain people. Moreover, there is no anonymity. 

Among major countries, the People's Bank of China is the most progressive in issuing such a currency. The secret development started back in 2014, but the world only found out about it in 2019. Today, testing of the central bank's digital currency, called DCEP, is in its final stages. 

Other assets

Tokens

A token is a type of digital asset that most closely resembles a digital signature, giving the right to own something, such as an amount of money in a certain currency, an apartment, a car, etc. Tokens are created on a third party blockchain. Depending on the parent blockchain tokens are issued under different standards: ERC-20 (Ethereum), TRC-20 (Tron), QRC-20 (Qtum), NEO-5 (NEO), BEP-20 (Binance), etc. 

The main difference between a normal token and a non-fungible token (NFT) is that the token must be standardized. You can issue a token to a smartphone that has never been used before and is in its factory packaging. But if you have already used it or if it is damaged, an NFT is created for it. The major disadvantage of any token is that there is no legal regulation that entitles the buyer of the token to own the asset. In other words, if you buy a token for a car, no court will give you the right to take the car away from the previous owner. However, some countries are already working on this. 

 

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