Types of Cryptocurrency: Coins and Blockchain

Not all types of cryptocurrency are the same. In this article we are going to discuss the first, and arguably most important, type of crypto: Layer 1 blockchain “coins”.

Cryptocurrency Coin vs Token:

The first important distinction to make is between a “coin” and a “token”. These two words are often used interchangeably on social media platforms and even by projects themselves. For the purposes of this learning centre, however, we will be defining them as follows:

Cryptocurrency Coin:

A coin is a cryptocurrency that is “native” to its own blockchain. For instance; Bitcoin and Ethereum are examples of coins – they operate on their own independent #ledgers#. Often the coin is used to pay to transact on the blockchain. For instance, when you do any transaction on the Ethereum blockchain you need to pay “#gas#” in ETH. This fee goes to the individual(s) who formed the block that the transaction occurred on.

Cryptocurrency Token:

A token is a cryptocurrency that operates on an existing blockchain. For instance in 2024 “#memecoins#” built on the Solana Blockchain have been very popular; these would be an example of tokens.

Tokens are used for a range of purposes, here are some examples of use cases:

To represent a share of a real world asset.

To interact with an app (dApp) built on the parent blockchain.

To vote on the direction a project takes (governance).

For funsies (memecoins or “shitcoins” as they are often called)

You can read more about cryptocurrency tokens here.

Grey Areas:

Some cryptocurrencies don’t fit cleanly into these categories. A great example is Metis – Metis is the native coin of a layer2 network built on top of Ethereum; it operates as the “gas token” for the network. For the purposes of this article we’ll be regarding these examples as tokens and focusing primarily on layer 1 blockchain coins.

We mention Metis as an example as that is the network our own project operates on. You can read more about that here.

It is also worth noting that many tokens fit into multiple categories.

Types of cryptocurrency Blockchain:

So now that you know what a “coin” is, let’s talk about Blockchain. If you don’t know what a blockchain is, check out our Introduction to Cryptocurrency article. Below are the five most common types of blockchain you will stumble upon. Please note that this applies primarily to public blockchains, not private or hybrid blockchains.

1. Proof of Work (PoW)

Proof of Work is the original consensus mechanism used by the first decentralized blockchain, Bitcoin. It requires participants (miners) to solve complex mathematical puzzles to validate transactions and create new blocks.

Examples: Bitcoin, (Ethereum was a PoW blockchain until 2022 when it started the process of becoming “Ethereum 2.0”.)

How it Works:
- Miners compete to solve a cryptographic puzzle.
- The first miner to solve the puzzle gets to add a new block to the blockchain and is rewarded with cryptocurrency.
- The puzzle’s difficulty adjusts over time to maintain a consistent block creation rate.

Pros: High security, well-tested.

Cons: Energy-intensive, slow transaction times.

2. Proof of Stake (PoS)

Proof of Stake is an energy-efficient alternative to Proof of Work. Instead of miners, it uses “validators”, who are chosen to create new blocks based on the number of coins they hold and are willing to “stake” as collateral.

Examples: Ethereum 2.0, Cardano, Solana

How it Works:
- Validators are selected based on the number of coins they stake.
- The selected validator creates a new block and receives transaction fees as a reward.
- If a validator behaves dishonestly, they lose their staked coins.

Pros: Energy-efficient, faster transaction times.

Cons: Potential for centralization if a few validators hold large stakes.

3. Delegated Proof of Stake (DPoS)

Delegated Proof of Stake is a variation of Proof of Stake that involves a voting system to elect a small number of delegates who are responsible for validating transactions and creating new blocks.

Examples: EOS, TRON, Steem

How it Works:
- Coin holders vote for delegates.
- The top delegates (usually a fixed number) are responsible for creating new blocks.
- Delegates are rewarded for their work and can be replaced by voters if they don’t perform well.

Pros: Fast transaction speeds, scalable.

Cons: More centralized than other consensus mechanisms.

4. Proof of Space (PoSpace) / Proof of Capacity (PoC)

Proof of Space, also known as Proof of Capacity, relies on participants proving they have allocated a significant amount of storage space to the network.

Examples: Chia, Burstcoin

How it Works:
- Participants allocate hard drive space for storing cryptographic data.
- When a new block needs to be created, the participant with the most storage space (or the quickest response) wins the right to create the block.
- Rewards are given based on the storage space allocated.

Pros: Lower energy consumption compared to PoW.

Cons: Requires significant storage space, potential for centralization if few participants have large amounts of storage.

5. Proof of Burn (PoB)

Proof of Burn involves participants “burning” (destroying) a certain amount of cryptocurrency to gain the right to create new blocks.

Examples: Slimcoin, Koinos

How it Works:
- Participants send a certain amount of cryptocurrency to a “burn” address, effectively destroying it forever.
- The more coins a participant burns, the higher their chance of being selected to create a new block.
- This process is repeated periodically to maintain network security.

Pros: Discourages hoarding, reduces total supply over time.

Cons: Destruction of resources, can be less intuitive.

Which Type of Blockchain is Best?

This is a question that we are simply unwilling to answer. As mentioned above, all of them have pros and cons.

Additionally “best” doesn’t have a fixed definition. Best investment? Best for building on? Best at being fair and transparent?

The most successful blockchain is Bitcoin, which is #Proof of Work#. That said, Bitcoin was also the first major public blockchain, which is a huge contributing factor to its success.

Cryptocurrency is a very young field; the “best” blockchain is probably not fully developed yet.

Whether being “better” will allow a different type of blockchain to take market dominance is yet to be known; but based on history in other markets, probably not.