From forked creations and evolution, cryptocurrency has grown into a body of thousands. Different types of cryptocurrency emerge every day, hoping to make a mark on the digital landscape; some make the cut, and some get cut off, while some continue to lurk in the shadows of the financial market, hoping to make a big appearance.

Despite their differences, they all have something in common: their digital nature, unlike the world’s traditional means of exchange. While thousands of cryptocurrencies exist, they can be categorized into four broad types for a more compact understanding of the subject matter: payment cryptocurrency, utility tokens, stablecoins, and central bank digital currencies (CBDC).

Let us explore these cryptocurrencies and see how they differ.

Payment Cryptocurrency

At the top spot and the most famous of all cryptocurrencies stands the payment cryptocurrency. As the name implies, these are used to pay for goods and services that fall inside or even outside their confines. The most famous and successful example of payment cryptocurrencies is Bitcoin.

Payment cryptocurrency is designed to be a general-purpose currency, and it has its dedicated blockchain for this sole purpose. The downside of payment cryptocurrencies, if you would consider it as such, is that decentralized apps and smart contracts do not run on their dedicated blockchain.

A major trump card of the payment cryptocurrency is the fact that there are only a limited amount of digital coins that can actually be created. The less created, the less the inflation. In the same way an overflow of hard cash in society causes inflation, the limited supply of payment cryptocurrencies always leads to deflation.

Some examples of these cryptocurrencies include Bitcoin, Bitcoin Cash, Dogecoin, Litecoin, and Monero.

Utility Tokens

The first step to understanding tokens is that they do not always have a blockchain; they usually run on other blockchains. A utility token is a digital token that serves a specific purpose within a blockchain’s digital landscape. Projects with their blockchain create them to enable interactions, transactions, and engagements within their forum.

The Ethereum network was the first to adopt this system of allowing other cryptocurrencies to live off its blockchain. Unlike payment cryptocurrencies, Ethereum allows smart contracts and the creation of decentralized apps (dapps) to reduce or eliminate the use of intermediaries between financial and legal entities.

Another difference between utility tokens and payment cryptocurrencies is that tokens are not capped; they can keep creating them without limits. This makes them inflationary, and they are subject to regular drops in value.

A major role of utility tokens is enabling access to certain features, services, or benefits available on the mother project they are hosted on. This works because they act as that particular project’s official and internal currency, which can be used as a pass to access whatever that system offers at certain fixed prices.

Examples include Funfair, Timicoin, Golem, Sirin Labs Token, and Brickblock.

Stablecoins

Stablecoins are the least volatile of all cryptocurrencies because they usually almost always remain at the same price. Stablecoins are created to be of stable value; their value is somewhat predictable. They maintain this value because they can be exchanged for fiat currencies, especially the US dollar and the Euro.

The stability of stablecoins present is influenced by assets backing them, which are usually kept in reserves as per the defined ratio. Commonly backed by fiat, some are backed by crypto, commodity, and algorithmic stablecoins, which use software and rules to maintain the stable peg with fiat or other assets.

A thriving example of the stablecoin family is Tether’s USDT, which is backed on a 1:1 ratio with USD fiat, meaning its value is pegged to the US dollar and is supposed to remain stable at 1 USD. Other stablecoins that maintain this value include Tether (USDT), USD Coin (USDC), Dai (DAI), Binance USD (BUSD), Gemini Dollar, and USD Coin.

Stablecoins are not only limited to fiat. As mentioned earlier, some are backed by gold, including Tether Gold (XAUT), Kitco Gold, DigixGlobal (DGX), and Gold Coin. Some algorithmic-backed stablecoins are DefiDollar (USDC), FRAX, Ampleforth(AMPL), and Empty Set Dollar (ESD).

Central Bank Digital Currencies (CBDCs)

Central Bank Digital Currencies are digital currencies issued in token form by a country’s central bank as a government-recognized and regulated currency pegged with the official hard currency of the issuing country, similar to stablecoins. CBDC implementation into the financial system and monetary policy is still in the early stages of adoption in different countries.

CBDCs, just like traditional cryptocurrencies, are built on blockchain technology in order to facilitate better payment efficiency and lower transaction costs. Although similar to other traditional cryptocurrencies, the issuing authority fully monitors, regulates, and controls the CBDCs in their country or region. There is no advantage of decentralization, anonymity, and lack of censorship here.

Additionally, CBDCs have certain advantages, such that they are expected to maintain their value or track with the domestic currency they are pegged with, even in times of inflation. Investors in CBDCs also do not have to worry about being tricked, fraud or mishaps recorded with other cryptocurrencies.

Some examples of CBDCs include the e-CNY, Digital Ruble, DCash, Sand Dollar, JAM-DEX, and the eNaira.

Final Thoughts

Cryptocurrency continues to evolve, with individuals constantly seeking innovative ways to enhance it. Currently, there are thousands of cryptocurrencies in existence and the potential for thousands more to emerge in the coming years. It's crucial to grasp the specific roles and purposes of these coins, tokens, and currencies in order to make informed decisions about your path in the crypto world.

In this discussion, we have explored the four major categories of cryptocurrencies to help make identification easier. If you are looking for one to invest in, leverage the insights gathered from here to make a decision and remember to remain observant.