Four Key Types of DeFi Coins You Should Know About
The cryptocurrency market doesn’t prosper on Bitcoin alone. As of June 2022, there were 19,991 cryptocurrencies. Bitcoin has served as the trendsetter by becoming the standard for cryptocurrencies, inspiring an ever-growing army of followers and spinoffs.
Investors are intrigued by the potential of cryptocurrency to grow in value and the potential transformation of the traditional finance system into decentralized finance (DeFi). The cryptocurrency market has been growing exponentially, and dozens of other crypto coins are designed to provide new features and serve as potentially worthwhile investments.
Types of cryptocurrencies
All cryptocurrency assets fall into different categories. Below, we’re going to shed more light on the key types of crypto assets beyond Bitcoin.
Though many people see no difference between crypto, coins, and tokens, it’s important to understand that they cannot be used interchangeably. Coins and tokens are both forms of cryptocurrencies, but they come with different functions. Here’s what you need to know about the different types of cryptocurrencies.
What are altcoins?
Altcoins can be used to describe any type of cryptocurrency other than Bitcoin and, for some people, Ethereum. There are thousands of altcoins on the crypto market, but not all of them are gaining traction. As a rule, altcoins are forks that occur due to a splitting of a blockchain. There are many reasons for a blockchain to fork, such as a new way to raise money for specific projects, transaction validation, internal disagreements within the blockchain network, etc.
For example, Dogecoin was created just for fun. It forked from Litecoin that forked from Bitcoin in 2011. Though it was created as somewhat of a joke, it’s still a digital payment method.
What are stablecoins?
Stablecoins are digital assets whose value is fixed to a real-world asset like the U.S. dollar or the euro, precious metals, etc. They were designed to avoid high market volatility. While other coins are backed by fluff, stablecoins are backed by real assets that can’t simply vanish into thin air. This structure stands in contrast to most crypto assets. You can even use Bitcoin and Ethereum to mint stablecoins.
So with stablecoins, people owning gold or U.S. dollars can tokenize them and deposit them into a smart vault to generate passive income. With TheStandard.io DeFi protocol, stablecoins are always overcollateralized, which means that there will always be more assets backing them than actual stablecoins. We started to build TheStandard.io in 2021 as we noticed
What are governance tokens?
DeFi, cryptoeconomics, and tokenizations are opening up new organizations and ownership models. New platforms, products, services, and even the internet emerging from these new models are becoming decentralized, user-owned, and operated.
But there should also be coordination, governance, and decision-making tools within these organizations and communities. This is where governance tokens make their entrance. These tokens represent ownership within a decentralized protocol and provide token holders with certain rights that can influence the future of a protocol with the right to vote on the proposed changes. Each protocol features its own mechanism and process.
Governance tokens are vital for the decision-making process at decentralized autonomous organizations (DAOs). Maker (MKR) is one of the most well-known DAO governance tokens that is used to vote on changes with its decentralized lending platform.
What are wrapped coins?
You can use Ether directly on the Bitcoin blockchain because only the Ethereum blockchain knows that you hold Ether. With wrapped tokens, you can transfer crypto assets between different blockchains and use them within the entire crypto ecosystem.
Wrapped tokens are highly similar to stablecoins like USDT, which are backed by the U.S. dollar. Wrapped Bitcoin (WBTC) is pegged to the Bitcoin (BTC), meaning 1 WBTC is always 1 BTC. But unlike BTC, WBTCs are realized in the form of ERC-20 and TRC-20 tokens and can be traded on Tron or Ethereum blockchains.
There is a particular technology behind making WBTCs on the basis of BTCs. Wrapped tokens are created and destroyed through the minting-and-burning approach. For example, a BTC is sent to a custodian who stores the BTC in a digital vault and locks it away to mint an equivalent amount of WBTC. And to burn WBTC, the same process takes place, but in reverse. This means that all wrapped tokens are backed by the equivalent amount of the underlying cryptocurrency.
Summing up
Bitcoin gave way to the crypto craze a decade ago and gave rise to the majority of cryptocurrencies due to its open-source code and censorship-resistant architecture. Today there are thousands of cryptocurrencies and different types of coins that you need to know about before entering the crypto world.
Cryptocurrencies are different from our traditional fiat currencies like the euro or dollar. Central authorities don’t govern them, and in most cases, they aren’t backed by real assets apart from stablecoins. Either way, cryptocurrencies have limitless possibilities. But with limitless potential comes unwanted incidents that you need to be cautious of before entering the crypto market.
