When most people hear “crypto,” one of the first things that comes to mind is Bitcoin. But do you know that the crypto world goes beyond Bitcoin? In fact, blockchain technology has diversified to include a wide variety of assets, each with its unique purpose and function.
In this article, we will be demystifying the different types of crypto assets. From cryptocurrencies to stablecoins and NFTs, you will have a foundational understanding of all the assets that exist in the industry. Let’s dive right in!
KEY TAKEAWAYS:
- Crypto assets go beyond just cryptocurrencies like Bitcoin and Ethereum.
- Crypto assets are financial products that are created and maintained on a blockchain, and they differ based on their type and function.
- Types of crypto assets include cryptocurrencies, stablecoins, tokens, and NFTs.
- Understanding the different types of crypto assets will help you make informed decisions that align with your financial goals.
What Are Crypto Assets?
They are digital financial products that are created and maintained on a blockchain. As such, they are decentralized, transparent, and are secured using cryptography. Moreover, they are managed by a distributed network of computers instead of a central authority like a bank or the government.
Types Of Crypto Assets
Crypto assets differ based on their type and function. While some are digital currencies, others give you exclusive ownership of digital arts and collectibles. That said, let us explore all of them in detail.
Cryptocurrencies
These are virtual currencies that function as a medium of exchange, similar to traditional money. They allow peer-to-peer transactions and are usually built on public blockchains. Examples include Bitcoin (BTC), Litecoin (LTC), and Dogecoin (DOGE)
Characteristics
- Some cryptocurrencies, like Bitcoin, are deflationary because they have a limited supply.
- Transactions are transparent because they are recorded on a public ledger.
Use cases
- Used as digital money for regular transactions.
- Bitcoin is seen as digital gold and is used as a store of value.
Stablecoins
Stablecoins are digital securities that are pegged to real-world assets like fiat currencies or gold to reduce price fluctuations. As such, they are ideal for transactions and savings.
Characteristics
- Less volatile than other cryptocurrencies.
Use cases
- Used to preserve value during market volatility.
- Funds transfer and remittances.
Types
- Fiat-collateralized: Backed by fiat currency reserves. E.g., Tether (USDT), USD Coin (USDC)
- Crypto-collateralized: Backed by other cryptocurrencies. E.g., DAI backed by Ether
- Algorithmic stablecoins: Controlled by algorithms that adjust supply based on demand. E.g., TerraUSD (UST).
Tokens
These are created and managed on an existing blockchain instead of on their own native network. Examples are basic attention token (BAT), Chainlink (LINK), MakerDAO (MKR), Uniswap (UNI), tZERO, and INX
Types
- Utility tokens: They give you access to a specific product or service on a blockchain. For example, BAT is used by Brave Browser to reward users and pay advertisers.
- Governance tokens: Governance tokens allow you to participate in decision-making actions like voting on upgrades within a blockchain project. For instance, UNI holders can vote on proposals like fee structures and partnerships that affect the Uniswap protocol.
- Security tokens: These give you access to own real-world financial assets like stocks, bonds, or real estate on a blockchain. Security tokens are regulated like traditional securities. Thus, they are linked to legal contracts and give you rights like dividends and equity shares. For example, tZERO gives you fractionalized and tokenized ownership in real estate to make trading easy.
Read Also – Crypto Coins Vs Tokens: Is There a Difference?
Non-Fungible Tokens (NFTs)
NFTs represent ownership of digital items, such as art, music, and virtual real estate. However, unlike Bitcoin or Ethereum, they can’t be swapped with each other. Hence, the term “non-fungible.” In simple words, once you own an NFT, be rest assured that there is no copy of it anywhere else.
Characteristics
- They have a unique identifier that makes them non-interchangeable.
- They are indivisible into smaller units.
- There is verifiable proof of the original owner of the digital content.
Use cases
- Allows artists to sell original and authenticated versions of their work. Examples include CryptoPunks and Bored Ape Yacht Club
- Games like Axie Infinity use NFTs to allow players to play, buy, and sell in-game assets.
- Platforms like Decentraland and The Sandbox allow users to buy, sell, and develop virtual games in the form of NFTs.
- Musicians can keep more revenue (by cutting out middlemen like streaming platforms) by selling their music to fans directly through NFTs.
Wrapped Tokens
Wrapped tokens represent assets from one blockchain on another, which enables interoperability or cross-chain interactions between decentralized networks. For instance, wrapped Bitcoin (WBTC) is a token on Ethereum that represents Bitcoin. This arrangement is made possible with the use of smart contracts.
Use cases
- Used for cross-chain lending, borrowing, and staking.
Asset-Backed Tokens
Asset-backed tokens (ABT) have intrinsic value because they derive their worth from almost any digital or physical assets. This can include crude oil, gold, real estate, equity, soybeans, and even artwork. They give you fractional ownership of traditional and high-value assets
Yield-Bearing Tokens
You enjoy passive profits from yield-bearing tokens simply by holding them. They work similarly to traditional fixed deposits because they are low-risk assets with predictable returns. Yield-bearing tokens appreciate over time without necessarily trading with them, and the interest accrued is added to your token balance.
Conclusion
Understanding and demystifying the different types of crypto assets is important if you want to navigate the market properly. Additionally, it helps you make informed decisions that align with your financial goals. As the blockchain world keeps evolving, ensure to stay updated on what is happening so you can actively participate in the future of finance.
Reference
- pwc.com – Demystifying cryptocurrency and digital assets
- lawrencestephens.com – A brief guide to the different types of cryptoassets
- forbes.com – Different Types of Cryptocurrencies
