Different cryptocurrencies for different applications

There are many cryptocurrencies, around. Bitcoin was the first one and then human creativity created many more, with different properties, so they can be used to satisfy different needs. Cryptocurrencies can be categorized in many ways. The first distinction is the coins and the tokens. Coins are mined, or minted and their creation follows a certain rule, set up by their creators. Tokens, are smart contracts that are created once, and, if there is an excess supply after the Coin offering, the excess amount of tokens are burnt (removed from circulation).

Way of creation (proof of work, proof of stake, proof of capacity, proof of availability etc)

Bitcoin was the first cryptocurrency. It’s creator, Satoshi Nakamoto, decided to use a proof-of-work mechanism. With proof of work, extensive calculations are needed to be performed by the mining software to find a block, and add transactions to it. With proof-of-work, the network needs a lot of power, and only high capital installations, can mine Bitcoins today. To solve this problem, a proof-of-stake mechanism was created. With proof-of-stake, the coins “locked” in a cryptocurrency wallet, are used to secure the network, and the higher amount, gives a higher probability for the wallet to “mint” coins. We use the word, “minting” to distinguish from the proof-of-work “mining”. Some coins are made to use allocated “hard disk space” to the network. The network, rents this space to users, and the more space you give to the network, the more coins you are rewarded. With proof of availability, the availability of a system, is used to create new coins. The more the system is on line (available), the more coins earned.

Used as “gas” or not

With Ethereum blockchain, and other blockchains that support smart contracts, any smart contract execution, need “gas” to be spent. Ether (Ethereum’s coin) can be used for transactions, or “gas”, to allow a smart contract to run. Token transfers on the Ethereum network, need Ether as gas, to pay the network fee, to confirm the transaction. Without, Ether, any ERC20 token, cannot be transferred.

Secured or not

Bitcoin’s blockchain is transparent. This means, that anyone with a block explorer, can view the blockchain data. The first attempt to solve this problem, was done with mixers, where Bitcoins, where transferred to many different addresses, to break the “chain”, so it will become difficult, to find the origin of the coins. Dash, added this feature to their protocol, where special nodes did the mixing, before any transaction. Then, other coins were created, like Monero and Zcash, where the data on the blockchain is encrypted. To prove that a transaction exists, you have to send the transaction ID to the other party, because the from and to addresses, or/and the amount, are not shown on the blockchain data. The latter type of coins are secured, because they keep the anonymity of the transaction, and the rest are not secured. Do not confuse the secure property, with the transaction security, because the transaction security, is blockchain’s job.

Cryptocuurency, is a new technological innovation. It is still, on it’s baby days. We will see, many more solutions becoming available. Day by day, month by month, year by year, we will see, an evolution similar, like the personal computer evolution in the 80’s, similar to the operating system evolution with Linux and other variants in the 90’s, and later. Fasten seat belts, and have fun!

Image from Pixabay