Updated April 19, 2020
Over 1,000 cryptocurrencies are currently in "circulation," although not all of them are valuable and widely known. And many differences exist between these cryptocurrencies. It is therefore common to see cryptocurrencies grouped or categorized in many ways using varied and often inconsistent terminology. Below we will discuss some of this terminology and also some basic points of distinction between types of cryptocurrency.
Coins vs. tokens
It is important to establish at the outset that there is a lot of confusion around these terms. Simply put, a coin is type of token, and a coin is the only type of token that should be labeled as a cryptocurrency. The term "coin" is therefore fairly broad.
In their relatively short history, coins have amassed a variety of alternate terms. For example, coins have been referred to as "usage tokens," "use tokens," "work tokens," "application tokens," "app tokens," "utility tokens," "protocol tokens," "intrinsic tokens," and "native tokens." Some have tried to label them based on their intended use, but this seems unnecessary since they are ultimately currency and will likely find alternative uses.
Aside from coins, security tokens are the other main type of token. Security tokens can be broken down into two categories – equity tokens and debt tokens. Equity tokens represent ownership in a company, whereas debt tokens represent debt similar to a bond. Based on a report from the SEC issued in 2017, these may be regulated as securities by the SEC. You should, of course, consult a financial professional on this.
More recently, the increasing number of initial coin offerings underscores the importance of the distinction between security tokens and coins. An initial coin offering (ICO) is a method of raising funds typically used to support a company or project in its early stages. Investors receive tokens in exchange for money in the form of fiat currencies or other cryptocurrencies. However, if the tokens are considered to be an ownership interest in the company (similar to stock in the context of an initial public offering or IPO) or otherwise fall within regulation of the SEC, unintended consequences could result. It is therefore extremely important that proper research is conducted and legal and tax advice is sought before investing in an ICO.
An example of the confusion
Coinmarketcap.com exemplifies the confusion between coins and tokens. This site provides separate lists of "coins" and "tokens" and indicates that "tokens" are cryptocurrency that is based on the platform or blockchain of a coin. For example, it considers both Tehter and Augur to be tokens since Tether is based on the Omni platform and Augur is based on the Ethereum platform. This site lists nearly 400 "tokens" based on the following platforms: BitShares, Burst, Counterparty, Ethereum, Ethereum Classic, NEM, NEO, NuBits, Nxt, Omni, Ubiq, and Waves.
This is problematic for several reasons. Coins are a subset of tokens, so creating groupings of "coins" and "tokens" is misleading. This makes about as much sense as attempting to draw a distinction between carrots and vegetables. The confusion is exacerbated by defining a "token" as being based on the platform of a coin since this seems to suggest that tokens are a subset of coins.
The solution would be to standardize the terminology and create different terms for coins built on the platform or blockchain of another coin and those that utilize their own platform or blockchain. Although terms like "native token" and "intrinsic token" seem like a step in the right direction, most every use of these terms further confuses the issue and fails to provide a term for coins built on the platform or blockchain of another coin.
So until the terminology is sorted out, labels, groupings, characterizations, and the like related to tokens and/or coins should be taken with a grain of salt. As a practical example, an important concern at this point in time for investors is whether a token is a security token or not. So from that perspective, the labeling of token as a coin, a native token, an app token or some other term is of little significance.
Mineable vs. non-mineable
There is a relatively clear-cut distinction between cryptocurrencies that mineable and those that are not. Some of the differences are discussed below.
Cryptocurrencies that are not mineable are typically created with a fixed supply of currency. Transactions are confirmed by users in exchange for transaction fees only. Non-mineable cryptocurrencies include Ripple, IOTA, NEM, NEO, Qtum, Omisego, Lisk, Stratis, Waves, and EOS.
Mineable cryptocurrencies are those whose supply can be increased by mining. Mining is the process of confirming transactions in exchange for a transaction fee and a reward. The reward is a predefined amount of the cryptocurrency added to the total supply of the cryptocurrency. Examples of mineable cryptocurrency include Bitcoin, Ether (often incorrectly referred to as its underlying platform "Ethereum"), Bitcoin Cash, Dash, Litecoin, Monero, Ethereum Classic, Zcash, BitConnect, and Steem.
However, most mineable cryptocurrencies will eventually become non-mineable cryptocurrencies. Taking Bitcoin as an example, it is estimated that mining will end around the year 2140. No more Bitcoin will be created through mining after that time. This, in combination with a continually-decreasing reward, helps to control the supply and maintain the value of Bitcoin.
Proof of Work vs. Proof of Stake
Most mineable cryptocurrencies use either the proof of work (PoW) algorithm or the proof of stake (PoS) algorithm to determine who can mine or confirm transactions. In short, PoW algorithms allocate mining based on computing power whereas PoS algorithms often allocate mining based on the amount of cryptocurrency held by the miner or mining pool.
Proof of Work (PoW)
PoW algorithms create a competitive environment where miners compete to confirm transactions by solving cryptographic puzzles. The first miner, or pool of miners, to successfully confirm a block of transactions receives a reward and the confirmed block is added to the blockchain. The reward is typically a predefined amount of cryptocurrency that is added to the total supply of the cryptocurrency. As such, mining is allocated by computing power.
One of theoretical risks of PoW algorithms is a 51% attack. A 51% attack is carried out by a miner or mining pool that controls a majority of the network mining power or hashrate. It could involve, for example, confirming fraudulent transactions and/or preventing the confirmation of valid transactions.
However, controlling 51% of the mining power would not guarantee the success of such an attack. It would merely make it more likely to succeed. And it should be noted that obtaining a majority of the mining power for most cryptocurrencies is not possible or feasible. Thus, the risk posed by 51% attacks is low.
Examples of cryptocurrencies utilizing proof of work algorithms include Bitcoin, Ether (often incorrectly referred to as its underlying platform "Ethereum"), Bitcoin Cash, Dash, Litecoin, Monero, Ethereum Classic, Zcash, BitConnect, and many others.
Proof of Stake (PoS)
Mining power is often allocated by PoS algorithms based on the amount of cryptocurrency held by the miner or pool of miners. Miners do not solve cryptographic puzzles as with PoW, thereby creating a more energy-efficient and less wasteful system. The main advantage however is the theoretical elimination of 51% attacks since it is difficult to obtain a majority of a cryptocurrency with PoS. Further, if a majority of a cryptocurrency is obtained, it would not be in the best interests of the owner to carry out an attack on the network.
The term PoS is sometimes misused to refer to non-mining activity. For example, Dash is sometimes labeled as PoS or a hybrid PoW and PoS cryptocurrency since users who own a certain amount of Dash can become full nodes or "masternodes" and earn a percentage of the reward for a miner confirming transactions in block. However, masternodes are not miners, and therefore the term PoS shouldn’t be applied to Dash. This is the case with other cryptocurrencies as well, so we recommend that you research the cryptocurrency before any use, investment, or mining.
Cryptocurrency hash algorithms
Cryptocurrencies are often categorized by the hash algorithm that they use for mining. Although it is not necessary for most purposes to have a detailed understanding of each algorithm, it is beneficial to at least recognize the names as they are commonly used. Also, the hash algorithm used by a cryptocurrency may influence one’s decision to use, invest in, and/or mine the cryptocurrency. Below is a list of the common hash algorithms along with some information and coins that use them.
SHA-256 is the most common hash algorithm as it was used initially by Bitcoin. Other cryptocurrencies that utilize SHA-256 are Bitcoin (BTC), BitcoinCashABC (BCH), BitcoinSV (BSV), DGB-SHA (DGB), LitecoinCash (LCC), Peercoin (PPC), and Myriad-SHA (XMY).
Scrypt has been adopted by several of the more recent cryptocurrencies as it is more memory intensive than SHA-256. Scrypt-N, Scrypt-Jane (Scrypt-Chacha), and Scrypt-OG are variations.
Scrypt is used by cryptocurrencies such as DGB-Scrypt (DGB), Dogecoin (DOGE), Einsteinium (EMC2), Florin (FLO), GameCredits (GAME), Myriad-Scrypt (XMY), Litecoin (LTC), Verge-Scrypt (XVG), and Viacoin (VIA).
X11 is a newer hash algorithm designed specifically for cryptocurrencies. It is a chained hash algorithm that utilizes 11 different algorithms: blake, bmw, groestl, jh, keccak, skein, luffa, cubehash, shavite, simd, and echo.
Popular cryptocurrencies that use X11 include Axe (AXE), Dash (DASH), Euno (EUNO), and Imagecoin (IMG).
Cryptonight was designed to be mined only by central processing units (CPUs) and not other devices such as graphics processing units (GPUs), field-programmable gate arrays (FPGAs), and application-specific integrated circuits (ASICs). This in theory will reduce mining power consolidation or mining centralization by helping smaller miners with personal computers (PCs) compete with larger miners and centralized mining pools (having access to many computer systems), thereby helping to keep the network more decentralized.
Cryptonight is used by cryptocurrencies such as Bytecoin (BCN) and Karbo (KRB).
Ethash was designed to fight mining power consolidation or mining centralization by making it inappropriate for and resistant to FPGAs and ASICs yet appropriate for CPUs and GPUs. Ethash accomplishes this by causing a system’s memory bandwidth to become the bottleneck, and therefore, is considered to be "memory hard" or "memory bound." CPUs and more so GPUs handle memory hardness well whereas FPGAs and ASICs do not.
Cryptcurrencies that use Ethash include Ethereum (ETH), Ethereum Classic (ETC), QuarkChain (QKC), Ubiq (UBQ), Ether-1 (ETHO), Expanse (EXP), Dubaicoin (DBIX), Pirl (PIRL), and Metaverse (ETP).
Equihash is another memory-intensive cryptocurrency designed to be resistant to FPGAs and ASICs.
Popular cryptocurrencies using Equihash are Horizen (ZEN), Hush (HUSH), Komodo (KMD), Pirate (ARRR), and Zcash (ZEC).
Neoscrypt is yet another memory-intensive cryptocurrency designed to be resistant to FPGAs and ASICs. It utilizes FastKDF which is a key derivation function (KDF) that uses more memory than FBKDF2 used by the Scrypt algorithm.
Neoscrypt is used by Feathercoin (FTC) and GoByte (GBX).