The global cryptocurrency market is volatile, but it still averages $2-3 trillion in value. Are you ready to start investing in crypto? Smart investors know all the swimming fundamentals before they dive in.
Not every cryptocurrency works the same. Different types of blockchain and consensus algorithms can affect your investment strategies. Read on for the field guide to crypto ecosystems.
Types of Blockchain
Blockchain uses distributed ledger technology to maintain decentralized networks. Currently, there are four main types of blockchain networks:
These networks can have restricted permissions, or be completely unrestricted. Some networks are a combination of both.
Public (Permissionless) Blockchains
Public blockchains allow anyone to run an authorized node. Bitcoin and Ethereum are two popular public networks.
These networks are 100% decentralized, meaning they have no central authority. This increases security with no single point of attack. However, this also hinders scalability and speed.
Private (Permissioned) Blockchains
Private blockchains use a central authority to manage users. These networks are usually smaller in scale.
They’re typically limited to users and uses within an organization. De Beers uses the private network Tracr to trace and identify conflict diamonds.
Hybrid (Combo) Blockchains
Hybrid networks have the perks of other networks, minus the drawbacks. They use a central authority but can still allow some public functions on the network.
Dragonchain is a hybrid network created by Disney. It’s currently used by companies as an enterprise solution for transaction verification.
Consortium (Jointly-Governed) Blockchains
Consortium networks are governed by multiple groups. This includes banks and governments entities. It also applies to industry-wide cooperation between private companies.
These networks are generally hybrid. Energy Web Foundation uses a consortium network to lower carbon footprints in the energy sector.
Types of Consensus
Distributed ledger technology needs a consensus algorithm to verify ledger entries (blocks). There are several different types of consensus, but most networks use either PoW or PoS.
PoW verifies blocks by having users complete an action, like solving a puzzle. The increased effort lowers the chances of fraud or frivolous activity. This solution uses up large amounts of time and energy, however.
PoS uses “stakes” to sidestep the energy and speed drawbacks of PoW. Instead of acting, users invest their system coins as proof of authenticity. Valid blocks are rewarded with more coins.
Types of Cryptocurrency
There are two main types of cryptocurrencies: coins and tokens. Although used interchangeably, coins and altcoins are slightly different from tokens. The best Bitcoin ATMs can convert tokens and coins into cash and vice versa.
Coins and altcoins represent purchasing power, similar to government-produced paper money and coins. It’s also native to its system.
Tokens represent a valued item you already own, similar to precious jewels or art. These items can be used for purchase or exchange. They also transfer across systems.
Some blockchains also use novel technology. Harmony uses a beacon chain and Effective Proof of Scale. Polkadot uses parachaining, which has helped the Polkadot price remain stable through this year.
Create Safe and Secure Crypto Opportunities
Crypto isn’t complicated. But there are different types of blockchain platforms and technologies to learn before you start diving into the market.