28 Jun Types of Crypto Technology: PoS, PoW, Tokens, and Stablecoins – What are they?

There are different kinds of cryptocurrencies today, all of which rely on the original blockchain technology that powers Bitcoin. Some of these are not designed to operate like fiat currency. To understand how cryptocurrencies are behind the scene you would have to dig into the technologies used by various coins. 

There are four primary kinds of cryptocurrencies that you will most commonly find in the market. Let us have a glance at what they are all about. 

• Proof of Work

This mechanism is used by Bitcoin and the majority of cryptocurrencies to validate the creation of blocks in the blockchain. This provides security and proof for everyone on the network of the authenticity of transactions and new blocks. 

It generates the complex puzzles miners have to solve in order to produce valid blocks and receive rewards. 

The proof-of-Work mechanism uses the SHA-256 algorithm and generates puzzles at random to be absolutely fair in its operation. There is no governance over which miners find the blocks. Bitcoin, in particular, relies on cryptography, economic principles, and game theory to ensure honesty through its network. 

Advantage

• Stays secure. The only way one can compromise its security is if an entity has control over more than half of its nodes making it possible to alter the network. 

Disadvantage

• PoW requires a significant amount of computing power. Since every node works on each transaction, simply adding a node doesn’t increase the total speed of the network. This results in the PoW mechanism being inefficient with power supply.
• Costs are higher for PoW.

• Proof of Stake

Proof of Stake is an alternative consensus mechanism to Proof-of-Work. In this model, miners lock up their funds in a smart contract. When the PoS algorithm grants a user to publish the next block, a part of those funds is kept at stake to validate the new block. The user is chosen randomly, similar to a lottery. The amount of funds a user has stored on the network increases their chances of mining the next block. 

Advantage

• It processes transactions faster. Since nodes divide into small groups and work on individual transactions, parallel transactions are taking place at the same time.
• Lower processing costs. 

Disadvantage

• They can be decentralized over time. 
• It is seemingly less secure than PoW. In a case when a node successfully makes a fraudulent transaction to the network, the participant will only forfeit their stake if the stake is more valuable than the reward they receive. 

• Tokens

The two kinds of cryptocurrency we discussed so far have distinguished technology that powers them. You will find another kind of currency in the market. Some of which vary in the purpose of their offering as well. This brings us to Crypto Tokens. 

They are not intended to be used as a general cryptocurrency. They represent crypto assets and are of a certain value. Token itself can not be converted directly into fiat currency, instead, they convert into standard cryptocurrencies like Bitcoin or Ethereum before you can cash it out. 

Advantage

• Provide liquidity in illiquid markets
• Represent assets or units of value.

Disadvantage

• Cannot determine their exact amount as it cannot be exchanged for fiat currency. 
• They are dependent on the blockchain they’re built on. This means, that in a case of an attack on the blockchain, or any technical alteration made by the developer, it can have an impact on the tokens. 

• Stablecoins

In the market where the values of cryptocurrencies are so volatile, Stablecons are made to provide consistency. They are a hybrid between tokens and standard cryptocurrency. They are built on existing blockchain but can be exchanged for fiat currency. They are essential as they provide daily transactions with a stable value. This is possible as they peg their value to fiat currencies and keep their reserves as a guarantee of their value. 

Advantage

• Isn’t volatile like cryptocurrency
• The storage medium for investors
• Allows you to pull out holdings to avoid loses

Disadvantage

• Solely relies on the companies to manage cash reserves to guarantee value. 
• It is not backed by the government and causes a loss in the case of poor management. 

Bottom Line

There’s much more variation to cryptocurrency than what one sees on the surface. The market is diverse and made up of groups and investors looking for different offerings in the crypto world. Since the technology is evolving rapidly, it’s safe to say with time, you will get to witness more cryptocurrencies come forth. These variations can very well be replaced by new developments. The basics from our discussion will only help you embrace the crypto market of today and tomorrow.