We have been pulled to the cryptocurrency space for various reasons. We like the high-velocity movement of the technology, the catfights on Twitter, the occasional airdrops, we feel the power of community (and sometimes get rewarded), getting a sense of freedom, but maybe, most importantly, to make profits.
Our basic research starts with looking into Coinmarketcap and Coingecko. There are thousands of tokens listed there with various measurable metrics. We take decisions looking at the price, the market cap, the supply, etc. However, there is one important component missing in them, and that is what is the type of the underlying blockchain?
We often hear in various forums about token utilities. Does a project need a decentralized blockchain (take the example of ripple)? I go further and ask, even if a token needs a blockchain, does it need to be sold in the open market? This is important. There are few such tokens, which remain centralized but still sell their token in the market. We have to understand that a project might have a flashy product, a great team, great marketing, and even adoption, however, that does not mean their token is as powerful as some other public blockchains like Ethereum. In Ethereum, you almost have the authority to run the network or at least indirectly participate in running it (as delegators in Eth 2.0). So how do I identify such projects where the linkage between the actual offering and the token is not strong?
There is another example of central banks creating their currency. We are afraid that they will replace Bitcoin. Is it so? It is not. Let’s dig deeper.
We need to understand the below 4 types of blockchains:
1. Public Blockchain: These are the blockchains where we, the regular people are involved. These blockchains run Decentralized Finance, experiment with new decentralized technologies, and try to provide us the freedom we seek so much in this industry. Any such blockchain will have 3 underlying features: Speed, Decentralization, and Security. At the very core, to drive such blockchains, we need to have a strong consensus algorithm. This algorithm ensures that anyone can run a node, have a copy of the ledger, and validate transactions. There is no access restriction, anyone can view information even the governance model is decentralized. The source code is also open. Bitcoin, Ethereum, EOS, Polkadot, Solana fall under this category. The more nodes run by common people, the more decentralized the network.
2. Private Blockchain: Organizations do not want to disclose their internal information. However, there are many benefits of using blockchain, particularly the use of smart contracts. Departmental processes can be automated, and lead time and complexity will be reduced. In such a case a company will want control, create permission levels, approvals, and authority to modify and change. So ideally there is no need for a public consensus mechanism. Such organizations can run their closed networks. A great example of such a blockchain is Hyperledger. The Central Bank Currencies might fall in this category.
3. Consortium Blockchain: Now imagine, you as a company run a blockchain, but you interact with various others organizations (both suppliers and clients). Even if you are running a private blockchain, it is still in a silo, as the end-to-end process involves external stakeholders. This is the case where the companies come together and decide to run the blockchain together. The companies run a node. Does it ring a bell? Hedera Hashgraph’s node is run by Google. Energy Web Foundation is another example. Ripple might just fall into this category too.
4. Hybrid Blockchain: Hybrid Blockchains try to get the best of both the world. In such blockchains, organizations can store and perform transactions in a closed network but can open up in case verification is needed. In such blockchains the upgrading of the permissionless part can be a challenge as the token does not have strong utility and hence the incentive to run nodes reduces drastically.
There are too many coins in the market. If you understand the above four categories, you can easily see that there are some tokens that you can avoid, as those are not meant for you.
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