The Cryptocurrency market has been developing at such a rapid clip, it’s hard to stop for a moment and catch’s one’s breath. ICOs, Proof of Work, Proof of Stake, Utility Coins, Tokenized Assets, Internet of Things, Blockchain of Things, Crypto Securities…more than enough to make one’s head spin. This blog post is meant to serve as a simple primer outlining the taxonomy of the crypto space, breaking it into three main buckets as we view it: Cryptocurrencies, Utility Tokens, and Crypto Securities.
Launched in 2008, Bitcoin served as the first application running on a blockchain protocol. The Bitcoin application itself in conjunction with the Bitcoin blockchain protocol make up the first cryptocurrency in existence. Ever since Bitcoin was launched, development teams have been tinkering with the core source code and released altered versions of that code (via a planned hard fork) creating new cryptocurrencies with different defining characteristics. These cryptocurrencies’ main utility is the trustless (no clearinghouse required) transfer of money/value over an internet protocol. Each cryptocurrency is designed with a different value proposition providing features for enhanced privacy, security, scalability, governance, or supply differences. Some examples include Ethereum, Ripple, Litecoin, Monero, and ZCash, amongst others. All of these main protocol chains fit inside bucket number one: Cryptocurrencies.
Released in 2014, Ethereum is the first turing-complete cryptocurrency, which is a fancy way of saying that developers can code decentralized computer applications to run on the blockchain. These decentralized applications are also known as smart contracts that utilize simple If/Then statements to determine when to transmit units of value to participating agents. The launch of this new functionality ushered in the initial coin offering (ICO) craze, allowing individuals from all over the world to contribute ether to smart contacts created by project teams working on novel use cases of the technology. Contributors receive tokens needed to run, operate, and pay for services of these new decentralized applications in exchange for their contributions. To date, there have been hundreds of ICOs raising a total of over $3.2 billion to fund the development of their projects. These project teams seek to create whole ecosystems and token economies, where their newly minted native token is used to pay for products and services. Stakeholders and developers of the application retain a percentage of the new tokens. And in order to receive compensation, the token must appreciate in value, thereby incentivizing continued development towards mainstream adoption. Some examples include Golem (decentralized computer resource lending), Augur (decentralized prediction markets), Aragon (decentralized corporate governance), OmiseGo (decentralized exchange and point of sale payment network), Kyber Network (decentralized token exchange and rich payment APIs), FunFair (decentralized gambling/casino), and many more. These new tokens fit inside bucket number two: Utility Tokens.
The third bucket in our crypto taxonomy, Crypto Securities, enable individuals to participate in the ownership of traditional assets such as real estate, equity funds, commodities or any other asset of value. This subclass involves the tokenization of traditional/alternative assets, allowing for reduced frictions when trading shares and more equitable entry by global participants. Imagine being based in New York and capitalizing on the Berlin real estate boom by buying tokens in a professionally managed real estate investment trust. Imagine crowdsourcing the equity in your home and obtaining the equivalent of a home equity loan, removing the need to deal with lethargic and fee-heavy mortgage brokers. The newly minted tokens are secured by the underlying asset which regularly distributes dividend payments to the token holders. Furthermore, these tokens are quickly and cheaply transferable to anyone around the globe. Crypto Securities can provide increased liquidity and participation in the ownership of anything of value that is expected to appreciate over time, and most use cases haven’t been theorized yet.
Cryptocurrencies, Crypto Utility Tokens, and Crypto Securities are subclasses that comprise the new asset class Cryptoassets. It remains to be seen which subclass will unlock the most value, as they are all in their infancy. Yet it is clear that this new asset class is here to stay as it constantly evolves and matures. We believe the crypto landscape will grow increasingly complex and nuanced, and more branches will be added to the cryptoasset class. Stay tuned for future developments and updates.