Crypto is more than just Bitcoin
In order to understand how different crypto assets can be classified it is important to look at; what the primary function is, where it fits into the asset class and why they exist. Not all crypto assets are created equally, the race is on to develop, adapt and design quickly for adoption.
In order to understand the future potential value of a crypto asset you first need to categorise where it fits, Magnet Capital has broken down the major categories we look at right now:
Cryptocurrencies are the first iteration of the asset class and the easiest to understand, there are 3 key attributes that make up a cryptocurrency:
- Medium of exchange
- Store of value
- Unit of account/payment
Examples - Bitcoin, Litecoin, Digibyte
Privacy coins hold the same attributes as cryptocurrencies, only their transaction history is masked, hidden or doesn’t exist at all. Where typically a blockchain’s main job is to record transactions in history forever and make this information transparent, a Privacy coin’s job is the complete opposite. It makes the data unsearchable and hides or masks various parts of the transaction ID to maintain anonymity.
Examples - Zcash, Monero, Verge
Remittance was created to disrupt global payments, (i.e. SWIFT) and allow immediate and cost-effective settlement. These crypto assets are still cryptocurrencies, but allow for fast distributed payment networks requiring high transaction volumes. In a banking example sending AUD to London in GBP could take 3-5 days, and cost dollars in fees. Using a remittance token you could use AUD to buy Ripple, send Ripple to the receiver and they sell their Ripple into GBP all in 10 seconds at the cost of cents.
Examples - Ripple, Stellar
Platforms are the most interesting addition to the asset class, in the adoption curve they provide the infrastructure to empower the development of applications that utilise blockchain technology. Platforms are also referred to as smart-contract chains. These chains have the ability to create smart-contracts, dApps (decentralised applications) and DAO’s (decentralised autonomous organisations).
Smart contracts allow for trust, transparency and openness to become the new normal standard. Smart contracts are often used to collect ICO funding and simultaneously distribute said ICO tokens back to the intended recipient based on the rules the creator has set; discounts, time-locks and distribution amounts can all be set and checked within the contract. Removing 3rd party risk and fees altogether… As long as the contract is written properly.
Platforms will become the new building blocks of future applications, the same was as operating systems did for us in 1987. It is likely that multiple platforms will exist with different value propositions and competitive advantages in the market. Some digital organisations will require faster chains, while others require more security or decentralisation - these defining attributes will set the platforms apart.
Examples - Ethereum, EOS, Cardano, NEO, NEM, Zilliqa
Interoperability chains are one of the hardest concepts to grasp, as anyone with an IT background will say the most difficult assignments are trying to make one technology work with another. These chains allow the transfer of information from one blockchain to another, non-intrinsically linked together, the sharing of value and information across chains is vital to the future success of blockchain technology and the asset class. Otherwise, you will need to engage multiple mediums to accomplish simple tasks - which is inefficient and won’t work.
The future allows you to have a digitally certified identity that can, with permission, communicate with your currency chain to allow for funds to be transferred for example - you as the host should not need to understand how the chains are linked together, nor how the process works - but trust your identity is linked with your money, digitally, with no 3rd party - besides an app.
Examples - ICON, WanChain, AION, BlockCollider
Stable/Sovereign Collateralised Assets
Stable and Sovereign coins are easy to understand, much like cryptocurrencies, they share the same attributes, but are collateralised with crypto assets or real-world assets in order to represent a fixed FIAT value.
Created to curb a high level of volatility and allow for individuals to move away from crypto assets but still keep a digitally transferable asset - these will become useful tools to institutions to hedge, individuals to diversify and companies to receive funds, all while remaining in the asset class.
Examples - Havven (Nomins coin), Maker (Dia coin), USDT, TrueUSD
Utility tokens are used as an exchange for goods or services. Utility tokens were created as a pay-to-play economy. Tokens are typically created by the goods/service providers and require you to hold that particular asset to transact on their platform - the value of the asset is based on supply and demand.
Utility tokens have found some uses but are typically fragmented, Magnet believes this will be the last use case adopted by the public.
Protocols are slightly different but offer the same attributes, protocols have linear usage - for example, protocol tokens will be used to execute one functional activity, 0x is used to create an order book entry and facilitate a decentralised exchange operation linking buyer and seller, Raiden Network Token enables off-chain transfers of on-chain tokens.
Examples - WePower,Steem, Sia, FileCoin, Golem, 0x, RaidenNetwork
Security tokens are probably the next most exciting development in this asset class, a concept which most people will be familiar with is equity in a company. Securities can represent any financial product such as derivatives, dividend bearing instruments, debt, credit notes or equivalent, security tokens will be no different other than they are digitised. These will be regulated, audited and legally bound.
Securities tokens will give holders the ability to trade immediately with little to no processing time or fees. Digital security tokens will be tradable into Bitcoin, Litecoin, USD, GBP and stable coins. More importantly, the securities tokens will legally represent their value, just like bonds, eventually, you will be able to freely trade one security for another, without needed to go back into any currency.
Examples - Issuance, True Leaf
Within each of the macro asset classes there is another layer which digs into functionality, execution, efficiency and scalability - once you’ve built a good understanding of the categories and where each project belongs, only then can you start comparing competition and mapping back to a real-world problems.
It’s important to remember that the entire asset class and blockchain is a piece of technology. The category landscape looked very different 12 months ago than it does today, this is an evolving cycle as the asset class continues to gain momentum.
We expect to see further developments and increase adoption in the following categories:
- Stable/sovereign collateralised assets
We expect the growth in projects in the following categories to plateau or decrease:
- Privacy coins
- Utility tokens
- Protocol tokens
Potential new categories that will come in the near future:
- Identity chains
- Education chains
- Medical chains