The Cryptocurrency Spectrum
Classifying cryptocurrencies has proven to be difficult. Here is a proposed dimension that cryptocurrencies live on.
Governments and Regulators are stuck
Defining what Cryptocurrencies actually are has proven to be difficult. Governments across the world lack a general consensus of how to manage these new assets. Are they properties, commodities, or payment mechanisms? These varying classifications make sense in some ways, and none in others.
Smart contracts integrate the power of generalized computers with the value of ‘‘things”.
Smart contracts allow internet-based coins and tokens to behave like the property or services found in the real world. Property in the real world can now be represented by a unit-of-account, that lives in a “publicly owned and operated cloud”, or, the blockchain.
That’s crypto is hard to classify. Coins and tokens can represent anything that has could representation on a piece of paper. A house deed, car title, shares of a company. The only thing paper can’t represent that coins/tokens can, are the rights to benefits/costs of a publicly owned and operated decentralized company (we’ll talk about these in the Asset section!)
When it comes to practical definitions, Switzerland seems to have it figured out. According to the Switzerland government, cryptocurrencies can be generally placed into the three financial categories:
- Payment tokens: tokens that are synonymous with cryptocurrencies and have no further functions or links to other development projects. Tokens may in some cases only develop the necessary functionality and become accepted as a means of payment over a period of time.
- Utility tokens: tokens intended to provide digital access to an application or service.
- Asset tokens: tokens that represent assets such as participations in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives.
In this article, I will outline some examples from the world of coins and tokens, that illustrate token designs that fit a wide variety of use-cases, yet largely fit the aforementioned categories.
TL;DR: Cryptocurrencies operate along a 3-variable spectrum, illustrated by the triangle above.
Money, Services, Property
- All crypto-tokens can represent money/currencies, because of the liquid nature of cryptographic tokens.
- All crypto-tokens can represent utilites, as they unlock access to features enabled by a decentralized network
- All crypto tokens can represent assets, as they all represent ownership of stake in a decentralized organization
Most cryptocurrencies can be found at the extremes of these variables, while some can be seen as somewhere in the middle.
Cryptocurrencies are generally called Coins, as opposed to Tokens
Currencies within the Crypto ecosystem come in many different flavors
Pure Currencies- No revenue stream. Doesn’t enable access to a (specific) service. Revenue streams generated by asset/security tokens usually pay with these coins. Low-to-medium velocity, with some exceptions).
- Dogecoin (a currency, mixed with a healthy dose of Meme)
- Tether, Dai, TrueUSD (All are stablescoins, =1$)
These currencies represent things that are solely attempting to be money. A store-of-value, unit of account, and medium of exchange. The most simple and pure form of units formed by a blockchain. Bitcoin has added purity because how it came to be: organically discovered and adopted as a means of exchange over time, unlike projects that have a “team” behind them.
Many people are skeptical about the power of the blockchain, and what it’s applications can really . However, there are very few people left that doubt that blockchains can, at least, create and transfer value (money) between eachother.
The Different Flavors of Currencies
Utility Currencies: A Medium-of-Exchange enabling access to networks
- XLM Stellar Lumens
- XRP Ripple
XLM Sellar Lumens and XRP Ripple represent high-velocity, substrate currencies. These currencies are intended to be the go-between for other currencies, where trading volume isn’t sufficient to achieve a good trade. For example, trading between Thai Baht and Mexican Peso might not have sufficient liquidity in the market; here XRP and XLM can operate as a middle-currency to complete the trade with sufficient liquidity. Potentially all other currencies can trade with XRP or XLM, meaning that XRP or XLM provide the utility of routeing value between currencies.
These Currencies have privacy features that gives them utility. A bullish argument for Monero might claim that Monero’s privacy-centric model gives it a strong case for a Store-of-Value. The ability to hide how much XMR you own corresponds with how society doesn’t talk about the size of their bank account, and how that information isn’t publicly available (unlike Bitcoin). Think off-shore bank accounts, holding value unknown by your spouse, etc.
I am not convinced of this argument, however. I see privacy coins with a similar value proposition as high-velocity coins like XLM/XRP. This is because of the monopoly that Bitcoin has on the ‘Store-of-Value’ claim. Because you can achieve Monero-level privacy by washing one’s Bitcoin, by buying and then immediately selling Monero, and sending your new BTC to a different Bitcoin wallet.
Both the above scenarios are probably true to some decree, meaning that they belong between the spectrum of Store-of-Value currencies, and Utility tokens.
DASH is the only currency that I could find that also represents some sort of asset. DASH is a hybrid proof-of-work, proof-of-stake system. The proof of work secures the blockchain, similar to Bitcoin, while the proof-of-stake system gives DASH some DAO-like features. The DASH DAO (Decentralized Autonomous Organization) turns DASH from a currency, to ownership of a piece of the DAO. Those with 1,000 DASH or more can stake their DASH to a masternode, which gives them voting power for the DASH DAO. 10% of all DASH that is mined goes to a community fund. This fund gets allocated to projects voted on by the DASH masternodes, and represent funds that can be spent for the promotion of the DASH currency. This means that a 10% of all newly minted DASH gets paid to people who are working to increase the value of the DASH currency.
Therefore, DASH represents both a currency and an asset, and has been placed between those two ends of the spectrum.
Pure Utilities- No revenue stream, used to access one specific service. Extremely high velocity. Typically have a finite supply, with some exceptions.
Utilities are freely tradable tokens that enable access to a service, either decentralized or centralized. Different services provide different utility to different people, and people can chose which tokens to buy, based on what needs they need fulfilled.
Generally, it is thought that tokens like these suffer from the velocity problem, although it is too soon to tell if this prediction will come true.
Utility Token Examples
Basic Attention Token (BAT): Pay BAT in order to gain access to the attention from millions of people that have ads enabled on the Brave Browser. Instead of paying google to display your ads, you can pay the consumers to view your ads.
Golem (GNT): Pay GNT’s, gain access to the decentralized world computer, created by linking people’s computers over the Ethereum blockchain. Your computational needs can now be outsourced, instead of to AWS, to an ownerless platform.
Siacoin / Storj: Pay Sia orStorj to gain access to decentralized encrypted cloud storage for your file hosting needs. Your file storage needs can now be outsourced, instead of dropbox, to an ownerless server.
SALT: Pay SALT’s, gain access to the SALT lending network and all services that they provide (this one is centralized, which is just fine)
Substratum: Pay SUB to gain access to websites hosted by a decentralized network of servers. Instead of GoDaddy, pay the computers owners that provide network hosting to Substratum.
If you’ve been in the crypto space, “security” tokens has been ringing in your ear. I originally called this section “security tokens, but it didn’t really hit the nail on the head. “Asset” tokens is a little more broad, and captures more of the functions that these tokens have.
Pure Assets: Enable access to revenue generated by a platform. Not designed to be exchanged as money. Very low velocity. Typically have a finite supply with some exceptions.
Asset tokens represent some sort of property, either in the real world, or in the internet one.
Property is a SUPER general term. Property is basically anything that could have a serial number, or a bar-code, or anything that has your signature on it and is legally yours, including shares of a company, rights to revenue, or securities.
Asset tokens, in my opinion, represent the most interesting possibilities in the cryptocurrency space.
Many cryptocurrencies at the top of CoinMarketCap.com fit the qualifications for being a security.
-An investment of money
-in a common enterprise
-with an expectation of profits predominantly from the efforts of others
and, for decentralized tokens, I would add
-is required for the functioning of a decentralized network
This classification tokens is important for investor education, as they all represent different kinds of decentralized property, and come in as many different types as real world property. Purchasing any of the listed tokens in this section is a very different decision than purchasing Bitcoin. The Return-on-Investment is dependent on fundamentally different issues for asset tokens, in the same way that RoI is totally different between purchasing a car or a house
Lets go through a few tokens and talk about the different characteristics and the qualities that each one has.
For this section, I went down CoinMarketCap and selected all the tokens that have a fixed supply, and enables access to a stream of revenue generated by the platform.
OmiseGO (OMG): OmiseGO is a Proof-of-Stake exchange. Nodes will have to stake the OMG token to validate transactions on the OmiseGO network. Those who stake their OMG tokens, will be paid a dividend at the end of the staking period that comes from the transaction fees that went through the network. Because the token enables access to the revenue created by the OmiseGO fee’s, the value of the token should represent some function of the potential revenue generated by the OmiseGO exchange.
Augur (REP): Augur is a decentralized prediction market, where users gamble Ether on the outcome of future events. Once the event has passed, REP token holders come and stake their tokens to the correct outcome of the event, allowing the bets to be settled to the truth. REP token holders are paid a small dividend of the Ether that was gambled, in order to incentive them to stake correctly. By holding REP, you are allowed access to the transaction fees of the Augur platform.
0x (ZRX): The 0x project is built to be a decentralized protocol to exchange tokens over the Ethereum blockchain. 0x token holders have the duty of relaying trades to one another, to ensure that those that use to protocol can trade the ERC20 token they have, for the one they want, at the best available price. The ZRX token holder gains transaction fees for executing trades. By holding the ZRX token, and by correctly relaying messages, you can gain access to the revenue created by the decentralized exchange network created by 0x.
MakerDAO (MKR): MakerDAO is the project behind the DAI stablecoin. Through the clever use of smart contracts, a two token system, and collateralized loans, the MKR system has produced the DAI stablecoin. DAI gains its stability by offloading it’s volatility to a dynamic system of over-collateralized loans. DAI gains its value by having MKR holders as the lenders-of-last resort as the ultimate backing of value. MKR token holders gain value when loans in DAI are repaid, and a loan fee is collected that burns a small amount of MKR. By burning a bit of MKR, the MKR token goes up in value due to the reduced supply. As loans of DAI get issued more and more, the increased volume burns more and more MKR, from the revenue created from the loan fees.
Binance Coin (BNB): Binance coin is the only centralized token in this list, and also has unique economics.
Binance coin is used on the Binance exchange as a platform currency as a trading pair. While most exchanges have BTC or ETH as trading pairs for all other coins, Binance Exchange also lists BNB as a trading pair for other tokens.
Users of the Binance exchange get a 50% discount on the exchange fees if own BNB tokens.
Using it’s revenue, Binance purchases BNB tokens on the secondary market and burns them, to decrease BNB token supply. This acts like a traditional company stock buy-back. It’s a round-about way of allowing people to gain access to the revenue that a centralized company takes in.
BNB represents is both Binance’s internal currency, and access to the revenue generated by Binance; BNB is both a currency and an asset. While most exchanges have BTC or ETH as trading pairs for all other coins, Binance Exchange also lists BNB as a trading pair for other tokens, making BNB coin a hybrid asset/currency/utility coin in the cryptocurrency ecosystem. This particular use of a currency is similar to coins XRP Ripple or XLM Stellar Lumens; BNB coin is meant to be a substrate-currency that facilitates trades between two other currencies of low liquidity, which is how it reaches its utility status.
Ethereum and EOS
Ethereum and EOS are the most unique of cases, as they both exhibit a balanced measure of all three characteristics.
Ether is a currency. Its dApp ecosystem is sufficiently robust, and ETH is generally distributed among different people well enough that it has become more than just gas for a decentralized supercomputer. Ether is a trading pair on all major exchanges, has significant market cap with plenty of liquidity. Ether has achieved currency status among the crypto world.
Ether is a utility. It unlocks and pays for access to a network of decentralized services.
Ether is also an asset. Staking 32 Ether (when Ethereum transitions to Proof-of-Stake Casper) will allow someone to receive transaction fees and block rewards to the Ethereum blockchain, allowing someone to receive interest around 3–6%.
Like Ethereum, EOS is also a very unique case. EOS represents some measure of all three qualities, but some things are just weird with it.
It’s not really a currency, as it doesn’t need to be transacted.
It’s kind of a utility, but only for the hosters of dApps, rather than the users. Users don’t need to use the EOS currency to operate EOS dApps. It’s the owners of the dApps on EOS who need to stake EOS tokens for access to the EOS operating system. So it’s a utility for dApp developers / but not regular consumers.
It’s definitely an asset, as it represents ownership of a certain percentage of network. However, on EOS, ownership is really separated into 2 categories: Block Producers and Token Holders. Block Producers get paid EOS to incentivize them to produce blocks. Token Holders decided who the Block Producers are. Block Producers job is to serve the Tokens Holders by honestly producing blocks. Token Holders serve the Block Producers by building stuff to bring users to the platform, increasing the value of EOS.
Non-Fungible Tokens, ERC 721s
Non-Fungible Tokens are certainly property. These things are most comparable to things with unique, unreplicatable properties. For things in the real world, think properties (house deeds, land ownership), or things with serial numbers on them, trading cards, pokemon, video-game items/artifacts. Things that are one-of-a-kind. By becoming tokenized, they also represent access to a network. Cryptokitties enables usage of the cryptokitty network, for example.
Token-Curated Registries can have an internal native token. These tokens will be backed by the value-token (likely Ether) that is deposited into the TCR smart-contract. The new tokens that are minted by the TCR, and given to the depositor, allow access to the functions of the TCR, while perpetually being backed by the deposited value token.