In 2017, we saw some amazing runs in the cryptosphere and an unprecedented wave of people entering the space that used to only be populated by us crypto-enthusiasts. In 2018, we can expect this trend to not only continue, but to accelerate.
Having been been doing this for quite some time, I believe that when entering the space and when putting one’s hard earned money on the line, a person should do so with both eyes open.
Most people today mistakenly correlate cryptocurrencies with bitcoin, as if bitcoin was the only cryptocurrency. When someone usually asks me, “Hey man, have you seen bitcoin recently? Its been insane!” I usually just take it that they are talking about cryptoassets in general.
Many also seem to have the misunderstanding that the only purpose for crypto is just as a form of money, a currency, a store of value. This however could not be further from the truth.
(I will be using the term cryptoassets to avoid confusion when talking about cryptocurrencies as well as cryptoassets that do not aim to be a currency)
There are so many different types of cryptoassets aiming to achieve such a wide variety of goals, its important that investors understand the end game of each so as to make an informed decision. These can range from being a store of value, enhancing privacy in payments, decentralising an existing centralised service and many more. By understanding the end game and product category, you will be able to identify certain key factors that can make or break the project, make a judgement if a cryptoasset will be able to reach mainstream adoption and how difficult it would be.
In this 3 part post, I will be going through the different types of cryptoassets in general and try to give you a brief overview what the cryptoassets within each category is trying to achieve. This will be more of a general overview as there can be many subcategories of cryptoassets attempting to achieve similar goals using different approaches. I hope this can serve as a good start for you in enhancing your knowledge of cryptoassets and hopefully help you to make better investment decisions in the future.
I have broken the world of cryptoassets into these categories (credit to OnChainFX) :
1. Currency
2. Privacy
3. General Purpose Platform
4. Distributed Storage
5. Payments Platform
6. Distributed Computation
7. Decentralised Web Hosting
8. On Chain Governance
9. Prediction Markets
10. IOT
11. Identity
12. Advertising
13. Content Creation
14. Asset Management
15. Time Stamping
16. Decentralised Exchange Platforms
17. Exchange Platforms
18. Lending Platforms
19. Crowdfunding Platforms
(I am aware that there are more cryptoassets in each category than the images shown)
CURRENCY
Characteristics
This category of crypto assets is probably the most well-known and the one that we are most familiar with. There are, however, some nuances within the category itself that are important for us to understand. Decentralised currencies such as Bitcoin, Stellar Lumens, Litecoin and Dash aim to operate as a store of value (like gold or the dollar), unit of account (the dollar) and medium of exchange (the digital packets that represent the US dollar transfer over the internet). In simple terms, they aim to create the decentralised version of money. Over time, technical issues and public perception arising from the user experience have shifted what is seen as the practical use cases of some of these cryptocurrencies.
General Use Case
If we look at Bitcoin, its original aim was to make payments cheap, simple and without requiring users to trust a 3rd party. In 2017, Bitcoin has started being perceived as more of a store of value (like gold) instead of something that we can use to buy a cup of coffee every day. This is due to its high transaction fees and slow rates of transfer.
Cryptocurrencies such as Stellar Lumens and Litecoin would probably be a better of cryptocurrency that could be used on a day to day basis. They deliver payments at very high speed while also charging a lower transaction fee than existing payment gateway providers (VISA, Mastercard).
This difference between a cryptoasset that is seen as a store of value instead of something that can replace our daily money is important to understand. Both are valid and valuable use cases. Trying to value each requires a totally different set of metrics and comparisons to be made. This knowledge will help us to better judge its potential value, possibility of success, risks, valuation and ease of adoption.
Keys to Success & Risks
The key to these cryptocurrencies succeeding in my opinion, would be merchant adoption as well as the payment infrastructure, both physical and digital. In such a speculative market today, there is also more incentive for people to hoard the various cryptocurrencies instead of spending it. Why would you spend something to get a cup of coffee today when tomorrow you could get 10 with the same amount? And if users aren’t demanding for the ability to pay with these crypto currencies, the merchants have no incentive to make the service available. Hence, the crucial chicken and egg problem that we find ourselves in today.
PRIVACY
Characteristics
Privacy coins generally hold many of the same characteristics as currency coins. They aim to marry all the benefits of currency coins together with providing anonymity and privacy over some, or all transactions.
This is one of the most successful and popular categories of coins.
One of the common misconceptions with bitcoin is that transactions are completely anonymous. While you can transact your bitcoin without providing any identification data or bank account, there is still data on the blockchain ledger that a hardworking hacker or government could potentially link back to you. Public wallets are viewable by anyone an this includes the balance of the wallet as well as how much money has been received and paid out from who and to whom. You also can read on how Coinbase’s lost court case against the IRS and its impact on bitcoin holders here. This showed that these transactions were not as anonymous as they appeared.
“Do we really want anyone and everyone to see what we have and who we send it to?”
Hence privacy coins build on the values of bitcoin but are designed to ensure that a user that does not want their financial and personal information to be made public won’t have that happen.
General Use Cases
Not surprisingly, this is the type of financial instrument that cybercriminals would use to prevent being identified. While it may be easy to dismiss these privacy coins as being only used for money laundering and other criminal activity, there is actual quite a significant legal use case for these cryptocurrencies.
Banks and financial institutions would potentially be adopters of these cryptocurrencies. In general, these financial institutions see the benefit in cryptocurrencies as it would make it easy for them to transmit large amounts of money around the world with minimal cost and at high speeds. However, on a normal blockchain, for example, bitcoin, the ledger of every transaction is open for all to see. While this might be great for a non-profit or a transparent government entity, some businesses may have trade secrets or lists of suppliers and clients that they would like to keep private. This would be a huge use case for privacy coins and probably why JP Morgan is working one of the leading privacy coins, Zcash.
If you are more technically inclined, it would beneficial to go through the respective whitepapers as most of the coins are using various different methodologies and approaches to ensure privacy. This would help you to better decide which coins would have a smoother road to mainstream adoption and otherwise.
Keys to success & Risks
With impending regulation coming as well as countries such as China and South Korea putting their foot down on initial coin offerings, I fear that privacy coins may be the first to be targeted. Governments could easily initiate a crackdown on a certain privacy coin, citing its use in terrorism or illicit activity, and probably face little public backlash for it. Just because the coins are anonymous doesn’t mean that they are exempt to the impacts of government action and regulation.
Despite that, we can clearly see that privacy coins are slowly but surely eating into the market share of bitcoin. I believe, eventually one or 2 of these privacy coins will surpass bitcoin as that layer of privacy will probably be crucial for mainstream adoption by financial institutions.
GENERAL PURPOSE PLATFORM
Characteristics
The most popular of these general platform cryptoassets would be the number 2 crypto of the moment by market cap, Ethereum. We will use it as the main example in this category for ease of explanation.
With most websites and apps today, information is stored on a server, which is basically just a computer with a database in it that has all of the site’s information. If that computer is damaged/hacked, all the data is gone. With these general-purpose platforms, a database is built that is distributed among a great number of computers around the world, so that all information in the database is public and the database can’t really be shut down as long as there are computers are still contributing to it. In addition, the different computers can also come together to verify results, should there be any inconsistencies. Most of them allow some form of “smart contract” to be executed as well. This allows you to execute code on the blockchain in a distributed way. The code itself represents an agreement that is able to enforce and execute itself.
General Use Cases
This network of computers and databases can be used to track payments, like bitcoin, or run a wide array of many other applications. You can now do something like specify conditions under which a person will be paid, and once those conditions are met the money will automatically go to the person without any outside interference (and in spite of anything that happens to one computer involved in the network). With these main functionalities on the platforms, developers are able to build distributed applications (dApps) on these platforms that perform a wide array of functions hence, their “general purpose” title. This can range from recording, tabulating and verifying voting results to running a distributed storage marketplace.
Keys to Success & Risks
While Ethereum has been the platform that more than 85% of the dApps in development have been building upon, many competitors such as Cardano, EOS, Neo have emerged providing significant advantages in terms of speed and scalability. Some of them already have a few dApps built on their platforms. Do your research into each of them to get a better grasp for each of their competitive advantages.
While we might be tempted to think that it might be better to invest in the newer platform as it has better X and faster Y, remember that the Ethereum developers and Vitalik are not sitting on their hands waiting for another platform to take their place or eat up the significant lead that they have built. They are actively working to improve the platform with significant updates coming up soon. Keep a look out for the Casper Protocol and Proof of Stake updates to the Ethereum network coming in 2018. Personally I believe that there is room for more than one general purpose platform if the decentralised future.
(Most of the cryptoassets listed after this are dApps built on the Ethereum network)
DISTRIBUTED STORAGE
Characteristics
These cryptoassets create a market for storage space that is distributed globally across participating computers. Put simply, what these projects aim to do is to create a peer cloud storage network that will allow users to transfer, store and share data without having to rely on a third-party storage provider (e.g Dropbox, Box).
“We believe data should be free. We aim to liberate the unused bits of the world and construct the largest storage superserver on the planet”
Siacoin
General Use Case
Using this decentralised network, your data that you are currently storing in your Dropbox server will instead be split into many parts and stored across many different hard drives across the world which have been rented out by people who are being rewarded in the various tokens for participating in the marketplace. With these decentralised storage networks, we are able to be part of that network by renting out unused space in our computers and earn money for doing so.
The main proposed benefit of this system would be that it will reduce the impact of potential infrastructure failures and security breaches. For now, the prices being offered by these decentralised storage marketplaces are also significantly cheaper compared to the legacy companies.
Keys to Success & Risks
The key factor to these decentralised storage systems would be if the user experience be as quick and simple as existing solutions. Should there be a increased significant waiting time to obtain the relevant data from storage, mainstream adoption would be highly unlikely. Should if be able to match or even outdo existing solutions, I really do see this decentralised storage space as one of the most promising among the dApps space.
Stay tuned and follow for Part 2!
Before you go: If you’ve found the article to be useful and enjoyable in anyway do help a brother out by dropping a few coins so I can get some coffee at the cafe when writing my next piece. Any amount is appreciated. No amount is too little.
Also if you disagree with anything or would just like to chat, drop a response below. Im open to constructive feedback and thoughts.
Peace out.
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