Platforms, Forks, and Bricks
A crash course on the different types of cryptocurrencies and how they interact in their quest to create value.
Circa 2013, I remember Googling something along the lines of “what is the total value of all Bitcoin?” and seeing coinmarketcap.com for the first time. The great big list of tokens was overwhelming — I had a basic understanding of Bitcoin by then, but I couldn’t wrap my head around what all those tokens were and why they existed.
7 years later, the website hasn’t changed much, but just about everything else in cryptocurrency has. Back in 2013, you’d be hard-pressed to come up with a framework for understanding the various platforms in a way that made sense of their value. Fortunately, the landscape has matured enough to make this possible, and yet I’m sure many people looking at CoinMarketCap today are just as overwhelmed. If this is you, then you may want to use this simple classification framework for defining the different functions for crypto tokens.
Cryptocurrency Classification 101
At the highest level, cryptocurrencies can be broken into 3 types:
- Platforms. A platform is a protocol for digital proof of ownership. Bitcoin was first, many have followed.
- Forks. When disagreements over governance come up, a platform can “hard fork,” splitting in 2. The forked protocol shares a transaction history with its parent up until the fork but becomes its own platform after that.
- Bricks. A brick is a crypto token built on top of an existing platform. It leverages the value of the platform’s functionality to create value in some other way.
At the bottom of this post, I’ve included a chart of the 20 most valuable cryptocurrencies by their function, broken down by their role within that function.
I. Platforms
Of the top 20 most valuable cryptocurrencies (April 2020), 11 are platforms.
Consider the top 3 crypto platforms: Bitcoin, Ethereum, and Ripple. Each of these was built for a different purpose and function better for different use cases. Today, there are 3 primary functions that crypto platforms serve:
- Pure Stores of Value (like Bitcoin)
- Decentralized Application (DApp) Development (like Ethereum)
- Currency/Asset Tokenization (like Ripple)
The reason platforms are split between these functions is that tradeoffs prevent one from being the best at all 3. A cryptocurrency’s “performance specs” will vary based on its architecture and governance — things like security, immutability, programmability, transaction time, transaction cost, and transaction bandwidth. These characteristics combine to make a platform inherently useful for a specific function, and 1 cannot be the best at all of them.
Consider that some platforms end up being inherently useful for a different function than it was designed. Take Bitcoin, which was built to be digital cash, but doesn’t work for this today because of its price volatility, slow transaction times, and high transaction costs. It turned out to be much more useful as a store of value. In fact, while trying to create digital cash, Bitcoin’s creator Satoshi Nakamoto may have accidentally created the best store of value in human history. Never before has there been a more scarce, secure, and immutable financial asset, with all the divisibility and transferability benefits of being digital-native.
A crypto platform’s ability to create value is directly related to its ability to serve one of these functions and gain traction with users.
II. Forks
Of the top 20 most valuable cryptocurrencies (April 2020), 3 are forks.
Sometimes civil war breaks out and a platform splits. Bitcoin Cash, for instance, separated from Bitcoin in 2017 after it had become clear Bitcoin was more useful as a store of value than as digital cash. Bitcoin Cash attempted to fix this by increasing block sizes to speed up transactions in hopes of restoring Bitcoin’s original purpose.
Many people are still trying to understand how to think about value of forked platforms, but for now, we can at least say that a fork doesn’t magically create 2 equally valuable platforms, doubling the existing value. However, its value wouldn’t be cleanly split either, since some users, developers, and use cases will apply to both, and having 2 working platforms offers backup if one of them should fail in the future. A safe assumption is that the result of a fork is 2 platforms, neither of which are as valuable as the original. A key takeaway from this is that platform forks detract value from the original protocol.
III. Bricks
Of the top 20 most valuable cryptocurrencies (April 2020), 6 are bricks.
Bricks, unlike forks, are mutually valuable with the platform they’re built on — they piggy-back on the success of the underlying platform and create value for it in return. The relationship between a platform’s value and the value of tokens built on top of it is another early area of crypto knowledge, but at the very least, successful and valuable brick tokens validate its platform’s usability. And more concretely, transacting tokens built on another platform involves some use of that platform token to work (i.e. collateral for Bitcoin Lightning Network, or gas for Ethereum). Because of this, trade demand for tokens built on top of a platform increases the demand for the underlying token, making it more valuable.
Bricks have all kinds of use cases. The cryptocurrency space has aged to the point that it seems reasonable to expect that the bulk of value created by new tokens from this point will come from bricks. Today, most of the market value from these tokens come from 2 specific use cases: Exchange tokens (generally used to facilitate trades on a crypto exchange) and stablecoins (coins that target a fixed price point for low volatility).
Of the 6 top-20 crypto tokens that were built on another platform:
- All of them were built on Ethereum.
- LEO Token — an exchange token and stablecoin, is built using both Ethereum and EOS, making EOS the only other platform with a top-20 brick (albeit with this asterisk).
- Only 1 brick is neither an exchange token or stablecoin: Chainlink, a decentralized price oracle for digitizing real-world data.
Charting the Top 20
With all these classifications, it becomes a lot easier to map out which tokens directly compete versus those that don’t. And also which are adding value to each other versus subtracting value. This is quite helpful for getting an intuitive grasp of the crypto landscape.
Below you’ll see a recent snapshot of the top 20 most valuable cryptocurrencies on CoinMarketCap mapped by these classifications. (Warning: by the time this is posted they are probably already out of date).
In filling in this chart, I had to research some of the tokens I wasn’t so familiar with, and having this framework while researching was quite helpful. Both beginners and experts alike might benefit from doing this on their own when first researching token they’re not familiar with:
I’ll end with a few important disclaimers:
- This is just a high-level way of categorizing tokens. Digging deeper, you’ll find that each token’s role in the ecosystem is more nuanced than these boxes suggest.
- While the industry has matured a lot in the last decade, cryptocurrencies are not “mature.” It’s still unclear just how valuable a lot of these functions are and if the market valuations are justified.
- Nothing in this article should be considered investment advice. In fact, it’s safe to say that no one should ever buy any financial asset based on something they read on Medium.
