The world of Cryptocurrencies has recently expanded rapidly into 1000s of different ‘coins’, In addition to the most well-known coins such as Bitcoin and Ether, there are other interesting coins such as Ripple and Monero, which have features very different from Bitcoin. There are also some coins which don’t serve much purpose or are scams such as the Fuck Token (FUCK) and the Useless Ethereum Token (UET).
All of these different digital assets can even be overwhelming to crypto-veterans, and so it is useful for these coins to be split into groups based on shared characteristics. It is much easier to analyse these digital assets if they can be compared with something similar.
Searches for ‘Different kind/categories/type of cryptocurrencies’ in Google bring up mainstream articles explaining the difference between Ether and Bitcoin. However, the information we are looking for is more specialized and needs a more macro-level perspective of the world of cryptocurrencies. There are two articles that attempt to categorize these digital assets which I will discuss below:
In this article on Hackernoon, the author (Alex Kruger) divides digital assets into two categories: Native Tokens vs Non-Native Tokens. Native tokens are Bitcoin, Monero, Ether etc. All these assets interact with their own blockchain. For example, to make a Bitcoin transaction, I need to pay a small fee in bitcoin for the transaction to be processed. Non-native tokens are built on top of another blockchain and use it to process transactions. For example, any transaction made with the FUCK token mentioned above would need to be paid for using Ether as it is a token built on the Ethereum blockchain. The author further subdivides Non-Native tokens into the following 8 types:
1) Protocol tokens. Digital tokens that are governed by a coded protocol. The rules of the protocol are enforced by the underlying blockchain technology. They are generally not linked to any “centralised” entity or any “traditional” real-world assets. (e.g. Augur: REP).
2) Tokens issued for accessing the platform/services of the issuing company; future services, to be precise, as in most cases tokens are issued when the platform is no more than an idea. Think of them as utility tokens or Gift Cards. (e.g. Civic, 0x).
3) Asset-backed tokens, where the blockchain asset represents a claim on an underlying asset, and to claim the underlying one sends the blockchain asset (i.e. the token) to the issuer. (e.g. Tether’s USD).
4) Token issued under the promise of participation in future revenues. (e.g. COSS, BitDice).
5) Tokens said to represent equity in the issuing company, giving token holders votes as shareholders, participation in future dividends, and supposedly ownership of the company as well. (e.g. Lykke).
6) Tokens issued under the promise of appreciation backed by promises from the company to repurchase and destroy tokens once sustainable revenue materializes. (e.g. Populous).
7) Tokens issued with no value proposition whatsoever (e.g. Steem, Fuck Token).
8) Potential scams (e.g. Magos).
This is a useful analysis of the different kinds of ‘Non-Native’ tokens. However, the author has not compared characteristics of non-native tokens with native tokens. For example, some Ethereum-based tokens would also function as a similar way to Bitcoin, but within a specific platform. For example, Bitcoin is used for payments, but so is Civic. The distinction is that Civic is only used for payments for Civic services. In addition, the author has split up the non-native tokens into too many cetegories. For example, there isn’t much difference functionally between #4 and #5.
This simpler framework comes from a different article on Hackernoon by Lou Kerner. The article summarizes a call where valuing cryptoassets was discussed. The article describes three differents kinds of Cryptoassets which are:
1) Cryptocurrencies: Bitcoin, Monero, Litecoin etc.
These are primarily used for payments or as a store of value
2) Utility Tokens: Civic, Golem, 0x etc.
These assets are used to perform a function within the given application
3) Crypto Securities: Real Estate tokens, tokens representing ownership in a piece of art (e.g. Maecenas)
These tokens represent the same concept as share in a company that trades on stock exchange, with the difference that the ownership and assets are built on the blockchain directly
Unlike the analysis by Kruger, this looks at the entire crypto ecosystem to find shared characteristics. However, I would argue that is too simplistic. There is no distinction between Bitcoin and Ether for example, which are fundamentally different in their function. Ethereum powers an ecosystem, while Bitcoin is a store of wealth.
Both Kerner and Kruger’s categorizations are welcome, but there is much that can be improved. I will suggest a framework for categorizing digital assets below:
3) Utility Tokens
4) Tokenized Real Assets
Examples: Bitcoin, Monero, Litecoin, Zcash
This type of digital currency is designed to be a replacement for money and is most likely to be used on a transactional basis. Different examples of this kind of currency may have specific characteristics. For example, Monero and Zcash are distinct for bring anonymity to transactions. Litecoin has very cheap transaction fees and is fast.
This type digital assets main utility is to be used as ‘gas/fuel’ for a blockchain platform that has decentralized applications built on top. If you want to perform a transaction using a smartcontract on the Ethereum platform, for example, you will need to pay a fee in Ether so that the miners will process the Smartcontract. This category of asset is quite small as there really are only a few platforms have been developed for use. Expect the category to grow larger with many new developments (e.g Qtum, Icon)
These coins are required to perform a specific action in an ecosystem run by the coin issuer. They are generally built on top of an existing blockchain such as Ethereum. This is the largest class of tokens now being built in the crypto space.
Civic is an identity management service that allows you to protect and authorize the use of your identity in real-time. The Civic token (Ticker: CVC) is used to perform actions in the Civic ecosystem. It will be able to purchase identity services and is offered as an incentive for validators.
The 0x (Ticker: ZRX) token allows users to exchange different types of ERC20 compliant tokens (all tokens issued on the Ethereum blockchain are ERC20 compliant). Users must pay the transaction costs using ZRX tokens.
Tokenized Real Assets
This is an emerging type of token that does not really exist in a definitive form at the moment due to the regulatory haze that has settled in the crypto world. A cryptosecurity would represent equity, but be built on the blockchain and tokenized. Until there is more regulatory clarity on what a tokenized security looks like, I expect this type of token to be rare. These tokens could possibly be valued using more traditional valuation frameworks because they would be similar to traditional equities. Examples of projects that are looking to introduce this kind of token are Maecenas (for art) and Polymath (for financial securities).
This type of asset acts much like a traditional security. A token of this type often comes with dividend payouts and voting rights, but usually no ownership stake.
This is a token that gives holders a portion of all the revenues generated on the COSS exchange, but no ownership rights.
There are many digital assets which have characteristics that don’t place them neatly within a single category.
While GAS (NEO’s sister token) is used for transaction fees on the NEO platform, NEO acts more as an asset for holding. Each NEO generates GAS and also gives voting rights on the platform.
The goal of this article is to provide some clarity on the categories of digital assets so that it will be easier to compare them going forward. Most mainstream media lumps Bitcoin and Ethereum together, but they are quite different and cannot be compared so easily. Bitcoin is better compared to, for example Litecoin. Ethereum is better compared to Nem or Neo.