Digital-assets is a class of programmable assets that exist in the form of electronic data to represent the ownership and value of underlying assets. With the development of the first and second generation blockchain, smart contracts and DApp, the friction of issuing and managing digital assets is reduced significantly. Crypto digital-assets is a sub category of digital-assets that is created, stored, exchanged, and managed in a decentralized computation network and free of intermediaries. The form of crypto digital-assets may be different from the traditional assets, but the heart of any crypto digital asset is no different than traditional assets which are entities used for capturing and storing value.
Categories of Digital Assets
Generally, crypto digital-assets can be classified into 6 different categories based on the difficulty of adoption of the blockchain technology. They are cryptocurrency, digitalized traditional financial assets, digitalized fiat currencies, digitalized intangible assets, digitalized tangible assets and digitalized conventional service and products.
Cryptocurrency is a type of digital asset issued by entrepreneurs to fund venture startup costs of a blockchain related platform. Typically, an initial coin offering (ICO) is used to issue cryptocurrency and commits to accept only that cryptocurrency as payment for future access to a digital platform. Sometime, the platform may have a decentralized governance body then it also represents the ownership of the platform. Other forms of issuing cryptocurrencies like proof of work mining and pre-mining, proof of stake mining and pre-mining etc. are also commonly used by startups. At the heart of cryptocurrency, it is a new type of asset which represents the value and rights for a promised service to be developed by utilizing blockchain technology. The ICO mechanism allows entrepreneurs to generate buyer competition for the token, which, in turn, reveals consumer value without the entrepreneurs having to know, ex ante, consumer willingness to pay. Furthermore, by revealing key aspects of consumer demand, crypto tokens may increase entrepreneurial returns beyond what can be achieved through traditional equity financing (Catalini & Gans, 2018).
Digitalized traditional financial assets are a digital form of conventional financial assets like equities, fixed income, ETF, REITs, derivatives etc. Digitalized financial assets allow anyone to own and transfer financial assets across an open financial network without the need for a trusted third party, which will streamline the financial asset creation, exchange, clearing, settlement and governance. For example, throughout the life-cycle of an equity trade many financial intermediaries are required: stock exchanges and trading venues (NASDAQ, NYSE), broker-dealers, custody banks and the Depository Trust Company. Blockchain could further streamline the post-trade part of the trade cycle by eliminating duplicative confirmation or affirmation steps, shrinking the settlement cycle, and reducing trading risk, which in turn should lower the industry’s cost and capital needs.
Digitalized fiat currencies are a digital form of fiat currencies like the US dollar, the Euro, the Japanese Yen etc., which exists on a distributed ledger network; and can be owned, transferred and exchanged without the involvement of a trusted custodian like a retail bank. Several central banks have been actively researching how to use blockchain technology to issue central bank digital currency ( Brainard, 2018) (Bank of Canada, 2016). Meanwhile, other private entities like Tether, TrustToken, and Gemini etc. are providing custodian service to issue digitalized fiat currencies like USDT, TUSD, GUSD etc. With a progressing regulatory regime and the development of blockchain identification technology, digitalized fiat currencies are growing exponentially and becoming a very crucial type of fiat currency.
Digitalized intangible assets are a digital form of intangible assets which are issued and managed through blockchain. Intangible assets like reward cards, royalty, copyrights, patents, trademarks, gaming points, credit scores etc. can be easily digitalized with blockchain technology. Nowadays, enforcing intellectual property is always a challenge for IP owners because of the difficulty of ownership tracking, and high cost of IP exchange and payment systems. Given the proliferation of content and easy of distribution on the web, intangible properties like software, music, images etc. are invariably used without being licensed. Blockchain has its native advantages like immutability, transparency, traceability, instant and low cost of exchange and transfer of ownership. It’s much easier to track ownership, rights and license transactions with blockchain to protect the intellectual property and give creators more control over licensing and enforce copyrights.
Digitalized tangible assets are a digital form of tangible assets of which the ownership and rights are digitalized, issued, distributed and managed through the blockchain. Tangible assets like real estate, commodities, lumber lands etc. can be used as underlying assets to back a digital token issued by a trusted custodian. The price of these tokens will be pegged to the underlying asset and the token can be traded, cleared and settled on the blockchain to eliminate the intermediaries like an exchange venue, a dealer and a broker etc. Also, the high divisibility of digitalized tangible assets makes it easily broken down to smaller units that can be used in exchange and transparently transfer ownership, which will increase the liquidity and efficiency of raising capital for high value assets. The popularity of stable-coins like petrol coin, gold coin etc. prove the huge potential growth of digitalized tangible assets.
Digitalized conventional service and products are a digital form of service and products which are issued by companies or individuals on the blockchain to represent their products or service. Once the products and service are digitalized, it’s very easy to trade and settle payment instantly on blockchain to significantly reduce the transaction cost and trade settlement cycle of the point of sale. Also, the traceability and transparency of the blockchain can help to solve the counterfeit product issues. More important, the high accessibility of the blockchain will help service and product owners reach out to a much broader population and customers to expand their market.
Digital Asset is the Future of Value Storing Medium
We believe blockchain’s transparency, accessibility, traceability, divisibility, instant payment, low cost, security, reliability and decentralization architect make it a particularly good choice for reshaping conventional business such as financial service, retailing, and supply chain etc.
Transactions that happen on blockchain can be easily monitored and traced through an open network, this level of transparency and traceability between participants will revolutionize the manufacture and retailing supply chain. High accessibility is another innovation of blockchain, which makes it a perfect technology to promote the financial inclusion and democratization as well as a borderless society. Digital assets are a programmable asset in the form of electronic data, which makes it highly divisible and instantly transferrable with low settlement costs. This will revolutionize financial services in value exchanges, clearance and settlement; capital raising and allocation; and payment systems, etc. With its distributed network architectural design, it solves the single point of failure problem and significantly increases the network security level and reliability.
Digital-asset is a cornerstone of the future digital and intelligent economy. With the development of the Intelligence revolution with technologies like artificial intelligence, machine learning, and the internet of things, the blockchain will play a critical role as a value exchange channel without any human involvement. Digitalized assets are the secret key to streamline, automate and speed up goods, services and value trade and settlement process. However, In the very early stages of blockchain development, there have been many challenges waiting for people to solve such as network scalability, a confusing and complicated user interface, lack of legal status, poor social awareness and recognition, and extreme price volatility. These challenges eventually will be solved through technology development, capital investment, a mature ecosystem, education, a strong regulatory regime, and broad adoption and awareness.
The popularity of the blockchain and Dapp development triggers a new wave of financial revolution, like the surging of cryptocurrencies, the initial coin offering (ICO) mania and the evolvement of token economy. Crypto digital assets are now becoming an emerging new type of assets and are growing exponentially. There are thousands of crypto digital assets (CoinMarketCap, 2018) issued and managed by utilizing blockchain technology, and more are being added every day. Meanwhile, digital assets capital market is immature and some people argues that If a successful central bank digital currency were to become widely used, it could become a substitute for retail banking deposits. This could restrict banks’ ability to make loans for productive economic activities and have broader macroeconomic consequences ( Brainard, 2018). Therefore, the need to develop a next generation decentralized lending platform to facilitate digital asset utilization and allocation is compounding. This higher level of efficiency will increase liquidity in the market, decrease counterparty risk, and optimize capital utilization (Schneider, et al., 2016).
Over many decades, a complex financial intermediation system has developed to store, manage, transfer, lend, invest, and risk-manage for this massive amount of money for uses in both the private and public sectors. Financial intermediation is a rewarding business, with a revenue pool of some $5 trillion a year (equivalent to about 190 bps of assets under management) (McKinney, 2017). With more and more assets being digitalized, the current financial intermediation system faces a fundamental change in the near future and to continue improve the efficiency and drive down the system cost.
Brainard, L. (2018). Cryptocurrencies, Digital Currencies, and Distributed Ledger Technologies: What Are We Learning? Decoding Digital Currency Conference. Federal Reserve Bank of San Francisco. Retrieved from https://www.federalreserve.gov/newsevents/speech/files/brainard20180515a.pdf
Bank of Canada. (2016, June 17). Digital Currencies and Fintech. Retrieved from Bank of Canada : https://www.bankofcanada.ca/research/digital-currencies-and-fintech/fintech-experiments-and-projects/
Catalini, C., & Gans, J. S. (2018). Initial Coin Offerings and the Value of Crypto Tokens. Retrieved 9 28, 2018, from http://nber.org/papers/w24418
CoinMarketCap. (2018, August 20). Retrieved from CoinMarketCap: https://coinmarketcap.com/
McKinsey. (2018). New rules for an old game: Banks in the changing world of financial intermediation. McKinsey Global Banking Annual Review.
NEO. (2016). NEO White Ppaer: A distributed network for the Smart Economy. Retrieved Aug 08, 2018, from http://docs.neo.org/en-us/whitepaper.html
Schneider, J., Blostein, A., Lee, B., Kent, S., Groer, I., & Beardsley, E. (2016). Blockchain: Putting Theory into Practice. Goldman Sachs Equity Research.