Before we discuss the various types of cryptoassets, let us first learn what cryptoassets are.
What is a cryptoasset?
A cryptoasset is a digital asset that utilizes cryptography, peer-to-peer networking, and a public ledger to regulate the generation of new units, verify transactions and secure the transactions without relying on third parties or intermediaries. It is a tokenized asset issued in a public ledger.
Generally, an asset is a store of value, thus, the name cryptoasset came about because they store value and can be converted into cash when need be. Additionally, benefits can be acquired from the assets if you hold or use them for a long period.
One of the most important characteristic of a cryptoasset is supply, which determines its utility and value. A cryptoasset supply may be finite or infinite, but this does not mean that the coin with infinite supply is less valuable. There are three types of supply in cryptoassets: the circulating supply (amount of coins available now), the total supply (coins already in existence) and the maximum supply (maximum coins that will ever exist for a particular cryptoasset).
Types of cryptoassets
Cryptoassets are many, but they are categorized into different types depending on their legal status, use-case, value dependency, utility and technical layer. Discussed below are the four different types of crypto assets.
Cryptocurrencies are digital/virtual currencies that are used as a medium of exchange and are decentralized. Cryptocurrencies are not issued by a central government. They are the most popular cryptoassets and have almost similar characteristics as fiat currencies but are never in physical form. The main purpose of cryptocurrencies is to act as digital currencies to offer secure and decentralized experience to its users.
The value of a cryptocurrency depends on the coin demand, the rate of new coin generation, the total and circulating supply and the blockchain they are based on.
Notably, the utility of every cryptocurrency is not the same. Coins with unlimited supply like Monero tend to become an alternative to fiat currency while a coin with limited supply like bitcoin has been and is still a good investment option.
There are over a thousand different types of cryptocurrencies. Examples include Bitcoin, Ethereum, Ripple, Litecoin, Monero etc.
- Utility tokens
Utility tokens symbolize decentralized units or services that can be bought, sold and earned. These tokens can be exchanged for specific services such as video game currency, just like the real-life tokens. Utility tokens act as API keys that one uses to access a certain service.
Utility tokens are usually released before the actual project is initialized. Their demand in the market influences their initial value. The utility of these tokens is directly derived from their use-case.
Examples of utility tokens include Augur, Siacoin, Somn, Golem etc.
- Platform tokens
As the name suggests, these cryptoassets are designed to act as a platform for other decentralized projects. They make thousands of other cryptoassets possible and are the most reliable.
Platform tokens make use of blockchain technology to build a database that is distributed among computers on the blockchain. This ensures that the information is secure and cannot be altered easily unless one alters every computer on the blockchain. Cryptoassets like Ethereum use smart contracts technology that enable the processing of a transaction once the terms of the contract are met by the transacting parties. This allows other cryptoassets built on such platforms to specify their own self-executing smart contracts on the blockchain.
As the usage of these tokens by other cryptoassets increase, so does their value. These tokens are the ones that are used to pay “gas” in order to access the platform.
Examples of platform tokens include Ethereum, Ethereum Classic, NEO, EOS etc.
- Transactional/Payment tokens.
Transaction tokens are cryptoassets that were launched in order to solve cross border transactional challenges. Banks and other financial institutions still rely on the old method of depending on SWIFT to help process cross border transactions. This process is slow and consumes a lot of time as it involves different processes such as KYC and AML requirements.
The best example of a transactional cryptoasset is Ripple. Ripple is a global real time settlement network that connects banks and financial institutions globally without the need of a third party. Ripple provides a fast cross border bank to bank payment around the world and is very secure as it provides the banks with an end to end visibility of whatever is happening throughout the transaction process
More transactional and payment tokens are being released targeting on corporates and individuals. We have IOTA that uses internet of things to handle micropayments; Metalpay uses blockchain to enable transfer of money across border using a mobile phone and this is aimed at helping the unbanked individuals around the globe.
- Security Tokens
These cryptoassets are different from the rest due to their functionality and regularity profile. Security tokens have a link to an external, real world asset. They are subject to federal securities regulations. The valuation mode of a security token relates to the value of the underlying asset linked to the token.
Security tokens have a much bigger role to play compared to other cryptoassets and are expected to have a massive growth this year of 2018. We have Miami Crypto Exchange that is preparing to do a crowdfund through securities token offering (STO) under the ticket MCEX. This is expected to revolutionize the securities market by increasing the liquidity of private companies’ shares. As time goes by, security token offerings might be the new standard in fundraising
An example of a security token is BCAP.
Stablecoins is another type of cryptoasset. They provide a stable store of value. Stablecoins do not suffer volatility like bitcoins and this makes them ideal for store of value, medium of exchange and unit of account. Stablecoins aim at becoming global and fiat-free.
Currently the most successful stablecoin is Tether. Soon there might be several as there are projects pursuing how they can achieve a stable coin.
More examples include Maker, Basecoin and Digix.
There is no clear framework established to categorize cryptoassets. This, maybe, is a subject that is currently on investors and regulators minds. Once the framework is established, we will see the true potential of these cryptoassets and huge financial evolution.