Cryptocurrency Categorization by Design
If you know the distinction between Bitcoin, Ethereum, and the other 5,000+ cryptocurrencies out there on a techno-molecular level, i would like to congratulate you on your knowledge and seek your input on this piece.
The purpose of this piece is simple: stir up some emotions and provoke some thoughts about crypto asset categorization.
The sooner we can produce, even a basic, framework the sooner we can transition to a greater economy!
A couple of Billion dollars and over a decade in, the cryptocurrency & digital asset industry flourishes but is still missing the necessary intellectual systems for valuation and fundamental analysis that exist in legacy economic industries. We can easily distinguish between Gold & Silver or Corn & Soy, but we struggle to identify the fundamental differences between Zcash & Monero or Tron & NEO.
As the world economy edges closer to its new superfluid self (as promised by blockchain and cryptocurrencies); it becomes increasingly important to be able to understand and distinguish digital assets from one another. With a clear way to categorize & classify crypto assets by the nature of their designs, we can build a universal framework for digital value attribution. A framework that is essential for adoption and globalization.
To move From a
Experimental Global Digital Economy → True Global Digital Economy
We need an universal asset Framework.
Without further ado, the simple Crypto Token Categorization Framework:
Whenever we go to inspect a crypto asset we need to define its CORE design attributes, namely:
1. Network Reliance – how muchdoes the actual project/network of the crypto asset depend on the token for its existence?
2. Degree of Legal Resemblance – does the crypto asset fall into a category previously defined by legacy systems (FINRA/FDIC)
3. Purpose & functionality – what can be done with the asset? Why would somebody want to own this asset?
Each attribute can then be ordered and cross-balanced between one other in order to place the crypto asset into the correct framework. To make things a tad easier, just grade the 3 attributes 1–100; and use the severity of each grade to place the crypto-asset accordingly.
As an example we can take crypto-asset “X”.
Imagine that crypto asset X has a high degree of Network reliance, nothing on the network can be done unless it is paid for in the X asset; like fuel needed for a car. (score = 90)
Due to the use of asset X as fuel for the network, (as in the case with oil) it is recognized by government bodies as a commodity, finding its degree of resemblance.(score = 50)
Additionally, to understand the purpose/utility of the asset just ask yourself “What Would Grandma Do” if i gave her this crypto; what can she do? Nothing besides hodling it or giving it back to you? (score = 20)
By classifying crypto-assets, we can begin to assign value proportionately. An asset that is for storing the wealth of 7 billion people, will arguably be more valuable than a crypto-asset that is used to reward its 100,000 users for micro-tasks.
Currency tokens are the simplest and most straight forward of token designs when it comes to identifying them. The exclusive application of currency tokens is as a medium of exchange and a store of value. Intended to act as a hedge These types of assets are usually built directly into the crypto-project and are tied in entirely to its network’s existence; any activity that happens on the network can only happen with the presence of the token.
Examples: Bitcoin / Ethereum / Beam / Grin / Stellar
As in the name of this category, the assets that are considered a utility, also tend to have a decent level of network-token dependence. The purpose of the assets falling into this crypto category is, allowance/access to a project utilization. These tokens can be thought of as the physical coins (quarters) that you must use to play pinball or air hockey, or the clearance ID needed in order to enter a government building. As of August 2019, token utility across the crypto-verse is scarce; most of the utility is found in staking or access to data feeds.
Examples: QSP / LOOM / AGI / LINK / LEND
An asset identity category that was forced by government regulation. Tokens that fall into this category can be likened to equities such as company stock and other legacy financial options. This classification is also arguably on the easier side to distinguish from others. If the token pays out company profits or shows partial ownership of a network or complies with the HOWEY test.
Examples: NEXO / SALT / SIA / Blockchain Capitol / RISE
A less popular category for asset placement, but a valuable one nonetheless. Asset tokens are somewhere between a Currency token and a security token. Acting somewhat like a digital twin to a physical asset, these cryptos represent the value of an underlying pegged physical asset. Stored in reserves around the world, any asset simply gets fractionalized and sold on the open crypto market. Gold, silver, water, oil, and just about anything else that one can contour up can serve as a pegging asset.
Examples: DigiXDAO / XZC / OneGram / Tether
Perhaps the least valuable of any token category. Assets that fall into this faction are nothing new or innovative. In fact, they rarely have any use case beyond being given out for free to an audience. This can be likened to the same low-quality systems such as Swagbucks or “Airline rewards miles” — a Loyalty Rewards Program. The value of these tokens is defined by the (approximately <1%) amount of money a company is willing to allocate to keeping their customers happy. Moreover, the use case of the token is tied to the platform, the only way that the tokens can realize value is if they are traded in to the company issuing them.
Examples: MPR / XYO / MDA / ETN
It is crucial to realize that some assets will belong to multiple categories while others may not even fit one. This happens because there are overlaps within the classifications themselves as well as a lack of unique categorizations tailor-made for crypto assets. Not to mention that we are still in an economy that is considered experimental.
After pinpointing the severity of each assets attribution and classifying the asset accordingly comes the next question: “Which classification is the best?”
At a high level, the answer is none.
But at the low level of investment and finance, the best assets would be the ones with the most room for growth or stability. Hence, we have a general, simple & incomplete matrix of preciousness:
There are multitudes of ways to enhance the granularity of these drawings, accuracy. If the classification system was lead by a governance component (centralized vs decentralized) then Currency & Asset might lead, unless you were a regulator then in which case the more regulated/centralized Asset & Security tokens would be preferential.
Moreover, the nature of each project, including but not limited to: the team, the community, the financial capitol behind the project, its geo-location, timing, and a slew of other variables, each would provide an individual adjustment to the projects “Preciousness”.
This is by no means a final or exhaustive framework, but it is one that does work.
There is no direction except ONWARD & UPWARD.
Buidl the Economic future — One system at a time.