Crypto Taxonomy 1010.22

The amount of cryptoassets in existence continues to grow, now numbering well into the thousands. This increase in quantity has been accompanied by an associated rise in the differing types of assets which can now be sliced in multiple ways including by what they accomplish, what they are used for, how they are perceived by regulators and their technical construct.

Cryptocurrencies vs Cryptoassets

The most frequently used term for much of the period since Bitcoin launched was ‘cryptocurrencies’, due mainly to its original vision to replace cash transactions. It therefore made sense to label Bitcoin a currency. However, as more and more new crypto projects launched, it became clear that few held any such aspirations to be a currency. This has led to a gradual shift to the label of ‘cryptoassets’ for non-currency based projects (such as ETH or EOS), denoting the move to a wider use case.

Tokens & Crypto Collectibles

Into this mix came projects launching on top of existing networks, and in particular a vast number running on Ethereum. As a result, an informal distinction came into being with the term ‘token’ became widely accepted for projects operating on top of another protocol.

This increasing specialization has continued, with the introduction of the likes of ‘crypto collectibles’ which reflect the rising use case of tokens for gaming and collectible markets.

Fungible vs Non-Fungible

These collectibles brought to the fore a different type of split; the difference between fungible (FT) and non-fungible (NFT) tokens:

  • FT: Interchangeable, meaning one version of the token is the exact same as any other, with the same specification, value etc. They can be divided into smaller units
  • NFT: Two versions of the same token aren’t interchangeable, because they possess different attributes. For example, two CryptoKitties may both have the same list of potential attributes at ‘birth’ – but they all are unique and end up with different attributes which define them. As such, they can’t be divided.

Generally, the likes of BTC and ETH are spoken of as being FTs. This is not quite true because, due to their lack of privacy, BTC can be tracked and rejected if their history isn’t desirable (e.g. they were stolen or came from transactions on the darknet). Because of these rejections, some BTC are more highly valued more than others. This is part of the reason why many flock to privacy projects which are (or should be) untraceable, thus making them FTs.

NFTs are generally accepted to comprise tokens which are more obviously unique. This could include the digital land in Decentraland, an item in a computer game or a provably rare card in a trading card game.

Security vs Utility

Regulators have sought to define tokens by their compliance. Despite the global nature of cryptoassets, owing to the United States’ long arm of the law debate on this point has largely centered around the Securities and Exchange Commission’s Howey Test. This test looks at if an investment is a security. There have been few formal declarations of what cryptoassets are or aren’t a security, but essentially it relates as to whether the project is offering an investment, if there are profits expected from the project and if said profits are dependent upon the people running the project.

Securities can include projects returning dividends (which is why many gambling projects have been delisted from exchanges) or which act as equity in a company.

Utility tokens, meanwhile, are more those which simply enable access to a product. An oft-used comparison draws a parallel between utility tokens and arcade/funfair tokens. People are buying them to use a service – not in the expectation of profits from dividends/ownership.

Utility tokens can be broken down into further subsets:

  • Access: As noted, access to the product or service
  • Work: Users of a network earn tokens by participating in a desired activity (e.g. reporting/voting on Augur to provide the correct answer for prediction markets)
  • Governance: Voting on changes to the network/protocol (e.g. ZRX), without any implied ownership of the project or rights to any profits

Evolving taxonomy

These segments also intersect, leading to a myriad of definitions. This is partly because of a lack of definitions and rulings from regulators, a standpoint which will reduce over time, but it is also due to the continued development of new token standards and the emergence of fresh use cases. Future pieces will look at some of these token standards in more detail, to look at how they are facilitating new business models and opportunities.

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