Not so long ago, there was an idea to digitize and decentralize every monetary transaction. Today’s idea is to remove every middleman and use cryptography and peer to peer networking to conduct financial transactions, file sharing, cloud computing, banking transactions, transactions among internet of things, and creating a platform for such transactions etc.
Cryptocurrency. Bitcoin. Decentralisation. Ripple. Ethereum. Mining. Smart Contracts. HODL. Our vocabulary has substantially increased within a really short span of time.
Ever since the introduction of bitcoin in 2009, a new era of cryptoassets has started. But what exactly is a cryptoasset? Is it any different from cryptocurrency? What is a cryptocurrency anyway? How do cryptoassets and cryptocurrencies work? Why is every company and country launching its cryptoasset? Will it replace the current monetary and non-monetary system?
Let’s answer all of your FAQs in this ultimate guide to cryptoassets.
What Are Cryptoassets?
Cryptoassets are digital assets which utilize cryptography, peer to peer networking, and a public ledger to regulate the generation of new units, verify the transactions, and secure the transactions without the intervention of any middleman.
Wasn’t it a cryptocurrency and not a cryptoasset?
Yes. It all started as a cryptocurrency when bitcoin was launched in 2009. But things have moved a bit forward since then.
Cryptocurrency vs Cryptoasset
Bitcoin was launched with an objective of becoming a new type of open and publicly accessible currency that used blockchain, cryptography, and peer to peer networking and derived its value from its status as a new type of money that can be sent, received, and earned through the participation in the blockchain. Its value depended on the its demand and supply just like that of any currency in the global economy.
A crypto asset is a blanket term which isn’t limited to cryptocurrencies. It is a tokenized asset which is issued in a public ledger, that doesn’t necessarily derive its value from the chain and whose application isn’t necessarily payments. It includes cryptocurrencies, utility tokens, platform tokens, and tokenised securities.
Why The Name Cryptoassets?
An asset is anything which functions as stores of value. Cryptoassets got their name for a simple reason that they can store value and can be converted into cash as an when needed. Plus, benefits can be derived from cryptoassets by holding them or using them over a period of time.
How Cryptoassets work?
Cryptoassets are encrypted assets which use peer to peer networking and a public ledger to execute and secure the transactions.
One of the most important aspect of cryptoassets is their supply. The supply of a cryptoasset is often the determinant of its utility and value. While some have a finite total supply, many are launched with infinite total supply. But this doesn’t mean that the coin with an infinite supply will be of less value. A cryptoasset’s supply can be divided into three types:
Circulating Supply: It’s the amount of coin available at present time and circulating in the market.
Total Supply: The total supply is the amount of coin that is already in existence (whether in circulation or not)
Maximum Supply: It is maximum amount of coin that will ever exist for a particular cryptoasset.
Different cryptoassets are developed with different algorithms based on their use case. Some are launched with the maximum supply and reduce with increased usage (ripple), some are launched with a less circulating supply and are mined with every transaction to reach to the maximum supply (bitcoin), while some are launched with a total finite supply and are earned by processing every transaction (ether).
No matter what the algorithm is. The differentiating factor of every cryptoasset is the distributed ledger which stores every confirmed transaction. This public ledger is usually called a blockchain.
Types Of Cryptoassets
Currently, there are thousands of companies offering thousands of cryptoassets having varied utility. Monero is a digital decentralized currency which focuses on privacy of the parties involved. Ethereum is a decentralized blockchain based application platform that runs on smart contracts. Kodak has recently launched its cryptoasset which can be used by photographers to register their photos through blockchain. Spotify has purchased a similar technology for music licencing. Siacoin is developed with an objective of creating a network of datacenters where people can offer their unused hard drive space to become a part and earn money. Steem is a blockchain-based rewards platform which uses smart media tokens (SMT) to monetize publishers’ content and grow the community.
All these cryptoassets can’t be labelled as cryptocurrencies for a simple reason that they aren’t created with a motive of replacing money. Therefore, it is important to divide them based on the characteristics they possess.
As of March 2018, there are around 1500 cryptoassets which can be divided into 4 categories according to the technical layer, use-case, value dependency, utility, and legal status. These four types of cryptoassets are:
These are the most well-known native blockchain assets with only the basic characteristics as those of a fiat currency, but are decentralized. The only purpose of these cryptoassets is to act as money or digital currency which offer a more secure and decentralized experience to the users. Most of the modern-day cryptocurrencies are focused on providing even a faster experience than the fiat transactions.
The value of cryptocurrencies depends on:
- The total and the circulating supply
- Demand of these coins
- Rate of new coin generation
- Blockchain they’re based on
The utility of every cryptocurrency isn’t the same. Some coins like Monero with unlimited supply and more focus on privacy tend to become an alternative to fiat currency, while other native cryptocurrencies like Bitcoin with limited supply has been and will be acting as a good investment option like Gold.
Even though many cryptocurrencies aren’t backed by the government, these are backed by the peer to peer network mining powered by millions of computers, the processing power of which is six to eight times greater than top 500 supercomputers combined.
Many countries like Venezuela and Russia have even launched their own government backed cryptocurrencies to capitalize on the power of blockchain.
Examples Of Cryptocurrencies
Cryptocurrencies brought the concept of cryptoasssets to the world. Some renowned cryptocurrencies are:
- Bitcoin Cash
The second to the list of types of cryptoassets are the tokens which makes thousands of other cryptoassets possible. As the name suggests, these cryptoassets are designed to act as a platform for other decentralized projects.
Unlike the current scenario where the information is stored on servers operated from one place and controlled by a single company, these cryptoassets use the blockchain technology to build a database that is distributed among all the computers present on that blockchain. This overcomes the limitations of traditional servers as the database cannot be shut down or damaged as long as the computers are contributing to it as every transaction requires different computers to verify it to remove any inconsistency.
Cryptoassets like Ethereum adds a layer of technology called smart contracts which is a computer code that must be fulfilled to complete the transaction. This lets other cryptoassets built on such platforms to specify their own self-enforcing and self-executing smart contracts on the blockchain.
The value of these tokens increases with the increase of its usage by other cryptoassets as these are used to pay ‘gas’ to access the platform. There are a total of 46310 Erc20 Token Contracts (Ethereum smart contracts) as of writing this article. No wonder, Ethereum is the second most valuable cryptocurrency after Bitcoin.
Examples Of Platform Tokens
Platform tokens are the most reliable set of cryptoassets. Some of the examples of platform cryptoassets are:
- Ethereum Classic
- New Economy Movement
Utility tokens (also called protocol tokens) denotes decentralized services or units of decentralized services that can be bought, sold, and earned. Just like any real-life service token, these tokens can be exchanged for specific services like distributed storage, video game currency, etc. That is, these tokens are developed with a specific use case in mind and acts as an API key which is used to access a specific service.
Suppose you plan to launch a video game which will involve a use of an in-game currency. This in-game currency can be launched as a utility token to the world at the time of an ICO to raise money for the project. The investors (future users, speculators, etc.) usually tend to invest in these assets at the time of the ICO because their price is much less than it’ll be in future.
These cryptoassets are usually released before the actual project is even started or when the project is in its MVP or beta stage. Hence, their initial value is influenced by their demand in the market which is influenced by the team’s ability, PR, and progress.
Unlike cryptocurrencies, the utility of these tokens doesn’t depend directly on the blockchain (most of them are based on platforms like ERC20) and is directly derived from their use-case.
Examples Of Utility Tokens
From decentralized storage to decentralized assets to decentralized payment platforms, cryptoassets have started to disrupt every industry. Some of the examples of utility cryptoassets include:
Transactional Tokens/Payments Tokens
Financial institutions and banks are still very slow when it comes to cross-border payments. They depend on years old technology facilitated by SWIFT which involves six different parties and KYC and AML requirements.
Transactional tokens are cryptoassets launched to solve this inter-border transactional problem. One of the great examples of transactional cryptoassets is Ripple. Ripple is a global real time settlement network which connects different banks and financial institutions around the world without requiring beneficiaries or other intermediaries. It enables cross border payments within banks within seconds while providing them an end to end visibility throughout the whole process. Take it as a platform used by banks and other financial institutions to power new payment services.
Similar transactional and payment tokens are released with more focus on individuals and corporates as their target audience. Stellar uses lumens as the facilitator of transactions, IOTA uses internet of things to handle micropayments, Metalpay uses blockchain to transfer money across the world with just a phone number.
The payment cryptoassets can be further subdivided into two categories:
Blockchain Based Transactional Tokens
Blockchain based transactional tokens are the 1st and 2nd generation blockchain tokens which depend 100% on blockchain to conduct, execute, and secure the transactions.
Examples Of Blockchain Based Transactional Tokens
Unlike cryptocurrencies, many of these cryptoassets don’t violate most of the Government policies and are even looked upon as a stable investment.
Internet Of Things Based Transactional Tokens
There has to be a different category for tokens operating on internet of things as these have opened an all new spectrum of decentralized economy by focusing on machine to machine transactions and microtransactions.
How this cryptoasset is different from the ones mentioned above?
Instead of using blockchain to handle transactions, this technology uses directed acyclic graph (tangle) to handle every transaction. According to a study, there will be over 75 billion internet of things connected devices in 2025. This technology uses this internet of things to process all the transactions which has the following advantages:
- Zero transaction fee
- Possibility of microtransactions
Examples Of IOT Based Platform Tokens
The Potential Of Cryptoassets
Facebook is planning to launch its cryptoasset. Starbucks is trying to integrate cryptocurrencies for cashless transactions. Venezuela has launched its own national cryptocurrency. Kodak is coming back to photo industry with the launch of KodakCoin. Spotify bought a cryptoasset startup, Mediachain, to simplify music licencing (and avoid future penalties).
Do you see what’s going on in the world?
Bitcoin may not be the next gold but cryptoassets are definitely the future. Most of the cryptoassets we know today are still in their introductory stage. Most of them are still ideas that have a lot of potential to grow. Golem is developing a supercomputer using unused processing power of the computers of the members. IOTA plans to delve into things ranging from shoes to big machines making communication, data collection and microtransactions possible. Stellar and Ripple have revolutionised how banks conduct inter border transactions.
Will cryptoassets replace the current monetary and non-monetary system?
We don’t know. But what we know for sure is that it’ll surely become a substantial part of it. With such disruptive technology in our hands, ideas that were just dreams could become true.
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A startup consultant, a dreamer, a traveller, and a philomath. Aashish has worked with over a 100 startups and successfully helped them ideate, raise money, and succeed. When not working, he can be found hiking, camping, and stargazing.