Today’s post is on the different types of Crypto Assets.
Given that cryptocurrency terminology can get intimidating sometimes, we prepared this post to help all of us navigate our cryptocurrency journey better. Enjoy!
A coin is a kind of crypto asset which operates independently of any other platform.
This implies that a coin has its own platform, for instance the platform of Bitcoin is blockchain. There is no difference whatsoever between a coin and a cryptocoin/altcoin, a coin is used as an abbreviation of cryptocoin.
Altcoins are the coins which serve as an alternative to Bitcoin. Most of the altcoins are variants of Bitcoin and are built with the aid of Bitcoin’s open sourced, original platform by making changes to the underlying codes. This results in the creation of a brand new coin which has different features.
Tokens are mainly used for the representation of a particular asset or utility which usually resides on top of another blockchain.
Any assets which are fungible and tradable can be represented by a token and they include commodities, loyalty points as well as crypto assets. The term “fungible” means that every unit of commodity/good is uniform, interchangeable, and substitutable like cash for cash, corn for corn, and gold for gold.
Tokens provide a way by which you can define a protocol and also find the required operating expenses to host it as a service.
Ethereum and Bitcoin have tens of thousands of servers around the world which run their network. They are referred to as “miners”. Miners cover the cost of hosting with the aid of built-in mechanisms which automatically distribute token rewards to computers on the network (“mining rewards”).
Tokens likewise provide a model by which shared computer resources can be created while ensuring the resources are decentralized without requiring an organisation to maintain them. This is the blockchain technology which allows shared data to be stored on a decentralized network.
The two terms are used for the description of the value of blockchain. Their usage as well as meaning overlap considerably.
A crypto coin can be referred to as a coin or a means of payment while a token has a broader functionality.
The main purpose of a coin is to act as money, a unit of account, store of value and medium of transfer. The coins tend to take the form of native blockchain tokens such as bitcoin (BTC), Litecoin (LTC), etc.
Ethereum can also be considered as a coin and its main purpose is to act as a form of money, store of value and also enable business to account and pay for services. They are also created as ERC20 tokens so as to make things convenience.
The blockchain token likewise have value but they cannot be considered as money the same way as a coin. Tokens are generally hosted on another blockchain, such as Ethereum or Waves2.0. These protocol would allow the users to create tokens using the core coin.
Tokens likewise offer functionality over and above that of digital cash. They may deliver value to the investors beyond speculative returns; this is one of the purpose of ChronoBank’s TIME token.
There are several ways through which this can occur but mostly value is created via buybacks. They may be used to hold votes by the community on key business decisions or even technical changes to the platforms.
In practice there is no sharp line between a token and coin. Both of them are used to transfer value and as a means of payment, just like the USD and other shares are used to reward people for the work done.
It is also possible to host coins as tokens on 2.0 platforms, just like LH on Ethereum. And the main purpose of the coin is to go beyond simple payments.
For instance, Crown (CRW) makes use of 10,000 coins which are locked in ‘Trons’ (masternodes) as a type of electoral college for governance votes.
Any currency that does not have a physical representation and resides on a set of computer system is called a digital currency. These currencies have been in existence for a long period of time and are used for making purchases.
Here are some examples of crypto assets which function on the blockchain platform.
This is the first second generation open source project which expands the applications of blockchain technology.
One of the outstanding features of Ethereum is that it includes smart contracts. Smart contracts are the contracts which have been pre-programmed with a set of definitive rules as well as regulations that are self-executing, without requiring any intermediaries. This is currently the most popular blockchain protocol to build on as well as issue their native tokens, with more than 1,500 projects currently residing on its blockchain.
However, one of the challenges ethereum is facing is scalability. There are pursuits of the appropriate solution so as to ease the issue, some of the most prominent solutions include Plasma, Raiden Network as well as Sharding.
This is a blockchain platform which is mostly seen as the ‘Chinese Ethereum’. Neo has the aim of developing more extensive functionalities for the development of DApps and smart contracts.
When compared to Ethereum, Neo has a different consensus mechanism, smart contract gas system, governance model as well as a different approach towards the adoption in the real world. Currently, there are only 9 nodes each which are being run by a company selected by the NEO council.
NEO seems to be relatively centralized but they are working towards decentralization in the future.
Zilliqa is a high-throughput blockchain which is developing a new approach of sharding so as to solve the main issue of scalability in the blockchain space. The company is founded in Singapore.
Ziliqa’s blockchain has been able to process 2,400 transactions per second (TPS). It is also looking for how it can be increased to more than 10,000 TPS very soon.
Ziliqa is linearly scalable with the number of nodes. That implies that a higher number of nodes will make the network get faster. In addition, they are looking for ways to integrate privacy features to their blockchain.
DApps is pronounced in the same way that Email is and the ‘D’ stands for decentralized.
To be classified as DApps, it is crucial for an application to meet the following criteria:
DApps functions by implementing the entire criteria in the above. This implies that DApp is an open source software platform which is implemented on decentralized blockchains and is fuelled with the aid of tokens which are generated using a protocol.
Being an open-source makes it easy for anyone to see and also contribute to the code. This likewise fastens the process for scalability of product development in terms of quantity and quality.
One example of a DApp is Kin.
Kin is one of the first bi-directional migrations, and the transaction of Kin will now take place side-by-side on both the Stellar and Etherum blockchain. This is a great move because it will help to enhance the speed while continuing to provide liquidity.
The goal of Kin is to create digital sharing economy where everyone is fairly compensated for the unique value which they contribute. While Ethereum provides an immediate liquidity for Kin holders, it’s not yet ready for mainstream consumer usage.
The creation of a bi-directional blockchain with Stellar Lumens will drive mass adoption of Kin by ensuring the provision of faster confirmation time, low transaction fees as well as scalability which is required in the ecosystem.
The ERC-20 is referred to as the list of rules for all Ethereum tokens to follow. This implies that this particular token empowers developers of all types to accurately predict how new tokens will function within a larger Ethereum ecosystem.
Because of the ERC20-protocol, projects do not need to be redone each time a token is released. This is because the ERC20 protocol is designed to be compatible with the new tokens, provided those tokens adhere to the rules. Thus, there is a need for developers of new tokens to be compliant with the ERC-20 rules.
ERC-20 likewise defines six different functions for the benefit of other tokens within the Ethereum system. These are generally the basic functionality issues, including how tokens are transferred and how the users can access data about a token. ERC-20 likewise prescribes two different signals which are taken by each token on and which other tokens are attuned to. In general, these functionalities ensure the Ethereum tokens of various kinds will work in the same way within the Ethereum system.
This also means that the entire wallet which supports the ether currency will support ERC-20 compliant tokens.
The initial coin offering (ICO) is an innovative approach which allows startups to bypass traditional early seed investment.
However, there are variations between the ICOs. The investors usually struggle to discern the category which an ICO token falls into, which is why we have provided an in-depth research so that investors can make an informed financial decision.
The major categories of crypto tokens are discussed below:
This is one of the most promising applications of Ethereum-based smart contracts. Equity tokens provide the potential for startups to issue stock or equity tokens via initial coin offerings.
This will provide benefits to startups because the point of entry into the financial market will be lower than in the past. This will also make the average investor access stock and allow the shareholders to take an active role in corporate governance due to the fact that voting can be conducted transparently via blockchain.
Due to the current lack of regulatory guidance, there has been an attempt by few startups to conduct equity sales. However, Delaware has recently passed a bill which allows companies to maintain a list of shareholders’ names on a blockchain instead of using the conventional methods. Therefore, blockchain-based stock trading is enabled.
This implies that it would only take some time before equity tokens take a central role in the crypto finance industry.
A security is a broad classification which refers to any form of tradable asset.
The investors have access to a wide variety of security tokens through the ICO, and this range from coins redeemable for precious metals to tokens which are backed by real estate.
In the United States, the sales of token as well as investments are subject to the SEC securities regulations. Usually, most people use the “Howey Test” to see if a token is classified as a security token. The essence of Howey test is to test the presence of speculative activities.
According to Investopedia, the Howey Test determines that a token is a security token if “a person invests his money in the token and is led to expect profits solely from the efforts of the promoter or a third party”.
Utility tokens can also be referred to as app tokens or app coins and they provide the users with an access to a service or product.
Most tokens may be regarded as securities they include a speculative element. However, if a token does not meet the requirements of the Howey test, it may fall under the classification of a “utility token”.
For instance, Filecoin raised an ICO record of $257 million plan to provide a decentralized cloud storage service which will take advantage of unused computer hard drive space. Consumers who bought filecoin can then use it for buying storage space.
Because there is a fixed supply, utility tokens may appreciate over a given duration if there is an increase in the demand for the service or product. However, investors should be wary of startups which describe their token as utility or app coin but likewise market it as an investment because there is likelihood that regulations will consider such asset a security.
It is essential to note that utility token is an organisational distinction and not a legal one. This is because the SEC has not given any official guidance on utility tokens, so there is no certainty whether they are subject to security regulation or not.
The term “community token” is a relatively new term in the blockchain world.
This term implies that value is driven by the network and the community. There is a new innovative concept on “minimum viable community” (as opposed to the regular startup term of “minimum viable product”).
If you are interested in this topic, please feel free to read the following whitepaper on community tokens.
As seen from the above article, there are many types of crypto assets. Learning how to discern the nuances is key to the investment, purchase and usage of crypto assets.
We hope you have enjoyed today’s post on the different types of crypto assets! We would love to hear from you, feel free to leave a comment or share this post!