Taxonomy of Cryptoassets: Consensus About Token Categories

Taxonomy of Cryptoassets: Consensus About Token Categories

The World of Tokens speaker series at Consensus 2018 took a number of blockchain experts and asked them to detail the current state of tokens — what is out there, and what’s emerging. In essence, to provide their own taxonomy of the emerging marketplace of blockchain tech.

Ryan Selkis of Messari kicked off the series, detailing his own taxonomy that included three main groups: cryptocurrencies, utility tokens, and cryptosecurities. His framework closely matches that used by Swiss Financial Market Supervisory Authority (FINMA), which is widely seen as being a thought leader among regulatory agencies.

Source: March 2018 FINMA Roundtable on ICOs

We’ll take a look at the view of Alex Tapscott, however. He broke down crypto a little further with seven types of tokens, or more broadly speaking “cryptoassets”.

Tapscott is the co-founder of the Blockchain Research Institute. He’s written a number of business books on digital commerce and of course blockchain. While speaking at Consensus he broke down a taxonomy of the seven types of cryptoassets currently leveraging blockchain tech. He starts off by noting that in 2016 the entire cryptoasset market had a global market capitalization less than UnderArmour — in the ballpark of $9 billion USD. Fast forward to today and that number has bloomed to a whopping $500 billion or more. Clearly the time to delineate what is what is past due because applications and many novel uses for blockchain have emerged.

Types of Cryptoassets

1. Cryptocurrency

First off is the poster child for blockchain, Bitcoin. Bitcoin fits under the umbrella of a cryptocurrency, of course, and it’s the fundamental building block to any blockchain ecosystem. But Bitcoin actually worked, and sparked a race to build more cryptocurrencies that do what Bitcoin does but with certain other features, be they anonymity, speed, throughput or whatever. Cryptocurrencies are designed to make trustless, peer-to-peer payments and there’s obviously many others besides Bitcoin these days. Their value today is relatively modest as to what Tapscott sees as their future. Also, Bitcoin’s dominance has waned considerably, formerly comprising 85% of the market, now less than 40%.

2. Platforms

Then we have platforms, which are essentially business logic, with smart contracts to ensure agreement. The best example here is Ethereum, what Tapscott calls “the investment bank of the cryptocurrency world” given its prevalence as people build on top of it. In fact, he points out that in 2016 about $165 million was raised by ICOs, in 2017 that was $6.5 BILLION, and in the first quarter of 2018 alone, it’s 7 or 8 billion dollars. Most of these are done on the Ethereum platform, although it’s not the only one. A number of third-generation blockchain protocols have emerged, and it is likely to diminish somewhat over time.. But a lot of fundraising is built on ERC-20, even if the end results are built on other platforms. Tapscott notes that Ethereum may not be the “internet of the future,” but the fact that it’s the de facto financing platform means a huge amount of value is coursing through its veins. These platforms, in time, could take over the traditional financial services industry as they grow.

3. Utility Tokens

These are tokens that “do something” hence the term utility. Tapscott notes that a few companies were busy trying to reverse engineer their tokens to have a utility, when they should have actually been a security token (his next list item), because they were trying to raise money. Utility tokens are intrinsically useful, however. In the case of Filecoin, it’s secure digital file storage. Augur is another example. Built on Ethereum, Augur allows you to create a prediction market. It’s open-source and uses real world data with token holders making corrections and potentially receiving a benefit for doing so. Betfair and PredictIt are very similar utility tokens. In any event it’s likely that token holders are the governors of these systems, and although they aren’t securities, they’ve attracted the attention of regulators due to the sheer number of dollars involved.

4. Security Tokens

There’s no physical asset to back security tokens, not a barrel of oil, or ship full of grain. They’re just contracts. Security tokens are much like stocks or bonds, a contract that stipulates their value and your benefit. Business logic in contract form can be tokenized. The equity market is a good target, says Tapscott, given the trillions invested. Compared to other asset classes — like the equity market — these tokens still a very small slice of the pie. He also says that stocks could eventually go peer-to-peer, which is an interesting concept, but makes a lot of sense. For more context, read The Blocks of a Security Token Platform.

Source: Alex Tapscott presentation

5. Natural Asset Tokens

These are an interesting group as the tokens are backed by something physical, like oil or gold or base metals. There are also experiments like air, carbon, or water. One natural asset token is the EARTH token, which was launched by a carbon mitigation company and aims to decentralize the marketplace for the trade of natural assets. These can play a part in the supply chain or in business logic, but what Tapscott finds interesting are new markets opening up because of the tech in blockchain itself. Carbon is a good example, as there’s no internationally recognized “carbon market” to speak of, and as people like Ryan Zurrer have pointed out, the carbon offset markets suffer from fragmentation. Tokens would provide a mechanism for standardization and accountability on a global scale.

6. Crypto-Collectibles

Of course, CryptoKitties is about as recognizable as Bitcoin at this point. These are typified by having uniqueness, and non-fungible items could prove to be a big deal in the future, says Tapscott. What’s central to this tech is the uniqueness, the ability to watermark something to prove its uniqueness. With a collectible, the key is that ability to authenticate. This also avoids the double spending problem. Tapscott envisions even more opportunities as celebrities or other “unique item” markets develop.

7. Crytpo-Fiat Currencies and Stable Coins

Stablecoins often have an implied pre-money valuation. But Tapscott asks, as a medium of exchange, why trust stablecoins over Bitcoin or something else more established to make payments?

Crypto-fiat is more interesting to Tapscott. Venezuela is perhaps one notorious example, with the Petro. There’s no real way to know if it’s truly backed by the oil the country says, as the government has become an international pariah. However, the pariahs of the world appear to be driving the development in this space. Why? Since 1947 in order to clear and settle transactions you wound up eventually going through U.S. dollars. But now Iran, Russia, Venezuela are looking at another currency “rail” to move payments for assets through — that’s compelling. It may also be why there’s some recalcitrance by other governments to give more credence to crypto-fiat tokens. But Tapscott argues it should be a rallying cry for other governments to listen and start taking crypto seriously.

On Regulation

During part of his talk, Tapscott mentioned that he speaks to regulators quite often and welcomes some oversight. Until the crypto market started dealing in billions of dollars of valuation, the industry wasn’t really worth the time for regulators. Now? Increasingly they are beginning to take notice. And this is something he welcomes, for it increases the legitimacy of the industry and prevents things like fraud and abuse. But he notes a risk of regulating too much and too soon. It’s something everyone in the industry will be keeping an eye on.