From service tokens to platforms

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What are crypto assets

There are many different classifications of crypto assets. Investment tokens (security tokens), service tokens (utility tokens), cryptocurrencies, exchanges, application tokens and altcoins are all shortcuts by which people try to divide assets into categories, united by some common properties.

Some of these experts, such as Tom Lee of Fundstrat Global Advisors, define categories based on how these assets are traded — based on market sectors. Lee identifies the following sectors:

  • Crypto products,
  • Platforms
  • Confidential Tokens
  • Exchange
  • Stable cryptocurrencies.

This classification is based on the fact that assets belonging to each of these groups are traded in a similar way, and taking into account their common properties, trading models can be built. Division into sectors is very important, but, in my opinion, a higher level of abstraction is needed here. These are crypto asset classes.

Crypto products, platforms and stable cryptocurrencies belong to a different type of asset than confidential tokens and exchanges, and I insist on separating the former from the latter. So we will have both asset classes and sectors, as in traditional financial markets. Other experts, for example, the main partners from Multicoin Capital, break down crypto assets into three main categories:

  • Currencies (capital storage facilities),
  • Investment tokens (tokens backed by real assets),
  • Service tokens.

The advantage of this classification is that, according to experts, each of the categories has its own special assessment model. They outline the cryptocurrency and service token valuation models. At the same time, they do not distinguish between platform tokens and cryptocurrencies, since they believe that platform tokens will also be used as a means of storing capital.

Some names have remained from the old days, and now they are, in fact, useless. An example of such a use is the word altcoin. It is not very clear what exactly this term means and whether it refers to all cryptocurrencies except bitcoin and ether.

This is a very large category of assets, from which there is little practical benefit. I suggest taking crypto assets a little differently. It seems reasonable to divide them into mutually exclusive categories according to some logical principles. In my understanding, there should be eight such categories:

  1. Basic
  2. Cryptocurrencies
  3. Platforms
  4. Service tokens,
  5. Investment tokens,
  6. Crypto products,
  7. Application Tokens
  8. Stable cryptocurrencies.

Assets combined in each of these categories will have common properties. They have similar functions, and they will respond equally to the market situation. They will have similar assessment models, somehow compete and cooperate with each other, be subject to the same regulatory risk, and generally form a single cluster within the general class of crypto assets.

From a fundamental point of view, I approach the classification of crypto assets as an investor. I want to have an asset allocation strategy, and so that I have the opportunity to open many positions for the best tokens, which, in my opinion, will bring me maximum profit in this particular class of crypto assets. I want to be able to calculate profit specifically for assets of a particular category. I don’t want cryptocurrencies, service tokens, platforms and application tokens mixed among themselves within a common asset class, because in this case I will not be able to make point investments in this market. Asset classes may have common valuation models, but different goals and functions. From the perspective of an investor, it seems logical to create 7-12 mutually exclusive understandable categories that will fully cover the entire wide range of crypto assets.

Basic

There are only two basic crypto assets – Bitcoin (Bitcoin) and ether (ETH / USD). I exclude ether from the platform category because it has special properties. In the end, for the purchase of certain cryptocurrencies or tokens, investors must convert their fiat money either into bitcoins or to the air. Although there are many differences between bitcoin and ether, they occupy a special position in the market, which no other crypto assets have.

Both are mined and have a clear monetary policy. Many experts say that bitcoin is a special class of assets, since it is a deflationary cryptocurrency with limited emissions. The Ethereum network is a platform with a different supply and demand mechanism. However, while these two crypto assets occupy the current special position in the market, I am inclined to combine them into a general category. Let’s draw an analogy from the world of finance.

The entire current global asset structure is based on gold. Monetary policy of the state depends on the amount of gold. Previously, it was the gold reserves that depended on how much money a particular country printed. Currencies allow you to set commodity prices and create fixed income bonds that make it possible to profit from capital in the financial market.

Stocks appear, representing shares in capital after determining the value of resources (commodities) and calculating interest rates and risk. Although gold is considered a raw material (for legal and other reasons), it is perceived both as a commodity and as a currency.

It has special properties that allow investors and fund managers to separate it into a separate category. I agree with it. The same applies to basic crypto assets.

Cryptocurrencies

The main function of cryptocurrencies is to be a digital payment medium. The fundamental question that needs to be answered in order to decide whether a token is cryptocurrency or not is: “Does it primarily serve as a means of exchanging or storing capital?” In other words, is it a full-fledged digital currency substitute.

Although each cryptocurrency, to varying degrees, performs these functions, this should be their main purpose. Assets grouped into the cryptocurrency category are exposed to a common regulatory risk, unlike other asset classes, for example, service tokens.

The value of a cryptocurrency is defined in the same way as the value of an ordinary currency. The exchange equation M x V \u003d P x Q is applicable to them. The cryptocurrency valuation model is fundamentally based on unit cost and, more importantly, on the velocity of money. If money inside the system circulates quickly, the value of this monetary system rises. All cryptocurrencies strive primarily to be a means of payment.

They are logically combined into a common subclass of assets, and there is no intermediate layer between them and the common class of crypto assets. Therefore, cryptocurrencies represent a separate category of crypto assets.

Platforms

Platforms are one of the most interesting representatives of the world of cryptocurrencies, since it is they who implement smart contracts and program money. If a certain blockchain in one form or another provides for working with smart contracts, then it is most likely a platform. In the future, software for legal and financial contracts will change the form and specificity of the global economy.

Fundamental shifts are already taking place in the field of accumulation, transfer and storage of value. To understand the range of opportunities that are opening up, let’s imagine a picture of the future in 10 years. All corporations will use smart contracts. Management, voting, supply chains and contract execution will change fundamentally. It will become possible to programmatically store and transfer value based on previously agreed conditions.

The whole world will benefit from the transparency and predictability of digital contracts. We will be able to trust digital voting, knowing that its results cannot be rigged. Land disputes will cease to exist. Platforms provide some of the main components of the blockchain, such as immutability and decentralization. At the same time, they significantly differ from cryptocurrencies in their stated goals and functions.

Their regulatory risk is not like the risks of other asset classes. Platforms are closer to legal contracts than the currency in the analog paradigm. Their assessment is mainly based on network effects. In turn, cryptocurrencies are valued by the speed of money turnover and the equation of exchange. Platforms significantly differ from other types of cryptocurrency assets and are an independent and independent asset class.

Service Tokens

Service tokens are primarily intended for practical use. They perform a specific function in the platform. Based on their protocol, developers can create useful and convenient applications. The service token pricing model is based on network effects;

Supply / demand has some influence on it. Typically, such tokens work on a third-party blockchain. The most popular basis for utilitarian tokens is Ethereum. They differ from platforms in that they depend on the selected blockchain and do not provide low-level access to it.

In addition, unlike application tokens, they are not limited to one program or service. Currently, service tokens are associated with one blockchain on which they were issued, however in the future they will be able to work in various networks and with different applications.

Investment Tokens

These tokens differ from other types of crypto assets in their functional nature, purpose and regulatory risk. Their value depends on their relationship with external assets and, most likely, they are subject to securities laws.

The cost of such tokens depends entirely on the potential of their underlying assets. In the future, the role of investment tokens will grow. According to forecasts, in the next 12 months, companies will appear that issue shares exclusively in the form of tokens traded on cryptocurrency exchanges. In addition, tokens secured by real estate will appear.

Investment tokens are distinguished from other types of crypto assets by their close relationship with an external, material asset.

Crypto products

Crypto products act as a direct consumed resource. They differ from platforms in vertical / industry orientation and allow the owner to manage a certain amount of resources. These resources can be disk space, computing power, etc.

Crypto products differ from service tokens by an assessment, which depends on the demand and supply of a particular resource. In addition, they use their own blockchain. The dynamics of supply and demand for the underlying asset has a significant impact on the price of commodity tokens. As a result, their prices are characterized by increased volatility.

At the same time, regulatory risks are lower due to attachment to a specific product. The evaluation model includes network effects and differs from the models used to evaluate cryptocurrencies and platforms.

Application tokens

Application tokens (appcoins) are used in one specific network and are designed for the application to work. They differ from crypto products in that their offer is not limited. They differ from platforms in vertical orientation and work in only one application. Application tokens do not have their own platform or protocol for third-party developers.

Their goal is functionality and concentration on a narrow ecosystem. Application tokens are based on the “many owners – one application” model; in turn, service tokens belong to the “many owners – many applications” model.

In this sense, appcoins have the most limited range of applications and depend entirely on the popularity of the application or service. As a result, their assessment model differs significantly from other classes of crypto assets.

Stable cryptocurrencies

Stable cryptocurrencies (stablecoins) act as a stable store of value. Currently, the most prominent representative of this asset class is Tether. However, the situation will change in the future. Several projects are actively developing their own stable coins. This is a new and growing type of cryptocurrency deserving of separation into a separate asset class due to its special goals and functional nature.

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