Bitcoin is now an accepted as a store of value. Its development in 2009 provided new concepts for the digital world. These included functional and secure decentralised networks, the public block chain, digital currency and trust-less transactions. It didn’t take long after Bitcoin validated these concepts that newer block chain projects imagined them in new ways. The first was an adaptation of Bitcoin via hard fork, using a simpler hashing algorithm to validate transactions. This was Litecoin, emerging in 2011 and superior to Bitcoin in some ways.
It was the very next token, also released in 2011 that experimented with the idea of recording data in the blockchain. Although largely unsuccessful, ‘Namecoin’ was an early mover in innovative thinking now seen in large projects with significant resources. In a similar progression, Peercoin was the next coin off the ranks, introducing Proof of Stake to blockchain. After Peercoin, NEO then introduced a Byzantine Fault Tolerance consensus mechanism in 2014 offering an open-source, community driven decentralised application platform.
This type of dynamic evolution, with new features and technology added to existing structures has continued for some time with over 1600 tokens now in existence.
Of these tokens, digital asset categories mostly fall into one of the following categories.
Bitcoin: The Gold Standard
Platforms: Dynamic Application
Utility Tokens: Functionality
Stablecoins: A Connection to Traditional Finance
Bitcoin is The Gold Standard of Digital Assets
While bitcoin can take on the function of currency, the role that it has emerged with in the digital asset space is more significant and nuanced than other transaction focused cryptocurrencies.
Bitcoin is the gold standard, emerging as the digital store-of-value, first written about by Nick Szabo here. Szabo managed to successfully conceive of the properties of money, itself a feat of philosophy and then also conceived of ways in which to represent those properties digitally. Finally, Satoshi Nakamoto created an open system that this store of value could operate in. Recognising bitcoin as a category in and of itself is necessary to establish that it remains the gold standard of the digital asset space.
This is especially important, as Bitcoin is not just the standard as Bit-Gold. The role that bitcoin plays in pursuing the conceptual ideals of digital assets has laid the philosophical and technological foundation for the rest of this layered, dynamic, complex and revolutionary space.
Cryptocurrencies perform efficient transactions
Since the success of Bitcoin, cryptocurrencies have emerged that fulfil the role of performing transactions more efficiently. These cryptocurrencies have greater transaction speed at lower cost than bitcoin and have a place in the world of digital assets by achieving these. The first of these to emerge was Litecoin in 2011. Litecoin was a hard-fork of Bitcoin, meaning that it was essentially the same protocol as Bitcoin. However the big difference was a change in the hashing algorithm, making Litecoin easier to compute.
Some cryptocurrencies are Bitcoin Cash, Litecoin and Ripple.
Privacy offers freedom
Cryptocurrencies that focused on privacy began to emerge when it emerged that Bitcoin was not as private as it was originally imagined. After the hack of Mt Gox, sophisticated tracking techniques were developed that analysed the public blockchain and could link blockchain transactions to people and entities. As one of the core ideals of Bitcoin, privacy is an area where Bitcoin was lacking. Recognising this, projects began to focus on privacy as a key feature in their blockchain. The first of these was Dash, who have an optional feature that can be selected on a transaction. The most well-known and popular privacy coin is Monero. Although Monero uses a public ledger and is a decentralised cryptocurrency, the source, amount and destination of funds is hidden.
Some privacy coins include Monero, Dash, ZCash and PivX.
Platforms allow The De-Centralised Application
Digital Asset platforms can be considered the ‘smart contract’ protocols that focus on facilitating decentralised applications (dApps). Platforms are better defined as tokens or protocols rather than cryptocurrency.
Platforms create an environment for the execution of decentralised applications through their code. This code sets the parameters for the smart contract, their network that supplies the computing power and the way that the protocol is incentivised to perform computation for the decentralised application.
The full scale of possibility in decentralised applications is yet to be explored and will increase over time as the platforms are better understood, more refined and become sophisticated networks that match the platform usage.
Platforms include Ethereum, EOS, Stellar, Cardano, Algorand, Tezos and NEM.
Utility Tokens focus on functionality
Utility Tokens act as a representation of a resource that can be accessed with the token. One of the best examples of a utility token is Golem which allows access to computing power. An entity may wish to use that computing power for mining cryptocurrency, rendering complex graphics or perform exponential calculations such as multivariate analysis. The price of the token is therefore related to the resource and the demand for that resource.
Utility tokens include Golem
Stablecoins are a link to traditional finance
Stablecoins are digital representations of fiat currency and provide a link between the digital asset world and traditional finance. Although the most popular denomination is US dollars, there are also stablecoins in Euro, Japanese Yen and Yuan. Practical considerations for trading in stablecoins include the assets backing them, the type of assets backing them and the degree to which they are backed, whether they are audited or not and the exchanges that accept the specific token.
The best examples of stablecoins are Tether (USDT), USD Coin (USDC), Paxos Standard Token (PAX), Gemini Dollar (GUSD) and a unique and interesting token DAI.
DAI is unique in stablecoins for its mechanism, which uses Ethereum and MakerDao to create a price for the US dollar.
These categorisations provide a broad overview of a dynamic and complex set of ideas and concepts and are not supposed to be a limiting or exhaustive description of the possibilities of Blockchain projects. As technology, development teams working in the space and the real-world uptake increases there will be refined iterations of most of these categories, plus more as time goes on. The future of Blockchain is an exciting one!