What are Digital Assets?

Digital assets are digital representations of value facilitated by cryptography and distributed ledger technology.  They have their own units of account and can be transferred P2P without intermediaries.

 

Blockchains are either designed to be a P2P payment system or a P2P computing system.  

Blockchains that are dedicated to being a P2P payment system are Bitcoin, Monero, XRP, and Litecoin.  Blockchains such as Ethereum, EOS, NEO, Cardano are P2P computing systems where new digital assets such as other cryptocurrencies or tokens can be built on top of these platforms.

 

Digital assets is a continuously evolving space, but it is easiest to understand it by categorizing them into cryptocurrency, crypto-commodities, and tokens.  

CRYPTOCURRENCY

Just like any other fiat currency, cryptocurrencies or crypto coins are digital currency or electronic money.  They are digital assets that use cryptographic principles in their operation and can serve as a means of exchange, store of value, and unit of account.  The value of currency tokens is tied to the broad base of individuals using it as a form of payment and the number of transactions taking place

 

The money that we use in our day-to-day activities to purchase goods and services such as the US Dollar, British Pound, Eurozone Euro, or Australian Dollar are fiat currencies that are issued by their respective governments.  The supply and value of these fiat currencies are heavily influenced by the decisions made by the central banks of these respective countries/regions (i.e., The Federal Reserve System [FED], Bank of England [BoE], European Central Bank [ECB], Reserve Bank of Australia [RBA]).   It can be argued that the value of a fiat currency is based on the trust that users’ of that currency have in the government and central bank that issues and manages the money supply of that currency.  

 

Bitcoin is the most popular and the first cryptocurrency or coin.

CRYPTOCOMMODITIES

Cryptocommodities use cryptographic principles on a platform that allow for the creation of new independent digital assets that can have a completely different unique set of goals.  For example, iron ore is a commodity that can be used to create steel that is used to make buildings, cars, ships, jewellery etc.

 

The most popular and first crypto-commodity was Ether on the Ethereum blockchain.  The Ethereum blockchain is a distributed computing platform that allows for the creation of decentralized applications known as dApps that are based upon smart contracts.  For any operations on the Ethereum network such as the creation and execution of smart contracts and transactions, Ether must be used.

TOKENS

Tokens are blockchain-based digital assets and are a unit of value that is being issued by a company.  They are programmable assets that are managed via smart contracts and an underlying distributed ledger (i.e., blockchain).  Companies create tokens and sell them to raise capital. There are four types of tokens, namely security, utility, governance tokens

1. SECURITY TOKENS

Security tokens are created as investments.  Security tokens share profits, pay interest or dividends to generate profits for token holders.  Some security tokens provide tokens holders with ownership of the company issuing the security tokens.  Security tokens that provide holders with some ownership may allow them to participate in a voting system that allows them to exercise some control over the company’s decision-making process.  Thus, security tokens are analogous to holding shares in a company if you are receiving both dividends and voting rights.  Security tokens can increase in value, and can be sold for cryptocurrency or cash.  Security tokens are subject to federal regulations and securities laws.

An example of a security token is Orbyt. Orbyt token holders complete a KYC (i.e., Know-Your-Client) process and hold more than 100 Orbyt tokens receive a Bitcoin dividend based on 20% of the BitOrb’sprofits.  However, the Orbyt token does not provide token holders with ownership of BitOrb or any voting rights in BitOrb’s decision-making process.

2. UTILITY TOKENS

Utility tokens are not created as investments.  They are also known as user tokens or app coins.   Companies can issue utility tokens to raise capital; however, utility token holders can only use the utility tokens sold by the company as a means of payment for use on the product or service that is being developed by the issuing company.  Intuitively, utility tokens can be perceived as a form of a digital coupon that can be redeemed in the future for discounted fees or special access to a product or service developed by the issuing company.  Therefore, use of a utility token is limited and they need to be sold for crypto-coin or fiat money to buy products & services from other companies.

An example of a utility token is Filecoin. Filecoin raised $257 million by selling tokens. Filecoin token holders will be granted access via these tokens to a decentralized cloud storage platform.

3. GOVERNANCE TOKENS

Governance tokens are not created as investments.  They allow holders to vote and influence decisions regarding the blockchain protocols, product or feature road maps or any changes to governance parameters. They are valuable for individuals who want to have a say in how the blockchain protocol is being governed. 

A popular governance token is MKR.   MKR allows token holders to vote on changes to the Maker Protocol and monetary policy tools such as a Stability Fee, the Dai Savings Rate, Debt Ceilings and more.  Voting can be used to make decisions on non-technical aspects of the protocol such as asset priority lists, governance processes, role mandates, and elections to fill certain roles.

An Honorary Senior Fellow at the University of Queensland with professional experience as a quantitative researcher for BlackRock and Bank of America Merrill Lynch in New York, USA. He led research teams in the development of capital models, securitized products and factor models in both equities and fixed income asset classes. Rand has several academic publications in cryptocurrency, portfolio management, systemic risk & quantitative trading

CONTINUE YOUR LEARNING

Previous
Next