Bitcoin Ecosystem Spectrum: How To Classify Cryptocurrencies According To Function


It is not easy to classify cryptocurrencies. There are many different coins in the market and with many different functions that makes it difficult for analysts to create a proper classification.

However, the crypto analyst, David Hoffman, was able to clarify several questions on the matter.

The first thing he mentions is that governments are also struggling to define what cryptocurrencies actually are. They do lack a general consensus about how to deal with these new assets. For example, Bitcoin (BTC) and Ethereum (ETH) are not securities but is XRP one? Are ICO tokens securities? Perhaps, they are properties, commodities or currencies.

However, one of the countries that seems to have a clear definition for virtual currencies is Switzerland. And indeed, the country has established itself as a major player in terms of regulations in Europe and around the world. There are several companies operating in the nation that have settled their headquarters in Zug or Zürich.

The country has created three different categories for cryptocurrencies:

  1. Payment tokens: these tokens are synonymous to cryptocurrencies and do not have other functions related to another development project. They could be accepted as a means of payment for goods and services.
  2. Utility tokens: these tokens allow users to have access to an application or service.
  3. Asset tokens: these tokens represent assets that are related to a company. Tokens with this characteristic are analogous to equities, bonds or derivatives. In this case, crypto tokens can represent ownership of stake in a decentralized organization.

    According to Hoffman, cryptocurrencies are called Coins, not okens. Some of the currencies that are now available in the market are Bitcoin (BTC), Litecoin (LTC), Nano, Verctoin (VTC) or Dogecoin (DOGE).

These currencies try to represent money. They can work as a store of value, unit of account or a medium of exchange.

In this category we can mention XLM and XRP. XLM and XRP are very fast and cheap virtual currencies. These two currencies can work in order to solve some issues related to trading volume and liquidity. For example, if an Argentine Bank wants to send money to Vietnam, there might not be enough trading volume between the Argentine peso (ARS) and the Vietnamese dong (VND). These two virtual currencies could solve this issue by working as intermediaries. XRP and XLM provide utility for routeing value between two or more currencies.

There are two important currencies in this category. We can mention Monero (XMR) and Z-Cash (ZEC). Monero can be used to hide all the information about how much money the user is transacting. It is difficult to trace and the information about the wallets is not available. Monero is currently the most valuable privacy coin in the market. The same level of privacy can be achieved with other privacy coins in the market.

In this case, Hoffman is able to describe DASH as the only currency that represents some kind of asset. This cryptocurrency is a hybrid between Proof-of-Work (PoW) and Proof-of-Stake (PoS) systems. Users with more than 1,000 DASH can stake their DASH and become a masternode, allowing them to vote for the DASH Decentralized Autonomous Organization (DAO).

10% of the fees paid while transacting DASH goes to a community fund that is used to promote the DASH currency. DASH gets paid to people who are working to increase the value of this currency.

This is the second category that David Hoffman described. These are tradeable tokens that allow users to gain access to a specific service, which can be centralized or decentralized.

An example of a utility toke is the Basic Attention Token (BAT). It is used to gain access to the attention of millions of people around the world that have ads enabled on the Brave Browser. With this currency companies do not need to pay Google to display the ads, instead, they can pay users directly.

Golem (GNT) is another token that allows users to gain access to a decentralized cloud storage for file hosting needs.

There are different utility tokens in the market and all of them provide access to different platforms and services.

This is the last category mentioned. These tokens represent property. However, the term is very weak since it is possible to own something with a serial number, a barcode or anything that has a signature on it. This includes shares in a company or securities.

There are several virtual currencies that could be deemed as securities in the top of CoinMarketCap. We are talking about an investment of money in an enterprise with the expectation of profits from the efforts of this company.

“This classification tokens is important for investor education, as they all represent different kinds of decentralized property, and come in as many different types as real world property,”

explains Hoffman.

There are some tokens that have different qualities and characteristics. Hoffman decided to select some cryptocurrencies that have a fixed supply and enable access to revenue generated by the platform.

The first one is OmiseGo (OMG). OmiseGO is a PoS exchange in which nodes have to stake OMG tokens to validate transactions that occur in the network. Users that stake their OMG tokens receive a dividend at the end of each of the staking periods. The value of he token enables access to he revenue that is created by the fees paid by the users. That being said, the value of the token should represent, in some way, the potential revenue generated by the OmiseGo exchange.

Augur (REP) is another token that allows users to earn a small dividend. The Augur platform is a decentralized prediction market where users can gamble Ether about future events. After the event, REP token holders stake their tokens to the correct outcome of the event. Users get paid a dividend of the Ether that they gambled.

0x (ZRX) is a project that aims to become a decentralized protocol to exchange tokens based on the Ethereum blockchain. ZRX token holder receive transaction fees every time they execute a trade. Holding the ZRX token and relaying messages, it is possible to have a revenue that is create by the decentralized exchange network created by 0x.

MakerDAO (MKR) is the project behind the so called DAI stablecoin. The system uses two different tokens and collateralized loans. The DAI stablecoin is stable because it offloads the volatility to a dynamic system of over-collateralized loans. Holders of MKR are lenders-of-last resort and provide value to the DAI token. MRK token holders gain value each time a loan in DAI is repaid. A loan fee is collected, burning a small amount of MKR. In this way, the MKR price goes up in value due to the reduced supply.

Binance Coin (BNB) is the token created by the famous cryptocurrency exchange Binance. It offers different trading pairs with BNB and users can get reduced fees by using this token. Binanace uses its revenue to purchase BNB tokens and burning them, decreasing the token supply. This works in a similar way as when a company buys its own stock back.

Binance is a currency and an asset, since it is used as an internal currency in the platform and allows users to gain access to the revenue generated by Binance.

Hoffman decided to add Ethereum and EOS as unique cases since they have balanced measures of three different characteristics.

The first thing that he says is that Ether is a currency. It is a decentralized ecosystem which is robust. Moreover, ETH tokens have been used not just as gas for the decentralized platform, but also it works as a trading pair in many different exchanges.

However, he mentions that Ether is a utility, since it unlocks and pays for access to a network with many different decentralized services. Moreover, Ether is an asset since staking 32 ETH allows users to receive an interest between 3% and 6%.

EOS has also three different qualities, however, EOS is not a real currency and does not need to be transacted, according to Hoffman. It works as a utility but for those that host dApps. Users do not need to use the EOS currency.

Moreover, it is an asset because it represents ownership of a certain percentage of network. But EOS ownership is separated into 2 different categories, Block Producers and Token Holders.

He then mentions that there are Non-Fungible tokens which are comparable to things with unique and unreplicatable properties. These can be things with serial numbers on them, trading cards or many other things. One of the best example is CryptoKitties.

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