Calling all digital tokens cryptocurrencies without any distinction is like calling the U.S. dollar, Monopoly bills, redemption tokens from the local arcade, and a coupon for a free soda nothing but “cash.” While they all are used for purchasing or redemption of goods or services, inherent nuances restrict what you can do, how you can do it, and where each is accepted.
We see the same thing occurring the currency cryptocurrency craze, where little distinction is made. Sometimes it comes from excitement, while other times it stems from a desire to hide the truth or the risks associated with new coins.
To evaluate ICOs and cryptocurrencies, we think there is a need for a classification system of sorts.
While this post isn’t the entirety of what a classification system would require, we invite you to use it to develop your own understanding of the space and build out a comparison tool specific to your objectives, such as investment or determining vendors and partners.
Understanding Token Nomenclature
The first thing that we need to do is determine that a blockchain or cryptocurrency is used for business processes and not just buzz. We’ve seen some companies increase in value significantly just by renaming themselves with blockchain in mind, even when they had no published blockchain efforts.
So, when you’re starting to look at different ICOs and projects, seek out a firmly grounded business objective and use for the innovative technology.
You might see a variety of terms and names as you start to dig through the myriad of products, services, tokens, and other blockchain developments. Some denote a technical differentiation while others may simply be a way for a company to create buzz.
Here are some common names that provide a definable distinction among cryptocurrency options.
Some tokens are tied to a specific asset or product — the rise of digital games now makes this common for both physical and digital items. They can represent ownership of an asset or specific access to it; like owning a piece of gold or having a timeshare for the weekend.
These tokens may be difficult to assess because their value is completely linked to the value of the asset. Your car may have depreciated in value over the past year, so ownership/access tokens for that car would depreciate too.
Some popular tokens are associated with collectible items. You may have heard of the CryptoKitties game where you can breed, buy, or sell digital cats for cryptocurrencies.
Many new ICOs have the look and feel of investment vehicles, so their coinage operates as an equity token. Think of this token as akin to stock or equity, where you’re looking to purchase a portion of the company’s future revenue.
Equity tokens are ownership in the platform itself, so you’ll share some of the profit of that platform. One important thing to review in these relationships and purchases is how the revenue/profit-sharing is identified and reported.
Tokens are standardized so that they always represent a certain percentage of the revenue and the accounting for such elements needs to be done by an entity within the company or by a depository. Some tokens have access to only a portion of a company’s revenue, typically when it has multiple business units or offers a variety of services tangential to the token-funded operations.
Your utility company doesn’t own energy as much as it owns the means to get that energy to you. Utility tokens are similar in that they are a purchase tied to an object’s use — like the power lines running down your street. Utility tokens aim to make it easier to use an object.
Ethereum is a top example because it lets you develop smart contracts on top of the platform that its Ether coins create, enabling developers to power their decentralized applications. Other utility tokens allow you to access decentralized storage or processing power, making it easier for a developer to run an application or store relevant data as needed.
Some tokens are backed by a specific asset or commodity to tie their value to the value of that asset. It differs from an asset token because it does not represent ownership of the asset, but merely has an asset set aside to determine the tokens’ value.
For example, Tether is a currency that is backed by one dollar per token issued. In theory, that would mean a token’s value could never go below the value of one dollar. The system holds its dollars in reserve so that it can, in theory, support all demands as needed. Trust issues, such as the theft of tokens valued at $31 million in Nov. 2017, could impact overall value, however.
Some tokens are used more to facilitate transactions and secure payments across borders, making them operate more like an immediate currency than an investment vehicle. These digital currencies allow people to buy and sell goods or services without traditional limitations and sometimes avoiding international transaction fees.
Think of it as a modern wire transfer service. Benefits of such currencies are that you purchase them only as needed and the value remains constant, so two individuals who buy and receive these coins are getting the same total value even if they purchase with one currency and then withdrawal the funds by transferring it into another currency.
Some digital currencies only can be purchased and used immediately, while you can hold others as their value changes.
Platform currencies are digital tokens that have an application and value relative to a specific application, service, or platform. You use them to perform actions on that platform, and their only use outside of it is a potential for trading and sales.
Often, this appears as a token or currency purchased to achieve a specific in-platform goal, such as buying advertising within a digital marketplace. Token purchases are used to fuel the platform activities and are often spent back to the platform owner, so there is continual use of tokens without necessarily a continued rise in how many tokens are minted.
And just a healthy reminder for you in all the crypto discussions. Fiat currencies are those that a government has declared as a legal tender. The government that declares it also backs it. The value of the fiat currency depends on the economy of the country involved. Think of this as a dollar or Euro.
In strong economies, fiat currencies have had a calming effect on inflation since they severed the relationship between printed currency and a commodity such as gold.
Hopefully, this gets you started in your efforts to understand and define the different currencies available to your digital wallet.