The word ‘cryptocurrency’ is a bit of a misnomer. Most cryptocurrencies are not used as currencies at all. At the moment of writing, coins like Bitcoin or Litecoin are spendable at certain (select) places, but other cryptocurrencies such as Sia or Storj are not designed to be currencies.
So at Infloat, we prefer to speak about ‘cryptoassets‘ or ‘cryptotokens‘, terms that encompass all digital assets that live and work on a blockchain (or a different type of decentralized ledger technology). But still, whether you use ‘cryptocurrencies’ or ‘cryptoassets’, the fact remains that these come in many forms; it’s useful to further distinguish them and make use of a taxonomy. So in this article, we’ll discuss a few categories of cryptoassets, ranging from cryptocurrencies (as a category, not as a catch-all phrase), to utility tokens, platform tokens, security tokens and collectibles.
But before we begin, consider this. There is no one true categorization of cryptoassets. For instance, Burniske and Tatar (in their book Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond) used 3 different categories, specifically: cryptocurrencies, cryptocommodities and cryptotokens. In contrast, this particular article on Medium delineates up to 19 (!) different categories. And we could go on.
Having worked with different ICOs and different types of cryptoassets, we currently feel that 5 categories of cryptoassets would make the most sense. In other words, we go a bit further than Burniske and Tatar, but not as far as delineating twenty different types (which in our opinion, somewhat defeats the purpose of creating a taxonomy).
Our first category is cryptocurrencies. Cryptocurrencies, cryptocoins or simply coins, are blockchain-based currencies that were designed and meant to be used as currencies. So what is a currency? Generally speaking, a currency has three aspects:
- A store of value
- A medium of exchange
- A unit of account
A lot has been said about whether or not cryptocurrencies like bitcoin are in fact currencies. For instance, could you consider bitcoin as a unit of account? While there’s many hurdles to be overcome for bitcoin (or other cryptocurrencies) to have all of these three aspects, they come the closest to being a real currency when compared to other cryptoassets.
For that reason, we do call these cryptocurrencies, even though they might not be currencies in the traditional sense of the word. Some examples of cryptocurrencies include Bitcoin, Litecoin, Monero, Zcash, and plenty more.
Utility tokens is what we would call cryptoassets that can be used to derive a certain utility or use. The word ‘utility’ can cause some confusion, as utility stocks are stocks of companies active in the utility sector (i.e. gas, water, electricity, etc.). In the crypto space however, utility is used to denote ‘useful’ or ‘functional’.
In that sense, utility tokens are cryptotokens that you can use to unlock some kind of value on a specific platform or within a certain ecosystem. Often, a utility token allows you to access a specific good or service from the company that has created that particular token.
An example we like to use at Infloat is Storj. Storj provides decentralized cloud storage, allowing you to either rent or rent out digital storage space. Using the Storj platform, you can pay for cloud storage, or get paid for renting out your storage, in the Storj token (STORJ). In this way, the Storj utility token provides access to cloud storage on the Storj platform.
Interestingly, Onchain FX covers a separate category which they call ‘brand tokens’ in their overview. However, we think that it’s difficult to provide a clear-cut distinction between such brand tokens (“specific-use on a single entity’s network”) and utility tokens (“tokens built for specific-use networks”), which is why we chose not to include this as a separate category.
Some taxonomies, such as the one introduced by the Cryptoasset book, do not create a separate ‘platform’ category. In contrast, we think platform tokens are wholly different from utility tokens, in that they provide the ‘power’ or ‘gas’ for third-parties to run applications on top of a specific platform.
Ether is one of the main examples of a platform token. Third-parties can build (decentralized) applications and smart contracts on top of the Ethereum blockchain. However, in order to do so they will need to pay transaction fees in Ether, the Ethereum blockchain’s native currency.
In this way, Ether is a platform token, as it allows not just access to a specific service, but to a whole platform which you could use to build new applications on. Some examples of other platforms and their tokens include NEO, QTUM, WAVES, and more.
Security tokens are tokens that are tied to a external (physical or non-physical) asset that is tradeable. But what do we mean by that?
A straightforward example of security tokens is tokenized shares. These are shares of a company that exist in the form of a cryptoasset (which has a bunch of benefits). An example of a business that is planning to tokenize its shares is Sisu. At the moment of writing, there are relatively few businesses that have tokenized (a part of) their shares, though we expect many more companies to issue such shares in the coming years.
Note that tokenized shares reflect just a small piece of the pie. Security tokens can also take the form of real estate, cars, paintings, luxury goods, or other (financial or non-financial) assets.
For those unfamiliar with the term, collectible tokens are tokens that represent a digital collectible. These digital collectibles work similarly to Pokémon cards. You can collect different kinds of Pokémon cards, which come in different flavors and different occurrences. This makes some cards more valuable than others.
In the same way, cryptokitties are Pokémon card-like assets that only exist in digital form but have similar characteristics in which some are rarer than others.
At this point in time, we haven’t seen many different types of cryptocollectibles or cryptotokens yet. However, as adoption of cryptoassets rise, so will the adoption of such collectibles.
Why categorize cryptoassets?
So there you have it. Cryptocurrencies, utility tokens, platform tokens, security tokens and collectible tokens are the five categories we typically use at Infloat.
As we explained in the introduction, this categorization is not the categorization of cryptoassets, nor is it the only categorization. But rather than focussing on which number of categories is best, we feel it’s important to use a type of categorization, as categorization allows you to differentiate cryptoassets from one another.
For instance, the design of a security token should be distinctly different in behavior, governance model, and tokenomics from a utility token. So by using categories — and in the process categorizing the token or asset you might want to create, you can clarify its intended use and use other tokens in that same category as a benchmark.
But if you want to know more about different token models and which kind of token is suited for your business and business model, simply contact us.