Blockchain is to Bitcoin what the internet is to email. A big electronic system, on top of which you can build applications. Currency is just one. - Sally Davies, Financial Times
The Island of Yap is obviously an interesting story but beyond the story is an extremely important reframing of how ownership works. It is important to remember that the Yapese transparent ledgers recorded who owned each stone and not the movement of the stones. Blockchain networks work in the same manner and allow us to track the ownership of all kinds of information, not only that of stone disks.
The first use case for this technology served to track the ownership of a virtual currency, Bitcoin, but blockchain technology itself can be used to track any kind of value ownership. Thousands of digital assets exist all representing different forms of value tracked on a blockchain. Let’s break down the different kinds of digital assets and discuss some of their characteristics.
The Types of Digital Assets
“Digital Asset” is a term that many people might find hard to define. In short, a digital asset is any form of value tracked on a blockchain. There are four broad categories of digital assets:
Payment tokens are digital assets that are designed to replicate traditional money. Historically, money has been defined by three characteristics. First, it must act as a store of value. For example, a dollar today is supposed to buy you the same cup of coffee it will tomorrow and in 10 years Second, it must be accepted as a medium of exchange; every store around NYC is willing to accept my dollar for their goods or service. Finally, it must be usable as a unit of account; businesses report earnings in dollars, not bananas because you can understand how much $10M is worth, but it's hard to gauge what 10M bananas are worth.
Anyone who is reading this has been alive only for an era when central government’s have had exclusive rights to create money, ie. the United States and the dollar. In the current environment (inflation at a 40 year high) you can begin to wonder how well the dollar actually embodies all of the characteristics of money outlined above.
Throughout this piece and in many others, the term “digital asset” has been used instead of “cryptocurrency”. Cryptocurrencies, if defined by their design, are actually a subcategory of payment tokens. While the other categories discussed in this article may represent other forms of value, cryptocurrencies are designed to replicate money through their reliance on a blockchain network structure rather than the “credibility” of a government.
Government’s historic responsibility when handling the creation of money has been to ensure people’s faith in its value. Cryptocurrencies intended to instill this faith through a well-architected, transparent network. The wide area of digital assets that fall into the cryptocurrency category are almost all variations of bitcoin’s original network design. Quite simply, the alpha and omega of cryptocurrency is bitcoin.
Utility tokens have too many sub-categories to count. You could potentially rename them “access tokens” because utility tokens grant you access to a particular event, product, service, network, community, or anything else that requires special permission to participate. The classic real world example of this is an arcade token. When you buy these tokens, you are simply buying the right to play/access various arcade games in a predefined area/setting. In the digital world, a utility token could represent the holder’s ability to access an application or rent computer storage. One great example of a utility token is Filecoin, which allows the holder to use a decentralized file storage network. Anyone can pay someone else to store their files for them.
You may have noticed that the first two types of tokens are more abstract. There are no physical payment tokens; rather, they simply exist as code, and utility tokens represent a nebulous concept of a right to an object or service. The difference between utility tokens and asset-backed tokens is that asset backed tokens represent a digital claim to a physical asset. Gold, oil, and real estate are all examples of assets that can be represented on a blockchain. Any type of asset could be “tokenized,” which means that its ownership is represented and tracked on a blockchain. Paxos Gold (PAXG) is a great example of this where each PAXG represents an allocation of gold holdings in an established gold storage facility.
Finally, we have hybrid tokens. As their name implies, a hybrid token is a token that has some combination of payment, utility, and asset backed tokens. In most cases the combination is an asset backed and a utility token. Non-Fungible Tokens (NFTs), which are a hot topic right now, in many cases would fall into the hybrid token category. The image they represent has characteristics of an asset, and in some cases, the holder of the NFT gets utility by gaining access to exclusive events. An excellent example of this is during NFT.NYC when people holding NFTs from the Bored Ape Yacht Club got exclusive access to events.
From Payments to Everything Else
Before closing out, let's discuss the concept of different blockchains. For the first half of blockchain technology's existence, payment tokens were the only use case for this tech (next week, I will explain why). The Bitcoin blockchain and other early competitors only allowed you to track one digital asset on your network and nothing else. In almost every instance, the asset chosen was some variation of Bitcoin. What this meant is that the idea of a utility token and asset backed token were only an idea and not reality.
In 2016, a small subset of the bitcoin community realized that you could track more than just payment tokens on a blockchain. With this, Ethereum was born. Ethereum was the first example of a blockchain that enabled you to track anything, not just payment tokens. It would be like some Yapese sailing to a new island, starting a new system and not only tracking stones in their ledgers but also boats, huts, and sea shells.
The above four categories are a good starting point for providing a framework by which you can explore the burgeoning digital asset ecosystem. Identifying what an asset is designed to do such as make a payment, gain access to a product or service, claim ownership of an asset, or some combination of these characteristics, serves as the basis for understanding its value. Digital asset categories will continue to evolve with every new innovation and serve as the foundation for what is being called “Web3” or the “metaverse.''
Huge shout out to my collaborators from Foster: David Burt & Tom White