Distributed ledger technology (DLT), blockchain technology, cryptographic assets, cryptographic currencies, cryptographic tokens — all of these terms are related. However, since the industry is not yet fully developed, there is a general lack of quality information to explain what each term means. To cover this gap Decentriq in collaboration with Frankfurt School Blockchain Center (one of the leaders in DLT-related research in Europe) are creating a classification of cryptographic assets.
How do we classify assets?
We at Decentriq use several layers for classification and categorization of assets. The main layer involves four types of cryptographic assets: platform coins or commodities, currency coins, utility tokens, and stable coins. For each of the four main categories there are several subcategories. For this blog we focus only on the main categories.
Platform coins are those that provide the ecosystem in which they operate the resources they need. A real-world example would be oil, which is required for numerous operations. These coins incentivize decentralized interaction of the participants in the network. They are generally related to the projects that allow dAPPs creation and hence the creation of subsequent independent tokens based on their blockchain. Examples of platform coins are Ethereum (ETH) and Cardano (ADA), both of which are crucial for the operation of the corresponding platforms.
Currency coins are those primarily intended to facilitate payments. These coins are expected to have the ability to be transferred quickly. Thus, the block time in the blockchain of such coins should be rather short. For these coins the key factor is the number of merchants who accept the coins. Nevertheless, it is crucial to mention that at the moment none of the currency coins have all three characteristics of a currency: medium of exchange, store of value, and unit of account. Bitcoin (BTC) is the best known example of a currency coin; however, its transaction speed and fees make it hard to use as a means of payment.
Utility tokens are those that give the owner access to a specific service. These tokens are meant to facilitate an enormous number of micro transactions. By definition, these tokens are prone to having a high velocity if they are actively used. As a service user, one usually has few incentives to hold the tokens, since one can easily exchange other cryptographic assets that store value better than utility tokens whenever there is a need for the token and hence in the usage of the platform. An example of a utility token is Golem (GNT), which allows the owner of the token to spend it on the “rental” of computational power.
Stable coins are those that are set to mimic the price of a traditional asset. Most commonly, stable coins mimic the price of fiat currencies, with the U.S. dollar being the most popular one. Nevertheless, they might also mimic the price of gold or any other asset. Tether (USDT) is the most used stable coin at the time of writing, however, recently the coin saw a major decline of almost 10% indicating that these assets are also in an early stage and face specific challenges.
How can one use sector knowledge?
The use cases for sector knowledge are very broad. However, the main ones are trading, fund reporting and comparison, risk management, peer group analysis, and valuation.
For trading and portfolio management a very popular strategy in equities and bonds trading is sector rotation. It involves holding a larger (overweight compared to market) share of funds in equities and/or bonds of sectors that the investor believes will outperform. Such a strategy allows high diversification of a portfolio while still being focused on some specific niche of the market.
In the traditional market there are ETFs for numerous sectors, each — as expected — performing differently. For example, the ETF on the technology sector generated a more than 27% in returns over the last year, while the ETF on the utilities sector generated only 1% over the last year. Moreover, depending on the country, the distribution of sectors within market indices might vary significantly. The graphs below show the distribution of the EURO STOXX 50 index and the DAX index. Of course, the distribution by sector depends heavily on the design of the index. However, it is quite fair to predict that the stock market for the E.U. is more diversified than that of Germany only, which can be seen in the diagrams below:
As Frankfurt School’s Professor Sandner has said,
“In many aspects the market for cryptographic assets is not different in needs from the traditional market, a crucial one being the need of transparent information. That is why we decided to co-found the International Token Standardization Association (ITSA) which also collaborates with Decentriq, a company operating in this field that aims to professionalize investing in this space.”
At the moment there are no segment ETFs or indices for the crypto market available. However, LYCAI — an index developed by Decentriq and LIMEYARD, is designed to represent the market at its best. Because of its strict calculation policies aimed at providing the best representation of the market, LYCAI does not include any stable coins. Since this blog is focused only on the top layer of crypto asset differentiation and is not granular, we compare here only the LYCAI and the simple-market top-20 among the four core types mentioned earlier. As can be seen in the diagrams below, the simple-market top-20 by market cap is less diversified than the LYCAI index, with payment coins representing a far bigger share in the former index. Fundamentally, we believe that development of platform, currency, and utility assets is vital for DLT. Hence, an index where the three types are presented in a more equal way is preferred.
If you would like to discuss these ideas or ask any questions, we would love to talk with you! Just reach us via email at firstname.lastname@example.org.
Because no central entity lasts forever, we develop, apply, and invest in decentralized technologies. We don’t want history to repeat itself, nor to let our future be determined solely by central powers. From anonymity preservation to zero knowledge, we shape answers that last.
Visit our website at https://www.decentriq.ch/.