What is a cryptocurrency, anyway? – On the categorization of crypto-currencies

The word “cryptocurrency,” while originally accurate for bitcoin, is now approaching the status of a confusing misnomer.

The now generic term is damaging the industry by providing a artificial barrier to entry with knowledge that is not accurate. When hearing the term, most people, “cryptocurrency“Immediately start associating and defining blockchain-based projects with the qualities of fiat currencies. It is imperative that we (as a community) make it clear to new entrants what exactly constitutes a ‘cryptocurrency’ – or the very least directs them to a few frames.

The early 2018 bear market is the perfect time to take a break from the frenzy, take a step back, and revisit the terms we’ve coined as an industry that end up confusing and misleading new entrants.

Rampant and ignorant price speculation diminishes the perceived value of slowing down, reading white papers, and technically digesting the booming industry.

Let’s be mature as an industry. In order to take a tangible step towards this, let’s fix what is clearly a glaring sign of disorganization and a very confusing barrier to entry for newcomers: the definition and classification of tokenized digital assets known collectively as crypto- currencies.

The goal of the initiative behind this categorization is to inspire those with more expertise to come forward and build on the knowledge framework we are developing today.

Existing frameworks

We are not the first to stress the need for a classification framework.

Rather, we offer a synthesis of these previous attempts with the ultimate goal of starting a dialogue. As an industry, it is essential that we reach consensus on a framework. Luckily, we won’t be starting from scratch as a few innovators have come up with frameworks which we’ll quickly summarize.

Angus Cepka Six Tier Frame

First, a big thank you to Angus Cepka, Partner at Goldman Sachs, for its six-tiered setting. He diligently summarized two other previous frameworks to derive his own. It succinctly defines each category, so we’ll list its scope with a definition sentence:

1. Cryptocurrencies: This type of digital currency is designed to replace cash and is most likely to be used on a transactional basis.

2. Platforms: This type of digital asset main utility should be used as “gas/fuel” for a blockchain platform that has decentralized applications built on top of it.

3. Utility tokens: These coins are required to perform a specific action in an ecosystem managed by the coin issuer. They are usually built on top of an existing blockchain such as Ethereum.

4. Tokenized real assets: A cryptosecurity would represent equity, but would be built on the blockchain and tokenized.

5. Cryptosecurity: This type of asset acts much like a traditional security; such a token often comes with dividend and voting rights payouts.

6. Hybrids: There are many digital assets that have characteristics that do not place them neatly into one category.

Three Tier Frame by Phil Glazer

Then we have Phil Glazer from the Maschmeyer Venture Group, who proposed a relatively simple three-level framework. I’ll save my reasoning for a later paragraph, but I’ll quickly review the three-tier frameworks to compare, contrast, and discuss them at length, so don’t worry, we’ll expand on the following list shortly:

  1. Currency
  2. Utility
  3. Platform

Three Tier Frame by Lou Kerner

Lou Kerner, a CryptoOracle VC partner, along with Geektime hosted a conference call of 400 thought leaders where they discussed, among other things, a classification framework. They also proposed a three-tier classification system:

  1. Cryptocurrencies
  2. Utility Tokens
  3. Crypto securities

Three Tier Frame by David Goodboy

From an editorial on NasDaq by a certain David Goodboy, we have another relatively simple framework with three levels:

  1. Transactional
  2. Utility
  3. Platform

Seven Tier Frame from Okex

Okex, a cryptocurrency exchange, has also set up a classification framework composed of seven different categories:

1. Currency: The goal is to develop a better currency for a wide range of usage scenarios, including as a tool for storing value, a medium for exchanging value, and as a unit of accounting.

2. development tools: Projects belonging to this category are mainly used by developers as modules to build decentralized applications.

3. FinTech: [These projects] are intended to act as new crypto-economy tools such as converting one monetary unit to another, facilitating loans, accepting investments, etc.

4. Sovereignty: Pprojects aimed at providing solutions that may never have to depend on an individual or organization to facilitate trust, such as cloud computing

5. Shared data: The goal is to allow anyone to contribute and share, annotate and create different analytical models on certain datasets.

6. Authenticity: Projects in this category strive to connect digital assets with those in the “real world”.

seven. Value exchange: Projects in this category strive to replace this need for trust in the traditional value exchange, leaving out the middleman and reducing the overall cost for users to exchange goods and services.

Summarize abstracts

A few recurring similarities and differences stood out to me when analyzing previous frameworks. The biggest noticeable difference comes from the number of categories in each frame; this range varies greatly from a minimalist at three levels frame to a huge at nine levels framework. Interestingly, the three-level frameworks also strongly account for the number of category modes among all the frameworks offered.

Three-level classification frameworks

Exploring the most popular frameworks by number of categories, the three-level classifications offered by Glazer, Kerner, and Goodboy, a few more notable similarities emerge.

All three frameworks list “Utility” as one of their three basic classifications.

Unfortunately, the three definitions fail to reach a consensus beyond exact overlapping nomenclature.. Goodboy defines a utility cryptocurrency as a “cryptocurrency designed for a particular task”. That seems a little too broad as a definition. Kerner and Glazer both offer deeper and more useful definitions that recognize a blockchain infrastructure containing decentralized applications (dapps); however, Glazer defines a utility crypto as a crypto that “can be mined above,” while Kerner qualifies a utility token as an asset traded on a dapp that takes advantage of a existing blockchain.

I believe Kerner offers the most accurate and agreed-upon definition for a utility token – and agree that since these tokens require an existing blockchain that may already have its primary cryptocurrency (such as Ethereum/ether tokens & ERC20), the nomenclature token, instead of cryptocurrency is fine.

Next, the three frameworks dictate a type of cryptocurrency strictly focused on mainstream adoption and transactional functionality for the masses; aka, literal crypto-currencies. These cryptos are what most people, especially those new to the space, first fully understand as they can compare the word currency to a previous heuristic associated with fiat.

Glazer and Kerner both use the literal word “cryptocurrency” while Goodboy offers “transactional”. Since we derive a classification framework for cryptocurrencies, I would avoid assigning any of these classifications to the same cryptocurrency – don’t define a word using that word in the definition, do you? Let’s go back to the name of Goodboy which describes well the main functionality of this classification: transactional.

A final similarity, though more superficial via similar nomenclatures, rather than meaningful in similar definitions, can be seen by two of the three executives (Glazer & Goodboy) dictating “Platform” as the third and final classification. Kerner, submits an interesting definition of “crypto-securities” as the third and final classification.

Of these three, I believe Glazer & Goodboy are on the right track with the “Platform” nomenclature.

From my perspective, the most important consideration in defining a “platform” cryptocurrency is the relationship that arises from platform cryptocurrencies and utility tokens: utility tokens are built above cryptocurrency platform. Or, at least, that makes the most intuitive sense to me.

Final Thoughts

By analyzing the three-level frameworks, we can extrapolate a pretty nice middle framework that categorizes “cryptocurrencies” into three overall classes: youtransactional cryptocurrencies, platform cryptocurrencies and utility tokens.

While new price peaks and troughs will undoubtedly continue to dominate the news cycle well into 2018, I suggest a change in journalistic focus for the good of the industry. To slow down. The lasting and impactful effects of cryptocurrencies will be felt for decades, so let’s take the time to make sure we’re all on the same page from the start.

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