The Art of Categorizing Cryptocurrencies
The word “cryptocurrency,” while originally accurate for Bitcoin, is now approaching the status of a confusing misnomer.
The now-blanket term is causing damage to the industry by providing an artificial barrier to entry with knowledge that flat out isn’t accurate. Upon hearing the term, most people, “cryptocurrency” immediately begin associating & defining blockchain-based projects with qualities of fiat currencies. It’s imperative that we (as a community) make it clear to new entrants what exactly constitutes a “cryptocurrency” — or at the very least point them in the direction of a few frameworks.
The early 2018 bear market makes for the perfect moment to pause the frenzy, take a few steps back, & re-visit terms that as an industry we’ve coined that ultimately confuse & mislead the hell out of new entrants.
Rampant, ignorant price speculation diminishes the perceived value of slowing down, reading white papers, & technically digesting the burgeoning industry.
Let’s mature as an industry. In order to make a tangible step towards this, let’s fix what is clearly a glaring sign of disorganization & highly-confusing barrier to entry for newcomers: the definition & classification of tokenized digital assets known collectively as cryptocurrencies.
The goal for the initiative behind this categorization is to inspire those with more expertise to come along and build on top of the knowledge framework we’re developing today.
We’re not the very first to point out the need for a classification framework.
We’re more so putting forth a summary of these previous attempts with an end goal of starting a dialogue. As an industry, it’s critical that we come to a consensus on a framework. Thankfully, we won’t be starting from ground-zero as a few innovators have put forth frameworks that we’ll quickly summarize.
Angus Cepka’s Six Tiered Framework
First off, a big thanks to Angus Cepka, an associate at Goldman Sachs, for his six-tiered framework. He diligently summarized two other previous frameworks to derive his own. He defines each category succinctly, so we’ll list out his framework along with a defining sentence:
1. Cryptocurrencies: This type of digital currency is designed to be a replacement for money and is most likely to be used on a transactional basis.
2. Platforms: This type digital assets main utility is to be used as ‘gas/fuel’ for a blockchain platform that has decentralized applications built on top.
3. Utility Tokens: These coins are required to perform a specific action in an ecosystem run by the coin issuer. They are generally built on top of an existing blockchain such as Ethereum.
4. Tokenized Real Assets: A cryptosecurity would represent equity, but be built on the blockchain and tokenized.
5. Cryptosecurity: This type of asset acts much like a traditional security; a token of this type often comes with dividend payouts and voting rights.
6. Hybrids: There are many digital assets which have characteristics that don’t place them neatly within a single category.
Phil Glazer’s Three-Tier Framework
Next, we have Phil Glazer, from the Maschmeyer Venture Group, who put forth a relatively simple three-tier framework. I’ll save my reasoning for a later paragraph, but I’m quickly glossing over the three-tier frameworks to compare, contrast & discuss them at length, so don’t worry, we’ll expand on the following list shortly:
Lou Kerner’s Three-Tier Framework
Lou Kerner, a partner at CryptoOracle VC, along with Geektime hosted a 400-thought leader conference call where they discussed, among many things, a classification framework. They also proposed a three-tiered classification system:
- Utility Tokens
David Goodboy’s Three-Tier Framework
From an op-ed on NasDaq by one David Goodboy, we have another relatively simple three-tier framework:
Okex’s Seven-Tier Framework
Okex, a cryptocurrency exchange, also put together a classification framework consisting of seven different categories:
1. Currency: The purpose is to develop a better currency for a wide range of use case scenarios including as a tool to store value, a medium of value exchange and as an accounting unit.
2. Developer Tools: Projects belonging to this category are mainly used by developers as modules for building decentralized applications.
3. FinTech: [These projects] have the purpose of acting as new crypto-economy tools such as converting one currency unit into another, facilitating lending, accepting investment, & so on.
4. Sovereignty: Projects aiming to provide solutions so that might never have to rely on any individual or organization to facilitate trust, such as cloud-based computing
5. Shared Data: The goal is to allow anyone to contribute and share, annotate and create different analytical models on certain data sets.
6. Authenticity: Projects in this category strive to provide the linkage between digital and ‘real world’ asset.
7. Value Exchange: Projects in this category strive to replace this need for trust in traditional value exchange, leaving the middleman out and reducing the overall cost for users to exchange goods and services.
Summarizing The Summaries
A few recurring similarities & differences stood out to me while analyzing previous frameworks. The largest noticeable difference stems from the number of categories within each framework; this range varies widely from a minimalist three-tiered framework to a whopping nine-tiered framework. Interestingly, the three-tiered frameworks also heavily represent the mode number of categories among all proposed frameworks.
Three-Tiered Classification Frameworks
Exploring the most popular frameworks by number of categories, the three-tiered classifications put forward by Glazer, Kerner, & Goodboy, a few more noteworthy similarities come to light.
All three frameworks list “Utility” as one of their three basic classifications.
Unfortunately, the three definitions fail to reach a consensus past an exact overlapping nomenclature. Goodboy defines a utility cryptocurrency as a “cryptocurrency designed for a particular task.” This seems a bit too wide of a definition. Kerner & Glazer both offer deeper, more useful definitions that acknowledge a blockchain infrastructure that contains decentralized apps (dapps); however, Glazer defines a utility crypto as a crypto that “can be leveraged on top of,” while Kerner qualifies a utility token as a traded asset on a dapp that leverages an existing blockchain.
I believe that Kerner puts forward the most accurate & agreed-upon definition for a utility token — and agree that since these tokens require an existing blockchain that may already have it’s main cryptocurrency (such as Ethereum/ether & ERC20 tokens), the nomenclature token, instead of cryptocurrency fits nicely.
Next, all three frameworks dictate a type of cryptocurrency focused strictly on mainstream adoption & transactional functionality for the masses; aka, literal crypto-currencies. These cryptos are what most people, especially those new to the space, first fully understand since they can compare the word currency to a previous heuristic associated with fiat.
Both Glazer & Kerner use the literal word “cryptocurrency” while Goodboy offers “transactional.” Since we’re deriving a framework of classification for cryptocurrencies, I’d steer away from assigning one of those classifications as the very same cryptocurrency – don’t define a word by using that word in the definition right? Let’s fall back to Goodboy’s name which nicely describes the main functionality of this classification: transactional.
A final similarity, albeit more superficial via similar nomenclatures, rather than meaningful in similar definitions, can be seen by two of the three (Glazer & Goodboy) frameworks dictating “Platform” as their third & final classification. Kerner, submits an interesting “Crypto-securities” definition as his third & final classification.
Out of these three, I believe that Glazer & Goodboy are on the right track with the nomenclature “Platform.”
From my perspective, the most important consideration for defining a “Platform” cryptocurrency is the relationship that stems from Platform cryptocurrencies & Utility tokens: utility tokens are built on top of platform cryptocurrencies. Or, at least, that makes the most intuitive sense to me.
By parsing the three-tiered frameworks we can extrapolate a pretty-agreeable average framework that categorizes “cryptocurrencies” into three overarching classes: transactional cryptocurrencies, platform cryptocurrencies, & utility tokens.
While price peaks & valleys new will undoubtedly continue to dominate the news cycle through 2018, I suggest a journalistic shift of focus for the good of the industry. Slow down. The long-lasting, impactful effects of cryptocurrencies will be felt for decades to come, so let’s take the time to ensure that we’re all on the same page this early on.