Ever since Satoshi Nakamoto published his controversial paper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash system’ in 2008, a whole new ecosystem consisting of cryptocurrencies/ digital assets / tokens in their thousands emerged under the global spotlight. There are literally new tokens being released everyday so how can any sane investors keep track of all the new ideas and information that are poured into the internet? Don’t worry, let us do the heavy lifting and summarize the most common token categories for you as suggested by Joshua Nussbaum from the New York- based venture capital firm Compound.
**Please note that many tokens are not black & white and might span across a few categories.
In general, the purpose of setting up these projects 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. Since Bitcoin is the first and most prominent example in this category it also inspired a lot of new initiatives. Many projects are designed solely to improve some aspect of the Bitcoin Network or to make the protocol suitable for a particular use scenario.
Projects belonging to this category are mainly used by developers as modules for building decentralized applications. In order to allow users to experience a smooth interface, many of the current underlying designs need to be validated in large-scale environments. Protocol Design expansion and interoperability are actively researched in several areas and will become an important aspect of the Web3 development stack.
This is one category worthy of attention from an investment stand point. In order for many blockchain applications such as a fully decentralized autonomous organization or a Google alternative that accumulates user data to work, the underlining development tools / infrastructure must be robust and adaptable to constant growth. Many of these projects are designed to do just that.
This category is fairly simple. If you use different blockchain protocols and applications (such as the “Developer Tools” example above), many may have their own native encrypted currency (cryptocurrency), resulting in the creation of multiple new crypto economies. In these economies, there will be a need for tools to convert one currency unit into another, facilitate lending, accept investment, and so on.
Over the past decade, we have seen great technological advancement from desktop application that is running locally to cloud-based applications that store user data on a remote server. But these centralized services also come with great risk and often becomes the primary target of hackers.
This gave rise to projects aiming to provide solutions so that might never have to rely on any individual or organization to facilitate trust. With the help of encryption technology, block chain and the right incentive mechanism, their goals might become reality.
A key design of Bitcoin is the ability to establish trust between different parties where transactions are made with its’ information shared in an immutable way. This can greatly impact how individuals conduct exchanges; it no longer requires a third party to establish trust within trades. Through block chains and cryptographic economic principles, the time and complexity of building trust is eliminated. 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.
An example is when network contributors of Data Sharing companies collect all aspects of data from more than 30 countries: from the consumption of certain foods / beverages to the materials used in specific areas. The company uses machine learning to gain insight and then sell these data sets to their customers.
The goal is to allow anyone to contribute and share, annotate and create different analytical models on certain data sets. Effectively eliminating the need to hire a specific individual(s) to get the job done. Contributors can earn tokens as a compensation to their effort and companies will acquire tokens to buy the data sets and insights; creating a demand for tokens. Theoretically, this leads to more contributors and increases the quality of data sets.
Ultimately, cryptocurrency are only digital assets which are recorded on a specific blockchain. However, it doesn’t link with actual, tangible assets in the ‘real world’. Projects in this category strive to provide the linkage between digital and ‘real world’ asset. The immutability and transparency of blockchain provide the much-needed assurance for counterparties to be convinced that ‘real world’ assets can indeed be represented in a digital manner.
Lastly there are also those projects which doesn’t fit into any categories and are generally in a league of their own. However, this category also includes ones with vague goals, poorly structured whitepaper, malicious intent and with the sole purpose of raising quick funds from investors of FOMO (fear of missing out) mentality.
As a general reminder, one’s choice of what to invest needs to be made carefully. And remember: never invest, what you can’t afford to lose.