Cryptoasset markets have lost around US$2 trillion in value since their peak late last year. Predictably, some in the mainstream media have rolled out obituaries for Bitcoin and others. To be sure, the breakdown in prices has been painful if you have a short-term time horizon. Declining asset values also suggest investors may have cooled on the sector, at least for now. But don’t let the crypto price “tail” wag the blockchain and Web 3.0 “dog.”
If you look beyond daily market gyrations, you’ll see that the foundations are being laid for a new internet and financial services industry built on digital assets and blockchain. This is likely to be the most important computer science innovation in a generation — the first digital medium for value — a way to move, store and manage assets like money, stocks, votes and even our digital identities privately and peer-to-peer.
Crypto “winters” are always the best time to drill down on these core concepts, do the work and build for the future. The last bear market brought us the non-fungible token (NFT) revolution, decentralized finance (DeFi), stablecoins and play-to-earn gaming, to name a few new industries, asset classes and innovations. What will this crypto winter make possible? Here are a few speculations. Web3 will usher in an internet that is more fair, private, decentralized, resilient and inclusive for economic and social interactions. This is all possible thanks to blockchain, the first digital medium for value — a way to move, store and manage assets like money, stocks, votes and even our digital identities privately and peer-to-peer.
Demystifying digital assets: the token taxonomy
I believe this bear market will lay the groundwork for Web3 to reach its full potential and become widely used globally by nearly everyone.
Powering the digital asset revolution are nine distinct types of new assets, enabled by blockchain. They are:
Cryptocurrencies (aka digital money): With a current market cap of nearly US$400 billion, Bitcoin is the mother of all cryptocurrencies. BTC functions like cash for the internet and a final settlement layer for the crypto-economy. For investors, it’s digital gold. It’s also a censorship-resistant alternative for the oppressed and a lifeline for many of the world’s unbanked. Bitcoin is unrivaled in this role.
Protocol tokens: These are the native tokens of the foundational platforms that power decentralized finance and much else. Examples include Ether, the native token of Ethereum; AVAX, the native token of Avalanche, SOL, the native token of Solana and ATOM, the native token of Cosmos and IBC. Protocol tokens account for hundreds of billions in cryptoasset market value.
Governance tokens: Governance tokens give holders say in the governance, specifically the allocation of resources from the common wallet of decentralized autonomous organizations (DAOs) and decentralized applications, or dApps. Examples include Uniswap’s UNI, Aave’s AAVE, Compound’s COMP and Yearn Finance’s YFI. As dApps take in more assets and users, their governance tokens often appreciate as the economic value they control increases, and their fees increase.
Non–fungible tokens (NFTs): NFTs are provably unique digital assets; they provide a means to verify the provenance, ownership and scarcity of these assets. They can also represent physical assets, such as luxury goods or sports memorabilia. Today they are primarily used for art, collectibles and digital assets inside games. They can also be used as identities, to express ownership of many other kinds of virtual goods and represent intellectual property.
Exchange tokens: Crypto-exchange tokens, such as Binance’s BNB and FTX’s FTT are native to centralized exchanges. Typically, these tokens are essential to the exchange’s functionality and incentivize adoption but confer no governance rights and are more centrally managed. BNB serves a dual purpose as an exchange token and the native token of the layer-1 Binance Smart Chain.
Securities tokens: There are two kinds of securities tokens: Securities tokens originated by traditional financial entities, such as investment banks or asset managers, and digitally native securities, such as DeFi investment funds and derivatives contracts. Securities tokens are transforming markets for stocks, bonds and derivatives.
Stablecoins: Stablecoins are cryptoassets with stable value pegged typically to the U.S. dollar. Examples include USDT, USDC, DAI and UST. Now with a total market value of about $140 billion, stablecoins use different methods to stabilize their value. Centralized stablecoins are backed by deposits of cash and equivalents inside financial institutions like banks. Decentralized stablecoins, such as DAI, are collateralized by cryptoassets held in smart contracts.
Natural asset tokens: These are digital assets backed by real-world commodities, such as land, oil, gas or carbon. For example, the blockchain-based ecology network Regen is connecting land stewards who protect and conserve ecosystems with buyers of offsets through the Regen registry, bringing transparency, liquidity and verifiability to the carbon credit market.
Central bank digital currencies (CBDCs): CBDCs are crypto versions of fiat currency, such as China’s e-CNY digital yuan and South Korea’s digital won. Advocates tout their potential to improve stability, reduce friction and broaden financial access. Critics point to their potential use for political oppression and mass surveillance.
What’s next for the digital asset revolution?
Digital assets are powering new industries, business models and organizations. DeFi is on course to becoming the financial system of the new internet and digital economy, reimagining every aspect of financial services peer to peer and online. DeFi has been resilient in the face of downward market pressure, in stark contrast to centralized shadow lenders like BlockFi. DAOs (or decentralized autonomous organizations) will continue to supplement corporations as a vehicle for organizing resources and creating value in the real economy (as they have in the digital economy). Enterprises and governments can also embrace Web3 tools.
Enlightened policymakers will harness the potential of blockchain to empower citizens to own their own identities and access services digitally, while preserving privacy. Digital assets may even disrupt the current balance of power in emerging economies as more people opt out of local currency and banking systems and leap-frog to digital assets, like U.S. dollar stablecoins (much in the same way they leapfrogged landlines and went straight to cell phones).
The unstoppable force of digital assets is on a collision course with Web2 behemoths like Facebook and Amazon, as well as banks, governments and other powerful institutions of today’s economy. The impact will be spectacular. As Warren Buffet says, “Be greedy when others are fearful and fearful when others are greedy.”
In my seven years in this market, I’ve never quite seen the confluence of fear, uncertainty and doubt swirling around crypto. But there is light at the end of the tunnel.
Alex Tapscott is managing director of the Ninepoint Digital Asset Group (a division of Ninepoint Partners LP). His new book, ”Digital Asset Revolution,” was published this month. This article is for information purposes only and should not be relied upon as investment advice. The author or his employer may have investments in some of the companies mentioned.
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