Due to the large number of different tokens, the universe of cryptoassets seems unmanageable. However, properties that allow a classification can be found quickly.
Coin versus Token
The terms Token and Coin are often used interchangeably. There's no official taxonomy yet, but a technical perspective allows for easy differentiation. Generally, in the crypto world, only Tokens exist, which can further be categorized into Protocol Tokens and Second Layer Tokens.
A Protocol Token is the native token of a blockchain that secures the corresponding network and is used to pay transaction fees. For example, Ether is the native token of the Ethereum blockchain, and NEO is the native token of the NEO blockchain. These native tokens are also referred to as Coins.
Second Layer Tokens are those created on an existing blockchain. This includes ERC20 tokens and NEP5 tokens on the Ethereum and NEO blockchains, respectively. They generally serve to enable the use of specific functionalities of a decentralized application (DApp).
"If you do not know the names of things, the knowledge of them is lost, too."
A uniform categorization for digital tokens does not exist. Most data providers use proprietary structures, but they are similar.
The following list shows the classification of tokens into eight categories as used by the data provider Messari:
Smart Contract Platforms
Centralized Exchanges (CEX)
Decentralized Finance (DeFi)
Decentralized Exchanges (DEX)
Various institutions are currently working on the creation of a globally applicable standard for the categorization of cryptoassets.
“Ethereum competes against Bitcoin in the same way that Microsoft competes against Gold.”
Crypto currencies are usually native tokens of a blockchain protocol. They are intended to serve as a store of value or a medium of exchange and thus represent two of the three functions of money.
Privacy coins represent a special feature. Contrary to a widespread assumption, cryptocurrencies do not generally guarantee anonymity. Anyone who understands the technical background and knows how a blockchain works can trace transactions. Developers have therefore also developed protocols from the beginning that make it possible to completely cover the traces in the network. The result is Privacy Coins, which allow users to remain completely anonymous.
“There cannot be stable money within an environment dominated by ideologies hostile to the preservation of economic freedom.”
Smart Contract Platforms
Smart contract platforms serve as the basis for decentralized applications that run on a distributed network rather than on central servers. These platforms are characterized by the use of programs that can be controlled externally or run autonomously and have access to digital assets - the smart contracts. They act as elementary building blocks of almost any complexity of blockchain-based, decentralized applications
Financial products are often the first solution mentioned when it comes to the potential use of decentralized structures. However, from a purely technical perspective, all applications can be extracted from centralized structures. For example, there are already decentralized video, gaming, and chat programs, as well as many other applications that have been brought to life via smart contract platforms.
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
The Internet is a decentralized structure. Many users confuse it with the World Wide Web, the best-known service that uses the Internet. This network is a largely centralized construct that most users use only superficially. The Web1, with its static hyperlinked pages, was followed by the current Web2, which also enables user interactions.
The blockchain has opened the way to the decentralized Web3, which again approaches the original idea of an "open, trustless, and permissionless network." The Web3 enables not only the reading and writing of data, but also the execution of decentralized programs. Projects working on the implementation of this new web are concerned with decentralized data storage, the use of distributed computing capacities or the decentralization of digital advertising, among other things.
"The Web as I envisaged it, we have not seen it yet. The future is still so much bigger than the past."
Stablecoins are designed to serve one purpose. They are supposed to have a stable exchange rate against a fiat currency, usually the U.S. dollar. Thus, they are meant to represent a low to near-volatility digital asset. Due to their low volatility, they fulfill the store of value function that is doubted for highly volatile cryptocurrencies.
Stablecoins represent a controversial sector. For some, these tokens are the logical digital replacement for fiat currencies. Others question the need for a token that merely replicates the U.S. dollar or another conventional currency.
Especially in regions with high inflation and economic uncertainty, such questions are met with incomprehension. There, people often do not have access to the U.S. dollar and value stablecoins as an unofficial but still attainable asset. Thus, cryptocurrencies are already achieving a goal in these regions. They facilitate access to financial services for all people who own a smartphone.
"I've found that luck is quite predictable. If you want more luck, take more chances. Be more active. Show up more often."
CEXes, DEXes and DeFi
Centralized Exchanges or "CEXes" are platforms and apps that allow cryptocurrencies to trade with each other or against fiat currencies. As marketplaces for tokens and as an interface to the fiat world, they are essential for the cryptobiotope. Centralized trading venues do not necessarily have to issue their own tokens.
Decentralized exchanges or "DEXes" enable the exchange of crypto assets without a central entity. The exchange of digital assets via a DEX is bilateral. If a user exchanges Ether for Bitcoin, the transfer of the two tokens occurs directly between the addresses involved. The DEXes enable this transfer but do not have access to the exchanged tokens at any time.
The acronym DeFi stands for "Dezentralized Finance" and is the umbrella term for decentralized finance applications based on cryptography, the blockchain and smart contracts. The existing financial system is centrally organized and, in simple terms, a structure with a large number of participants executing transactions through central intermediaries such as banks. The path from the existing centralized to the decentralized world is therefore also referred to as disintermediation.
“In concentrated portfolios, market fluctuations are magnified. All market noises look like real events.”