Taxonomy of cryptocurrencies

By AlethiaArete | Crypto Thinking | 8 Sep 2020

In every other market there are specific categories used to label the products that a participant can buy. In stocks, a stock could be categorized by market cap, the field of the economy that the business operates, profitability, volatility of the price, whether it offers a dividend, and there are ETFs which hold commodities and so forth. All of these things are used by participants to spread their money through the market to try and create a mix of securities that will hopefully provide more return and less risk.

We're starting to see blockchains characterize themselves in similar ways. There are some overlapping properties. For example, market cap which is a metric of the general amount of value in a cryptocurrency. Another is beta, or a measure of the volatility of a cryptocurrency. I don't think I've ever seen beta measured, the concept can clearly be brought right over. Nexo pays dividends through their token, and there are several gold backed and fiat backed tokens on Ethereum. Some tokens offer governance rights, basically becoming DAO securities themselves. Some properties are particular to cryptocurrencies though, and should be considered when deciding to hold a particular crypto or not.

Hard money cryptocurrencies are basically the original use case. With a limited supply, and in the case of XRP a decreasing supply, an increase in economic activity brings an increase in price. Much the same way gold and silver were used as currency until very recently (and still are in the case of the Utah Goldback, and others) cryptos like the Bitcoins, XRP, Stellar, Digibyte, and others. These are meant to be a fairly stable store of value, at least as liquidity and use for the currency increases. In light of the unlimited money printing that seems to be going on the world over, it makes sense to be holding one or two hard money cryptos that you believe will have increased use as the years pass.

Transactional cryptocurrencies are like the USD. They are intended to be the foundation of smart contract platforms, the currencies that underpin the networks which allow complicated open blockchain economic activity including DeFi. These are Ethereum, Cardano, Tezos, VeChain, the Flare Networks, and others. The currencies on these networks is used to power transactions and smart contracts, causing a constant draw and need to purchase based on the amount of activity on the network. The exception is VeChain, which gives you an amount of VTHO each day which is the gas used to power transactions on VeChain. These cryptocurrencies are often inflationary in nature and also often utilize staking in some form. While they are inflationary, it doesn't mean that the value will continuously tank. If the real value of the network growths faster than the inflation rate, value should increase. There is also the fact that staking to secure the network requires a great amount of value be locked up and not be on the open market, which will constrain supply.

Layer 2 tokens have been created to solve one problems or another on the parent blockchain, such as Loopring for cheaper, faster trading and transactions, Matic for dapps on Ethereum, Chainlink on Ethereum and Band on Cosmos both provide off chain data in to blockchains in the form of oracles. These protocol can majorly enhance the functionality of the parent blockchain if successful onboarding people to use their platforms as Chainlink has been. Layer 2 tokens could possibly be broken down further into tokens for oracles, transaction cost, dapps, and so forth.

Platform tokens are used by specific businesses to provide utility and value to customers who use their platforms. These include BTR on Bitrue, Cel, on Celsius, Nexo for Nexo, BNB on Binance, and SHA for Safe Haven. It'll be necessary to lock these up to use certain services, or you'll recieve a reward for doing so, which all ties into the business model of the platform. If the business is successful, it's reasonable to think the token will be successful also in some form.

Governance tokens have been a bit of a rage recently. They provide some sort of right to govern and vote regarding the smart contracts that they are connected to. Examples are Maker for Maker DAO, KNC for Kyber Network, COMP for Compound. There are many others. These come close to being securities, and personally I think they will be declared to be securities since they have an open market value, allow voting on issues for the platform, and often return some sort of fee or benefit.

I have taken the stance that a proper crypto portfolio contains a mix from each category, with the exception that you probably shouldn't hold governance tokens unless you actually want to help run the platform the token is for. Certainly it makes sense to hold a hard money crypto, and the transactional cryptos that also stake could make a great savings account since they often distribute newly minted coins into stakers wallets every so often.

Platform tokens and layer 2 tokens are a bit more selective, but if a platform does well like Nexo and Celsius have, than it's reasonable to think holding their tokens could be worthwhile, especially if you also use the service.

The last thing I'd suggest is to hold stablecoins in an interest account. The reason for this is stablecoin interest is generally over 8%, which is huge. I've seen numbers reaching up to a whopping 15% with the associated platform token on platforms that I consider to be legitimate business. That will help you to continue to bring in income even if your investments in other cryptos don't do as well. Steady income is steady income, after all. And it compounds.

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