Emerging Technology Demystifying cryptocurrency and digital assets

The crypto space is vast, and it can be easy to get lost in a sea of terms and definitions. Consider this a brief introduction into this ever-changing universe.

Digital assets like cryptocurrencies, NFTs and other tokens are past “emerging” — they’re here to stay. 

Blockchains are the technology solutions that enable digital assets. A blockchain is a method of securely recording information on a peer-to-peer network. It’s a shared public database, duplicated across computer systems, in which new entries can be added but existing entries can’t be altered. 

Blockchain entries, called blocks, are generated via specific protocols that are different for each blockchain. Each block contains encoded information about the previous block, reinforcing the order and structure of the blockchain as it grows. 

A digital asset is created, or minted, when new information is added to a particular blockchain. Through blockchain entries, users can exchange existing digital assets and/or create new (mint) ones.

Digital asset types

Think of the term “digital assets” as a broad container that encompasses anything minted and exchanged on a blockchain. We generally place digital assets in five categories.

Crypto assets

Any digital store of value or medium of exchange (currency) that’s stored on the blockchain.

What it can be used for
  • Investments
  • Payments
  • Creating a coin to fund a project

Stablecoins

A type of cryptocurrency designed for price stability. Stablecoin prices are linked to fiat currencies, commodities or other crypto assets.

What it can be used for
  • Payments
  • Foreign exchange
  • Cross-border payments and transfers

Non-fungible tokens (NFTs)

A token that represents ownership of a unique digital item (think a work of art, a government ID, a specific unit of production). An NFT certifies that the holder owns the underlying digital asset and can sell, trade or redeem it.

What it can be used for
  • Proving your identity and granting access (to either a virtual or physical space)
  • Tokenizing your supply chain to track inventory movement and ownership
  • Ownership of virtual items (games, avatars, virtual land)

Central bank digital currencies (CBDCs)

A type of digital asset that represents a nation’s fiat currency and is backed by its central bank. Not all nations issue CBDCs.

What it can be used for
  • Payments
  • Cross-border payments and transfers

Security tokens

Digital assets that meet the definition of a security or financial investment, like stocks and bonds.

What it can be used for
  • Tokenized versions of stocks (equity) and bonds
  • Tokenized versions of real world assets (real estate, property, plant, and equipment, etc.)

Digital asset storage

Digital assets are stored and recorded on the blockchain ledger where they were issued (in most cases). Your ledger entry has a public and private key associated with it, which you can think of like a computer-generated email address and password. Wallets help store your keys securely so that only you can access your digital assets, and they give you a convenient place to view your assets and ledger positions. This is an important distinction: the digital asset is stored on the blockchain ledger, and the keys that give you access to it are stored in a wallet.

Storing digital assets: All digital assets are created and permanently recorded on the blockchain. New digital tokens are issued with a private key, a code that certifies asset ownership. Keys can be securely stored in an encrypted digital wallet.

Your private key (remember, think password) is what you will use to prove your ownership of the digital asset if/when you want to do something with it. If you wanted to send some cryptocurrency to another person, for instance, you would need your private key signed to the transaction in order for it to be accepted as a new blockchain entry. This is why it is important to protect your keys.

Selling digital assets: Digital wallets enable owners to browse and access their assets. Trading a digital asset or spending a crypto token transfers the token to a new owner. All transactions are recorded on the blockchain.


The world of digital assets

Once you have tokens, what can you do with them? Applications can confirm the tokens in your wallet to provide users with any number of opportunities like exclusive options in games, apps that work with your token, and finance functions exclusive to cryptocurrency (e.g., DeFi). Let’s see what this looks like.

Layer 1

This is the basic blockchain architecture that your token resides on.

Layer 2

Layer 2 scaling solutions all work differently, but their main function is to sit on top of the main chain and make transactions faster and cheaper by aggregating data.

Functional layer

The top layer is made up of apps that enable users to view, trade and spend digital assets.

Marketplaces

Users can spend their digital assets to purchase products and services. These can include digital asset products such as NFTs but may also include things beyond the blockchain ecosystem like tickets to real world experiences or the deed to a real world asset.

What this will look like in the future

Users spending their digital assets on items at physical retailers. Built into every point-of-sale system is the capability to accept digital assets as tender. Eventually, you will spend digital assets on everything from clothing to cars.

DeFi

Decentralized finance is an umbrella term for a variety of financial applications provided through digital assets. Because digital assets live on the blockchain, we can access and manipulate them via code in smart contracts. This enables infinite possibilities to automate complex transactions and financial activity where the digital assets are the medium of exchange.

What this will look like in the future

Financial opportunities being built into the options on purchase of a digital asset. Being able to get a loan, insurance or other financial instrument automatically agreed to by a provider via the blockchain.

Exchanges

Users can trade digital assets much like in traditional FX or stock markets. Users may want to trade to enact speculative investments or to acquire the currency necessary to play a new game, use a new dApp, etc.

What this will look like in the future

Your standard exchanges have the capability to trade digital assets for stocks, commodities and other financial instruments.

Games

Games built on a blockchain can offer tokenized in-game currency to their players. Because the currency is a digital asset, users can have real ownership over the value they earn. This includes the right to sell to or exchange with other players in a way traditional game developers have never offered.

What this will look like in the future

In-game currency being traded for other digital assets between gamers and potential gamers who are interested in joining the game.

dApps

Decentralized apps (dApps) includes any other applications built on a blockchain. We have yet to see how the dApp market will develop and what new services/products will be offered, but we do know that dApps have a distinct advantage over traditional mobile and desktop apps: they will have more direct access to user assets thanks to their foundation on the blockchain.

What this will look like in the future

Using a digital asset based-app without realizing it. Apps will be able to recognize your identity and provide you access based on the digital assets in your wallet.

Access layer

This is the part the users see. How you actually interact with this world in a visual shell.

Putting it all together, we see how the world operates right now:
Examples of what tokens can be used for: Marketplaces, DeFi, Exchanges, Games and dApps. Digital wallets. Digital assets: Crypto, Stablecoins, CBDCs, NFTs and Security Tokens

 

This is only a starting point. Each of these elements will require its own separate understanding and strategy to succeed. Learn more about digital assets, what they mean for your business strategy and stay on top of the latest industry trends in this evolving space.

 

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