Below, we will seek to explain the basic features of the technology underlying Bitcoin and other crypto tokens and clarify what crypto assets actually are.
Blockchain basics
Blockchains can be defined as shared, immutable ledger databases that are stored as “blocks” of data. In these blocks of data, assets and transactions in a business network can be tracked. All of the participants in a blockchain will have access to the last and updated “block” of data at all times. The blocks are protected through cryptography, i.e., a method of protecting information and communications through the use of code – hence the commonly used term “crypto tokens” or “cryptocurrency”.
Blockchain technology and DLT (Distributed Ledger Technology) are the underlying technologies that makes blockchains and crypto projects possible. One way to view blockchains way is as the software that makes different crypto projects possible. Different types of cryptocurrencies each run on their own blockchain, where all transactions by the participants (the holders of the cryptocurrency) are recorded on the blockchain. Even though blockchains typically are associated with cryptocurrencies, virtually anything of value can be tracked and traded on a blockchain.
One can think of blockchains as a set of data that is shared with all the participants at all times, where all actions taken on the blockchain are recorded in a transparent way, and that cannot be tampered with or governed by anybody. This setup makes up an effective, cheap and secure alternative to traditional methods of recording transactions and the whereabouts of assets in a business network.
Blockchains and platforms built on blockchains can be permissioned or permissionless. In permissioned blockchains, someone controls who can participate in the blockchain. Permissionless blockchains are open to everyone with access to the internet. Most of the well-known blockchains that exist today, like Bitcoin, Ethereum and Solana are such permissionless blockchains. They are also open source, meaning that the original code running the blockchain is made freely available to everyone. The permissionless blockchains seek to let its participants interact in a decentralized manner, i.e., that person A and B can interact and transact without the need of approval by any intermediaries.
It is the original code of the blockchain that determines what actions are possible to execute on the blockchain. The Ethereum blockchain for example, lets its users run so-called smart contracts (not legal contracts, but a set of code) that are programs that run on the blockchain and self-execute when set-out pre-conditions are met. These smart contracts make it possible for others to develop their own crypto project with their own rules set out in the code of such smart contracts “on top” of the Ethereum blockchain. There are several thousand such projects running on the Ethereum projects, doing a variety of different things. The global insurance company AXA, for example, uses the Ethereum blockchain to automatically compensate policyholders when flights are delayed.
Digital assets, cryptocurrencies and crypto tokens
The terms “digital assets”, “cryptocurrencies” and “crypto tokens” are often used interchangeably to describe different types of digital intangible assets that are held in a crypto wallet. A crypto wallet allows owners of different assets on a blockchain to store the keys to these assets. Such wallets exist in different forms, both online and offline. There are also a lot of crypto exchanges online offering to store such digital assets on behalf of their customers.
The term “digital assets” refers to assets that are stored and traded digitally. Thus, both cryptocurrencies and crypto tokens are subcategories of digital assets.
A cryptocurrency is the so-called “native asset” of a particular blockchain and is as such directly issued by and used on the blockchain it runs on. One of the most famous and most used blockchains worldwide is Ethereum. The native cryptocurrency of the Ethereum blockchain is called Ether and is used to pay for the use of the Ethereum blockchain. Other examples of cryptocurrencies are Bitcoin and Cardano, which also run on, and are used on, their specific blockchain. The intended use of cryptocurrencies differs for each cryptocurrency. Bitcoin is intended to be used as a currency and a payment system. Ether and Cardano, on the other hand, are intended to be used as payment for the use of the services the blockchains they run on provide.
Crypto tokens are assets created by blockchain-based organizations and companies on top of a blockchain network. In other words: crypto assets “without” its own blockchain to run on. On the Ethereum blockchain, there are many thousand types of crypto tokens that offer different types of blockchain based products or services. Some crypto tokens are developed by highly professional and skilled companies or teams, while others are outright scams designed to cheat investors.
The way different crypto tokens are used may vary significantly. Some crypto tokens are linked to and backed by real-world currencies like the dollar or the euro, in order to maintain a stable value while still accessing the blockchain ecosystem it runs on (example.g., Ethereum, Cardano or Solana). Such crypto tokens are called stablecoins (e.g., USD Coin), and relieve their holders of the extreme volatility associated with cryptocurrencies, while still holding assets linked to an immutable blockchain with no central authority.
Another interesting aspect of the use of crypto tokens is the role of so-called “DAOs” (Decentralized Autonomous Organisations, often called “crypto-companies” or “crypto-partnerships”. DAOs make up virtual organizations, they are owned by their members (token holders), and have no management nor any other representation in the physical world. The members of a DAO can propose and vote on proposals about how the DAOs mutual funds should be spent. An interesting example of such an organization is the Wyoming-based CityDAO, that has bought 40 acres of land in Wyoming and plans to build a city. This is possible because the state of Wyoming has passed a law that grants DAOs standing as legal persons. It will be interesting to see how this will play out in practice.