Crypto Primer: Use cases of cryptocurrencies
Cryptocurrencies are unique in that they can be used in multiple ways. While this is true for other assets as well (for example, gold can be money as well as used as raw material to make certain products such as jewellery), cryptocurrencies can be used in more ways than any other major asset.
The Bitcoin whitepaper’s stated goal was the creation of a decentralised, incorruptible monetary system – “better money”. Since then, many more use cases have emerged for digital assets.
Medium of exchange
Cryptocurrencies can be used as alternatives to fiat currencies in payments. Until recently, their use as currencies in real world transactions has been very limited. However, with the institutionalisation of crypto assets, they are now becoming widely accepted as a means of payment. With El Salvador as the first mover, even countries have started to recognise it as official tender. Meanwhile, in countries that experienced economic collapse and hyperinflation, cryptocurrencies are being embraced unofficially.
Store of value
The tokens of blockchain protocols, such as Bitcoin and Ethereum, exhibit strong store of value characteristics, such as scarcity, permanence, verifiable authenticity, portability, secure storability, and divisibility. In some respects, cryptocurrencies are superior to gold (as they can provide verifiable authenticity, portability, storability, and divisibility), and their disinflationary nature makes them a suitable safe-haven asset relative to fiat currencies, especially during periods of monetary instability.
Computing platform for decentralised applications
Cryptocurrencies are the native currencies of decentralised blockchain protocols, and the fuel of the protocols’ transaction cost economy. As applications build on top of these protocols, the native token is used to facilitate the transactions and pay the transaction fees when the applications are used.
Decentralised blockchain protocols are well suited for hosting a wide array of applications using smart contracts (self-executing transaction protocols) – from tracking supply chains, to enabling internet of things (IoT) systems, storing trademarks, and confirming authenticity.
Decentralised governance of organisations
Digital tokens are also used as vehicles for the governance mechanism of a platform or application. They can represent voting power, eligibility to propose changes, or the right to vote on proposals.
The use of digital assets for governance may or may not be linked to economic activity – much like in the case of voting and non-voting shares that may have different economic rights.
Application layer uses
Native assets of applications (“utility tokens”)
Applications may use digital tokens for access to the service that the application provides, as entitlement to discounts, or as the unit of value in which transactions within the application are denoted. These use cases are often referred to as utility tokens (although the definition of “utility tokens” is debated in various jurisdictions, we refer to them here in the economic sense: tokens that provide holders with some entitlement to participate or provide some benefit).
Proof of ownership
Digital assets can be used to prove ownership of physical assets or rights (such as copyright) as data stored on a distributed ledger is tamper proof and immutable. This use case has wide applications from proving ownership of digital collectibles, discount vouchers, rights to cashflows (eg royalties), or maintaining the register of beneficial owners entitled to participate in corporate actions.
Representation of assets
Crypto assets can be used to create digital representations of tangible or intangible assets such as reals estate, art works, or shares. These “tokenized” representations of the underlying asset offer fractional ownership and improve liquidity for the underlying asset. In the case of highly illiquid assets such as art, this can be very beneficial.
Social media and membership
Digital assets can represent memberships, and it can be used to reward activity on a social media platform.
Digital art and mementos
A new type of asset, and a use case for digital tokens, is creating original digital art, or capturing and owning records of activity in the digital space. These tokens are one-offs.
Key to remember
While most financial assets have a single use case or at most a dual use case, crypto assets can be used in a number of ways and they can fulfil multiple functions. They can be consumed (“burnt”) resembling commodities, they can generate yield similar to fixed income instruments, they can represent economic and voting rights, and they can be used as currencies, and more. While not all use cases apply to all crypto projects and their tokens, most crypto assets can be used in multiple ways – with the consequence that they derive value from multiple sources.
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