What Are Cryptoassets?
The Basics
Some people imagine cryptoassets as digital “coins” that exist exclusively online. This is, however, a limited view of what is a broad and complex ecosystem of different products. In practice, there is no one “cryptoasset”—there are multiple different applications of the underlying technologies that perform a host of different functions. It is vital that investors understand both the similarities and important differences among the various types of cryptoassets.
In the simplest terms, a cryptoasset must have the following characteristics:4
It must be digital
A large portion of the world’s assets are digital. For example, there are around $2 trillion of notes and coins in circulation, but almost $7 trillion on the balance sheet of the U.S. Federal Reserve. Most U.S. dollars, in other words, exist only as digital entries in electronic ledgers at banks and other financial institutions. Futures contracts, certain stocks, and a host of other financial instruments likewise exist entirely in digital form–yet none of these assets are considered cryptoassets, because while all cryptoassets are digital, not all digital assets are crypto.
To achieve that status, an asset must also meet the additional requirements below.
It must rely on cryptography
As the name implies, cryptoassets are reliant on cryptography. Cryptography is the process of securing communication and information from third parties. Cryptoassets use cryptographic methods to secure transactions and transaction records, control the creation of new assets, and manage asset ownership. While ownership of a dollar bill is determined by who has it in their physical wallet, ownership of a cryptoasset token is determined by who has the cryptographic key to a digital wallet, for example.
It should use blockchain technology
As a general rule, most cryptoassets use decentralized ledgers known as blockchains (see Box 1). Blockchain enables a high level of security and provides the infrastructure needed to create new tokens and record transactions—although their functionality and applications extend far beyond this.
BOX 1
What Is Blockchain?
A blockchain is, essentially, a database made up of a chain of records in the form of “blocks.” Each of the blocks contains a record of some type—transaction data, for example—a timestamp, and certain cryptographic information that helps to ensure the security of the data. Crucially, the blockchain ledger is not stored on a single, central computer. Instead, multiple computers that make up the blockchain network each store a complete copy of the ledger. This is why blockchain is also known as distributed ledger technology—the blockchain ledger is distributed over multiple individual computers or “nodes.”
4 Jan Lansky. Possible State Approaches to Cryptocurrencies. Journal of Systems Integration. 2018.
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