From Bitcoin to Crypto Assets

This article first appeared in print edition 4.1 of yBitcoin. Click here to see the full issue. Click here to order your copy.

By Jeremy Gardner

In 2009, an anonymous programmer or group of programmers using the pseudonym Satoshi Nakamoto released an open-source software that introduced an entirely new paradigm for asset creation and distribution. Bitcoin was born, and after nearly a decade, that software, the framework for the world’s first cryptocurrency, has been tweaked and copied to form hundreds of new cryptocurrencies — decentralized, digital tokens that are not controlled by any single entity.

For those interested in creating their own cryptocurrencies, copying the codebase is the easy part. Gaining and maintaining value of the currency, and therefore a market share, is the real challenge.

Building on Bitcoin

According to CoinMarketCap.com, as of press time, over 370 cryptocurrencies have eclipsed the $1 million market capitalization point and nearly 200 have a market capitalization of $10 million, while only a handful have a cap over $1 billion. Despite the broad growth, Bitcoin still dominates the crypto-asset market, hovering around 50 percent of all market capitalization.

The unique proposition of a cryptocurrency is fairly straight forward: to provide a financial incentive and reward for verifying transactions in a blockchain network. In the early years of this industry, when someone wanted to change or improve part of the software, they would have to make a new cryptocurrency to embody the change. However, if each innovation results in another cryptocurrency, and that innovation is then improved upon by the next cryptocurrency, then the former will likely lose its value with the latter taking its place in the market. This is why many new cryptocurrencies fail; innovation tends to outpace the adoption of the technology being innovated upon.

A handful of computer scientists saw promise beyond these new alternative implementations of digital money and instead envisioned an ability to issue tokenized real-world assets on top of a blockchain. These additional tokenized assets would allow cryptocurrencies to be validated and backed by something beyond the intrinsic value of demand for the currency. New blockchain platforms such as Nxt, BitShares and the Bitcoin blockchain meta-layer once known as Mastercoin, now known as Omni, were built. These allowed for the creation of tokens such as Tether, a U.S. dollar–paired blockchain asset built upon Mastercoin.

AppTokens, DApps and New Value Creation

What followed these token-enabling protocols was an even more ambitious attempt to create a “Bitcoin 2.0” or “smart contract” blockchains. From this, blockchains such as Ethereum, Lisk and Qtum have been born. What these smart contract blockchains do differently than cryptocurrency and token-focused blockchains is enable decentralized applications (abbreviated as “DApps”) in addition to real-world tokenized assets. Examples of DApps include Augur, a decentralized prediction market platform, and Golem, a distributed computing system, both of which exist on the Ethereum blockchain.

Although decentralized applications are built upon other blockchains, they often require their own assets in order to create a provably honest consensus or incentive mechanism that replaces a central authority. These assets are known as application tokens, or “apptokens” for short. These tokens are usually distributed through token sales or ICOs (initial coin offerings), in which anybody owning cryptocurrency can participate. Such offerings often raise well over a million dollars in a matter of a few days, or sometimes minutes, and often raise exponentially more.

Each of these developments is part of a seismic shift in how value is created, represented and transmitted. The full ramifications of this shift will not be felt immediately. In fact, it may take years before they are fully felt. But when they are, and they surely will be, the perception of what value is will be forever changed.