Crypto 101

A key part of the 3iQ mission is to create value for our investors through thought leadership and education. Whether you’ve been "hodling" bitcoin for years or are new to cryptoassets, let’s have a conversation about the facts.

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Introduction

Generally, a digital asset can be any information, number, code, or token which has been generated and protected through cryptographic means or otherwise. These digital assets can express elements of ownership finality, governance, self-sovereignty, scarcity, and immutable transference which are typically enabled by some kind of blockchain technology. Some refer to digital assets as bearer-instruments of the future, essentially bypassing the need for middlemen and centralized controlling authorities.

To learn more about blockchain technology, please view our primer here: https://3iq-au.com/blockchain-basics-2/

Digital assets can be further categorized as coins, tokens, cryptos, cryptocurrencies, cryptoassets and more. All are fairly synonymous in the industry, but each could offer their own technologies and utility benefits. The one thing they have in common, though, is that these digital assets are commonly secured by various functions of cryptography.

Governance

As an investor, the first thing to consider when looking at any digital asset is whether it is backed by a centralized or decentralized blockchain network. Digital assets which are backed by decentralized blockchain networks typically cannot be modified, or have their source codes changed, by any one central authority. Transactions which are conducted over these networks cannot be reversed or changed once they have been confirmed through the blockchain; however, under centralized governance structures, these transactions could be reversed or changed in the future. A general feature of most digital assets is that they are permissionless, or “trustless”, meaning that the network is available for anybody to participate in this consensus process.

Source: 3iQ Corp

Decentralized governance structures mean that the economics and decision making surrounding the digital asset cannot be controlled by a centralized authority. A centralized authority could be seen as a company making decisions on behalf of its investors and customers, or it could represent a sovereign nation conducting government policy and other monetary decisions on behalf of its citizens. For example, digital assets underpinned by decentralized blockchains generally cannot have the total supply of that digital asset changed by participants without the consensus of the network first. Explicit rules behind the technology and economics of the digital asset are generally enforced by the participants of the entire network.

Centralized Government Example:

Decentralized Government Example:

Source: 3iQ Corp

In decentralized governance structures, decision making is often distributed among token holders, who could each share an equal vote. Understanding the governance structure of any digital asset is important to verify which participants actually own the digital asset and who has the authority to make changes or protect the network.

Consensus Mechanisms

A central aspect of blockchain technology is the distributed ledger, which contains a record of all previous transactions. It is called a distributed ledger because it is not stored in a central location, rather it is stored across a network of computers across the world. Key to the operation of a distributed ledger is ensuring the entire network collectively agrees with the contents of the ledger; this is the job of the consensus mechanism. Public, decentralized blockchains backing digital assets such as Bitcoin have their distributed ledgers accessible by any participant. Typically, they are accessed by either running node software or they are made accessible by blockchain explorers, which essentially run the same node software but host its contents online in familiar web-based formats, such as blockchain.com.

Behind most digital assets, there is some kind of consensus mechanism. The purpose of a consensus mechanism is to verify that information being added to the ledger is valid i.e. the network is in consensus. This ensures that the next block being added represents the most current transactions on the network, preventing double spending and other invalid data from being appended to the blockchain. In addition, the consensus mechanism keeps the network from being derailed through constant forking.

There have been a number of different consensus mechanisms devised, each with their own pros and cons. They all serve the same core purpose as described above, but differ in methodology. The primary difference between varying consensus mechanisms is the way in which they delegate and reward the verification of transactions.

To learn more about consensus mechanisms of digital assets, please view our primer here: https://3iq-au.com/consensus-mechanisms/

Digital Asset Categories and Sectors

As the digital assets industry is still relatively new and nascent, participants often must rely on unique methodologies and classifications as derived by other thought leaders and industry experts in the space.

  • Digital Assets
  • Cryptocurrencies
  • Cryptoassets
  • Crypto

These terms are generally used interchangeably, but can be narrowed and specified across a broad-range of investable assets on the internet. Below are some of the different categories which could make up the digital assets economy:

Source: 3iQ Corp

Technology is driving change at an unprecedented pace, towards a digital economy. With this brings disruption to various facets of the global economy. Significant changes are occurring in multiple sectors and impacting financial markets, monetary systems, global trade, and commerce.

The printing of money, combined with social, political, and technological factors has increased the interest from an investor, developer, and academic perspective for digital assets. Historically, when money has been printed, it has led to periods of rising prices resulting in inflation or hyperinflation. This means that goods become unaffordable as wages are worth less. Many believe that digital assets such as bitcoin are viewed as a potential hedge against the drop in value of fiat currencies. Unlike fiat currencies, many digital assets are verifiably scarce as a feature of their design.

Bitcoin and Ethereum are the most well-known names among all digital assets. However, other digital assets, referred to as “altcoins” have garnered more interest recently as their use cases develop and sectors of interest arise. In our view, Blockchain Operating System (OS), Decentralized Apps (Dapps), DeFi protocols, Token-to-Token Exchanges, Decentralized Content Delivery Network (CDN), Blockchain Bridges, and Stablecoins will form seven verticals of the Web 3.0 based digital assets economy. The traditional markets (Fiat Capital/Monetary System, which includes cash, stock markets, bond markets, property markets and art markets) will gradually evolve to converge with the digital assets economy.

Sources:

Atzori, Marcella. “Blockchain Technology and Decentralized Governance: Is the State Still Necessary?” SSRN Electronic Journal, Dec. 2015, https://doi.org/10.2139/ssrn.2709713.

Loewen, C. (2022, February 28). Blockchain Basics: 3iQ Corp. 3iQ Digital Asset Management. Retrieved March 16, 2022, from https://3iq.ca/blockchain-basics-2/

Loewen, C. (2022, February 28). Consensus mechanisms explained: 3iQ Corp. 3iQ Digital Asset Management. Retrieved March 16, 2022, from https://3iq.ca/consensus-mechanisms/

Disclaimers: 

The contents on this website are provided for informational and educational purposes and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting and tax. Please consult with your own professional advisor on your particular circumstances.   3iQ Corp. makes no representation or warranty to any investor regarding the legality of any investment, the income or tax consequences, or the suitability of an investment for such investor. All content is original and has been researched and produced by 3iQ unless otherwise sourced or stated therein.

References to specific securities are presented for illustrative purposes only and should not be considered as investment advice or recommendation. The specific securities identified and described herein should not be considered an indication of how the portfolio of any investment vehicle is or will be invested, and it should not be assumed that investments in the securities identified were or will be profitable.

Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with 3iQ with respect to any linked site or its sponsor, unless expressly stated by 3iQ. Any such information, products or sites have not necessarily been reviewed by 3iQ and are provided or maintained by third parties over whom 3iQ exercises no control. 3iQ expressly disclaims any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these.

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A Quick Primer on the Metaverse​

The Metaverse could be described as an interoperable network of shared experiences and applications. This includes products, items, devices, tools, and other infrastructure provided by many unique decentralized and centralized counterparties at the same time.

The Origins of the Metaverse in MMORPGs

Historically, online multiplayer video games filled much of this void. Early experiences or “instances” have origins dating back to the early 1990s, with massively multiplayer online roleplaying games or “MMORPGS”. Early MMORPGs, such as Everquest, Second Life, World-of-Warcraft, and more recently Roblox and Minecraft, all shared one thing in common: ownership of game assets was permissioned via a centralized publisher or developer software. Game assets could be certain items such as outfits, weapons, or skins which are obtained by either playing the game or by purchasing items through permissioned software provided by the publisher or developer. As a result of this, the game publisher essentially cornered both the primary and secondary markets for these game assets. Users would log in directly to this software, using account-based systems implemented by the publishers.

Users and market speculators have long looked for ways to bypass this permissioned software, usually by offering third-party software of their own which would misuse user-to-user trade systems (which do not incur fees), providing useful utility but very poor OpSec (operational security) of user game assets. Publishers have historically been strict on game assets being traded outside their scope of control. In their defense, not only could it be a motive for profit – but a motive to prevent the game world from being unfair. A good example of this is buying World of Warcraft Gold from a third-party vendor online to purchase better gear for your character. However, not all game assets offer competitive advantages and are purely cosmetic – so is this just a potential power overreach?

World of Warcraft:

Use of the auction house is permitted, but people can't buy gold from third-party vendors as that violates the game’s Terms of Service. This is because everything needs to be earned by the user and not from any outside vendors.

Source: Wowpedia as of April 25, 2022.

Counter-Strike:

Users can buy and sell cosmetic items through the Steam Community Market. These units are not intended to be redeemed for real dollar amounts. Money flows in, but not out easily. Third-party software can offer solutions for fiat off-ramps.

Source: Steam Community Market as of April 25, 2022.

The Modern-day Metaverse Takes Things Further

Instead of your game asset (or item) working in just one instance, what if that same asset could be transferred, or even used simultaneously in multiple Metaverse instances at the same time?
This is where modern digital assets underpinned by public blockchains could have an advantage over early technological iterations. By using permissionless public blockchains, such as Ethereum, users have full control of their Metaverse assets (Non-Fungible Tokens or NFTs). These digital assets follow similar technology standards, such as ERC-721 (Ethereum NFTs) in the backend, while art is rendered in familiar 3D file formats such as 3D (.vox) files or other equivalents hosted on InterPlanetary File System(IPFS). Today, many NFT developers embrace “interoperability”, which is the art of making NFT assets work in multiple Metaverse instances at the same time.

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Bored Ape Yacht Club: https://twitter.com/yugalabs/status/1505014986556551172
Webb3: https://twitter.com/Worldwide_WEB3
Nike RTFKT Pod: https://www.linkedin.com/pulse/my-journey-web3-nfts-metaverse-joel-ponce/
Isotile Metaverse: https://twitter.com/isotile/media
Voxels: PROBCAUSE https://twitter.com/probcause/status/1389764754391064580

Beyond NFTs and game assets

Beyond NFTs and game assets, an open Metaverse based on public blockchains could offer opportunities for both individuals and enterprises to market themselves. Historically, for a brand or product to be placed in a game instance, there would have needed to be some kind of license agreement between the enterprise and game producer. Today, modern Metaverse instances are being run on public blockchains, and individuals and enterprises can directly create and display media assets inside these instances, typically with little restriction from the developer. For example, instead of a specific product license agreement for use inside a game world, an enterprise could purchase a plot of land and market its products with no permission from the developer.

The technology behind the Metaverse is constantly changing and improving. This is largely due to the power of universal Web 3.0 based-logins, such as Metamask wallet signing, as well as the permissionless nature of transferring assets between one another on a public blockchain network. Everybody is free to access the cryptographic security offered by public blockchain networks.

Some good, modern examples of Metaverse instances, in our view, are Voxels and Decentraland. Like the early MMORPGs which came before them, each offers different communities, looks, and experiences; however, their back-ends are similar in the fact that they settle assets on Ethereum or Ethereum layer-2 solutions.

These instances can be accessed publicly by anyone; however, ownership of game assets is private and secured by the blockchain. Land and parcel sales have primary and secondary markets where users are free to buy and sell game assets between one another or from the developer directly. At the same time, both instances support ERC-721 (Ethereum NFTs) assets. This means that an owner of an NFT could display their assets from an Ethereum Web 3.0 wallet such as Metamask, at the same time, in both instances. Perhaps the NFT developer provides 3D files for their NFT assets, and possibly the instance developer offers support for those 3D files. Most Ethereum-based instances support the native 2D rendering of any NFT asset, while 3D is marginally more difficult to implement due to the sheer number of NFT existing assets.

Ownership Finality and Verifiable Scarcity

An added benefit of a blockchain-based Metaverse instance is ownership finality and verifiable scarcity. Historically, video game worlds have been accessed by accounts provided by the game developer – meaning the game developer has your password saved on one or more centralized servers somewhere, while also maintaining the power to revoke that account access at any time. In addition, that game developer is in theory unrestricted from multiplying your game assets and increasing its supply, putting pressure on its rarity or secondary market price. With Ethereum, we can verify that certain digital assets cannot have their supplies changed, nor can you have your permissions revoked from accessing that digital asset. Most assets used in Metaverse instances are bought and sold using ETH and other ERC-20 (Fungible Token) assets such as USDC or DAI.

These combined factors have led to a recent boom in Metaverse land sales, advertising, events, and more. Both Decentraland and Voxels have announced hard-capped supplies for parcels, adding an element of scarcity. Basic laws of economics explain that when there is capped supply and increasing demand, prices increase. One thing is certain, though – while certain Metaverse land can be capped, there is no theoretical cap of Metaverse instances. Even more recently, there has been a push from Web 2.0 giants, such as Facebook (now Meta) to create their instances.

Enterprise hardware dominance is an issue that should be addressed. For example, Meta owns Oculus (VR headsets) while Apple and Samsung lead in mobile cameras (AR). Most Metaverse instances rely heavily on 3D graphics processing, so Nvidia and AMD come to mind as well. Some instances are already mobile-ready and work directly in internet browsers with no software installation. Some experiences can immediately be deployed to hundreds of millions of existing users, like Snap’s Snapchat and Meta’s Facebook/Instagram products.

While it’s a shot in the dark, we place a low probability that these enterprises pursue public blockchain technology stacks for their Metaverse instances; although we could see them support certain digital assets and technologies (such as ERC-721) with limited functionalities in the future. It’s more likely, in our view, that these enterprises pursue their federated blockchains or sidechains for their Metaverse instances. Fiduciary duty entails supporting shareholders first, not community first – a staunch difference between the current Metaverse instances we see today.

Learn more about Metaverse below:

Visit 3iQ Metaverse HQ

 

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Fred Pye

Frederick T. Pye

CHAIRMAN, CHIEF EXECUTIVE OFFICER & DIRECTOR

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Frederick T. Pye is the Chairman, Chief Executive Officer and Director of 3iQ Corp. He is also the Chairman and Director of 3iQ Digital Holdings Inc. Mr. Pye is recognized for creating and promoting creative and unique investment products for the investment industry.

Mr. Pye has managed private client portfolios with Landry Investment Management and various other investment dealers. Prior to this Mr. Pye was Founder, President & Chief Executive Officer of Argentum Management and Research Corporation, a company dedicated to managing and distributing quantitative investment portfolios including the first long-short mutual fund in Canada.

He was also Senior Vice-President and National Sales Manager of Fidelity Investments Canada and an integral part of the team that saw assets rise from $80 million to over $7.5 billion in assets under management during his tenure. He also held various positions with Guardian Trust Company, which listed the first Gold, Silver and Platinum Certificates on the Montreal Exchange.

Mr. Pye obtained a Masters in Business Administration from Concordia University.