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.
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.
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
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.
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/
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