Most of the economic activity in crypto-land has revolved around Bitcoin and other crypto-assets like Ethereum, in the context of them being internet currencies or digital monies. Although speculation around this use-case is the dominant use case for most of the value locked in digital assets, the specter of assets going beyond money and currency always loomed large over the crypto-market and the dreams of its participants.
The blockchain and cryptocurrency revolution has, organically and in a manufactured manner, generated a lot of hype about its potential to transform close to everything in our lives. In an indirect way we think this is largely true, but many hyped use cases never made much sense to us and have yet to play out as a good idea. However, there is a large class of compelling ideas for the use of digital assets outside of their use as money. These particular use cases were only ideas and dreams just a few years ago. The tools necessary to create them didn’t necessarily exist yet, or the execution on earlier attempts was a bit off.
Before we get into the other use cases let’s review what we mean by money or currency. First we want to get into the frame of mind that almost everything has SOME subjective value to someone, and since money is used as a representation of value, everything has some level of moneyness. Now, that means some things are closer to 0 on the scales of moneyness and other objects of desire are closer to 100. But to have or hold value for any period of time gives you some level of moneyness.
The best monies are portable, divisible, and can be used as a medium of exchange, store of value and a unit of account. This means the best monies are relatively easy to transfer, easy to split up, they don’t decay, they’re a common social reference point, and they’re almost universally accepted.
Having these qualities in mind, we can see why the US dollar would be high up on the money scales and why Bitcoin wouldn’t be too far behind, while something like cigarettes can be used as money, but they’re probably not the best money. Something like fruit on the other hand, would be a terrible money because it decays so fast and would be terrible for many other reasons.
All of the assets and use cases we’re about to talk about have varying degrees of moneyness, but are ultimately used for their purposes beyond money, which is what we want to explore.
Below we’ll give a brief overview of the use cases that we currently know about, that can be used today. These are no longer just ideas and dreams, but rather concrete projects with multiple teams tackling the same use case with proven demand.
Crypto-assets ranging from Bitcoin to Ethereum to LINK to Litecoin to BAT, etc., are being used as collateral to borrow against. Crypto-banks lend against digital assets and more decentralized smart contract based protocols allow their users to borrow against the assets they commit to the protocol.
This is the crypto version of a home equity loan, or borrowing against your portfolio of securities. We don’t consider a owned home or a security to be “money”, but we can borrow money against their value as collateral for a loan. An increasing number of crypto assets are being used for this.
Cred is an example of a company that will lend against digital assets, treating them as valid collateral for a cash loan. You can also use Cred to earn interest within the Edge Wallet.
Aave is an example of a protocol that allows users to deposit crypto in a smart contract and borrow against that asset. Aave is one of the many applications a part of the decentralized finance movement.
Bitcoin introduced the world to digital scarcity for the first time. Building off our newfound abilities to create scarce digital objects, digital crypto creators have created an incredible universe of unique digital objects such as digital art, in game tools, digital trading cards, etc. Who would buy this or make this? Well, who would buy or create unique art or play games? It’s something humans like to do whether you “get” the value of one particular NFT or not.
Traditional Securities (Equity + Debt + Real Estate)
Any and all securities, debt and equity, public and private, can be represented and traded on many different blockchains. Instead of being paper or digital entries on the sole ledger of entities like the DTCC, traditional financial securities can be controlled by public and private key pairs and transferred and settled on public blockchains. Companies have already done this by raising equity on platforms like Polymath, which builds on top of the Ethereum network, acting as the blockchain equivalent of the DTCC. The key difference between the two is that Ethereum is public, transparent, and provides open access for anyone to build on top of.
Polymath, Liquid, Harbor, and RealT are examples of projects tokenizing the ownership of traditional assets which many groups, organizations, have already taken advantage of. This will only grow and expand.
Nexus Mutual is a decentralized insurance cooperative that allows investors, developers, and entrepreneurs to pool their smart contract risk in a way that insures themselves, their applications, and their teams against catastrophic financial risk.
Bugs and mistakes happen, even with the most thorough audits, the job of making sure everything is secure is really never complete. The only way to get really close to 100% assurances is to create insurance like protocols and cooperatives that offload catastrophic risk away from individuals, teams, and/or apps and instead offload it into a collective that can handle the risks, for fees. Reliable insurance is one of the most important pillars of an advanced, commercial society.
Digital Utility: Access to Scarce Digital Resource
Digital Assets can be used to consume digital resources like computation, memory, storage, information, digital advertising, etc. Assets like Ethereum (ETH), Filecoin, Storj, Golem, Chainlink (LINK) and Basic Attention Token (BAT) give their holders access to specific digital resources on specific platforms.
This is somewhat comparable to airline miles. Airline miles are not considered great “money”, but they are assets that can be bought, sold, and earned, and they consume one specific resource: airline miles on a specific airline. Digital utility tokens serve the same purpose, but they’re usually for some digital resource.
A few DeFi (Decentralized Finance) protocol creators and teams have created tokens that give the holders of those tokens a certain amount of decision making power over the operation, parameters, and direction of the protocol. They’ve done this in order to pass off power and responsibility to a looser community of users and developers who leverage the protocol for their own uses. In effect decentralizing the protocol, through tokenization and clever incentive design.
For example, YFI is the governance token of the Yearn.finance yield optimization protocol.
Synthetics & Derivatives
Derivatives and Synthetics are financial instruments that derive their value from an underlying asset \or group of assets whether they be stocks, commodities, bonds, indexes, etc. The synthetic or derivative isn’t the asset or assets themselves, but rather they are created to mimic or simulate the price structure and returns of the asset or group of assets.
Rather than a web of legal contracts, lawyers, bankers, and regulatory institutions, a crypto derivative or synthetic is instead automated by a web of smart contracts, infant DAOs with governance tokens, and secured by public blockchains. Tokens attached to those smart contracts could be assets that track another asset or track a collection of other assets; the token can be a representation of a collection of digital and/or traditional assets, which derives its value or price from those underlying assets.
Yield Optimizers & Trading Strategies
There are now tokens that represent pools of capital that employ algorithms to take the pooled digital capital and allocate them between different decentralized money markets as efficiently and effectively as possible. For example, the y.earn protocol has liquidity pools with different yield earning strategies that are represented by a digital asset. That asset is a claim on the assets and the yield generated by algorithms looking for the best lending rates in the different money markets on Ethereum such as Compound, Aave, and DYDX.
Yearn is one such example with its various yTokens.
A project like Bloom (BLT) is an example of this. Bloom token (BLT) holders are able to invite new users to the platform and vouch for their identity or character by “staking” their reputational capital (BLT) in the Bloom network. If a user vouches for someone that ultimately defaults on a debt, that user will see their Bloom score decline. Likewise, if users stake for individuals that pay back debts on time they will see an increase in their score. In addition, the bloom platform plans to provide a credit registry to track repayment of debts and a credit scoring system.
Redditt seems to also have gotten into the token game, testing subreddit, reputation tokens.
Membership and Early Access/Waiting Lists
We’ve recently seen the use of digital tokens as a means of creating a waitlist for a digital product. Early access to the Zora TestFlight Apphttps://ourzora.com/zora/flight can be purchased and held as a cryptographic token. This can be bought and sold on the open market. The more demand there is for a spot in the line, the higher the price of the token goes.
Last but not least, almost all digital assets are financial hybrids in the sense that they don’t fit into our traditional financial categories because the crypto medium is different in very tangible ways than the previous mediums money and finance has operated in.
For example, Binance Coin, BNB, can be described as a hybrid token that holds attributes of both an equity and a utility token. Boxing it in as one or the other, misses a crucial aspect of it and many other crypto assets.
As we can see, digital assets, although high in moneyness, can be used in different ways beyond the basic functions of money. Far from just being the ideas of bright eyed dreamers, these uses are real in the present tense and substantial in their future significance.
Their existence means not only can everything that has been created in the traditional financial system be created in the emerging system of blockchains and digital assets, but we can go way beyond whatever was created before and might transform the meaning of value itself while we’re doing it.