The original sin of the blockchain industry was the umbrella term Cryptocurrency. This single word has done more damage to the image of this industry than any hack or fraud. I say this because this word has destroyed the imagination of onlookers who have come to the conclusion that everything going on here is about currency.
For the remainder of this article forget everything you know about the world of “cryptocurrencies”, and allow us to introduce you to the world of cryptoassets.
What is the Purpose of Cryptoassets:
Cryptoassets facilitate funding, coordination, and alignment of different forms of capital, all aimed at developing open source software. The end result is that open source software now has a sustainable funding and incentive structure.
In our view this means talented engineers, developers and entrepreneurs can obtain the same level of incentives that they do in a traditional business setting.
Examples of forms of capital that cryptoassets can coordinate:
Cryptoassets can be used to incentivize and reward developers for building meaningful software that extends the capabilities of the service.
Cryptoassets can be used as a reward system for those who contribute hardware to secure and maintain the network.
Cryptoassets can be used as a reward system for those who stake their assets to secure and maintain the network
Cryptoassets can be used to incentivize users to participate in a service.
Cryptoassets can be used to raise financial capital for the build out of a service
Cryptoassets can be used to incentivize and reward participation in the governance of a service.
In many cases, cryptoassets are essentially the glue that serves as a coordination point between specialized hardware operators, users, developers, and investors. If designed well, cryptoassets can create meaningful positive sum relationships between the stakeholders of any network or service available online.
Cryptoassets therefore present an opportunity for the establishment of open, transparent and community-owned alternatives to every online service available today, and perhaps will create services unimaginable in the old paradigm.
The Key Elements of a Cryptoasset:
As we explore our classification framework, it is important to emphasise that cryptoassets are highly expressive and programmatic, encompassing a wide variety of forms and functions. While our framework provides a general overview of the cryptoasset universe, remember that specific cryptoassets may possess unique characteristics that set them apart.
To fully grasp the intricacies of cryptoasset classification, investors need to be mindful of four key elements: Who is the issuer, how is the software governed, what type of cryptoasset is being used and are there financial or non-financial value flows attached to the ownership of a cryptoasset.
Who is the Issuer:
Every cryptoasset has an issuer. This can vary significantly, ranging from individuals, institutions, and governments to decentralised autonomous organisations (DAOs) or cryptonetwork. Most readers will be accustomed to the first three issuers but DAO’s* and cryptonetwork** are new organizational structures.
How is the Software Governed:
The second element pertains to the governance model of the service or platform the cryptoasset operates within. This can be centralised, with a select few controlling the future trajectory, or decentralised, enabling stakeholders to participate in governance decisions.
What Type of Cryptoasset is it:
Broadly we have identified three distinct forms of cryptoassets. The first are Asset backed cryptoassets, these are representations of value that exist on chain such as a stablecoins that are pegged 1:1 with US dollars or other fiat currencies held in a bank account. We have started to see the very early stages of tokenized equity examples of which can be found here and here.
The second cryptoasset type is transactional cryptoassets. These cryptoassets are essential to the operations of the networks within which they function. Users are required to pay in these cryptoassets when using the service or network. You can think of these cryptoassets as legal tender on their various networks, in order to use the service a transaction fee must be paid in the networks cryptoasset similar to how taxes or obligations in various jurisdictions have to be paid in the countries legal tender. From a high level we can think of these cryptoassets as cryptocurrencies or cryptocommodities. For the sake of finding common ground below are some similarities between transactional cryptoassets and traditional economies.
ETH is a great example of a transactional cryptoasset. Regardless of what you wish to do on the ethereum network, you will require ETH the cryptoasset to pay gas fees. Validators who wish to participate in the networks consensus are also required to stake ETH. ETH in this sense is the primary payment method and unit of account for the Ethereum network.
The final cryptoasset type is non-transactional cryptoassets. These are cryptoassets that are not required in the provision of a service. They are often used to represent governance rights over the software. These are akin to crypto’s pseudo equity market. Below are some similarities one could find between Non-Transactional cryptoassets and traditional businesses.
Sushiswap, a decentralised exchange, is a great example of a non-transactional cryptoasset. Sushiswap’s smart contracts are governed by SUSHI holders and allow traders to swap tokens in a peer to peer manner, the contract itself charges a fee. This fee is distributed to liquidity providers and SUSHI holders.
Are there Financial or Non Financial Value Flows:
The final dimension focuses on how value accrual occurs. This can take the form of financial value, such as dividends, buybacks or revenue sharing, or non-financial value, like access to exclusive services, discounts or rewards.
It's important to keep in mind that there exists many similarities between transactional and non- transactional cryptoassets. Both assets can confer governance, pay out a dividend, perform a buyback, issue bounties to developers or provide exclusive access to a set of services.
These are the crinkles that add to the complexity of attempting to apply traditional valuation methodologies to the world of cryptoassets. Analysts will need to incorporate features such as discounts, rewards or the value of access into their valuation approach.
From our point of view transactional tokens resemble currencies and commodities and should be compared based on their relative inflation rates and real staking yields, non-transactional tokens however are more similar to businesses. They provide a service, charge a fee and accrue residual interest that can then be distributed to holders or used for further development.
How are we positioned in the context of the Cryptoasset Taxonomy?
A significant portion of the Etherbridge fund is presently allocated to transactional cryptoassets, with a particular emphasis on Bitcoin and Ethereum. We view this as a defensive stance that emphasizes allocations in assets that not only enjoy mainstream recognition but also boast massive total addressable markets (TAMs) and hold pivotal roles in the overarching blockchain ecosystem.
The fund remains defensively positioned due to a lack of evidence that excess returns are broadly available, however we maintain allocations to non-transactional cryptoassets such as UNI, AAVE, LDO, OP, and ARB. Our focus for this class is on retaining top-tier market leaders, specifically within crypto use cases that align with our investment thesis. Within this basket we have exposure to decentralised exchanges and money markets, liquid staking and ethereum scaling solutions which remain our highest conviction ideas.
Bitcoin, a transactional cryptoasset, is a core long term strategic allocation for the fund. We remain convicted that increasing demand for apolitical, non discretionary money will continue to build and that Bitcoin is the purest expression of this thesis. The up and coming halving event will serve as yet another legitimacy check on bitcoin's programmatic and predetermined issuance schedule.
Ethereum, another transactional cryptoasset and long term strategic allocation, holds firmly as the heartbeat of the majority of public blockchain activity. It is a hub, hosting nearly 1000 protocols and boasting one of the most vibrant developer communities. Since the approval of EIP1559, we have become more confident that increasing usage of the Ethereum network will translate into higher prices of ETH. We look forward to further improvements to the ethereum network such as account abstraction and proto-danksharding (EIP 4844), these will mark meaningful improvements to the user experience of Ethereum.
Uniswap and Aave, are the incumbent Defi kings. Uniswap a decentralised exchange and Aave a decentralised money market, remain our favourite picks in the world of DeFi. Together they earn more in fees than popular smart contracting platforms such as Binance smart chain, Solana, Cardano and Polygon put together.
In the realm of liquid staking derivatives, LDO emerges as our top pick, maintaining its dominion over the market and providing pivotal staking services across notable networks such as Ethereum, Solana, and Polygon. Lido’s capacity to sustain its market share and perpetually expand its service offerings across an expanding array of Proof of Stake blockchains aligns with our strategy of backing robust, market-leading entities.
Lastly, ARB and OP, representing Ethereum's Layer 2 scaling solutions, have demonstrated robust growth and have progressively carved out meaningful market share from alternative smart contracting platforms. Whether evaluating Total Value Locked (TVL), fees, protocol adoption, or stablecoin market caps, ARB and OP consistently demonstrate performance and growth, outpacing competitors such as Polygon, Solana, and Cardano. Their business models, which we liken to refineries of the crypto realm's most crucial commodity—blockspace—exude sustainability and growth potential, further solidifying their positions within our portfolio.
*What is a DAO?
A DAO, or Decentralized Autonomous Organization, operates via blockchain, enabling automated, transparent decision-making and financial transactions without centralized authority. Utilizing token-based governance, participants vote on proposals, guiding the DAO's activities, and managing its funds, all enforced through unchangeable smart contracts, ensuring transparency and adherence to established rules.
**What is a Cryptonetwork?
Cryptonetworks, layered over the internet, utilize consensus models like blockchains for state maintenance and updates and employ cryptoassets to motivate participants, including consensus enforcers (miners/validators). While some, like Ethereum, serve as versatile programming platforms, others are specialized: Bitcoin prioritizes value storage, Golem focuses on computations, and Filecoin facilitates decentralized file storage.
While it’s easier to look away, seeking to understand is the only path to a more enlightened and empowered world. Bitcoin, Ethereum and distributed ledger technology are complex systems that require due diligence to comprehend and operate in. Etherbridge lowers the barriers to understanding this fast-growing digital economy.
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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments. Collective Investment Schemes (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up. Past performance, forecasts or commentary is not necessarily a guide to future performance. As neither Lima Capital LLC nor its representatives did a full needs analysis in respect of a particular investor, the investor understands that there may be limitations on the appropriateness of any information in this document with regard to the investor’s unique objectives, financial situation and particular needs. The information and content of this document are intended to be for information purposes only and should not be construed as advice.