Ever wonder why English spelling makes no sense? Some sounds like numb and not at all like home. Bomb, comb and tomb do not sound the same, nor do bury and fury. You can pronounce lead in two ways and they mean different things.
It is the same with crypto. People have different definitions of the same word , or call the same things by different names. The reasons for it are also the same as the reasons for the infuriating English spelling – decentralisation and a lack of top-down control.
Monuments and paintings spell the name of King Henry VIII’s first wife in at least six different ways: Catherine, Katharine, Catharine, Katherine, Katherina and Cathrine. However, she signed her letters as Kateryn. There were no rules.
Eventually, the popular spelling of a particular word would become so prominent that it became the accepted spelling.
Crypto is going through a similar evolution, which can create a fair amount of confusion.
In this note, we highlight key terms that are often used to mean different things.
The term digital asset dates at least as far back as 2014, and its use became common during the 2018–9 crypto winter. It was initially preferred over the previous term cryptocurrencies because not all crypto assets are currencies. However, its popularity during the crypto winter was primarily due to the new generation of professional crypto market firms wishing to dissociate themselves from the scams and low-quality projects of the 2016–7 ICO Boom era.
Still, the phrase digital asset is quite problematic, as it causes much confusion. Almost all financial assets are digital and have been for decades. Bearer securities have all but disappeared, and most money only exists on a digital ledger. Cash accounts for approximately ten percent of the global money supply – the rest is purely digital, as are most securities. The term digital asset is extremely generic and does not describe crypto assets at all, like calling a tiger an animal but never a tiger – it’s not inaccurate, but it’s not very helpful.
Although the term digital asset is not misunderstood within the crypto market, the opportunities for confusion will compound with mainstream adoption – especially as Wikipedia defines ‘digital assets’ as ‘anything that exists only in digital form and comes with a distinct usage right’ which include “photography, logos, illustrations, animations, audiovisual media, presentations, spreadsheets, digital paintings, word documents, electronic mails, websites, and a multitude of other digital formats”.
In the case of crypto assets, the best descriptor is what clearly differentiates: their decentralised nature and the distributed ledger technology (DLT). The latter, however, is quite a mouthful, and the term decentralised asset has not been used much so far. For a reasonable compromise between accuracy and convenience while avoiding misunderstandings, we prefer the term crypto assets.
The term utility token has been used with three different meanings. While its use in some cases is accurate, in others, it has been used to obfuscate deliberately.
One meaning is legal – some regulators have created categories for crypto assets that have different regulatory treatments. Using a regulatory definition in a given jurisdiction is an accurate descriptor. But the legal definitions do not necessarily correspond to the economic reality of the asset; therefore, the term can cause confusion.
Another meaning is literal – the native tokens of blockchain protocols have a very specific and important utility: they are used to secure the network, and this utility has value.
But during the ICO Boom, the term utility token was widely used to describe crypto assets with no economic value issued by centralised entities. At the time, this capitalised on the limited understanding of most investors. It implied a parallel to native protocol tokens, such as Bitcoin and Ether, which do have a valuable utility, unlike tokens issued by private corporations. To justify the utility claim, sometimes fake utilities were created such as forcing the use of the token to pay for products and services on the platform – which is more disutility than utility, as it is an inconvenience.
Tokens without economic value can have legitimate use cases – the problem arises when it is implied that they have financial value.
In the first two cases, the term utility token is accurate, although it is important to define the context (i.e. legal or economic). In the third case, the term is basically a euphemism for a token without any economic value.
This definition also has multiple meanings.
One is the legal definition of what constitutes a security in a given jurisdiction. But this definition is unclear, as most regulators are still deliberating as to which crypto assets should be classed as securities.
While the regulators’ definition of security tokens is still rather fluid, projects that have proactively registered their issued tokens as securities can legitimately claim that they issued security tokens.
The term security token can also be used with an economic meaning: a token that gives rights to assets or cashflows in a similar way to traditional securities – irrespective of whether the token is registered as a security and irrespective of the relevant regulators’ view on it.
Both definitions make sense, however, we prefer to avoid the term because of the lack of regulatory clarity and, thus, the opportunity for confusion.
In the earliest days of the crypto market, cryptocurrency was the original term used for Bitcoin and other blockchain protocol tokens that were issued.
As this segment of the market still constitutes about 80 percent of the entire crypto universe, the term has often been used to describe all crypto assets, even though many types of crypto are not currencies at all. For example, the tokens of decentralised applications, such as Aave or Chainlink, have no currency-like characteristics or uses – the same way Microsoft shares do not.
To avoid confusion, we steer clear of the term when discussing the entire crypto market, although it is reasonable when describing layer-1 protocol tokens. However, even layer-1 protocol tokens, such as Bitcoin, are not just currencies. They are much more than that, as they have multiple use cases. This makes the term at least somewhat inaccurate, although it is widely used.
The term Web3 was defined initially as the decentralised internet. Projects working on various aspects of creating this new iteration of the internet constitute the Web3 sector of the crypto market.
Then again, the term Web3 is sometimes used to describe all decentralised applications (e.g. Web3 gaming and Web3 metaverse), and some use it to describe the entire crypto universe.
We find it more useful to stick to the narrow definition of Web3: the next iteration of the internet where users control their data and their user experience instead of centralised entities, including creating the foundations and infrastructure that allow the decentralised internet to operate as well as the user-facing applications of it.
Further confusion is created by the fact that before the advent of the crypto ecosystem, the term Web3 was used to describe a stage along the trajectory the internet was expected to follow where it would become increasingly AI-driven and centralised, heading towards human/technology convergence. The crypto vision of Web3, in many respects, is the opposite of the prior vision.
The term blockchain is used to refer to the technology underlying crypto assets. The term is so entrenched and widely used that it is too late to debate its accuracy at this stage.
We would, however, like to point out the inaccuracies. Blockchain in itself is simply a type of database structure. It is a very efficient one, and one that lends itself to the extraordinary demands of crypto protocols. But what makes these protocols unique and valuable is the distributed ledger technology, not the fact that they use the blockchain database structure to store data.
Furthermore, while most crypto protocols use blockchain database structures, not all do.
Which leaves the word blockchain as an inaccurate descriptor of the technology. But the usage is now so common that the ship has sailed on arguing with it.
Early on, when new token types started building on top of the original blockchains, the blockchain layer was referred to as layer 1 and the applications building on it as layer 2.
However, as the technology matured, the initial scalability bottlenecks were more quickly and efficiently solved by another layer building on top of these blockchains than by upgrading the existing blockchains or developing new ones. These scalability projects that are attached to layer 1 blockchains are now referred to as the layer 2 sector.
There remains some confusion where some still refer to decentralised applications as layer 2. Still, the scalability sector is winning out in staking a claim on the term layer 2.
The term application layer is also used in two meanings – one narrower and one wider.
In a broader sense, it refers to all the different token types that are built on top of the protocol layer, including NFTs, stablecoins and tokenisation.
A narrower meaning describes decentralised applications only as the application layer (e.g. decentralised finance, blockchain-based gaming).
Here, the confusion is less about the word sector, as this is a well-established term used in the traditional financial markets.
However, the crypto market often applies that word to describe something that is clearly not a sector but rather a theme.
The best example is describing smart contract platforms versus currencies as two different sectors. These are one and the same as far as the technology is concerned. Ether has the second largest market share after Bitcoin in payments among protocol tokens. Many regard Ether as better money than Bitcoin. Bitcoin meanwhile, also attempts to compete in the smart contract space, with recent successes in capturing market share. Bitcoin and Ethereum are clearly not fundamentally different things – they simply have different market shares currently in the various use cases of blockchain protocols.
Aligning assets around themes is useful and legitimate, but themes are not sectors. For example, an investment product around the theme of crypto being used in payments would include tokens with a large market share in payments (probably also including Ethereum), as well as projects that create stablecoins (now widely used in payments), decentralised payment applications and tokens of centralised companies that facilitate and enable crypto payments.
Another example is layer 2 scalability protocols that specifically serve the needs of an application sector, such as gaming or metaverse. They clearly benefit from the theme of a rise of the decentralised metaverse for example, but they are still a scalability protocol – not a metaverse application.
The term altcoin is used in two meanings.
Originally, it was coined to denote other layer 1 protocols that were created to compete with Bitcoin. They were alternatives to Bitcoin, thus the name altcoin.
However, the term has also since been used to describe every single crypto asset other than Bitcoin (e.g. application layer tokens or tokens issued by private companies).
GameFi is a relatively new term that is already used in two different contexts.
The narrow interpretation is the overlap of gaming projects with financial activities such as lending/borrowing and trading the tokens representing in-game items.
Some, however, apply the term to mean the entire blockchain-based gaming sector, which is somewhat inaccurate, as not all gaming projects have a lending/borrowing and trading aspect (e.g. blockchain-based gambling projects do not).
We have also noticed that when hacks occur in the crypto market, some commentators refer to all hacks as DeFi hacks, irrespective of the platform that was hacked.
When the hacked platform is referred to accurately, it is easier to determine which sectors and types of projects are vulnerable – whether it was a gaming platform, an interoperability protocol or actually a decentralised finance platform that was hacked.
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