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September 29, 2021

Thought Leaders

A Taxonomy For Cryptoassets

There are currently more than 11,000 cryptoassets traded on over 400 exchanges, with a total market capitalization of $2.2 trillion.1 Each of these cryptoassets can be classified and understood using different lenses and metrics. In this respect, understanding the differences is certainly not an insignificant task.


This article sheds light on popular cryptoasset taxonomies, based on the depth, breadth, and scope of their use. Providing a universal taxonomy is beyond the scope of this report, however comparing different approaches is helpful to (1) understand the aggregate trend on market use of cryptoassets and (2) ultimately provide a framework to help investors navigate the complexity of this asset class.

Introduction

A taxonomy for cryptoassets can be based on different properties and characteristics. For instance, it is possible to rank assets based on an objective metric such as market capitalisation. However, asset characteristics related to value, prices, liquidity, and volatility do not necessarily offer context on the actual use case and scope of a given asset.


A taxonomy based on a variety of attributes, including regulatory status, underlying protocol, supply, economic incentives, use case and industry may be more useful. For instance, classifying cryptoassets by their use case and industry provides a logical way to compare different projects, and ultimately how to invest across them. The clear example is comparing Bitcoin (BTC) with Ethereum (ETH), the two largest cryptoassets by market capitalisation. While BTC is seen as a potential a Store-of-Value similar to gold, ETH is known as the leading platform for decentralised finance applications. Comparing the growth prospects of the two is therefore not just wrong from a pure fundamental perspective, but it makes little sense from an economic standpoint.

Use Case Classification

The first natural grouping for cryptoassets are by their legal dimensions. For most jurisdictions, the classification of cryptoassets as securities is still rather blurred. Although some legal systems are more lenient towards the integration between the real economy and cryptoasset markets (e.g. the recent introduction of BTC as legal tender in El Salvador), there is no globally consistent legal approach and framework when it comes to classifying cryptoassets. Emerging markets in particular are lagging more developed economies in this area.

 

One way around this is to link the legal definition of an asset to its use case. For instance, if the primary use case of a cryptoasset is being a method of payment (e.g. Litecoin, Stablecoins, etc.), then the legal classification should be the one of a payment method. A taxonomy based on the intended use has been proposed by the Swiss Financial Market Supervisory Authority FINMA.2

 

FINMA classifies cryptocurrencies as payment tokens, asset tokens and utility tokens:

 

  • Payment tokens are typically not viewed as securities. Their use case is to provide a method of payment or value exchange. BTC falls within this category. As such, these cryptoassets do not confer any claim upon the issuer.
  • Asset tokens are closer to conventional securities. This is because the intended purpose of these tokens is to provide a claim on future cash flows, company property or revenues. This makes them like traditional financial assets for which there is an established framework.
  • Utility tokens are somewhat a residual category. The intended purpose is to provide access to a given product or service. In this respect, although the definition of a utility token is still rather ambiguous, they are not viewed as standard securities.

 

Figure 1 provides a breakdown of the FINMA classification for more than 1600 cryptoassets for which such classification is available. We report the size of each group as a fraction of the total number of assets classified.

Figure 1: Use Case Classification

Source: Aaro Capital Research, CryptoCompare
Notes: The figure shows the fraction of cryptoassets classified as Asset, Payment, Utility and hybrid combinations based on the FINMA classifications. This covers the 1602 cryptoassets for which the FINMA classification is available, as of 15th September 2021.

Two interesting facts emerge. First, of the 1602 cryptoassets analysed, 81% are classified as utilities, 5% as payment methods and less than 1% as pure assets. Most have not been classified as securities. Second, some utility tokens (around 11% of all cryptoassets classified) are assumed to have received some sort of initial funding (ICO, pre-sale or other form of funding), making the FINMA security guidelines applicable for this sub-class.

Industry Classification

The taxonomy provided by FINMA primarily reflects the intended use of each cryptoasset. A second classification can be based on the economic properties of each asset. Cryptoassets can be categorised based on their primary industry activity or realm.

One can apply Standard Industrial Classification (SIC) codes to cryptoassets based on their market of operation. For instance, decentralised exchanges, crypto asset management, liquidity providers, payment systems, and so on, can all be classified under the Financial and Insurance Sector. Similarly, cryptoassets which relate to gaming, and NFTs related to social media, art and entertainment, can all be classified under the Arts, Entertainment and Recreation sector. The Office of National Statistics (ONS) provides SIC codes with different level of granularity. At the very high level, we can distinguish between eight different industrial sectors.

 

Figure 2 below provides a breakdown of this industry classification for more than 1600 cryptoassets for which such classification is available. We report the size of each group as a fraction of the total number of assets classified.

Figure 2: Industry Classification

Source: Aaro Capital Research, CryptoCompare
Notes: The figure shows the fraction of cryptoassets classified according to a first layer of the SIC classification. We look at the 1602 cryptoassets for which this industry classification is available, as of 15th September 2021.

Understandably, the vast majority of the 1600 cryptoassets analysed fall under the Finance and Insurance sector. This reflects the explosion of the Decentralised Finance (DeFi) ecosystem since early 2020. The second and third largest industries are Blockchain-specific applications, such as layer-2 solutions; and Arts and Entertainment. The growth of blockchain-specific applications goes hand-in-hand with the growth of the DeFi space. Most DeFi applications are built on the Ethereum platform. A growing number of applications means higher costs and more network congestion, which in turn spurs innovation for faster and less expensive layer-2 solutions on top of the Ethereum blockchain.

DeFi vs Stablecoins vs …

Novel crypto concepts such as Stablecoins and Decentralised Autonomous Organizations (DAOs) have been gaining traction since the creation of Tether USD (USDT) and DAOs such as Compound (COMP) and MakerDAO (MKR). This possibly suggests a further taxonomy of cryptoassets based on the nature of their market positioning. For instance, DeFi tokens can be separated from stablecoins, and ERC-20 tokens can be separated from tokenised assets and exchange tokens. Such classification is not easy to implement, as it requires evaluating each project individually.

Figure 3: Market Classification

Source: Aaro Capital Research, Glassnode
Notes: The figure shows the fraction of cryptoassets classified according to the corresponding market and purpose. We look at the 107 cryptoasssets for which such classification is available, as of 15th September 2021.

Figure 3 provides a breakdown for more than 100 major cryptoassets based on some of their specific characteristics.3 ERC-20 projects represent almost 60% of the 107 projects considered. Examples of ERC-20 projects are Band Protocol (BAND), Basic Attention Token (BAT), Chainlink (LINK), OmiseGO (OMG), etc. Some of these projects are in the top 50 by market capitalisation. Similarly, also DeFi tokens also play a significant role in the aggregate market landscape with 23% of the 107 projects classified as DeFi applications. Among others, Aave (AAVE), Uniswap (UNI), Augur (REP) and Compound (COMP) all are within the top 100 by market capitalisation. Stablecoins and exchange tokens represent 8% and 7%, respectively, of the total number of projects / assets.

Conclusion

The rapid growth of cryptoasset markets requires a complete and coherent taxonomy based on legal, economic, and market aspects of each project. Although we are still far away from such a universally used classification of cryptoassets, several considerations can be made. For instance, we can classify assets based on their intended use, their “industry”, and/or their project specifics.

 

In this article we briefly review and investigate the extent to which such classifications represent the market for cryptoassets. Few things emerge:

 

  1. When it comes to the intended use, the majority of cryptoassets are considered utility tokens or hybrid utility/payment or utility/assets

 

  1. The Finance and Insurance sector dominates other industry classifications.

 

  1. ERC-20, DeFi and Stablecoins characterise a majorty of the cryptoasset market as of September 2021.

Footnotes

1 Source: CoinMarketCap, 19th September 2021.

 

2 FINMA. (2018, February 16). FINMA publishes ICO guidelines. Retrieved April 9,

2018, from https://www.finma.ch/en/news/2018/02/20180216-mm-ico-wegleitung/

 

3 Source: Glassnode.

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Crypto-tokens and equity investments are high risk in nature and you should always take the advice of a professional financial advisor from within the jurisdiction in which you reside before making any investment decisions.

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