How to use crypto: 8 digital asset utilities

ResearchAug 05, 2022
How to use crypto: 8 digital asset utilities

Over 300,000 million people use cryptocurrencies worldwide, and this number can soar to 1 billion by 2030. Digital assets are not merely a medium of exchange — they can serve as a store of value, a representation of physical assets, a governance mechanism, and more. Discover the key advantages of cryptocurrency transactions and blockchain technology in our guide.

What is crypto?

In layman's terms, a cryptocurrency is a digital (virtual) currency used over the internet directly, without institutional oversight. As cryptocurrencies are not generally issued by central authorities, they are immune to censorship and government manipulation. Instead of a bank account, crypto holdings are kept in digital wallets — custodial and non-custodial.

Centralized finance vs. blockchain platform. Source: ResearchGate
Centralized finance vs. blockchain platform. Source: ResearchGate

The term crypto reflects the algorithms and techniques securing transactions, such as hashing functions and public-private keys. Any cryptocurrency is based on three aspects:

  • cryptography
  • decentralization
  • consensus mechanisms

The total number of coins and tokens has more than doubled since 2021 — today, it exceeds 12,000. The rate of adoption depends on the regulatory landscape around the world, which is still uneven.

The UK, the US, Germany, and Finland are some of the most crypto-friendly countries. Yet only El Salvador and the Central African Republic recognize crypto as legal tender. In November 2021, over 100 national governments were developing guidelines for virtual currencies. China and eight other countries have explicitly banned them.

Quick overview of blockchain technology

Cryptocurrencies are based on blockchain, a distributed digital ledger storing transaction records. It is shared over a network of computers. The transaction history is public, transparent and immutable, which also makes it traceable and secure. Here is what happens when you transfer the most popular virtual currency via a mobile device.

Steps of Bitcoin transaction. Adapted from CryptoManiaks
Steps of Bitcoin transaction. Source: CryptoManiaks

Crypto holders do not worry about identity thieves thanks to pseudoanonymity. Cryptographic keys safeguard their personal details. A holder of BTC is linked to a public Bitcoin address, but their actual name and address remain hidden.

Compared to traditional currencies and wire transfers, online payments are inherently more secure. This form of peer-to-peer network functions beyond the reach of central banks. Given its decentralized transactions and data storage, it can benefit a wide array of industries.

For instance, there are multiple use cases for musicians, from royalties to revenue sharing to fighting piracy. Music companies can buy and sell rights in streamlined ecosystems where anyone can trace the history of these transfers. The blockchain network technology is also applicable to:

  • Financial services
  • Vehicle titles
  • Polling and voting
  • Healthcare
  • Movie industry

Types of Cryptocurrency

Since the emergence of Bitcoin in 2009, the market has been flooded with thousands of other cryptocurrencies. They belong to five main categories.

Bitcoin

BTC is the first cryptocurrency and the undisputed market leader. Its market cap ($24.5 billion) is twice as big as the runner-up's. The most popular coin was designed as a medium of exchange for peer-to-peer transactions around the world. At the all-time high in November 2021, one Bitcoin was worth $69,044.77 on cryptocurrency exchanges.

Altcoins (alternative coins)

This category includes all other cryptocurrencies. While many altcoins are based on Bitcoin, they support a variety of utilities and use cases. The most popular altcoin — Ether — is the second most commonly traded cryptocurrency.

ETH has diverse applications. Aside from payments and transfers between wallets, it is used to compensate miners and cover transaction fees on the Ethereum network. ETH is the lifeblood of this immense ecosystem that, unlike Bitcoin, supports smart contracts and Dapps (decentralized applications).

Tokens

These are units, or representations, of value created by projects built on top of blockchains. For instance, ERC-20 tokens powered by Ethereum are used to raise capital, provide loyalty rewards, manage governance, and more.

Tokens are compatible with the native currency of the underlying blockchain, but this is still a separate asset class. Ethereum hosts thousands of platforms — for example, Cryptokitties, Dai, Chainlink, and Compound — and each of them has its own native token.

Stablecoins

These are cryptocurrencies whose value is pegged to real-world assets. For example, Tether (USDT) was designed to represent a fiat currency — the US dollar — in a 1:1 ratio. Dai (DAI) and USD Coin (USDC) are also tied to greenback. In June 2022, Circle launched the first Euro-backed stablecoin — Euro Coin (EUROC).

Pegging mitigates volatility, as fiat currencies are more stable. The same is true for stablecoins linked to precious metals — for instance, Pax Gold (PAXG) and Tether Gold (XAUt).

Meme coins

These are digital assets inspired by jokes and viral memes. Some of the most valuable cryptocurrencies of this kind are Dogecoin (DOGE), Shiba Inu (SHIB), and Baby Doge (BABYDOGE), all featuring Shiba Inu.

Meme coins work similarly to other crypto, as they are built on blockchain and related technologies. However, there is an absence of fundamental use cases. Typically, these assets are commutative-driven and dependent on social media marketing for success.

Top 5 memecoins by market cap as of August 5, 2022. Source: Coinmarketcap
Top 5 meme coins by market cap as of August 5, 2022. Source: Coinmarketcap

Top 8 digital asset use cases

Coins and token can be stored, transferred, and traded. The range of potential benefits beyond conventional finance is expanding rapidly. The following list is not exhaustive, but it includes the most salient applications. Here is how eight use cases for cryptocurrency work.

Use case #1. Financial transactions

Over 15,000 merchants, including giants like Starbucks, Lamborghini, Tesla, and McDonald’s, accept Bitcoin. More brands are eager to join the crypto bandwagon. According to a survey by Deloitte, 75% of retailers in the US expect to implement crypto payments within the next two years.

Using a digital wallet, you can pay for goods and services on any e-commerce website accepting cryptocurrency.  This payment method is always direct and independent of any central authority. As a result, money transfers are freer and censorship-resistant compared to traditional payment systems.

Use case #2. Crypto banking

The market of crypto finance has borrowed a few functions from conventional banking — most notably, crowdfunding, lending, and interest-bearing. Users can earn impressive APY on Interest Accounts or term deposits, take out loans collateralized by crypto, generate financial statements for tax authorities, and more.

Adoption by financial institutions is on the rise. Major banks like Barclays, Goldman Sachs, and JP Morgan, have started incorporating crypto into their offerings. In particular, clients can open crypto interest accounts and savings accounts. JP Morgan's wealth-management clients can access cryptocurrency funds. Recently, Bitcoin has also become part of 401k schemes.

Use case #3. Investment (store of value)

The average financial advisor is not well-versed in crypto, but the investment landscape is changing. Bitcoin has already been dubbed digital gold as it transfers value over space and time. Given its spectacular price hikes, the coin could potentially outshine oil and gold as a store of value. This reasoning underlies many cryptocurrency investments.

Some experts suppose BTC will eventually take the market share away from gold, albeit in the distant future. Like gold, it is rare — the total amount in circulation is capped at 21 million coins, and the final bitcoin will only be minted around 2140.

At the same time, you do not need online brokers or another intermediary to invest in crypto. It is also non-physical, so theft is more complicated (as long as you store your private key in a safe place.) Finally, Bitcoin is more divisible — 1 BTC contains 100,000,000 satoshi.

Due to market volatility, diversification is the primary piece of investment advice. Don’t put all your eggs in one basket, the old adage for stocks and shares, is just as relevant. Those who invest in crypto should spread their money out among different coins and tokens. Do not invest all your money in a single coin.

Use case #4. Asset tokenization

Tokens can represent a variety of things in the physical world — from real estate to stocks to copyrights. Tokenization created intrinsic value that is directly connected to the underlying assets. This allows individuals or entities to achieve two goals:

  • Increase the market liquidity of their assets in the physical world
  • Give access to investors that were previously excluded from the market

Public companies can raise capital through ICO (Initial Coin Offering) instead of issuing shares. To that end, they can mint coins or tokens and put them for sale in exchange for fiat or virtual currencies. This scheme is not limited to projects residing on blockchain.

Utility tokens give access to products or services developed using the proceeds. If the buyers get voting rights or a share in the company's future revenues, these assets are called security or asset tokens. It is not mandatory for ICO coins or tokens to have tangible value.

Use case #5. Transaction fees

As we have mentioned, Ether is not only a digital currency — it is also the specific cryptocurrency for gas fees within the native blockchain project. They are paid for any type of actions, be it a transfer or a smart contract call. You will inevitably pay ETH to:

  • move ETH between digital wallets
  • swap ETH to ERC-20 tokens
  • access play-to-earn games
  • use decentralized finance protocols
  • purchase NFTs

Fees for crypto transactions achieve two goals:

  • Securing the network. If transactions were free, spamming would be easy — hackers could send millions of messages and bring the network down. Fees are a crucial safeguard for smart contract execution.
  • Incentivizing the node. Depending on the consensus algorithm, nodes could include miners, validators, or other types of users responsible for proposing and validating blocks on a blockchain. The higher the tip paid by users, the higher the chance of their transaction becoming part of the next blocks.

Types of incentives

In Proof-of-Work (PoW), miners provide computational power to verify transactions and secure the network. Bitcoin's algorithm generates puzzles to produce new coins, and the term PoW reflects the computational effort required to get block rewards. The first miner to solve each mathematical puzzle gets a particular amount of native tokens.

In Proof-of-Stake (PoS), security is based on validators staking the native tokens. For example, this is the function of ATOM on the Cosmos blockchain. Like miners, stakers propose new blocks and pass users' transactions through. In a variation of PoS called Delegated Proof-of-Stake, users become entitled to a portion of the rewards after they delegate the tokens to the validators.

Proof-of-Stake. Adapted from Ledger.com
Proof-of-Stake. Source: Ledger.com

Use case #6. Governance

This aspect of blockchain protocols defines the way future upgrades are implemented. Interestingly, Bitcoin has no agreements on proposed changes, which makes soft and hard forks inevitable. As an alternative solution, governance tokens give holders voting rights, so they can propose changes and vote for the upgrades suggested by others.

On-chain governance, a concept championed by gaming providers, combines decentralized autonomous organizations (DAOs) with governance tokens. For example, any future changes to the yearn.finance protocol are governed using its native token YFI.

This model has an inherent flaw: in theory, holders with the most tokens may abuse their power. However, in most cases, governance tokens democratize the process. This system for managing blockchain changes is applicable to many spheres.

The MetaBrewSociety company offers co-ownership rights in the world’s first blockchain brewery through NFTs. Instead of selling real company shares, the business will mint 6,000 NFTs giving voting rights via its DAO and a rich annual beer allowance.

Some of the benefits described by the MetaBrewSociety. Source: MetaBrewSociety.com
Some of the benefits described by the MetaBrewSociety. Source: MetaBrewSociety.com

Use case #7. Crypto gaming

Most games in the blockchain space include one or more native tokens. Players use them to get in-game assets, trade NFTs, and more. The rise of play-to-earn (P2E) games, where players mint new tokens, proves that crypto and gaming are a perfect match. The use of crypto assets on gaming platforms can streamline their policy-making.

Popular governance tokens include AXS (used in  Axie Infinity) and SAND (part of the Sandbox ecosystem). In the future, crypto gaming platforms could become income sources for many people. The potential of P2E is immense.

Use case #8. Equity tokens

Dapps are built using liquidity pools, which accumulate liquidity from users in form of different cryptocurrencies. Contributors get rewards like a a share of trading fees. Subsequently, they use equity tokens to claim back their locked assets. The can also use these tokens to add liquidity to other pools.

Buying and selling digital currencies on crypto exchanges

You can buy and sell cryptocurrency on specialized platforms. The best crypto exchanges will provide all the necessary tools, similarly to conventional brokerages. Different platforms offer different supported assets, fees, payment methods, and security. There are two types of these environments — decentralized exchanges (DeFi) and centralized exchanged (CeFi).

CeFi vs. DeFi

Centralized cryptocurrency exchanges are biggest key on-ramps for crypto. They offer the ease of use and security of a traditional financial institution. Users' assets are stored in hot wallets by the exchanges, and they also use KYC (Know Your Customer) protocols for identity verification.

DeFi is a relatively new concept — the term was only coined in 2018. Decentralized exchanges require self-custodial wallets and offer no customer service. They are completely trustless and permissionless. On the downside, in case of a scam or smart contract exploit, there is no way to recover the funds.

Looking ahead: digital assets and their use cases

As a form of digital money, cryptocurrencies are beyond the control of any individual, group, central bank, or other entity. They let users pay for goods and services, benefit from price hikes, earn interest, and achieve a variety of other goals. The number of applications for businesses and individuals, from finance to gaming, is constantly growing.

Financial institutions can block a bank account, but not a digital wallet. Transactions in a distributed ledger are transparent, immutable, and protected from manipulation. Given the benefits, crypto assets and blockchain technology are here to stay, with more utilities and use cases ahead.

Disclaimer:

The information provided by CoinLoan (“we,” “us,” or “our”) in this text is for general informational purposes only. All investment and financial opinions expressed by CoinLoan in this text are from the personal research and open information sources and are intended as educational material. All outlined information is provided in good faith. However, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information in this text.

Like the article? Spread the word!
We use cookies to provide the best services. Cookies are subject to our Privacy Policy.