For many years, people used to believe that the Earth consisted of an amalgam of four elements – earth, fire, water, and air. It took until nearly 1750 for scientists to show that fire isn’t an element, but the result of a process. Later, in 1869, Mendeleev unveiled his Period Table of Elements – which showed which chemical elements could actually exist, including those not present here on Earth. Mendeleev’s work led to a purposeful search and a synthesis of elements – resulting in breakthroughs in many different industries.
There’s a feeling that people today are repeating that same process with digital assets – categorizing them as traditional, cryptocurrencies, tokens, and so forth.
A couple of weeks back, we launched a document (Principles of Digital Asset Classification) which presented the principles for classifying digital assets. Although it’s a theoretical document, it still contains a number of items of interest. We used the document to divide all the processes in asset accounting systems into the following five categories:
- Transaction Processing
Prior to the emergence of Bitcoin, it was believed that such processes could only be handled in a centralized way. Bitcoin, however, showed that it was perfectly possible to set up decentralized financial systems.Prior to the emergence of Bitcoin, it was believed that such processes could only be handled in a centralized way. Bitcoin, however, showed that it was perfectly possible to set up decentralized financial systems.
Our belief is that each of these processes could have THREE categories – centralized, decentralized, or that the process is impossible in principle.
Let’s list off the possible combinations:
- All the processes are centralized – this is fine, and it gives us a central bank currency.
- All the processes are decentralized – an option that gives us Bitcoin.
- The first four of the processes are decentralized, but Audit is impossible – such systems exist, such as the cryptocurrency Monero (or ZCash).
- The first four of the processes are decentralized, but Audi is centralized (!). This is possible, and called ZCash, provided that the initial secure parameters haven’t been destroyed (which is, most probably, the case ???? ?)
- Governance and Issuance are centralized, but Custody, Processing and Audit are decentralized – a combination we see in Ripple or Stellar.
- All processes are centralized, but transactions are impossible – this is PKI (a centralized infrastructure of open keys).
- All processes are decentralized, but transactions are impossible – this corresponds to identity on blockchain.
And so forth. Technically, if we try all the possible combinations, they total 3^5 = 729 different results 🙂