For many years, people used to believe that the Earth consists of an amalgam of four elements—earth, fire, water, and air. It took until nearly 1750 for scientists to prove that fire isn’t an element but a result of a process. Later, in 1869, Mendeleev unveiled his Periodic Table of Elements which showed the chemical elements that could actually exist, including those not from our Earth. Mendeleev’s work led to a purposeful search and a synthesis of the elements, resulting in breakthroughs in many different industries.
I have a feeling that people today are repeating the very same process with digital assets, categorizing them as the traditional ones, cryptocurrencies, or other types of tokens.
A couple of weeks back, we issued a document (Principles of Digital Asset Classification) which shows the principles for classifying digital assets. It’s a theoretical document, yet it has some items of interest. We have divided 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 is possible to set up decentralized financial systems, where each of these processes is decentralized and never relies on some single party. But, that’s not where it ends. Bitcoin is an accounting system with an ultimate possible level of decentralization and independence. The fact, however, is that it’s not the claim of each and every accounting system.
Ten major companies that want to establish a common-for-them accounting system for reconciliation of operations don’t need to build a public, trustless, Bitcoin-like database.
So, the conclusion we’ve arrived to is that each of the foregoing five processes in the accounting system can actually be of three types: decentralized, centralized, absent (the fulfillment of the process is meaningless or impossible due to certain reasons).
Let me list off some of the possible combinations:
- All processes are centralized. Traditional (as of today) way of things — a central bank currency.
- All processes are decentralized. That’s what Bitcoin is.
- Governance and Issuance are centralized, but Custody, Processing, and Audit are decentralized. That’s the combination we can see in Ripple or Stellar.
- All processes are centralized, but transactions are impossible. That’s the case of PKI (a centralized infrastructure of open keys).
- All processes are decentralized, but transactions are impossible. This corresponds to some blockchain-based, digital identity systems, for example.
And so forth. Technically, if we try all the possible combinations, the total is 3^5 = 729 different results 🙂