Crypto assets and Cryptocurrencies

Chapter 5:

Dr. Trupti Lotlikar

Department of Information Technology
FR.CRIT, Vashi.
 Cryptoassets
• A crypto-asset is a digital asset that uses peer-to-peer networking , encryption and a
public ledger to control the creation of new units, validate transactions, and safeguard
the transactions without any involvement of middlemen.
• Using peer-to-peer networking and cryptography, crypto-assets help decentralized
business, cutting out the middlemen and lowering prices.
• Crypto-asset are used by the internet of things(IoT), making payments or sharing files.
• Whatever serves as a value store qualifies as an asset. The ability to store value and
convert into cash when necessary is the sole basis for the name “cryptoassets,” which are
digital assets.
• A digital representation of wealth that is cryptographically protected is called a crypto
asset.
• There are around 1591 crypto assets, four categories exist:
• 1. Platform tokens/crypto commodities
• 2.Utility tokens
• 3. Transactional tokens
• Cryptocurrency
• The most well-known kind of crypto-asset is a cryptocurrency,.
• Litecoin, Dash and Bitcoin are among examples.
• These crypto assets sole function is to serve as money or digital currency, providing consumers
with a more secure and decentralized experience.
• What is cryptocurrency?
• It is a decentralized encrypted digital currency that can be mined, moved between peers and
verified in a public ledger.
• Users may transmit exactly what they want without a 3rd party’s participation.
• They change in value according to supply and demand , much like conventional fiat currencies.
• It is intended to be unaffected by government interference and control.
• It is not released by a centralized body.
• The first cryptocurrency, Bitcoin , was introduced in 2008,
• Altcoins first started in 2011
• The top 5 cryptocurrencies by market capitalization are Ethereum . Bitcoin Cash,
Ripple, Litecoin and Dash
• Benefits of cryptocurrency:
• Simple to carry
• Simple, quick and safe
• Decentralized structure
• Customer privacy
• Transparency
• Disadvantage of Cryptocurrency
• Lack of knowledge and understanding
• Volatility Risk
• Top 7 CryptoCurrencies:
• Bitcoin
• Ethereum
• Litecoin
• Peercoin
• Dashcoin
• Namecoin
• Novacoin
• Ripplecoin
• How are Tokens defined?
• Tokens are digital assets created on a cryptocurrecy’s blockchain.
• A token is built on a existing blockchain, as opposed to a coin , which is built on its own
original blockchain,
• Ex. on the Ethereum network, ERC-20 tokens are created.
• Token represents a particular asset or utility, which typically sits on top of another
blockchain.
• In Ethereum, a custom token of any kind is merely a component of a token “contract”.
Each token contains a small database that tracks who owns what. This ‘token’ is only an
item in the token”contract”, and this contract just lists who owns this token.
• Technically, a token never actually resides in your wallet. Your token is actually just a record
in the database of tokens contracts that will read “0xffoaYOURWALLET=1000 tokens.”
• It resembles a pincode that you enter an ATM to check the balance of your bank account ,
• Different type of tokens:
• 1. Equity tokens serve as a representation of a company’s shares and equity.
• 2.Utility tokens a means of gaining access to goods and services
• 3. Payment tokens: Tokens for making payments for goods and services
• 4.Security tokens save personal data to electronically authenticate a person’s
identity.
Coins(Cryptocurrency) Tokens

Native to its own blockchain technology, or built Built on top of an existing blockchain
onto a blockchain

Mining is the main method of distribution Primarily distributed through ICO’s

It takes a great amount of time and effort to create. It is comparatively simple to make

It is used to store or transfer money It is valid with one merchant

• 1. Fungible v/s Nonfungible Assets:
• An asset that can be exchanged for another one, much like money can, is fungible
• For eg, , the value of Indian rupee is the same as the next, It makes no difference which you have because
they are all equal in terms of worth, value and purpose.
• For eg. Shares, if one purchases 500 shares of TCS, one wouldn’t care which 500 shares you received as long
as you got 500 shares of TCS.
• However, a non-fungible asset is not the same as its equivalent.
• Due to its uniqueness, non fungible tokens(refereed to NFT) are digital assets that are difficult to trade for
other assets.
• For eg. A piece of art that has a special meaning for the owner and would be challenging to swap for another
piece of art because of the discrepancy in their perceived valuations.
• A non-fungible asset is one that cannot be exchanged for another asset because no two assets are alike and
do not have the same values.
• For eg, exchanging a puppy with a gaming tool because they are not the same and do not have the same
value.
• For eg, 2 houses and 2 cars do not have the same values , since they have different histories and owners.
• 2. Platform tokens/Crypto commodities
• Platform tokens were developed for the purpose of serving as a platform for the
growth of other decentralized projects.
• Ethereum is a biggest platform token.
• A hardware and software foundation for the creation of decentralized
applications is provided by Ethereums decentralized platform(dApps)
• With the advent of smart contracts , new projects can be created on Ethereum
platform and create their own smart contracts on blockchain, The Ethereum
platform allows new projects to create their own ERC20 tokens
• 3.Utility /Protocol Tokens
• ERC20 tokens created on the Ethereum network are utility token(protocol tokens)
• OmiseGO, Filecoin, Bancor, and BAX are few examples
• These tokens can be traded for particular products and services like distributed
storage, in-app money or more practical uses.
• The projected usage of these tokens in the project for which they are developed
typically determines their value.
• 4. Transactional Tokens
• Fastcross-border payments are made possible by transactional tokens, which
also provides process transparency.
• These are typically blockchain based tokens like Ripple, and Iot tokens like
IOTA.
 Erc20 and ERC721 TOKENS
• Blockchain Developers frequently designed tokens based on personal preference ,
which made it difficult for token ecosystems to communicate with one another and
restricted interoperability
• ERC were developed by Ethereum developers to address this issue.
• Programmers of smart contracts use the Ethereum blockchain platform to create
standardized documents known as ERC-s
• These documents lay out the guidelines that coins based on Ethereum must follow
• ERC -20 is most popular standard for Ethereum tokens
 ERC20 (Fungible Tokens)
• The Ethereum blockchains first token standard, ERC-20, makes it possible to create
fungible tokens
• Febian Vogelstellar developed the ERC-20 standard back in 2015.
• ERC-20 is a wellknown standard in the crypto community and can be used with any
other. For e.g., fungible tokens stand for assets like fiat money, an ounce, and ICO’s that
can have their value substituted with something else of equal or greater worth
• The main advantage is that the token may be interacted with a standard way by an
application or smart contract without the need to know specifics about the token,
• Startups are benefitting from ERC-20 token, as millions of dollars are successfully
raised by several firms through token sales.
• ERC 20 contract have millions of tokens and these get distributed to owners.
• It is a standard protocol that regulates the tokenization and ensures that the
technical specifications of tokens are met. If a token does not meet regularity, it
wont be called ERC20 token.
• The following digital assets might theoretically be represented by an ERC-20 token:
• Financial resources in the real world, such as stock in a corporation, dividends on
shares, etc
• Tickets for a web based game or scheme
• Points earned through online gaming
• A smart contract ability to create fungible tokens is defined by the ERC-20
protocol. Its primary techiques include:
• Name()optional: The name of the token
• Symbol() optional :With the symbol component, users could find the ticker
symbol for the token
• Decimal() optional : the decimal places of the token
• This allows for fungibility.
• totalSupply(): The total number of existing tokens.
• BalanceOf(): The total number of tokens owned
• by a particular account,
• Transfer(): Moves a number of tokens from the callers account to a specified
address
• transferFrom(): Same as transfer(), but it also specifies the address to move tokens
from
• Allowance(): The number of tokens a spender is allowed to spend on behalf of the
owner via transferFrom()
• Approve():sets the number of tokens a spender is allowed to spend
• With the exception of the ist 3 labelled(optional), which enhances usability, all of
these techniques are strictly necessary in an ERC-20 smart contract.
• Additionally, an ERC-20 contains 2 events: Transfer(which is triggered whenever
tokens are transferred) and Approved(which is triggered if the approve()method is
successfully called)
 ERC 721
• ERC-721 are also known as Non-Fungible tokens(NFT)
• Nastassia Sachs, Dietr Shirley and William Entriken developed the ERC-721 standard.
• ERC 721 , similar to ERC-20 can generate as many tokens and distribute these to own multiple
tokens
• ERC 721 has extra functions and contain meta data.These are called smart contracts because of
this each token can have unique properties making each token unique and you cant exchange one
token for another because none are exactly the same.
• NFT’s give programmers the ability to tokenise ownership of any type of data in any format.
• ERC-721 has its own set of standards
• ERC-721 signifies :
• A special piece of digital content
• Stuff from social media, such as Reels, Tweets and images
• Collect ibles and gaming equipment
• Video game characters
• Erc-721 smart contract mechanism includes:
• balanceOf(): the no. Of tokens in th owners account
• ownerOf(): the tokenId of the owner
• safeTransferFrom(): safely transfers tokens from the owner address to the recipients. The
tokenId must get be specified as a parameter
• transferFrom():same function as safeTransferFrom(): , but generally not recommended
• Approve(): Allows an address to transfer a token identified by its tokenId, into another
account. It trigger the approval event
• SetApprovalForAll():Allows an operator to call safeTransferFrom or transferFrom for any
token owned by the caller.
• getApproved(): Get the approved account for a specific tokenId.
• Is ApprovedFor All(): Checks if the operator is allowed to manage all the assets of the owner.
• Aditionally it includes events such as Transfer(which occurs whenever ownership of a NFT
changes) and Approval(which activates when the approved address for an NFT is changed)
Criteria ERC20 ERC721
Fungibility Fungible in nature Non-Fungible in nature
Token Identity The various tokens do not differ much The token has a distinct identity and is
from one another distinguishable from the others
Collecting Tokens issued by ERC-20 are not collectible Tokens issued by ERC-721 are collectible similar to
Tokens fiat money
Can transfer Value exchange between users Rights transfer
Adoption Commonly adopted Acceptance levels are limited
Value fluctuation ERC-20 tokens have the same value Depending on their rarity and uniqueness, ERC-721
tokens value changes
Divisibility Can be divided in various ways, even 0.1% ERC-721 tokens cannot be divided
of the token can be shared,
Ownership There are no designated specific ownership Special ownership function may be made available
functions functions
Recovery No mechanism for recovery A recovery mechanism is put in place . If the address
is fake, go back to your wallet
Examples Binance coin, Dogecoin, Dai, Omisego, Decentraland, Crypto Kitties, Ethermon
Maker
 NFT
• A Non-Fungible Token(NFT) is a digital asset that simulates actual things from real world, including
art work, music, in-game objects and films
• They are traded online frequently with cryptocurrencies and encrypted
• Relation between NFT’s and cryptos:
• Except for one commonality, NFT’s and cryptocurrency tokens are distinct. They are comparable
because they all were created using same type of programming , i.e cryptography.
• Cryptocurrencies are traditional currency are fungible, NFT’s are not
• Fungibility is the capacity to trade one thing for another.
• Nft token is unique, no two users can exchange or trade them at the same rate or break them up into
smaller parts like money
• Each token is distinct and possess special qualities
• The popular standard currently used by NFT is the Ethereum token standard. Eg. ERC-721
• NFT’s help digital artists in preventing plagiarism by tokenizing their work and
making it impossible to copy.
• There is no way to delete or change the ownership of any NFts because they are
recorded on the blockchain network, which has a immutable ledger,
• Compared to cryptocurrencies like bitcoin, Ethereum, NFT’s are more versatile and
physical items or collectibles can be lost, broken or destroyed by users, while NFT’s
cannot be taken or destroyed,
• Once a user acquires ownership, they have permanent ownership.
• Nft;s cannot be duplicated and thus 3rd party cannot misuse an artists intellectual
property.
• Users can buy and trade NFT’s on a variety of NFT platforms, including Opensea,
Mitable and Nifty Gateway
 Attributes of NFTs
Uniqueness:
NFT’s are distinct since no two NFTs are alike and they cannot
be used interchangeably. Each NFT’s meta data is an
unchangeable record that serve as its certificate of authenticity.
Ownership:
NFT’s are stored in an associated account on a DLT. The original
developers of the NFT have the private key to the account where
the NFT is stored, and they are free to transfer the NFT to any
other account.
Transparency:
Since public distributed ledgers are decentralized and irreversible,
where records of token and activity can be publicly confirmed,
buyers may trust and confirm the legitimacy of a specific NFT.
• Indivisibility:
• The utility of NFT is always been indivisible.eg. Airline ticket cannot be bought in aprts
• Scarcity:
• NFTs can be difficult to obtain, this contributes to their value.
• Although developers are free to produce as many assets as they want , they also have the
option of setting a capacity on the number of NFT’s to create scarcity
• Easily Transferable:
• NFT’s are only used when they are unique and they are only bought and traded in specific
markets
• Indestructible:
• Since NFT’s are controlled and operated via blockchain raises the security level for them.
This establishes that these NFT’s cannot under any circumstances be removed or
destroyed.
• How does NFT work?
• Neither blockchain nor NFT include any storage for the actual artwork
• The files fingerprint or hash, a tokens name and symbol, link to an IPFS-hosted file
can be used for storage
• Large data can be stored and shared effectively using IPFS, a file sharing technology. It
uses cryptographic hashes which are conveniently stored on a blockchain.
• The creator of the NFT still holds the copyright and reproduction rights, but the
token owner is the rightful owner of the original artwork. As a result , an artist can
continue to sell prints together with its original works of art as NFTs
• By submitting a blockchain transaction , one can sell it. This data can never be altered
• Also helps to keep track of tokens correct owner and the price at which it has
previously been sold
 ICO(Initial Coin Offering)
• ICO is the crypto equivalent of the IPO(Initial Public Offering)
• The purpose is to raise capital, where digital proprietary tokens are sold
• A company creates an ICO when it sells tokenised cryptographic assets
to raise money for its operation
• It is a source of funding for new businesses. ICO’s are startup
companies efforts to generate money through crowdfunding. The
startups’s own coin provides the incentive for participating in these
crowdsourcing efforts.
• To Investors or speculators a certain amount of cryptocurrency is
offered in the form of tokens
• Through cryptocurrency exchanges , tokens are listed
• MasterCoin, released in 2012, was first ICO
• In 2014, Ethereum had a token sale to raise money. In the first 12 hours,
it raised 3,700 BTC or about $2.3 million
• Since ICO’s are largely unregulated, investors must be extremely
cautious and diligent whle learning about and making investments in
them
 Phases of ICO
• 1. Idea: The crucial step by the team and the company would
be to comprehend how blockchain technology will work in
the business world and what specifically they intend to
provide customers and investors using the technology.
The business chooses the recipients of its fundraising effort and
develops the necessary information about the business or
project for possible investors
2. Team: Building a talented staff is necessity. The founders will
only go as far as the team will allow them to.
One needs to create the product, and other team members
handles marketing, community support etc.
In addition to the core staff, companies require advisors.
One of the advisors should be a lawyer with background of ICO
support, and makes sure adhering to the KYC and AML
regulation/
• 3, Create White Paper:
• Investors will write white papers in consideration of security laws.
• Apart from organizing the ICO, the crypto project produces a white paper, which it makes accessible
to interested investors via new website created .
• The technical details of the cryptocurrency technology will be presented in the white paper.
• The main objective of the white paper is to increase the confidence and trust of potential investor.
• It should also provide legal explanations of the applicable securities laws and related rules to the
ICO.
the project promoters include the following significant information regarding the ICO:
• The projects objective:
• The perquisite that the project would fulfil once it is was completed
• Estimated financial cost of the project.
• How much virtual currency are the founders going to keep?
• What forms of payment and which currencies are accepted?
• The ICO campaign duration.
• 4. Token Delivery: The next phase is production of tokens.
• The tokens are digital representation of assets or services on the blockchain.
• We need to create a smart contract or small code alterations on existing
blockchain platforms inorder to generate the tokens and automate the token
distribution process.
• Tokens Trading:
• The Ethereum blockchain technology is popular choice for ICO launches
since it offers smart contracts, the key mechanism for automating token
generation and distribution.
• The company undertakes promotion campaign to bring new investors.
• The advertising of ICO’s are on number of online sizeable platforms, like Fb
AND GOOGLE TO reach broadest investor base.
• 6. Execute project: The tokens are made available to investors after they have
been created.
• The company can then utilize the funds raised from the ICO to provide new
goods or services.
• The investors can either use their token to gain access to these goods and
services or they can wait for the value of their tokens to increase.
• Advantages of ICO:
• 1. It is relatively inexpensive and simple for business to strat practically globally.
• 2. Obtaining regulatory permissions is simple.
• 3. token owners may remain anonymous.
• 4. Tokens can be traded on both controlled and decentralized exchanges.
• 5. High Liquidity: An asset is said to have high liquidity if it can be bought or sold
quickly on the market without materially altering its value.
• 6. Less paperwork is required: Traditional assets like IPO’s , stocks, bonds are
dependent on numerous regulatory filings, which can take time and effort, ICO’s
however use blockchain technology to maintain a ledger of numerous transactions
and enables instantaneous updating of data.
• Disadvantages of ICO:
• 1. In most jurisdiction, there is no investor protection
• 2.. There are lot of scams: Ico’s are frauds sometimes and uninformed
investors are t evictims of this fraud because they are mostly unregulated.
The money lost in scam wont be reimbursed. This is th ebiggest drawback.
• 3. Normal disclosure and transparency requirements do not apply to token
issuers.
• It is simple to hack them
• Th etokens will depreciate and eventually lose all of their value if the ICO
project fails.
 STO
• Tokens are categorised as utility token and security token
• Utility Token: Tokens that guarantee future use of a good or service are known
as utility tokens, They serve a purpose and are not intended to be investments.
E.g sturbucks gift card(cant make money by selling the card, paid in advance )
• Security Tokens : Tokens that stand for tradable financial asets, such a s
companys stock or bond
• Security tokens are designed as an investment option, they provide dividend
payments, profit sharing or interest payments that imply potential future earnings.
 Why Security Tokens?
• Initially there were scams and manipulations because the ICO industry was unregulated.
• When everyone had purchased a token, investors artificially inflated the price before
selling off all of their shares.
• When ICO finished and money was raised, some businesses simply disappeared, taking
money with them,
• ICO’s held in 2017 were 80% fraud.
• None seeks authentication to conduct an ICO. All that is required is setup of website,
some tokens and beginning of general public sales. Public concern grew as things
became out of control. Regulators than sought to look into whether these alleged
tokens should be actually classified as securities,
• Security Token Offering(STO) can help in this situation.
 STO
• A sector that wants to raise money will issue a security token offering(STO).
• Similar to ICO, a STO issued digital tokens that are connected to actual assets
like corporate shares or real estate investment trusts(REIT). As a result , they
are considered investment contracts and are subject to current securities laws.
• The key benefit , they are supported by trustworthy resources and are subject
to control and regulation under current security legislation.
• STO’s are more secure than ICO’s since the SEC only approves projects that
are legitimate and sincere in their goals.
• Complies with the government regulation.
• How to offer a Security Token?
• The security must be registered with the SEC if u wish to issue it.It is a
difficult and costly procedure
• Advantages of STO:
• Offerings of security tokens are governed internationally.
• Regulations cut down on fraud.
• Trades in STO’s take place on trusted exchanges.
• Tokens are supported by movable property, money rights, equity and debts,
• Investors have access to larger markets, due to STO’s , practically any asset class can
be tokenised.
• Cheaper option for firms than an IPO.
• Without a broker, investors can exchange security tokens among themselves.
• From fundraising perspective, a larger investor base can be attracted as digital assets
are simple to advertise and transfer across borders.
• Disadvantage of STO:
• STO only makes investment available to accredited investors.
• Many investors choose not t o participate in STO’s because of the lockup
time and the cost of compliance
• Better suited for investors that are digital natives.
 ICO STO
The issuer will mange the token sale The Issuer handles the fundraising
Starups, public enterprises and SME’s are issuers Huge corporations, Startups, public companies and SME’s are
issuers
Issues with trust , as some token issuers provide High levels of trust due to tokens inherent value
false information.
Investors bear all of the risk Fully compliant and regulated.
There is no need for a legal or regulatory Regulations that are complicated and regulated by KYC/AML
structure checks
Extremely unsafe because transactions take place Controlled by US SEC rules makes the coin extremely secure,
on ICO project website that might not have
necessary security safeguards

High Risks and little investor protection Each token is a security that safeguards investors rights,
Investors are completely anonymous Investor-friendly transparency
 ICO STO
Launch cost are low Launch cost are average
Coins are listed on standard cryptocurrency exchanges Specislized security token exchanges and platforms
list tokens

Low liquidity Average liquidity

Useful Token Backed by realworld assets tokens

To purchase and store tokens, you must have a crypto Users don’t have to give up ownership and control
wallet of the business
Whitepaper is published Offering memorandum
 Different Cryptocurrencies
• A form of digital or virtual money used for transactions is called a
cryptocurrency.
• It doesn’t have a physical form, however, uses encryption and resembles
actual money
• 18000 different cryptocurrencies with $2 trillion market capacity as of march
2022.
• Bitcoin and altcoins are popular cryptocurrencies. Original currency is
Bitcoin, and all cryptocurrencies develop after that are altcoins
 Bitcoin
• It functions as a electronic payment system and a cryptocurrency
• Satoshi Nakamoto founded the company in 2008
• It is first decentralized payment network
• It is a peer-to-peer system
• The market value of bitcoin is $ 331 billion
• 1BTC=$17,238
 Ethereum
• By market capeitalization, Ethereum was launched in 2015and is the second
largest cryptocurrency after bitcoin.
• It enables programmers to create and execute a wide range of applications
• Ethereum was split into Ethereum (ETH) and Ethereum Classic(ETC)
• The market value of Ethereum is $157 billion
• IETH=$1287
 Solana
• Solana is a public blockchain network that features smart contract
functionality
• It runs scalable, decentralized apps.
• Solana offers high transaction throughput and lower transaction costs
compared to blockchains like Ethereum.
• Its native cryptocurrency is SOL.
• The market capitalization of Solana is $11.98 billion’
• 1ETH=$13
 Litecoin
• Launched in October 2011 was one of the first altcoins
• Peer-to-peer LTC was founded in 2011 by Charlie Lee
• Had many similarities to bitcoin and based on bitcoins original source code.
• Used for less expensive transactions
• The market capitalization of Litecoin is US$3,4 billion
• 1LTC=$7.8 11 USD
 Ripple
• Ripple, a worldwide payment network, is used by major banks and financial
service companies.
• Ripple developed the cryptocurrency known as XRP
• The Market capitalization of Ripple is US$17 billion
• 1XRP=$0.39 USD