Taxonomy Deep Dive
The WisdomTree Digital Asset Taxonomy is our map of the digital asset universe. We break down the ecosystem into eight distinct categories.
Each category has different research, valuation and evaluation methodologies because of their different use cases and value propositions.
Click through each category below for details and examples.
The following high-level profiles should not be viewed as complete descriptions of the applicable digital assets, each of which is complex and exhibits different characteristics, use cases and risk profiles. All users of the information herein should conduct their own diligence using professional advisors.
This is the original digital asset category. Bitcoin is the most popular example.
Centralized finance tokens are issued by companies and used on or issued using digital asset technology stacks.
Layer 1 smart contract networks build on the existing Bitcoin framework.
A stablecoin is a token on a blockchain that is algorithmically or operationally pegged to an asset or currency in a 1:1 ratio to maintain a stable value.
Layer 2 scaling blockchains are built using the layer 1 blockchain as a foundation.
DeFi can lower traditional financial fees, create near-instant settlements of digital assets and have other uses from lending, borrowing, trading, payments and asset management.
Non-fungible tokens (NFTs) are often seen as similar to digital collectibles.
More to learn! Oracles and Storage.
Why Multiple Layer 1 Categories?
As a starting point, it’s important to understand layer 1 blockchain/ protocol. The term "layer 1" refers to a base layer protocol. This can be thought of as similar to the different protocols that govern how email works, i.e., Simple Mail Transfer Protocol (SMTP) Internet Message Access Protocol (IMAP), and Post Office Protocol (POP). Some applications sit on top of these protocols to use the protocols, such as Gmail, Microsoft Outlook and Yahoo email.
Layer 2 refers to a separate protocol that sits on top of the layer 1 protocol. Layer 2 protocols depend on layer 1 protocols but have different use cases that are explained further in the taxonomy.
Table of Contents
Taxonomy Deep Dive
Important Information Related to this Article
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Information provided by WisdomTree regarding digital assets, crypto assets, blockchain networks or technology providers should not be considered or relied upon as investment or other advice, as a recommendation from WisdomTree, including regarding the use or suitability of any particular digital asset, crypto asset, blockchain network, technology provider or any particular strategy. WisdomTree is not acting and has not agreed to act in an investment advisory, sub-advisory, fiduciary or quasi-fiduciary capacity to any advisor, end client or investor, and has no responsibility in connection therewith, with respect to any digital assets, crypto assets, or blockchain networks or otherwise.
There are risks associated with investing, including the possible loss of principal. Crypto assets, such as bitcoin and ether, are complex, generally exhibit extreme price volatility and unpredictability, and should be viewed as highly speculative assets.
Crypto assets are frequently referred to as crypto “currencies,” but they typically operate without central authority or banks, are not backed by any government or issuing entity (i.e., no right of recourse), have no government or insurance protections, are not legal tender and have limited or no usability as compared to fiat currencies. Federal, state or foreign governments may restrict the use, transfer, exchange and value of crypto assets, and regulation in the U.S. and worldwide is still developing.
Crypto asset exchanges, liquidity providers, networks, protocols, settlement facilities, service providers and other participants in the digital asset ecosystem, and/or crypto assets related to the foregoing, may stop operating, permanently shut down or experience issues due to security breaches, fraud, insolvency, market manipulation, market surveillance, KYC/AML (know your customer/Anti-Money Laundering) procedures, non-compliance with applicable rules and regulations, regulatory investigations or orders, technical glitches, hackers, malware or other reasons, which could negatively impact the price of any cryptocurrency traded on such exchanges or reliant on a digital asset ecosystem participant or otherwise may prevent access or use of the crypto asset.
Crypto assets can experience unique events, such as forks or airdrops, which can impact the value and functionality of the crypto asset. Crypto asset transactions are generally irreversible, which means that a crypto asset may be unrecoverable in instances where: (i) it is sent to an incorrect address, (ii) the incorrect amount is sent, or (iii) transactions are made fraudulently from an account. A crypto asset may decline in popularity, acceptance or use, thereby impairing its price, and the price of a crypto asset may also be impacted by the transactions of a small number of holders of such crypto asset. Crypto assets may be difficult to value and valuations, even for the same crypto asset, may differ significantly by pricing source or otherwise be suspect due to market fragmentation, illiquidity, volatility and the potential for manipulation.
Crypto assets generally rely on blockchain technology and blockchain technology is a relatively new and untested technology which operates as a distributed ledger. Blockchain systems could be subject to internet connectivity disruptions, consensus failures or cybersecurity attacks, and the date or time that you initiate a transaction may be different then when it is recorded on the blockchain. Access to a given blockchain requires an individualized key, which, if compromised, could result in loss due to theft, destruction or inaccessibility. In addition, different crypto assets exhibit different characteristics, use cases and risk profiles.