If you’ve only got a minute:
- Digital assets are the representation of resources that are issued and transferred using distributed ledger or blockchain technology.
- Some benefits of blockchain technology include greater transparency, enhanced security and traceability of data.
- Examples of digital assets using distributed ledger or blockchain technology include cryptocurrencies, NFTs and CBDCs.
Digital assets have been in the spotlight in 2021 and it’s easy to see why. They have been rising in value, product offering, and use cases.
Digital assets, defined
In its most basic form, digital assets are simply content or resources that can be stored digitally. This means videos, images, audio clips, and document files count stored in computers or data storage devices count as digital assets.
A more specific definition of digital assets also exists. In this case, digital assets are the representation of resources that are issued and transferred using distributed ledger or blockchain technology.
In the last few years, blockchain has become a buzzword, due in much part to the ever-increasing interest in cryptocurrencies like Bitcoin and Ethereum.
While blockchain technology is complex to understand, the concept itself can be easily explained. Simply put, a blockchain is a database that uses a huge network of computers to verify data simultaneously on a digital ledger. This allows data to be stored across the network but not be edited.
Some benefits of blockchain technology include greater transparency, enhanced security and traceability of data.
In recent months, we have seen a wide variety of innovative applications of digital assets coming to the market. They have been adopted by numerous mainstream financial service providers and public sector initiatives. At the same time, there are heightened levels of volatility due to speculation along with scepticism and regulatory risks.
Cryptocurrency
Unsurprisingly, the most commonly known digital asset is cryptocurrency. Bitcoin perhaps epitomises the keen interest in digital currencies, although the universe of cryptocurrency has expanded rapidly since it was first introduced over a decade back.
Cryptocurrencies exist primarily on a network of computers. “Crypto” refers to the usage of cryptographic methods to secure ownership and validate transactions on this computer network.
“Currency” implies that they constitute an electronic system of money, which can be used as a medium of exchange in digital transactions, as a unit of account and as a store of value.
Cryptocurrencies’ success in the currency arena will depend on whether they are as broadly accepted for payments as fiat currencies (e.g. US Dollar).
Other examples of cryptocurrencies include Ethereum, Tether, Cardano and Litecoin.
Digital assets are not just limited to cryptocurrency. Though many cryptocurrencies have reached all-time highs in 2021, there are other digital assets that are also garnering greater attention.
Non-fungible tokens (NFTs)
As its name suggests, NFTs are non-fungible. This means it is not interchangeable with other forms of currency at the same value, making it unique.
NFTs contrast with fungible assets like fiat currency (i.e US dollars or Singapore dollars) and cryptocurrencies (i.e Bitcoin or Ethereum) – in that they can be interchanged easily.
Presently, NFTs are being transacted in digital marketplaces with cryptocurrencies as the medium of payment and the Ethereum blockchain as the decentralised ledger of choice.
Use cases for NFTs are mostly in the digital collectibles, music and art space, but it can expand into other areas in due course.
Central Bank digital currencies (CBDCs)
CBDC is a digital currency issued a country’s central bank. It can be managed using a digital ledger which might or might not be a blockchain. Like a paper-based currency note that carries a unique serial number, each CBDC unit will also be distinguishable to prevent imitation.
Since it will be a part of the money supply controlled by the central bank, it will work alongside other forms of regulated money, like coins, bills, notes, and bonds.
A working example of this is China’s digital yuan, which has been in trial since April 2021.
To the general public, CBDC is the digital form of physical cash. From the perspective of banks, CBDC can be used to settle interbank payments and transactions, like electronic bank reserves held at the central bank.
The important difference between CBDCs and cryptocurrencies are that CBDCs will still largely be controlled by the central bank. They could be managed in a distributed ledger or not, but ownership determination is not through a consensus protocol, unlike cryptocurrencies. Their issuance and value will be determined by policies, not algorithms.
This article is part of a series of articles covering Digital Assets. If you enjoyed the read and want to learn about digital assets in greater detail, do check out the other articles in this series:
