Digital Asset vs Digital Currency: Which fits best to describe the DeFI space?
Is Bitcoin an asset or a currency? Is it an investment or a payment system? From the beginning of time, these questions have been raised plenty of times in order to figure out what exactly this new DeFI Space is. With the gaining global adoption and a vast variety of DeFI Projects within the space, let us take a closer look at the difference between a Digital Asset vs Digital Currency and which is better suited to describe the DeFI Space in general.
A Currency that transforms into An Asset
The introduction of Blockchain technology brought with it a lot of benefits that can be implemented in our current traditional system but it also brought a lot of assumptions that needed to be discussed. Assumptions such as Blockchain technology and Bitcoin are the same thing or that Blockchain technology can only be used in the financial sector. Although Blockchain does gain mainstream popularity through Bitcoin, its use case goes far beyond the financial sector.
Bitcoin was certainly the first major use case of Blockchain Technology when it was introduced in 2008 but over the years blockchain technology has grown beyond Bitcoin. We have seen the technology being adopted by major banks and institutions to ensure the security and transparency of information to its users. But throughout its major use case, it is important that we currently focus on the DeFI Space as we discuss further.
The original idea behind Bitcoin as inscribed by Satoshi Nakamoto was to create an electronic cash system that is transparent and secure through the use of Blockchain technology. It aims to fix the mistakes of traditional banks by creating a peer-to-peer payment system that ensures more manageable global payments. From the original perspective of Bitcoin, it was created to be a digital currency that can be an alternative to its fiat currency.
So what is a Digital Currency you may ask? In its definition, Digital/ Virtual Currency is any currency, money, or money-like asset that is primarily managed, stored, or exchanged digitally through the Internet. The definition of Digital Currency goes beyond Blockchain based Currency as it also includes Central Bank Digital Currency and other virtual currency such as the funds in your favorite game. With the growing adoption of the internet, these Digital Currencies will become a more common thing to describe our currency.
Now from these definitions, we cannot clearly define the DeFI Space in general as a Digital Currency as it only represents a small part of it. These arguments were also backed by the idea that as the years gone by Bitcoin, Ethereum, and co have become more valuable over the years as it is frequently traded. The discussion then shifted to Bitcoin being a digital asset as it has an economic value that we can own and is liquid enough to be traded.
Now the definition of a digital asset is generally anything that is created and stored digitally, is identifiable and discoverable, and has or provides value. This includes anything from Data, Image, Video, or even to a certain extent Digital Land that has ownership rights for its holder. With this definition in mind, Bitcoin and co can certainly be considered a digital asset as it does provide ownership rights to its holders and it can be stored digitally in your digital wallets.
Although assets are not generally used as a payment method at the same time, Bitcoin is used as a payment method whether in its own network or externally. This is a doubt that is pointed towards its status as a digital asset and it also does not represent the word Digital Asset entirely. To add to these 2 points above, if you discount stablecoins, most Blockchain based Digital Assets do not possess real intrinsic value. What I mean by intrinsic value is if the trading of these assets stops, they do not represent an ownership right of anything.
This is why the DeFI Space is always at a crossroads between being a Digital Asset vs Digital Currency as although it represents some part of both definitions, it does not reflect both of them clearly. Even Stablecoin such as USDT or USDC which generally were designed for easier cross-border payments but also traded like an asset within the exchanger. It also seems that the whole DeFI Space is always divided on this opinion as more projects come with different unique aspects.
Is this a Bad thing? Obviously not as Digital Asset like Bitcoin marries the best of both worlds into one single concept and provides us with a much easier way to own both. It also manages to tick the last box that differentiates between Currency and Money which is being “A Store of Value” although its volatility issues put doubt on this point. It is quite a good thing when we still are at the beginning of its long journey to supremacy.
2022 has certainly put a test towards its true status as an asset with cases such as FTX and Celcius which managed to suck the liquidity of the space. It also has seen DeFI Projects such as Terra Luna which wanted to replicate a digital currency but collapse within a short time. Digital Asset vs Digital Currency will continue to be a debate when one aspect fails and another succeeds but what definition currently fits the state of the DeFI Space?
Digital Asset > Digital Currency
If we look at the development going on within the DeFI Space, it seems like the community seems to regard Bitcoin and co as more a Digital Asset than a Digital Currency. It seems like the focus is centered more on the price of these Digital Assets within the exchanger than on its ability to be an efficient global payment method. This is obviously a stark transition from what Satoshi Nakamoto imagined for Bitcoin in 2008.
Part of the reason why it is viewed as more of a Digital Asset than a Digital Currency is because the situation wants it to be that way. El Salvador is one of a kind that adopts Bitcoin as a legal tender nationwide but for the rest of the world, fiat currency remains the only viable payment method. With the rise of CBDC and the DeFI Space still plagued by volatility issues, it is quite difficult to imagine for Bitcoin to be a legal tender globally. Bitcoin and co are used as payment methods within the network and in some institutions but it is an unprecedented task for Satoshi Nakamoto’s original vision to be achieved.
The regulation also plays a key role in shaping the view of the DeFI Space as a Digital Asset rather than a Digital Currency. This then encourages the development within the DeFI Space such as NFT or Metaverse to focus more on it being a Digital Asset. This then became a catalyst for institutions and enthusiasts that enter the DeFI Space to view it the same with the recent development of the ETF by major financial institutions being a recent example.
All in all Bitcoin and co are digital assets that can serve as a digital currency at the same time and we should be excited by what this technology has brought. At the current state, it fits a lot better if we focus on the DeFI Space being a Digital Asset as it ticks more boxes than the other. Of Course with the development that is still going on and hundreds of projects coming up every day, who knows we will come to a time where we can consider it a Digital Currency. What we can do now is to continue to push the boundaries of what is possible within the DeFI Space so we can stir it to a greater direction in the years to come.
We at Nagaya Technologies realize that there is a huge potential for the DeFI Space to grow on both sides of the perspective, Nagaya is the world’s first hybrid digital asset that is limited in supply to maintain its store of value while providing benefits from its subsidiary projects to encourage more holders to keep collecting this Digital Asset in the future. For more information regarding the latest updates on Nagaya and our whitepaper, you can visit us at https://www.nagaya.co
Or you can talk to us at t.me/nagayaofficial