From Wild West to Foundation of Finance: The Case for Public Permissionless Blockchains

“Stablecoins are a type of cryptocurrency that act as a form of cash but sit outside the banking system. They are used to pay for other crypto assets…” Financial Times, 2 April 2025 There are a lot of names in the crypto space. People often use them interchangeably. Different countries, different companies, and different regulators all have their preferred names for what they’re talking about. But it matters that we all know what we’re talking about when we use these words and - as much as possible - use them in the same way. This is particularly true when it comes to regulation because without solid definitions, compliance is difficult.  In this Owl Explains note we’re going to tackle lexicography for commonly used terms for what we prefer to call tokens. And explain why we think ‘tokens’ is the best word to use when talking in a general sense. By the end of the article you should be able to see how the Financial Times quote at the top uses these different terms - and decide whether you think it gets them right. Crypto: Let’s start with the fundamental word: ‘crypto’. The ‘crypto’ in cryptoasset or cryptocurrency comes from ‘cryptography’. That is, the use of codes or ‘encryption’ to provide secrecy. Cryptography is an ancient practice going back many thousands of years, at least to the ancient Egyptians. Modern cryptography has been greatly enhanced by the use of computers and new techniques. Together these allow people to create the public and private keys necessary for blockchain. The use of ‘crypto’ essentially just means that some information has been ‘encrypted’ using these modern cryptographic techniques. And in practice it is used to refer to something on a blockchain - or the whole blockchain-based sector itself. Cryptocurrency: A cryptocurrency is, naturally enough, a type of currency utilizing  ‘crypto’. But what is a currency? A currency is a type of money widely used in a particular area. It is a form of ‘money’. So by calling something a ‘cryptocurrency’, its founders are implying that it has the characteristics of money: the dollars, pounds, euros or yen that you use every day. The three fundamental characteristics of money are: That it is a store of value. That is, that what you hold today will be worth the same amount tomorrow. That it is a means of exchange. That is, that other people will be happy to take it in exchange for goods or services they provide. That it is a unit of account. That is, that you can price a good or service in it.  While ‘cryptocurrency’ was one of the first ways of describing these blockchain-based units, it is now largely out of favor since many (or even most) don’t fulfil these three characteristics. When was the last time you heard someone price something in Dogecoin? Cryptoasset: More popular nowadays is the term ‘cryptoasset’ (and note that there are different ways of spelling this: all one word, with a hyphen, or as two separate words). But what’s an asset? An asset is something that has (financial) value. So a cryptoasset is something on the blockchain that holds (or represents) value. This makes sense as a term, given that many people buy or sell ‘cryptoassets’ as speculation (to make money) or because it offers them access to something else that has value (like a blockchain protocol or a good or service in the real world). But while this is a useful term that is in wide use, it does also have one issue with it: it implies the crypto ’asset’ does have some sort of value. Which they don’t always. For example, a tokenized digital record, such as a diploma, might not ever have (or be intended to have) a value. So calling them ‘cryptoassets’ would imply a use - and therefore a form of regulatory treatment - that doesn’t make sense.  This is one of the reasons we stress token classification, including in our submission to the SEC Crypto Task Force. This terminology matters when it comes to thinking about the correct regulatory treatment for things on the blockchain. Nowadays when a regulator or government official says ‘crypto’ they’re referring to a cryptoasset - and probably including the idea of a ‘cryptocurrency’ within it. Stablecoin: Stablecoins are a unique type of ‘cryptoasset’ that attempt to maintain a stable value against a reference asset. Usually today this reference asset will be a so-called ‘fiat currency’: in other words, the normal currency of any given country (dollars, pesos, etc.). In this sense they are a ‘crypto’ or on-chain representation of normal money that already exists, and they fulfil the three functions of currency by ‘piggybacking’ on the underlying existing fiat currency. Previously (around 2018-2019) the term was used more loosely to mean something that tried to reduce volatility in the value of a cryptoasset - either through its backing asset or via an algorithm. Now, largely driven by regulation, ‘stablecoin’ tends to only refer to a token that is pegged one for one to a single fiat currency, or perhaps sometimes to a group (a ‘basket’) of different fiat currencies. So depending who you’re talking to, ‘stablecoin’ could be referring to the whole universe of ‘stablecoins’ that attempt to minimise volatility or just to those, more common now, that maintain a stable value against the reference asset or fiat currency. Central Bank Digital Currency (CBDC): A CBDC is very similar to a stablecoin, in that it is the ‘digital’ version of a fiat currency, except that it is created by a government’s Central Bank or other monetary authority. That is, a CBDC is issued by a country’s public sector and is a direct liability of that authority. There is therefore no private sector company responsible for it, or which could go bankrupt or fail to provide it. That makes it very safe, in an economic sense, for people who hold it. Many countries are still exploring developing a CBDC, and there are significant ongoing political discussions around questions like privacy rights and the ability of governments (or Central Banks) to control how a CBDC might be used by citizens and businesses. Digital [currency/asset/cash]: As you’ll have seen in the term CBDC, this is not called ‘crypto’ but ‘digital’. That’s because ‘crypto’ implies something on a blockchain, as we’ve seen, and through its meaning about the wider sector still sometimes has a negative connotation. Central Banks don’t want to be associated with that - and anyway may not issue on a blockchain. So they used ‘digital’. That makes sense as far as it goes, but has one major problem: the overwhelming majority of ‘traditional’ money is also digital because it exists as commercial bank deposits (and indeed as Central Bank reserve deposits). These deposits are purely digital in that the value solely exists as information inside bank computers. Calling something blockchain-based as ‘digital’ does not really help distinguish it.  In other words, digital is a much broader category that includes crypto. Virtual [currency/asset/cash]: Some people use the term ‘virtual’ in an attempt to get around this confusion, though it’s now a little less used than it used to be. ‘Virtual’ covers basically the same ground as ‘digital’ but without the confusion about existing bank deposits. In this sense it’s really used as a synonym for ‘on-chain’: that is, something based on a blockchain.  Virtual has more traditionally been used to mean anything on the internet, such as people referring to a “virtual meeting” when they do a video call.  For these reasons, by and large the term ‘crypto’ is winning out as the main usage for something on-chain. All these terms are in use, but all have problems. So what does Owl Explains use?  Well, we prefer the term ‘Token’. This word refers to something that is used to represent an asset, item, bundle of rights or thing. It does not necessarily imply financial value (like ‘asset’) or money (like ‘currency’). It is technology neutral, so does not imply something has to be blockchain-based (like ‘crypto’) or not (like a CBDC) - and indeed it even applies to non-digital/virtual representations like those that are based on paper (like old time stock certificates or tickets to an event) or metal (like subway tokens). A ‘token’ can refer to all these things without implying any characteristic, and therefore without prejudging any regulatory treatment. And the word ‘token’ allows anything to be ‘tokenized’ or ‘represented by a token’, which is  a major growth area for the blockchain sector at the moment. In an upcoming post, we’ll explain how tokens themselves can be classified from a regulatory and market point of view.

This is Part Two in our Staking series. Click here to read Part 1. Staking is frequently a mischaracterized and misunderstood activity, in large part due to a lack of understanding surrounding the fundamental principles of staking as well as the different models. Staking is an integral part of the infrastructure that keeps a blockchain functioning and secure. It is a technological activity utilizing hardware and software, and reliant on communications over the internet.  It determines who participates in the updating of the blockchain to maintain Byzantine fault tolerance. It does not require the participant to transfer ownership of their tokens to a third party - it is not lending or custody —but some models do involve the token owner transferring control. While rewards are in place to act as an incentive for participants to stake their tokens, this is an outcome of the process, not the driver for it.  PoS includes several variations, each catering to different user needs and blockchain architectures. Solo or Direct Staking Users run their own validator nodes via their own software and hardware, maintaining full control over their staked assets and potentially receiving higher rewards than if they were using a third party. However, the barrier to entry for solo staking is high - there is significant technical expertise required as well as a large up front equipment cost. Additionally, there is the cost of the stake that must be posted:  32 ETH to activate a validator on Ethereum, 2000 AVAX on Avalanche, for example. Users are solely responsible for maintaining hardware uptime and security, and therefore will bear the full effect of any penalties from the protocol if there are failings.  Third party models The term Staking-as-a-Service (StaaS)  is often used very broadly in the blockchain ecosystem, but is actually not particularly helpful, as it is too generic a description. A third party can manage many different aspects of the staking process for users depending on a number of factors; it is best therefore to split this category out. Non-custodial delegated staking: Token holders stake their cryptoassets via a self-hosted wallet but delegate validator operation to a third party, such as a StaaS provider, in exchange for a service fee. This reduces costs and technical complexity compared to solo staking while ensuring that only the token holder can sign transactions, claim rewards, and unstake using their private keys. Custodial delegated staking: many large cryptoasset custodians now offer staking as an ancillary activity. The custodian stakes the tokens (with permission) on behalf of the token holder in exchange for a service fee. While the third party will take custody of the assets in this example, it is because of their nature as a custodian, not because staking requires it. Custodians can store the tokens in different wallets based on the requirements of the tokenholders: segregated staking keeps the tokens entirely separate from others and there is no co-mingling of assets; omnibus staking puts all tokens together in an omnibus or aggregated wallet, lowering the barrier to entry; pooled staking combines assets across multiple participants in return for a ‘share’ of an already active staking position.    Liquid Staking:  A commonly cited concern with staking is that once a token is staked to the network, it can’t be accessed until the end of the lock up period. Liquid staking providers allow tokens to be deployed via a protocol to receive a receipt token (or Liquid Staking Token (LST)) which acts as proof of the underlying staked tokens and any associated rewards. The LST can then be deployed in other activities e.g. on Defi protocols and can continue earning rewards.  Staking isn’t a one-size-fits-all approach—different models cater to different needs, from solo staking for those who want full control to third-party and liquid staking options that lower barriers to entry. That’s why it is important to read the fine print on whichever model you choose.  While these models make staking more accessible and flexible, they also come with varying degrees of risk, from slashing penalties to counterparty exposure. So, what should you watch out for when staking your assets? In our final post, we’ll explore the key risks and considerations to keep in mind before getting started. Stay tuned!

Welcome to Part 1 of our Staking Series... Consensus mechanisms serve as the backbone of decentralised networks, ensuring security, efficiency, and trust in the evolving landscape of blockchain technology. In recent years, Proof of Stake (PoS) has emerged as an energy-efficient alternative to Proof of Work (PoW), becoming one of the most widely adopted consensus mechanisms today. Unlike PoW, which relies on computational power, PoS leverages token ownership to validate transactions and secure the network, reducing energy consumption while maintaining security and decentralisation. Staking - A Brief History and Explanation A consensus mechanism is exactly as it sounds - a means of reaching agreement between network participants. In the absence of a centralized intermediary that can review and verify transactions, as well as monitor participants, decentralised networks need to build trust and reach consensus through other means. This is also known as the Byzantine Generals problem. Proof of Work (PoW) was the first widely adopted consensus mechanism, and supports tokens like Bitcoin - it actually originated in the early 1990s as a way of preventing email spam. Miners compete to find a valid cryptographic hash that meets the network’s difficulty target. The first miner to succeed proposes a new block of transactions and if the network verifies the block as valid, it is permanently added to the blockchain. The successful miner receives a block reward (newly minted tokens + transaction fees). PoW makes fraudulent transactions extremely difficult, because it requires huge amounts of computational power to execute a 51% attack (controlling the majority of mining power). However, PoW has faced criticism as the growing number, diversity, and value of PoW networks and their cryptocurrencies have led to a significant increase in computational power demands, reaching levels comparable to those of mid-sized countries. Proof of Stake (PoS) has been developed as an alternative consensus mechanism, aiming to achieve the same level of network security but without such high energy demands. Unlike the outright competition of proof-of-work, proof-of-stake (PoS) uses a different set of incentives to make sure that network participants behave honestly. PoS relies on participants—known as validators—to lock up, or "stake," their tokens in order to propose and validate new blocks. Validators, like miners, provide technology services to the blockchain. They run software to implement the consensus and validation process. They operate infrastructure hardware and software (akin to Internet service providers). Both miners and validators have a critical role in recording information to their respective blockchains and enabling decentralized systems, but they do so differently. Validators are selected based on the size of their stake and other network-specific criteria, rather than engaging in energy-intensive computational puzzles as seen in PoW. The more tokens a participant stakes, the higher their chances of being chosen to validate the next block. However, this selection process is often weighted with additional mechanisms to prevent undue centralization. When a validator is chosen, they are responsible for verifying transactions, adding new blocks to the chain, and ensuring the overall integrity of the network. In return for their services, they receive staking rewards in the form of newly minted tokens and transaction fees.  As shown by the explanations above, PoW and PoS are not actually the core of how validation of transactions and consensus about adding blocks are achieved. Rather, they are the mechanism by which the participants in those activities and the proposers of blocks are permissioned by the network.  This is known as “sybil resistance” because it stops attackers from gaining easy access to these very important functions by imposing a cost to participate.  Validation of transactions and consensus about which block to add next are carried about by the miners and validators who have paid the price of admission through their work or their stake.  Staking market today PoS has demonstrated its ability to strengthen network security while also being significantly more energy efficient. Additionally, unlike PoW which requires significant upfront investment, PoS allows a broader range of participants to contribute to network security. In a PoS system, validators are selected based on the amount of cryptocurrency they stake rather than computational power, which means that individuals and organizations with varying levels of resources can participate without needing expensive mining rigs or access to cheap electricity.  As such, PoS blockchains have evolved quickly over the past few years, accompanied by an increase in staking activity. In Q1 2024, the average staking reward was 10%, translating to annualized staking rewards of $14 billion—up from $4.9 billion in the same quarter of 2023. The total value of staked assets during this period was projected to reach $239 billion. Staking has come a long way, offering a more energy-efficient and accessible alternative to traditional mining. As the market continues to grow, understanding the different models of staking becomes essential for both newcomers and seasoned participants.  So how do different models compare, and what are the trade-offs between them? Stay tuned for our next post, where we’ll break down the various staking models and what they mean for investors, networks, and the broader crypto ecosystem. Part 2 available now! "Exploring Models of Staking"