A cryptoasset that is not backed by an underlying asset or item. Rather the asset is left for the forces of supply and demand to determine its value and performance. Non-backed cryptoassets (unbacked cryptoassets) do not work as a representation of any underlying asset, claim, or liability. A cryptoasset is a digital asset that represents any digital store of value or medium of exchange (currency) that is stored as entries on the blockchain. It is a digital representation of value or a right that can be transferred or stored electronically (digitally) using distributed ledger technology (DLT) or similar technology. Cryptoassets use cryptography (a method to secure data), peer-to-peer networking, and a sort of general ledger to initiate, verify and record transactions. DLT is a technology that enables the decentralized storage, update and validation of encrypted data. One example of DLT are blockchains on which entries are added as ‘blocks’, which form a ‘chain’ that cannot be manipulated or broken. Transactions are recorded on the chain to facilitate verification and provision of proof about existence without the need for a third-party.

An example is an unbacked cryptocurrency, that by nature functions basically as competitors to fiat currencies, being now a widely acceptable medium of exchange (for certain transactions). For example, Bitcoin is used to buy or sell goods and services and pay salaries, and can function effectively as an instrument for protection against inflation. Furthermore, certain coins can provide for the function of a store of value. As such, coins that maintain their value could be used as collateral for specific types of transactions (obtaining credit and loans, not only locally, but anywhere in the world. As universal collateral, these coins do not require a borrower to place traditional types of collateral that are usually connected to a specific place or jurisdiction.

Unbacked coins also include the specific category of altcoins, that started to appear in the market after invention of Bitcoin. And example is Litecoin, which is a version of BTC with certain improvements such as reducing the processing time for transactions. Litecoin was designed, as a derivative of the Bitcoin network, to enable instant payments and receipts virtually anywhere in the world. The coins can be efficiently mined with consumer-grade hardware. Given its history and origination, Litecoin is perceived to be as silver to Bitcoin’s coin. Another interesting altcoin is Ripple: a protocol that connects financial institutions to use their coin instead of fiat currencies to transfer funds globally. Banks can use Ripple to make cross-border payments in a cost-effective, safer and faster way. Those are examples of ‘’unbacked’’ cryptocurrencies since they do not provide a representation of any underlying asset, claim, or liability.

Due to the lack of asset backing, such cryptocurrencies inherently feature high volatility, and hence they remain an unstable form of payment. To solve this shortcomings, the developers came up with the concept of stablecoins. This coin is a cryptocurrency (or a digital token) that derives its value from real-world assets (RWAs), such as commodities, precious metals, real estate, or other tangible assets, intangible assets or financial assets. It is a digital asset whose value is pegged to a reference asset, which is either fiat currency, exchange-traded commodities (such as precious metals or industrial metals), or another cryptocurrency. Stablecoins (also, asset-backed cryptocurrencies) are created by establishing a sort of link between the value of the digital token to the underlying asset using blockchain technology. The value of this asset-backed token (ABT) or backed crypto asset is referenced to the performance and market value of the asset it represents.