Crypto Asset Class Overviews
Keep in mind that crypto-assets vary widely. It's important to fully understand the unique risks associated with each before investing.
We encourage you to review our asset risk summaries to to get a better understandin gof the primary risks related to some of the major categories of crypto-assets available on Tap
Below, we outline some of the different types of assets you might come across:
Stablecoins
Stablecoins refer to crypto-assets that assert their value is tied to specific reserve assets, such as fiat currencies (e.g., US Dollars). These assets may utilise different mechanisms to achieve and maintain price stability, each of which carries distinct risks.
DeFi Tokens
DeFi tokens are crypto assets associated with decentralised financial applications.These rely on smart contracts, and protocols that operate on blockchain technology.
Meme Coins
Memecoins are crypto-assets whose valuation is predominantly shaped by social media engagement, community-driven momentum, and viral online trends, rather than intrinsic utility or traditional financial metrics.
Wrapped Tokens
Wrapped tokens are digital representations of other crypto-assets. They are generallydesigned to enable compatibility and facilitate interactions between differentblockchain networks.
Staked Assets
Staked assets are tokens that are locked within a blockchain protocol, contributing tonetwork security and stability while allowing holders to earn rewards in return for their participation.
Stablecoin
A 'Stablecoin'(such as USDC, USDT, EURT) refers to crypto-assets that aim to maintain their value by being pegged to reserve assets like fiat currency (e.g., US Dollars).Different methods are used to preserve this stability, each presenting its ownset of risks. Below are some of the risks associated with Stablecoins:
• Third-PartyRisk: When a stablecoin is backed by collateral (e.g., fiat currency), you depend on athird party to manage this collateral. If the party becomes insolvent or fails to uphold the necessary reserves, this introduces financial risk.
• ForeignExchange Risk:Many stablecoins are pegged to the US Dollar, exposing you to fluctuations inthe exchange rate between the US Dollar and your local currency, such as USD toGBP for UK users.
• RedemptionChallenges:For stablecoins that claim to be redeemable for underlying collateral, there's a chance the redemption process may not function as intended, especially during market volatility or due to operational issues.
• Collateral Volatility: If the collateral is another crypto-asset or becomes volatile, the value of the collateral could decrease, undermining the stability of the stablecoin.
• Algorithmic Uncertainty:Some stablecoins rely on algorithms to maintain their stability by adjusting supply based on demand. If the algorithm fails or behaves unpredictably, the stablecoin could lose its peg or even its entire value.
DeFi Tokens
Decentralized Finance (DeFi) tokens (e.g., UNI, LINK) are crypto-assets tied to financial applications and protocols built on decentralized blockchain technology. Below are some of the risks associated with Defi tokens:
• Smart Contract Vulnerabilities: DeFi depends on smart contracts, and even small coding errors or vulnerabilities can be exploited, potentially causing significant losses for holders of DeFi tokens.
• Rug-pulls / Exit Scams: DeFi projects are sometimes launched by anonymous or pseudonymous teams, increasing the risk of"rug pulls" where developers abandon the project and withdraw funds, leaving investors with tokens that have lost their value.
• Regulatory Risk: Operating without traditional intermediaries or financial crime controls, DeFi may face evolving regulatory scrutiny. New regulations could affect the legality, use, or value of DeFi protocols and assets. For instance, some protocols may face regulatory actions in certain jurisdictions, potentially impacting their token value if deemed non-compliant.
• Complexity of Protocols: Many DeFi protocols are complex, making it difficult for the average user to fully grasp their mechanisms and associated risks. This complexity can lead to uninformed decision-making.
• Reliance on External Data : DeFi protocols frequently rely on external data feeds or oracles. Inaccuracies or manipulation in these sources can lead to unexpected financial outcomes within the protocol.
Meme coins
Memecoins, like DOGE and SHIB, are crypto-assets whose value is largely influenced by community enthusiasm and online trends rather than traditional market fundamentals. Below are some of the risks associated with meme coins:
• Price Volatility:Meme coins are highly susceptible to extreme and sudden price swings, with their value often driven by social media buzz, celebrity mentions, and other non-financial factors, making them highly unpredictable.
• Market Manipulation: Meme coins are particularly vulnerable to manipulative tactics, such as "pump-and-dump" schemes, where prices are artificially driven up, only to crash when large holders selloff their tokens.
• EmotionalTrading:Meme coins often provoke strong emotional reactions from investors, leading to impulsive decision-making. This emotional investing can intensify losses as people react to hype rather than market analysis.
• Lack of Practical Use:Many meme coins don’t offer any intrinsic utility or purpose, relying mainly on speculative trading and community interest for their value, rather than any real-world application or function.
• TransparencyIssues:Information about meme coin projects can be scarce, with limited details about the development teams, project goals, or financial backing. This opacity makes it difficult to gauge the legitimacy or long-term potential of these assets.
Wrapped tokens
Wrapped crypto-assets, such as WBTC and WETH also known as ‘wrapped tokens’ serve as tokenised versions of other crypto-assets. These tokens are primarily designed to enable compatibility and facilitate interaction between different blockchain protocols. However, there are several risks associated with wrapped tokens:
• Collateralisation Risk: Wrapped tokens are generally backed by a corresponding amount of the underlying asset. However, if the systems or processes supporting this collateralisation break down, the wrapped token may not retain its expected value.
• SmartContract Vulnerability:Wrapped tokens depend on smart contracts to maintain their value in relation to the underlying asset. Flaws or weaknesses in these contracts can be exploited, leading to potential loss of funds.
• Custodial Risk: The assets backing wrapped tokens are often held by a third-party custodian. If the custodian becomes insolvent, mismanages funds, or is hacked, the value of the wrapped token could be compromised.
• PriceDiscrepancy:At times, the value of the wrapped token may differ from that of the value of its underlying asset due to factors like liquidity issues or market inefficiencies, leading to a gap between their respective prices.
• BridgingRisk:Wrapped tokens are used to transfer assets between different blockchain ecosystems. Technical issues or security vulnerabilities in the bridging process can disrupt transfers or impair token functionality.
Staked Crypto-assets
Staked crypto-assets, such as staked ETH or DOT, are locked within their respective blockchain protocols to help secure the network and provide the opportunity to earn rewards. However, there are several associated risks:
• Liquidity Constraints: Certain protocols require staked assets to remain locked for a specific period, meaning you may not be able to access or sell your assets immediately. More details on lock-up periods for staking are available here.
• Uncertain APY: The annual percentage yield (APY) or reward rate you receive from staking is determined by the protocol and can fluctuate over time. It is not guaranteed.Information on how staking APYs are calculated can be found here.
• Slashing Penalties: When you stake your assets, there is a possibility of losing a portion of them if the network penalises the validator you're using for misconduct, which could be caused by intentional actions or technical errors.
• Protocol Risk: Staking protocols are subject to updates and changes. Modifications to the underlying consensus mechanism can introduce new risks or lead to unexpected outcomes.
Crypto-assets span abroad spectrum, each with its own unique risks and characteristics. From stablecoins and DeFi tokens to meme coins, wrapped tokens, and staked assets, understanding the potential challenges—whether related to market volatility, regulatory developments, or technical vulnerabilities—is vital. As the crypto space continues to evolve, staying informed about these risks helps in navigating the crypto landscape responsibly.