Mapping the crypto ecosystem
Taking your first steps in the crypto ecosystem can be daunting. You start off thinking it is all about magic internet money, then realise that is just one use case that blockchain technology and cryptocurrency are disrupting. So what does the map of the crypto ecosystem look like? This article will briefly introduce the key sectors to guide your journey.
Bitcoin - Fixing Money
Your entry point into the world of crypto is likely to be via Bitcoin. This makes sense because as the first cryptocurrency - conceived in 2008 - it was the inspiration for everything that followed.
Its creator used the pseudonym, Satoshi Nakamoto, but no one knows who that is in real life. Their intention was to create a new, better form of money, outside the control of the governments, that had in-built scarcity and required no permission to use.
How Bitcoin achieves this, is via something called a blockchain. That technology isn’t specific to just creating a monetary system, it is about sharing and validating any kind of data, without the need to trust a central policing authority.
If you wonder what’s wrong with the money we already have, then read this separate article about fiat money and how it works, but Bitcoin’s success has inspired other types of internet money:
Privacy Coins - Bitcoin is completely transparent, every transaction can be viewed on its blockchain and potentially associated with real-world identity. Privacy Coins have emerged to address this e.g Monero or Zcash.
Stablecoins - Digital clones of Euros/Dollars, acting as a bridge between existing money and crypto like Bitcoin. They are easier to move across borders, but stable in value.
Bitcoin Forks - Bitcoin is open source. Anyone can make a copy and change aspects they think they can improve. This has happened numerous times, the most prominent being Bitcoin Cash (BCH).
Faster & Cheaper Coins - Bitcoin sacrifices speed for security and decentralisation; it can take around 30minutes for a transaction to be confirmed in its blockchain and costs a few dollars/Euros. Other cryptocurrencies have emerged to be faster and cheaper, but sacrifice on decentralisation i.e. they are prone to censorship or control. Examples are XRP, XLM.
The blockchain also lit the touchpaper on an explosion of ideas that utilise blockchain technology.
Layer 1 Blockchains: Making It Easier To Build & Invest In Digital Projects
The second cryptocurrency to emerge, inspired by Bitcoin’s blockchain design, was Ethereum. Ethereum works as a new kind of internet money - it is faster and cheaper than Bitcoin, but considered less decentralised - but more importantly, it functions as a rentable world computer. You’ll see Bitcoin and Ethereum described as Layer 1 blockchains.
Think of the power Apple or Google have in deciding what Apps are available in their stores, and how App creators are forced to share revenue and follow strict guidelines. Ethereum allows anyone to create an App - actually called a dApp - and imposes no rules. It serves as both the engine for any computation, and provides an easy way to create a token to allow users to gain utility from the dApp.
Ethereum has inspired an explosion of blockchain based applications, described as Layer 2. Its popularity has meant that the fees that users of these Apps, pay for executing transactions through Ethereum’s computing power - known as the EVM (Ethereum Virtual Machine) - have become really expensive, and created competition from other similar Layer 1 applications.
Each Layer 1 application is an ecosystem in its own right. The more Layer 2 applications they support, the bigger the potential network effects and overall value that the it represents.
Example L1s are: Ethereum, Solana, Avalanche, Terra.
Exchanges, Cefi & Defi - Opening Up Wealth Management
Cryptocurrencies have utility - they can be used to achieve specific things now - but they also have speculative value, based on future adoption and usage.
Unsurprisingly people focus on the money-making angle so a huge aspect of the crypto ecosystem is buying/selling cryptocurrencies on exchanges to speculate on future value - like buying shares in publicly traded companies.
Example exchanges are: Coinbase, Kraken, Binance.
Not everyone wants to trade the crypto they own, but they are interested in gaining a passive income, just as you can earn interest on savings. You can think of this as crypto banking. Cefi - Centralised Finance - uses familiar business set-ups with offices/staff and regulation, to offer interest/loans of your crypto.
Example CEFI services are: Celsius, Nexus, BlockFi, Crypto.com
Blockchain technology has enabled trading and wealth management to happen without any formal structure behind it, it can all be managed by code - in the form of Smart Contracts - and managed by the solutions that are built on top of L1 blockchains - as described above.
This whole area is called Defi (Decentralised Finance) and is essentially disrupting Wall Street, Hedge Funds and the walled gardens of wealth management.
Example DEFI platforms are: Compound, SushiSwap, Uniswap
Bridges Between Blockchains
As the ecosystem of blockchains started expanding it became pretty clear that it would be essential for chains to connect with each other.
At the moment this is generally achieved through bridges, which can be complex and expensive. This inspired the development of so-called Layer 0 blockchains that themselves support L1 blockchains enabling interoperability - allowing L1 blockchains that functionally link to each other.
Examples of Layer 0 chains - Polkadot and Cosmos
Oracles: Allowing dApps to Share Data
It is equally important for blockchains and Smart Contracts to receive/send data from the outside world, otherwise they can only function with reference to themselves. Oracles provide this service, sharing data in a very specific way that retains its independence, essentially being crowdsourced, rather than coming from just one provider. This might be price data, weather/temperature data, sports results; any information that would feed a dApp.
Example Oracles are: Chainlink, Band and Augur.
NFTs - Art, Collectibles & Digital Rights
You’ll have to have been hiding in a cave to have not seen some mention of NFTs - Non Fungible Tokens. You can think of NFTs like digital receipts; they provide a record of ownership, immutably recorded in a blockchain. ‘Immutability’ is a fancy word for something that cannot be changed.
NFTs can prove ownership of both digital and physical objects, the most obvious being art and collectibles. A collection of avatar style images called CryptoPunks, created in 2017, were among the first NFTs created on the Ethereum network. The value of many early NFTs has skyrocketed since, and inspired NFT creation across sport, music and brand development.
Though attention is on the resale value of NFT collections, there is a much broader use case around NFTs unlocking latent value in things like subscription models or user generated content. Imagine your gym membership or Netflix subscription being an NFT that you can transfer if unwanted?
Example NFTs: Digital art like Beeple: Everydays the first 5,000 Days or CryptoPunks
Example NFT marketplaces: Open Sea, Rarible
What the hell is web3.0?
Though the internet was born in 1983, it wasn’t commercially available until the 1990s. That initial era and the following decade are considered web 1.0. It saw global adoption of the internet and the growth of online commerce.
Web 2.0 saw the transition of the web from a passive experience, to something interactive via social media and user generated content.
The big drawback to that attention economy was that the social media behemoths that emerged - like Facebook & Google - did so by monetising user data. Web 3.0 sees control shift back to the user, which can be facilitated by the decentralised nature or blockchains.
So a web3 wallet is one which has no central authority; you are in charge. The concept of user generated content also being owned by the user is encapsulated by the Play to Earn economy and the growth of Decentralised Autonomous Organisations (DAOs); organisations owned and run by their users.
Examples of Web3.0 applications: Browser wallets like Meta Mask; Metaverse games; User run entities like MKR DAO or ShapeShift DEX
The Metaverse & Play to Earn
Gaming is arguably the most popular modern pastime. We invest enormous amounts of time playing our favourite games, which translate into enjoyment and maybe bragging rights. But those efforts, represented by a player account with associated awards and in-game items, belong to the platform or game provider.
What if everything we created while playing could be sold, traded or monetised? That is what the blockchain is delivering by supporting play to earn games, games where users control the value they create, using NFTs as the mechanism to trade in-game items and tokens to enable users to own a stake in the ecosystem they help grow.
Many of these ecosystems are expected to move beyond what you would consider as just a game, which is why they are being described as a Metaverse, a virtual world explored immersively through a VR headset.
The fact that Facebook rebranded as Meta shows you how much hype there is in this area, with the Covid Pandemic providing extra impetus toward remote working and living, that could soon take place in a Metaverse.
Right now there are few, if any, working examples of Play-to-Earn/Metaverse games, with most of the focus on building the economies for in-game items and underlying governance tokens, while the actual playing environments are being constructed.
Examples of Play-to-Earn: Decentraland & Sandbox
The crypto ecosystem is so fast moving and so diverse that the term’s original connection to ‘internet money’ is becoming outdated. Web3.0 is increasingly being used as a catch-all to describe online economies where users flip from being the product, to producers and contributors in environments where they can both have a say in governance, and share in success.
The extent to which web3.0 can fully deliver on those ideals still comes down to decentralisation, the fundamental feature of Bitcoin, where crypto started. So crypto’s ecosystem is becoming increasingly tribal and political especially as the value it represents grows.