Blockchain Blog 11: Blockchain Ecosystem — Crypto Categorization
Like the Internet, which was the base for all the internet-based solutions today, Blockchain is the base for many innovative decentralized solutions. We are still in the early stage of blockchain but the solutions created upon the blockchain principles are enumerable and created across all the major sectors, whether it be Decentralized Finance or any core areas.
There are now more than 2,000 different cryptocurrencies in circulations, so Why are there more cryptocurrencies than just Bitcoin?
When Bitcoin was first created, it was made with the intention to function as a form of digital cash. Over time this focus has shifted from a decentralized payment coin to a store of value that rivals gold. While Bitcoin does perform well as a store of value due to its deflationary protocols, there are many things that Bitcoin does not do well. Advances in the development of blockchain technology has lead to new innovations and use cases for the technology. The expansion of use cases for cryptocurrency has allowed for the growth of various coin projects that aim to solve real-world problems.
As we don’t keep 2 use cases of the Internet-based solutions under one umbrella similarly we will categorize cryptocurrencies based on the problem they solve. We will further dig into a few of the cryptocurrencies later in more detail. In this blog, we will start with Crypto Currencies Categorizations
Cryptocurrencies can be categorized based on various aspects like:
- Market Capitalization
- Blockchain Networks
- Mediums of Exchange
- Blockchain Oracles
- Blockchain Bridges
- Sharing Coins
- And Others…
Investors often view and categorize cryptocurrencies based on their market capitalization.
Large-cap coins: These coins include Bitcoin and Ethereum. They have a market cap of more than $10 billion. These investments can be considered lower risk because they have a track record of growth and have higher liquidity. This means that a higher volume of people can sell without a significant price impact.
Mid-cap coins: These coins have market caps between $1 billion and $10 billion. These coins can be considered somewhat proven with room to grow, but still, have a higher risk than large-cap coins.
Small-cap coins: These coins have a market cap of less than $1 billion and often are new to the space. These coins are highly vulnerable to dramatic market cap increases or decreases, and as a result, can have volatile price fluctuations.
There are many major blockchain networks that allow for the creation of ecosystems, where multiple coins/projects/tokens can run all on the same network.
The Ethereum Network is able to host a wide variety of tokens with different uses through the use of smart contracts. Here are some examples of tokens hosted by the Ethereum blockchain:
- Uniswap (UNI) — A popular decentralized exchange on the Ethereum blockchain.
- Polygon (MATIC) — Polygon is a multi-chain scaling solution for Ethereum.
- Aave Lending (AAVE) — Aave is a decentralized lending platform running on the Ethereum blockchain.
- Enjin Token (ENJ) — ENJIN is a software project that gives developers the ability to create and manage digital assets on the Ethereum network.
Payment Coins/ Mediums of Exchange
A medium of exchange is an instrument used to enable the sale, purchase, and trade of goods between parties.
Stablecoins are digital assets created to imitate the value of fiat currencies such as the U.S. dollar or the Euro. They allow users to quickly and cheaply transfer funds around the world while maintaining a stable value. Most stable coins are backed by a 1:1 ratio of dollar to coin. Projects such as Tether have collateral that backs their coins in the form of fiat, crypto, or other commodities stored in their reserves.
Cryptocurrencies are mostly pseudonymous meaning that although true names and locations are not recorded into the blockchain, wallet addresses and transaction IDs are in fact recorded.
Theoretically, one could search through a history of transactions and attempt to associate a user with a mix of wallet addresses and transaction histories. Privacy coins aim to eliminate this potential flaw by masking transaction information.
Oracles are third-party services that send information to smart contracts from external sources. Blockchain networks on their own can only source information from data on the network. Oracles act as a relay, where off-chain information can be supplied to various blockchain networks.
While major blockchain networks such as Ethereum and Cardano aim to facilitate transactions and information verification using their own versions of blockchain technology, these separate networks are typically not compatible with one another. Information is not easily shared and transferred without an intermediary. Some projects aim to create cross-chain bridges, which are essentially digital pathways to bridge the gap and facilitate the transfer of information between these ecosystems more easily.
- Polkadot (DOT): Polkadot is one of the largest projects working to create cross-chain bridges. Its goal is to build a blockchain of blockchains, where any and all blockchain networks can be connected and bridged through the Polkadot network.
- Cosmos (ATOM): Cosmos is another project attempting to enable more data transfer between networks.
As a blockchain sees increased network activity (increased transactions and use), it can suffer from network congestion scaling difficulties.
Layer 2 scaling solutions refer to a secondary chain that can help alleviate network congestion and improve transaction speed.
A fork in a blockchain is essentially a split where a second project emerges from the original. This could be the result of members of a development team having a disagreement on the direction of the original project. A significant change in how the network operates could be proposed that splits the blockchain into two, where one network follows the old way of doing things and the new one follows a new set of rules. One part of that team may decide to go forward with their alternate vision, replicating the history of that blockchain up to that point and then going forward with their new direction.
Certain cryptocurrency projects aim to revolutionize digital data storage and file sharing through the use of decentralized blockchain technology. The decentralization of data storage can allow for cheaper storage rates for all and more efficient data transfers across the globe.
Lending platforms allow users to lend and borrow crypto from other users.
- Lenders will receive rewards when depositing their funds to pools supported by the platform.
- Borrowers can benefit by taking secure loans from the platform by depositing collateral.
Lenders benefit by earning interest on their deposits and borrowers benefit by having a source of liquidity to acquire loans. APYs may fluctuate up and down based on factors such as demand or scarcity.
Centralized Exchange Tokens
Some exchanges have decided to develop their own tokens for various uses. The use cases for these tokens range from acting as tokens for liquidity pools for margin trading to tokens used for their own in-house blockchain networks.
Decentralized Exchanges (DEXs)
The use of smart contracts has allowed for the creation of decentralized exchanges. These differ from typically centralized exchanges in that they are not controlled by a single entity or group.
Centralized exchanges hold your funds when you invest and buy crypto, whereas on decentralized exchanges funds are directly stored on the blockchain itself.
Decentralized Autonomous Organization (DAO)
A Decentralized Autonomous Organization (DAO) is a way to bring governance to a decentralized protocol without compromising any of the benefits of decentralization.
DAOs allow the users/token holders the right to vote on proposed changes to the network and the overall future of the network. There is no influence from a central authority. We will further explore more about the DAOs in more detail in later blogs.
The rise and popularity of Dogecoin have ushered in a new category of cryptocurrency: memecoins. Memecoins are typically based on internet memes (jokes, humor, funny images) such as the Shiba Inu, dogecoin, and other various figures.
These coins have dominated investing social media circles throughout 2021, and some such as Dogecoin have become popular throughout mainstream media. While would-be investors may hear stories of extreme profits from early adopters, the potential for extreme gains is equal to the potential for extreme losses. Most memecoins do not have a use case, meaning that they do not have a specific or unique function compared to other cryptocurrencies. They do not aim to solve a real-world issue or to provide a financial service. Investing in Doge or other memecoins is not recommended, and is considered a high-risk investment
A lot of people while investing in cryptocurrencies do not take into consideration what actually they are investing in. Each genuine cryptocurrency company is a solution of its own, and they are addressing a specific problem in an entire blockchain ecosystem. One must not blindly invest in any of the cryptocurrencies based on the hype created in the market and instead research thoroughly about what actual problem a cryptocurrency backing company is solving. We will later look at the research structure which we can follow before investing in any of the cryptocurrencies, but before that, we will further explore more about Decentralize Finance (DeFi) and Decentralized Autonomous Organizations (DAO) as they are a crucial part of the entire blockchain solution.
Read Next Part: Blockchain Blog 12: Decentralize Finance (DeFi)
Entire Series: 28 Blogs on Blockchain and Cryptocurrency
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