The Crypto Space
A comprehensive guide to the blockchain industry
The crypto space is becoming increasingly popular. It started out as an underground technology created by an anonymous figure with the pseudonym Satoshi Nakomoto and in the early days was being tested and used by just a handful of people. Now, with 9,657 projects listed on CoinMarketCap (CMC) and upwards of 10,000 non-listed projects (as they lack a native token, but are either wholly or partially active in the crypto space) we can confidently say that crypto has grown into a formidable sector of the economy that is attracting ever-more investors and bright minds. However, to the layman and even those who are working in the space, there remains confusion as to the big picture as well as to where different entities are positioned in the market and how projects relate to one another.
We have endeavored to map out the crypto space and the largest projects therein with the aim of bringing some clarity to the different layers and market segments, as well as explaining certain aspects of the underlying technology along the way. We hope that this will serve as a guide to newcomers and veterans alike, and that it will help unify how we talk about and perceive crypto.
We have identified four main layers (L1 to L4) based on: (a) whether they are a native blockchain technology; (b) whether and how they allow for further solutions and functionality to be built on top of them from a technical perspective; (c) whether they are oriented towards enterprises more than the retail end-user; and (d) how much technical proficiency the end-user needs to utilize a given solution (see Figure 1). Within these four layers, we have also identified 38 distinct project categories, which represent a given industry or market niche in which projects are establishing themselves. The categories are elaborated on in more detail at the end of this article, along with an explanation of our overall research and categorization methodology.
Layer 1: Blockchains & Smart Contract Platforms
This is the foundation of the entire crypto space and the projects represented here are blockchains (chains) that operate on their own protocols and support their proprietary networks. They may still, however, be related to (built on, forked from, inspired by) other blockchains (e.g., ETC, BSV, RUNE), but they operate independently and support their own ecosystems. Furthermore, in this layer you will only find coins and not tokens. And this is, perhaps, the key distinction to observe. Namely, coins are:
- the native cryptocurrency of a given blockchain (network);
- a store of value and a medium of exchange (they represent money);
- mineable (this term originates in Proof-of-Work but is also applied to Proof-of-Stake), i.e. they are used as a monetary incentive for nodes to validate transactions and run the underlying protocol.
Tokens, on the other hand:
- operate on another coin’s blockchain (non-native);
- they represent ownership over unique assets;
- their monetary value originates from a certain business beyond a blockchain.
Therefore we can say that coins represent the monetary valuation of trust placed in a given network’s ability to facilitate secure and fair transactions. Tokens represent verifiable ownership over a tangible or intangible asset, which is secured and enforced through an underlying network. While not accurate in many cases, a useful analogy can be to think of coins as US dollars (or another fiat currency) and tokens as equities (or a contract or certificate of ownership).
Currently, two main consensus mechanisms (protocols) are used for processing blocks (transactions) on blockchains: Proof-of-Work (PoW, originating in Bitcoin); and Proof-of-Stake (PoS, originating with Peercoin and adopted more recently by Ethereum). Each approach affects the balance between speed and network security and their importance deserves a closer look.
PoW sacrifices throughput (transactions per second or TPS) for improved security and privacy by having all nodes in the network compete for compensation (a mined coin) by being the first to validate a set of transactions. This is done by solving a complex mathematical problem which, in essence, requires computers to repeatedly guess random numbers (nonces) to feed into a hash function which computes strings for a new block of transactions until the right string is guessed. It takes a computer time to keep guessing numbers and checking their result until the right string is generated — that work guarantees security and accuracy of all transactions submitted to the chain. The result of difficult and slow guesswork can be checked and verified by other nodes in the network instantaneously, which further ensures that any fraudulent attempt is difficult to execute and easy to detect. The node that first submits the right string confirms that all balances in the network are correct and that all transactions have been processed correctly up to that moment, acting as an auditor confirming there was no foul play in the creation of the balance sheet tracking all of the accounts in a system. Thus, nodes act independently for their own gain and whoever has the most processing power in the network (is the most invested into the network) also has the best odds of earning the block reward. We note that if a single actor controls 51% of all nodes (total processing power) they could, theoretically, compromise the system, but as the number of nodes increases such a scenario becomes highly improbable. On top of that, due to the difficulty of mining new blocks, it is no longer profitable to mine “alone” and miners usually consolidate into mining pools, with some of the pools accounting for double-digit percentage shares of overall mining power. These have concrete monetary incentives to ensure the system keeps functioning fairly and correctly.
PoS increases TPS at the cost of network resilience to bad-faith actors by not requiring all nodes to mine each new block. Rather, it randomly assigns each new block to any one of the validator nodes that holds a staked (locked) interest in the native cryptocurrency (you can read more on Staking in Layer 3: Tools & Services). To become a validator, a node needs to stake a given amount of the network’s native coin (e.g. for Ethereum the minimum required is 32 ETH) and this acts as a security deposit. The node then gets randomly assigned multiple transactions to create a block (or a shard of a block with Ethereum), the node validates the accuracy of all transactions contained therein, and submits the block to the chain. Other validator nodes then check the submission and confirm the accuracy of the block (or shard) submitted, which then disperses rewards to the validator node submitting the block and all other nodes confirming its accuracy. Thus, individual nodes receive rewards for completing two value-add actions: 1) validating transactions, creating and submitting blocks or shards to a blockchain; and 2) validating (attesting) the accuracy of other nodes’ submitted blocks. Should a node be caught in a deliberate fraud attempt, that node’s stake gets slashed (e.g. 1/32 of the stake for Ethereum) and the node gets gradually removed from the network. Much like with PoW, if a single node consolidated 51% of the total stake in a network, that node would effectively control the network and could add fraudulent blocks to the chain. However, acquiring a 51% share of a network’s total staked value is risky and, while doable on small projects, it becomes very expensive for a coin like Ethereum making this risk possible but highly improbable.
Within Layer 1, blockchains can be split on a simple permissionless (public) or permissioned (private) basis depending on the lack or existence of restrictions to hosting a node in the network or accessing its source code. Further categories emerge when considering if the chain is operating on a singular or multitude of protocols and whether it is possible to use the chain as a development kit for further blockchains. In terms of market cap it is apparent that the dominant type of blockchains are open-source, permissionless blockchains, which make up over 70% of the total crypto market capitalization (33% excluding Bitcoin) of the top 400 projects on CMC as of August 4, 2022 (see Figure 3). These public blockchains account for 104 of the top 400 projects listed on the site.
The second largest category in terms of market cap and number of projects contained therein are Builder Blockchains (sometimes also referred to as “Layer 0” blockchains). These protocols come equipped with a software development kit (SDK) and allow for new blockchains to be developed and deployed on them, thus inherently addressing scalability and interoperability issues of blockchain technology at their core. These new chains can be completely independent L1 chains or can function as sidechains (note that we have classified sidechains as L2 solutions despite the fact that they mostly operate independently). The primary benefit of Builder Blockchains is the fact they streamline the creation of new blockchain projects and strive to make them more compatible and interoperable.
Less prevalent categories of Layer 1 are private, hybrid and consortium blockchains. While these represent only a fraction of the total crypto market cap, they are significant for their technical and governance structure, as well as the fact that they are often implemented by large traditional corporations. Private or Permissioned Blockchains allow for a higher level of security, privacy and centralized control over a blockchain network and its source code. This can be a better alignment for large corporations that want to ensure the safety of business secrets or are subject to stringent regulation and supervisory pressure. For certain use cases, centralized control over the network and who has access rights to it is critical.
Hybrid Blockchains implement a best of both worlds approach by keeping parts of the network open-source and permissionless to encourage development, adoption, and decentralization, while imposing permissioned access to other parts of the network (usually governance) to ensure added security and compliance. This makes them an interesting middle ground even for traditional corporations to explore and consider as an alternative to a fully private network.
Finally, Consortium Blockchains employ a single UI and suite of tools for their multitude of chains, while still allowing some independence to address individual market needs through different implementations of their underlying protocol. These are primarily used to develop and deploy enterprise solutions, as the underlying (usually, permissioned) network ensures security, stability, and ease-of-use, while the modular chain structure allows for customization of the end-product to specific business needs.
Layer 2: Middleware Solutions
Generally speaking, the speed and efficiency of blockchains are limited by two factors: block size and block processing speed. Both are determined by the consensus mechanism (protocol) that a given blockchain utilizes to process transactions. Speed and efficiency can be addressed by exploring and deploying new configurations of currently existing protocols (e.g., with sharding) or by building solutions on top of the existing protocols that find methods to increase TPS, while maintaining or even improving network security.
Layer 2 exists precisely because of this: to address concrete shortcomings of the underlying technology and expand its potential for improvement without changing the base security and structure of a blockchain. Thus, the categories in this layer provide solutions for three pillars of blockchain development: (a) Scalability: increasing transaction throughput and processing capabilities of underlying networks; (b) Interoperability: increasing connections between different networks and allowing for cross-chain functionality; and (c) Privacy: improving control over and security of online identity and user-generated data.
Several observations can be made regarding Layer 2. Ethereum is the dominant blockchain used as a development platform as can be seen from the number of ETH-based projects in all three categories of this layer (denoted by the blue dot). It should come as no surprise that for Bitcoin most efforts have been directed towards scalability (increasing TPS) and privacy (ensuring security and anonymity) through the development of sidechains and/or forked chains (denoted by the orange dot). Tokens that originate from Blockchain builders are concentrated in their two strength areas — scalability and interoperability.
Looking at the $42 billion market cap of the entire layer and the 107 projects therein, its significance for the broader crypto space immediately becomes apparent. This layer allows for increases in speed and efficiency without sacrificing security and privacy, as well as not requiring any changes to the base protocols. The scaling and interoperability solutions can be further segmented into subcategories: sidechains, parachains, bridges, and rollups.
Sidechains are off-chain protocols (independent blockchains) that are linked to a main (parent) chain and facilitate the movement of data (blocks) on and off the main chain to increase TPS. These blockchains communicate with the parent chain through a two-way peg which ensures that data on both chains is synchronized. For example, the Lightning Network is a payment protocol that runs as a side chain to the BTC blockchain and increases the speed while lowering the cost of micropayments on the BTC network. In essence, two transacting parties lock-in a given amount of BTC on the Lightning Network and use that locked-in amount to transact at greater speeds and lower costs. Once all transactions are processed on the Lightning Network, a single transaction is sent to the BTC network which confirms the balances stemming from the Lightning Network transactions. Another example is MATIC, a PoS Ethereum-compatible sidechain that runs on an entirely different protocol, but is still pegged to Ethereum. The process is similar, as the MATIC network processes large bundles of transactions off-chain and only returns processed data to be stored on the ETH parent chain. Due to the sidechains’ pegs to and dependence on the parent chain we did not classify these independent blockchains as Layer 1 solutions.
Parachains are a relatively recent novelty in the crypto space, with DOT and KSM spearheading this development. Essentially, parachains are shards of the main chain, representing smaller semi-independent fragments, all handling different computing requirements while operating on the same (or virtually identical) base protocol. Thus, parachains increase TPS by processing transactions independently, but (unlike sidechains) they rely on the parent chain mining/staking nodes for security. Some are virtually indistinguishable from the main chain (like DOT’s core parachains), while others are distinct entities running on a common protocol (like GLMR and ACA).
Bridges are protocols designed to facilitate interaction between different blockchain networks as well as to accommodate differences between various protocols and block compositions. They encompass most interoperability projects, as they are aimed at protocol inter- or intra-connectivity (i.e., facilitating interactions between different networks, as well as projects within a given network). ETH’s Plasma protocol is an example of a bridge that is utilized by MATIC, a sidechain which provides additional scalability and interoperability to the base ETH network. Bridge protocols are inherently connected with and dependent on the previous two subcategories, as these technologies can deliver value only by operating jointly. There is one key issue with bridges — disparity in trust and security. This issue is twofold, as two different blockchains can have different mining/staking bases, which can open up the less-mined/staked chain to bad-faith actions; and the bridge builds its security on its own protocol, instead of the protocols of the blockchains they are connecting, which makes them a weak link susceptible to attacks (e.g. the successful attack on Harmony’s Horizon bridge).
Rollups are scaling solutions which take over part of the data processing from main chains and handle it off-chain while running in parallel with the main chain. Essentially, several transactions are moved off-chain, processed, batched together (rolled up), and returned to the main chain as compressed data. This reduces transaction load on the main chain and opens up additional storage and processing power pools. Rollups are similar to sidechains in the sense that they aggregate and process transaction data off-chain before sending it back to the main chain as a compressed batch of transactions. The key difference between these two scalability solutions lies in where the processed data is stored. Rollups store the processed data on the main chain instead of keeping it on their rollup chains, whereas sidechains facilitate data storage on their own chains. Furthermore, while sidechains run their own security protocols, rollups rely on the main chain for security and data integrity. There are two rollup subcategories: Zero-Knowledge (ZK) rollups and optimistic rollups.
ZK rollups are smart contracts that validate a batch of transactions off-chain and return it to the main chain with an included cryptographic validity proof called a ZK-SNARK. Every submitted data batch gets checked by the network and is added to the main chain if successfully verified. As the name suggests, in this setup, the main chain has “no knowledge” of all of the transactions that were processed in the rollup. Instead, it relies on the validity proof to ensure that all transactions that were processed off-chain and their resulting balances are valid and consistent.
Optimistic rollups (OR) function in a similar manner but, unlike ZK-rollups, rely on crypto-economic incentives and a dispute resolution system based on validators (fraud detectives) to ensure the validity of transactions submitted to the main chain. The party submitting a rollup to the main chain has to provide collateral (a native cryptocurrency bond) to be able to execute the submission. At any time, any node that spots a fraudulent transaction can submit a fraud proof, at which point a validator node also puts forth their own collateral and the dispute resolution process begins. The network calls back the state (balances) at the time and executes the transaction again. If the results of this repeated transaction are invalid, the node submitting the rollup gets penalized by having a portion of their collateral burned, with the remainder distributed proportionally to all nodes that aided the fraud detection process. In the same way, should a validator node submit an invalid fraud proof, that party also gets penalized. In theory, as long as there is a single honest node in the network, the integrity of the submitted batches will always remain intact.
Layer 3: Tools & Services
In Layer 3, we start to see more end-user facing solutions, the facilitation of complex interactions with blockchains, and the development of products and services designed to support the growth of an increasingly sophisticated technological base. While Layer 2 projects are mostly concerned with optimizing blockchain efficiency, Layer 3 opens up broader use case functionality of the underlying technology. For the most part this layer consists of tokens, with the exception of an occasional coin being developed that has a particular use case (mostly in the fields of decentralized computing and AI) around which its entire value proposition and functionality revolves (e.g. ICP, HNT, MED, IOTX).
We classify Layer 3 as containing solutions which: are oriented towards businesses, enterprises, and developing infrastructure for the running of end-user applications; are more complex than retail end-user applications and often require at least a basic understanding of blockchain technology to be used; and/or facilitate access to and operations on the blockchain itself.
The entire layer has a market capitalization of roughly $267 billion (second largest after Layer 1 and almost double that of Layer 4). Stablecoins make up most of this capitalization (over 57% as at August 4, 2022), which is due to their utility in facilitating transactions, trading, and stabilization of value of holdings. It is interesting to note that the stablecoin USDT has the largest daily volume of all traded coins and tokens, even more than BTC or ETH. Within this category we differentiate asset-backed and algorithmic stablecoins. While asset-backed stablecoins maintain their peg by keeping reserves of the pegged currency or asset and usually guarantee that every digital instance has a real-world equivalent, algorithmic stablecoins utilize a mint-burn mechanism to maintain a dynamic ratio of crypto assets in a liquidity pool to support a peg. In theory, algorithmic stablecoins allow for a truly decentralized approach to managing stability of monetary supply, but depeggings of large projects have exposed an inherent risk in this approach. On top of that, regulators have already started advocating for more substantial capital and liquidity requirements to be met. While Gold Tokens can be considered asset-backed stablecoins (gold being a traditional value preservation asset), we grouped them into a dedicated category to showcase the niche itself and because Gold Tokens fall into an in-between area of marketplaces (buying and selling of gold) and stablecoins.
The second largest category in terms of market cap is Staking & Yield Farming, which represents one section of the Decentralized Finance (DeFi) industry segment (others include Crypto Banking, Decentralized Exchanges, and Wallets). We define DeFi as any project that provides financial services (payments, lending, borrowing, trading, fundraising etc.) in a decentralized manner. This segment has grown rapidly since its inception as it caught the interest of investors (and many speculators) looking to achieve above-average returns through fixed yields on time-locked deposits. At a time of zero interest rates it was a highly attractive option for investors. Staking is a fundamental necessity for PoS protocols to run, as it involves an investor time-locking their crypto assets to act as a node/validator on the underlying PoS network and provide price stability on secondary markets. Yield Farming has the same technical and conceptual basis, with the two key differences being the investors’ time horizon and the use case. While staking is a long-term investment that supports the development of a business and operation of a blockchain (akin to acquiring and holding equity in a company and expecting dividends), yield farming is a shorter-term strategy which seeks to maximize yields across different projects and staking channels (analogous to technical trading or derivatives trading) by providing capital to liquidity pools (e.g. on DEXs) to allow for swapping of tokens in said pools.
Decentralized Exchanges (DEXs) are another part of the DeFi segment and are the fifth most capitalized category within Layer 3. In essence, DEXs are protocols running directly on a blockchain and acting as peer-to-peer (P2P) marketplaces that allow for coins and tokens to be swapped without a central authority settling the trade. Users incur both blockchain gas fees and a pool fee for each transaction. Gas fees can vary depending on the network load at the time of the swap and can sometimes be significantly higher than the CEXs’ fixed trading fees. There are different ways of structuring a DEX, but the most common method is the Automated Market Maker (AMM) model. Essentially, an AMM is a smart contract that eliminates the need for traditional market making. This is done by having liquidity pools in which users can stake tokens in return for a relative portion of the generated pool fees. Price discovery is achieved using a simple formula which calculates the ratio of tokens in the pool — as tokens are sold the price decreases and vice versa. The primary selling point of DEXs is the fact that (unlike with centralized exchanges) users retain custody over their funds, as they perform swaps using their personal wallets.
Wallets are cryptocurrency asset management software running on a blockchain. These can either be custodial wallets (an exchange account or holdings in an ETF) or non-custodial wallets (running directly on a blockchain), depending on whether the user retains their account’s private key or entrusts it to a third party. To clarify: every crypto wallet has a public key (address which is publicly available and used to identify the recipient/sender of funds) and a private key (large, randomly-generated password to access and manage funds on a wallet). Thus, we consider non-custodial wallets to be another part of the DeFi segment, while custodial wallets represent an extension of a service provided by a centralized entity. This is because non-custodial wallets provide a financial service (asset management and payment processing) and operate in a decentralized manner with no single central authority needed to process the transactions. Note that some of the most widely used wallets today (Coinbase, Metamask, MyEtherWallet, Coinomi) do not have a CMC-listed coin or token, but function as a protocol on the Ethereum blockchain (or in a multi-chain environment like Coinomi), while others offer hardware-based cold storage (e.g. Ledger) to facilitate offline storage of private keys and offline access to holdings.
We divided the remaining 12 categories into two groups: technical development (Figure 5, market cap table: TechDev) and financial technologies (Figure 5, market cap table: FinTech). As the name suggests, TechDev projects are those that bring tools, services, and infrastructure to market to allow for more complex functionality to be developed and run on a blockchain. Decentralized Autonomous Organizations (DAOs) are the largest category by market cap within this group and they received significant attention in late 2021 as more hype was starting to build up around the Metaverse and Web 3.0. These projects represent a solution for decentralized governance of the crypto space (Metaverse / Web 3.0) on both a micro (corporate/project management) and macro level (development of the “Internet of the future”), as they allow for a community to govern itself by relying on their stakes/participation in a given project. Computing & Cloud solutions are closely linked to Filesharing solutions, as both can leverage mutual synergies. Projects within these categories are developing methods for utilization of decentralized processing power and cloud storage to facilitate safer and more efficient online file management, while also providing key infrastructure for the development of further applications and tools that require more substantial computing power and storage. Internet-of-Things projects benefit from mutual synergies with the AI & Big Data category in a similar way. Namely, AI requires large datasets to learn and develop but once it is “trained”, it can significantly improve the efficiency of data analysis, management, and usage. The IoT category generates significant end-user data while also requiring elements of AI functionality to provide the optimal end-user experience. Within this group we also have Telecom projects, which are building blockchain-based infrastructure for mobile and internet communications.
The FinTech group of projects brings more complex products (financial instruments) and services to market. Wrapped Tokens provide interoperability and faster transaction speeds to coins (e.g. wBTC on the ETH network), tokens, and non-crypto assets (e.g. real estate, art, stocks) by placing them into a custodial digital vault and issuing (minting) a new token that is pegged to the underlying asset. This process allows for non-native assets to be transacted on a given blockchain and for assets with low throughput and high transaction costs (like BTC and ETH) to be transacted using a network with a higher TPS. Launchpads serve as crypto incubators, accelerators, and crowdfunding platforms. Launchpads range from an additional service provided by exchanges to dedicated projects focused on creating opportunities for early-stage coins and tokens to be funded and developed (e.g. POLS is part of the DOT ecosystem but also accepts projects which were not built on the DOT protocol). The Financial Infrastructure category includes projects that are deploying financial products and services inspired by traditional finance. These businesses create software solutions such as trading bots, terminals, and order aggregators (to name a few) that facilitate more efficient functioning of the crypto financial sector and provide value-add to investors and institutions alike. Market Making companies aggregate orders on financial markets to build order books on centralized exchanges (DEX market making is different as it utilizes AMM and liquidity pools instead of a centrally managed order book). This bolsters price stability by providing greater liquidity to the traded assets. While Hedge Funds are not listed on CMC as they normally do not issue a token, they are a critical piece of the crypto financial sector as they provide additional liquidity to the entire sector by either investing directly into projects or through the algorithmic trading of coins and tokens on exchanges in an effort to capture consistent profits (alpha) using high frequency trading and other algorithms.
Finally, we categorize Oracles as projects that fit neither the TechDev nor FinTech label clearly. These solutions allow for real-world, non-crypto data to be collected and imported to the blockchain without using on-chain data storage capacity. This data is utilized in blockchain services and products, without slowing down the underlying network and without the need to manually input the data. Currently, the primary use case for oracles is in the financial sector — importing data from traditional financial markets (tickers, prices, volumes, etc.) and making it usable by crypto financial institutions, platforms, and terminals. However, the technology has the potential to influence many more industries, as bridging real-world and crypto data will become increasingly important as adoption of blockchain continues and more users start generating data.
Layer 4: Applications & End-user Solutions
Layer 4 is the closest layer to the retail end user and the projects here are primarily concerned with providing value-add in the form of applications (products and services) that are aimed at incentivizing mainstream retail adoption of blockchain technology. This creates a dynamic in which this layer relies entirely on the technological base of all previous layers, yet it is crucial for attracting paying customers to crypto and enabling further development of the entire space. We also note four significant technological developments happening in this layer that are opening up new opportunities for the entire crypto space:
- the nascence of a blockchain-powered Internet in the form of Metaverse & Web 3.0;
- the proliferation of non-fungible tokens (NFTs) in entertainment, gaming, art, and business;
- the advancement of the crypto financial sector through further growth of centralized exchanges (and other institutions like OTC traders and prime brokers) as well as the development of blockchain-based banking solutions (banking of the unbanked, borrowing, lending); and
- the disruption of traditional service providers through blockchain-powered utilities, public services and professional services.
These four developments have the potential to disrupt traditional markets, as the services provided here derive particular advantages that stem from their blockchain base. It creates end-user value by: (a) leveraging blockchain technology to improve data and fund security against single-party attacks (e.g. in healthcare, insurance, and energy sectors); (b) providing end-user monetary incentives for loyalty and usage (e.g. NFTs, gaming, and entertainment); and (c) bringing decentralization and democratization to traditional industries (like banking and the development of the online landscape. This is also the most easily understood layer to the layman (which confirms its importance for broader adoption of blockchains), as it provides real-world everyday use cases for the technology being built in the previous three layers.
It is clear that centralized exchanges (CEXs) are the most significant Layer 4 category in terms of market cap (and even more capitalized than the entirety of Layer 2). Indeed, exchanges were amongst the first dedicated crypto applications to be deployed and they facilitated the buying and selling of crypto coins and tokens. Exchanges have become a gateway for crypto newcomers and retail traders due to their visibility resulting from significant advertising spend and because they are key partners for traditional financial institutions. The importance of this category is further bolstered by the fact that Coinbase (not listed on CMC) became the first crypto exchange to be publicly listed on a U.S. traditional exchange (NASDAQ: COIN) in early 2021, which was a sign of recognition for the entire crypto space from regulators and traditional financial institutions alike.
In the Crypto Banking category we grouped all projects that allow for traditional banking activities to be conducted on the blockchain, including lending, borrowing, and creating a debit account (i.e. facilitating deposits, withdrawals, and savings). These projects are unique due to the way they utilize smart contract technology to track obligations arising from the crediting of institutional customers and how they facilitate delayed payments (debt annuities). Much like with traditional investment banks, the deposits of customers are used to lend credit to crypto institutions and projects. However, unlike traditional banks, there are no barriers to entry for small depositors and the customer receives a more significant share of the interest generated by the credit. Furthermore, great value lies in the fact that these projects facilitate low-cost account creation and maintenance. This makes crypto banking a very attractive option, in particular for unbanked populations in emerging economies. We note a distinction between projects that emulate traditional banking through a centralized custodial entity that allocates deposits to market makers, other financial institutions or DeFi protocols (e.g. BlockFi and NEXO) and those that are fully decentralized, non-custodial protocols that generate returns through staking and liquidity aggregation across multiple blockchain networks (e.g. AAVE, COMP, and AMP). Essentially, much like exchanges, crypto banks can range from centralized to decentralized and can leverage both TradFi and DeFi functionalities for their offerings.
Meme projects (or meme coins), while few in number in the CMC top 400, carry significant weight (roughly $16 billion market cap across just 6 projects). This is primarily due to the market caps of DOGE and SHIB, which are an interesting phenomenon of the space. There are claims being made about the scalability of these projects that justify their creation and valuation and there is value to be assigned to the highly engaged communities that surround them. However, we need to note that speculative tendencies are prevalent in these communities and meme projects have proven themselves to be susceptible to pump-and-dump schemes.
NFTs are the third most capitalized category (second, if you consider the value of non-listed platforms) in this layer. The opportunities this technology provides for developers, businesses, and end-users allows it to be deployed across numerous industries (categories) and makes it one of the foundational pillars of Web 3.0. From a conceptual standpoint, NFTs are a certificate of uniqueness, authenticity, and ownership of an asset in a digital setting. The assurance stems from the unique code (hash) assigned to every instance of an asset which serves as authenticity proof and the publicly available transaction history which is tracked by the blockchain’s open ledger. The possibilities created by NFTs are already being leveraged by gaming projects and crypto platforms for online content creation and sharing. For the NFT category, we only considered projects that allowed development, minting, and trading of NFTs; not those that utilized NFTs for a game, an entertainment platform or for building a Metaverse environment — these were put into their respective categories, as NFTs were not the primary value-add of the project.
Gaming projects have received significant attention since late 2021. These projects are building economies around tokens and NFTs to add monetary incentive to in-game activity as well as facilitating trading of in-game assets (skins, mods, boosts, characters, etc.). This focus on creating value for gamers that goes beyond the entertainment of the underlying video game is creating a new paradigm in the video game industry by allowing players to “Play-to-Earn” and effectively turning games into a potential source of income. Entertainment solutions are also embracing NFTs — redirecting monetary gains from business to users in the areas of online content creation and sharing. Much like gaming projects, these solutions utilize NFTs to guarantee the intellectual property rights of any content posted online and open new potential revenue streams for content creators, while also giving the end user more direct control over their spending. Essentially, these projects are creating micro-transaction economies in which users do not have to subscribe to the services of a particular platform (e.g. Netflix, YouTube, HBOMax, etc.) with a very broad range of in-house produced and licensed content (most of which the user never even consumes). Instead, the end users purchase content directly from the content creator or studio and spend their money in a more focused manner. This incentivizes user spending, while also allowing for more income to be retained by the creators instead of the platforms themselves resulting in an overall more profitable business model for content creators. Furthermore, risk of demonetization is practically completely eliminated and content engagement is improved, as end users are actively invested into a creator.
The three previously mentioned categories (NFTs, Gaming, Entertainment) all contribute to the creation of and transition to Metaverse & Web 3.0. We distinguish between projects that indirectly build up a supposed Metaverse (i.e. the three previously mentioned categories) and those whose principal value proposition rests on facilitating the development of the Internet of the future. These projects are focused either on migrating Web 2.0 products and services to a Web 3.0 setting or on building blockchain-based tools, services, and applications in anticipation of the advent of the Metaverse. Thus, here we see: (a) solutions that build virtual reality environments and assets which populate those environments (or provide development kits for both); (b) projects that build social networks and communities on the blockchain enabling users to create and manage their online identities and personal networks; and (c) solutions that are bringing existing Web 2.0 products and services to the Metaverse environment. All of these projects are analogous to real-world construction companies: they are creating the environment (plots of land, infrastructure, residential and commercial buildings) in which human activity will be conducted in a virtual setting. This infrastructure-building aspect could, in theory, justify classifying this category under Layer 3. However, the lack of enterprise-facing solutions, the focus on attracting and engaging end-users, and the goal of facilitating end-user activities on the blockchain through easily understood UIs and functionality places this category decidedly in Layer 4.
The six smallest categories by market cap (starting with Logistics & Mobility and ending with Employment) fit into a group of disruptors of traditional providers of utilities, public and professional services. Namely, all of the categories contained in this group are endeavoring to leverage blockchain technology to provide services in a cheaper, more secure, and transparent manner. Thus, Logistics & Mobility projects center around improving supply chain management through clearer data tracking, optimizing traffic flow by leveraging automated systems, improving ride sharing platforms, and providing drivers (both retail and professional ones) with more sophisticated GPS and traffic monitoring capabilities. Marketplaces are seeking to migrate e-commerce to the blockchain and facilitate transacting of real-world or digital goods through crypto-backed platforms. By doing this, they are actively cutting the costs of middlemen and distributors, providing more transparency to clients, creating more streamlined agreements and enabling settlement of purchases using cryptocurrencies. Insurance projects aim to bring the insurance industry to the blockchain to leverage the inherent security and transparency of blockchain technology, while also using smart contracts to provide guaranteed settlement and fulfillment of all obligations arising from a contracted insurance policy. This has the potential to make insurance more accessible to end users, while also enabling them to control which companies they share their highly personal data with and how (for insurance, this includes data points on health, income, asset ownership etc.). The Healthcare category seeks to optimize the way healthcare data is managed and improve its security, while also providing patient-facing solutions to improve communication between medical experts and their patients with the aim of improving treatment outcomes. Much like with insurance projects, data security and anonymity is critical for the healthcare sector, while access to large sets of verified patient data is crucial for pharmaceutical companies to improve their existing drugs or develop new ones. Energy projects are bringing more security to user-generated data, while also building functionality to facilitate micro-generation of energy and distribution of it in a local network. These projects allow for more precise and transparent tracking of individual energy consumption, while also enabling excesses of household-generated energy (through solar panels, for instance) to be distributed and sold in real-time in exchange for token incentives. Employment solutions are looking to change the way job hunting is conducted by providing streamlined platforms to end-users through which they can apply to any job they search. This not only simplifies the process for job seekers by creating a standard for the industry and a single online profile with which they can apply to any company, but also allows job providers to shift job vacancies from their websites to a standardized platform on which they can also be given access to verified prior employment information from prospective candidates. We note that many of these transitions to blockchain are still in early development and their success is by no means guaranteed.
We’ve come to the end of this broad overview of the crypto space and no doubt there will be contrary opinions regarding our choice of layers and categories therein. We look forward to hearing feedback from the crypto community and note that as things are moving at lightning pace the landscape will continue to evolve and change. What follows is a description of the methodology we used to decide on which projects made the cut and which ones missed out.
We approached this task by first creating a database of the Top 400 crypto projects based on market capitalization as listed on CMC. We then set out to manually determine the categories in which a project might be operating, as well as which blockchain each project is running on (its own or a 3rd party protocol).
Individual categories were determined using the existing CMC category tags supplemented by additional categories defined by us, based on what we identified as being a distinct market segment or sub-industry. After the initial run-through, we eliminated categories that contained only one project and consolidated categories that were so closely aligned and overlapping that we deemed there is no need to add distinction between the projects contained therein (e.g. Computing & Cloud, AI & Big Data). Table 3 provides a glossary of the categories that were produced with this approach.
Individual projects in each category are presented in descending order based on their market caps, as seen on CMC. To better showcase the depth of the crypto space, we supplemented certain categories with projects that did not have a native token listed on CMC or projects that were listed on CMC but were not in the top 400 based on market capitalization. These projects were included because of their significance in terms of market cap, number of active users, or the precedent they set for the entire industry. Such non-listed or non-top-400 projects are marked with italicized names/tickers (examples include Coinbase, Alameda and Paxos).
Furthermore, we marked each project with a colored circle to indicate which blockchain the project runs on (is based on, forked from, or serves as a companion chain to). For visual simplicity and clarity, certain blockchain bases (like ONT, QTUM, XRP and other native chains) were not included in the color-coded legend, as they appeared only once or twice throughout the top 400 list.
Below each visual representation of a given layer and categories therein, we also provided a table overview of the total market caps of all projects within each category based on CMC data. In these tables, we estimated company valuations of non-listed projects (italicized rows) based on online data:
- shares outstanding x price per share;
- last round of funding received adjusted for general price drop YTD; or
- industry-benchmark revenue multiple x most recent revenue data available.
Finally, a vast majority of all projects covered in our research appear in multiple categories and even multiple layers, due to their business models or technology requiring vertical integration of the value chain. Because of this and the addition of companies not listed on CMC, the sum of market caps of all categories (and summed number of projects included in each category) will be greater than the sum of all 400 projects as seen on CMC. For instance, a Metaverse & Web 3.0 project building a social platform will have an L4 patient-facing application, likely running on its proprietary L2 privacy-centered sidechain, while managing and processing user data with an L3 Big Data solution. Each segment of the business adds different value from a mutually exclusive perspective, while delivering even greater value as a collective solution.