Hi, my name is Crypto

Welcome back to Carmen’s reflections about crypto and blockchain assets. In this “episode” we are going to (finally!) talk about THEM, the blockchain-based crypto assets: what are they, what purpose do they serve in the crypto ecosystem (and in the real life!), how can they be clustered and recognized etc. In our previous chats I only covered “indirect” topics such as who are the buyers and sellers in the crypto market, what are my sources of information about this domain (basically I went around the bush, to be frank 😊). Now it’s time to go back to the meat.

It took me more than a year to get some sense of the magnitude of the blockchain & cryptoassets market. With more than 7.800 such assets grouped in more than 122 categories (as per Coinmarketcap classification), you will forgive me for taking so long to write about them. You will also forgive me for providing an incomplete, simplistic and very personal view of how to think about these assets. (Nota bene for the meticulous of you reading this article: I use the words “assets”, “tokens”, “currencies” interchangeably, even if they don’t mean the same thing).

Since I am a visual person, I needed some sort of metaphor / analogy to explain (to myself, first of all) what types of crypto-assets exist in this brave new world. I decided to use the car analogy, even if not 100% perfect.

My elevator pitch is the following (I will expand on each group / term later, don’t worry):

• > The engine: is represented in the crypto-world by blockchain platforms (layer 1)
• The gear/supercharger: these are the layer 2 solutions of a blockchain platform
• The fuel: (some of it) comes from crypto/blockchain oracles
• The chassis: under the form of stablecoins
• The garage / parking place: wallets / where you keep your tokens
• The car body & interior: same as we have sport cars, family cars, collection cars etc, we also have different big use cases in crypto. In this article I’ll cover the major ones: DEFI, payments / remittances and NFTs

NB1: There are other components of a car that have a nice correlation in crypto, but I won’t cover them here due to lack of time/space. For example, the car board could go well with data analytics blockchain projects like The Graph, or the safety belt & airbags with crypto insurance services like Shield Finance (a nascent industry, but much needed in the future)

NB2: I struggled to find a nice association to a car’s wheel, so I’d be happy to hear your ideas in the comments section below 😉

Let’s tak them one by one.

(1) Blockchain platforms (protocols)

are the largest and most important category in the blockchain/crypto market. They are the base of everything being built using blockchain and cryptographic technologies (just like the engine is for a car). In short, blockchain platforms are huge databases where transactions are created (usually via smart contracts), validated (via decentralized block nodes) and stored (in the ledger). When I say “transactions”, I mean whatever agreement has been decided by two parties in order to transfer value from one to the other: exchange token A with token B, move product C from point D to point E, send quantity F of token G from person H to person I, store file J in exchange of fee K, pay quantity L for product/service M to supplier N … and I could go to the end of the alphabet, but I think you got the gist.

Based on their technical setup and strategic/use-case intent, blockchain platforms are of different shapes and forms. The classifications that helped me keep sane and get to the essence are:

a. Layer 1 versus layer 2: this is a technical classification, whereby layer 1 platforms settle transactions at the base level, in the most secure (but oftentimes slowest) way possible. Layer 2 solutions on the other hand are bolted on layer 1 platforms to simplify, accelerate and scale transaction settlement, e.g. by performing less critical parts of the process. Think of a highway that connects two large cities: it’s lighted, well maintained, monitored for fraud/accidents … BUT … it’s also congested and expensive to use. That’s a layer 1 (L1) platform. A layer 2 (L2) platform would be a parallel road that connects the same two cities: smaller, maybe winding, passing through some forests …. but surely less expensive (if not free) and much faster when the highway is congested. One can decide to use the highway (L1) for a critical part of the journey, and the parallel road (L2) for the rest. My favourite L1 platforms are Ethereum (the king), Polkadot (cool), Solana (fast) and ATOM/Cosmos (interoperable). For L2 solutions I’d go with MATIC/Polygon, as it’s the most en vogue and used nowadays

b. Specialized/focused or generic/multi-purpose: In the past few years, the number of projects / use cases leveraging decentralized, trustless blockchain technologies has exploded (they are much more than the 7.800 tokens I mentioned in the beginning, as not all teams decide to launch a tradable asset together with their project). As effect, blockchain platforms also started to split, based on whether they want to specialize in a certain domain (e.g. decentralized finance) or they prefer to keep a fit-for-all approach. Ethereum is a fit-for-all platform in my view, as well as most of other high market capitalization blockchains: it serves decentralized finance (DeFi), non-fungible tokens (NFTs), corporate supply chain / data storage projects, stablecoin issuance, initial coin offerings etc. Blockchains like Chiliz or Enjin specialized in issuance of NFTs for example. MANA is a blockchain for virtual gaming only … and so forth.

(2) Oracles

In the same way a car cannot operate without fuel, so are the blockchain platforms. In order to serve their purpose (e.g. to generate smart contracts) they need data (to include in the respective contracts).

For very simple contracts that only require on-chain data, the blockchain itself might be able to produce it. Think of a payment that only needs to know the recipient’s blockchain address and the amount to send: all these are data that can be found in the blockchain transaction log (thus the name “on-chain”). For all other smart contracts (the majority!), data from other chains or from the real world, is needed. These are called “off-chain” data. Think of a trade where you want to buy/sell an asset at a pre-determined price: this price needs to be fetched from somewhere else than the blockchain itself (e.g. from an exchange platform like Binance, Coinbase or Kraken). Or think of a blockchain-based betting platform: if in November 2020 you wanted to bet that either Biden or Trump would win the US elections, the betting platform would need to know who actually won. This information exists in the “real world” (e.g. in mass-media, White House), and not on the blockchain itself.

Data from other chains or the real world is collected, stored and fed into blockchain platforms by special databases/networks called “oracles”. The largest oracle in the crypto space is Chainlink. They are in the market since 2017 and have amassed hundreds of partners who use their data, including all major blockchain platforms, DeFi projects, crypto insurers, decentralized gaming platforms etc. Other smaller players in the oracle space are BAND protocol, Ocean Protocol or DIA.

(3) Stablecoins

are coins who, by design, are supposed to not change in value (and most of them are pegged to the US dollar). Most used stablecoins in crypto world are USDT, USDC and BUSD: together they cover more than 80% of all transactions. Traders and investors use them to avoid making transactions in fiat currencies (like USD, EUR, Renminbi), to “park” their money in times of crypto-market downturn or to lend them for an income (they work like your bank’s savings account, just that the interest rate is positive, haha!). If you are active in the crypto-market you should get very familiar with these stablecoins, and especially with their underlying collaterals / reserves: in case of huge market disruptions (like March 2020 Covid-induced meltdown) you want to be sure that your stablecoin will still value 1 USD and that you can cash it easily. The good news is: more regulation on stablecoins is on the way!

(4) Wallets

These are the “storage” places for your crypto assets. They can be less protected but cheaper and more convenient, like an open air parking slot: these are called “hot wallets”. Alternatively they can be better protected (like a garage is for a car) but then they are usually more expensive and time-consuming to use: these are called in the crypto-world “cold wallets”. Let’s take them one by one.

a. Hot wallets store your assets (and the private keys) online. Most used wallets are the ones offered by exchanges themselves. If you trade on Coinbase, Binance, Kraken etc then you also store your acquired assets in their “hot wallet”, unless you move them somewhere else. Other hot wallets are standalone projects/Apps with varying degree of safety and bolt-on services. The ones I use/prefer are Metamask (for their browser integration facility), BlueWallet (for very cheap and fast Bitcoin transactions using the Lightning Network), BlockFi (for earning staking rewards on my deposited assets), Trust Wallet and SwissBorg (also for staking rewards and online purchases). Some also issue crypto credit cards 😉.

b. Cold wallets store your assets offline (or at least can be accessed only via an offline device/key). Ledger is by far the market leader in this area. For 80–100 Euro you can buy their physical device which will generate (and store) your private keys to access your coins. When you want to make transfers you connect the device to the Ledger app/desktop interface and the private keys stored on the device will do their magic. Once you finish the transaction you disconnect the device and there will be not trace left of your keys anywhere online (or at least this is what they say 😊).

Attention! Since wallets are still new, evolving and largely unregulated beasts, there are risks associated with using them. One of them is ownership. If you heard the saying “Not Your Keys, Not Your Coins”, this refers to instances where you store your assets in a hot wallet and you don’t own the private keys (most exchanges we talked about here do this). In this case, if your funds go missing, its’ not easy to claim them back since you don’t own the keys yourself. Another real risk is data leakage. You might have heard about Ledger’s epic data leak of 2020, whereby 270.000 customers had their Ledger personal data released on internet (email, phone, address, but NOT their private keys). Lastly, password/fund recovery is hard thing to do, too. Especially with cold wallets, once you lose the secret code that unlocks your device, you can say good bye to the assets that were secured by respective private keys. You might also have heard of people who owned thousands of Bitcoin since 2009 and could not retrieve the codes to their wallets anymore.

(5) Use cases

The most exciting group of crypto-assets are the ones related to a specific utilization / theme. The crypto-equivalent to a sports car could be the Decentralized Finance (DeFi): both are cool, fast, and risky to use if one doesn’t know what (s)he is doing 😊. A family car could be associated in crypto with payment/remittances platforms: both need to be reliable, stable and easy to use. And last but not least, collection cars have their counterpart in crypto under the form of non-fungible tokens (NFTs): both are unique/special items for which passionates are willing to pay insane amounts of money sometimes. Let’s take these three categories one by one.

a. DeFi platforms: These are blockchain-based platforms whose main aim is to help users buy, sell, swap, lend, borrow and stake crypto-assets. The DeFi scene has been exploding since the “DeFi summer” of July-August 2020. In less than one year the total value locked / transacted on DeFi platforms increased 6–8 times (from 11 billion to 65 billion USD at the time of writing, with a high of 88 billion USD in May this year). On Coinmarketcap there are 1580 tokens associated with DeFi which have at least 1 million USD in market capitalization. Most are scams or are highly susceptible to hacks. Among the ones I found more serious/established and with strong fundamentals are: Maker, Compound, Aaave, Curve (mostly focused on lending/liquidity provision and stablecoins), Uniswap, SushiSwap, 1INCH, YearnFinance (decentralized exchanges that do everything you want: asset swapping, staking, yield farming, liquidity provision etc), Synthetix, UMA, FTX (for derivatives trading)

b. Payments/remittances platforms: serve one of the most important and valuable purposes of the crypto/blockchain sector: they make transfer of money quick, cheap and secure, regardless of the amount sent or the distance between parties. You would say we already have a good-enough banking & remittance system, why do we need blockchain? Well, all is good with traditional payment platforms until one tries to send small amounts frequently (which is the case for billions of people whose lives depend on remittances from family members working abroad). I made a quick simulation on Western Union’s website: I wanted to send 50 CHF from Switzerland to Philippines. The transfer fee is 7% (3.5 CHF) and they offer a not-so-favourable exchange rate between the two currencies. With blockchain-based payment platforms like Stellar or Ripple this cost would be close to zero.

c. NFTs: are digital proofs of ownership of assets that are non-fungible in nature (meaning, they are unique and distinct from each other). While most underlying assets that are NFT-ed are NOT crypto-related (e.g. works of art, concert tickets, fan collectibles, land/properties, gaming characters) the process of their creation is done via minting on blockchain platforms such as Zilliqa, Chiliz, Theta or Decentraland. There are also marketplaces such as OpenSea, Rarible or Refinable where people can buy, sell, collateralize or exchange their assets. For specific NFT collections, have a look here, as I’m not well versed into this space. While crypto/blockchain space has long been seen as a niche / exotic / complicated world, the emergence of NTFs this year made it palpable and fun for pretty much everyone around.

I would have loved to cover the topic of two other emerging blockchain applications: play-to-earn (GameFi) and social/community tokens. But since I’ve already bombarded you with precisely 2.416 words so far, I’ll have to call it a day. Have a great day/night ahead and enjoy life.