Much like the stock market, the cryptocurrency industry has eleven meaningful sectors to pay attention to. These sectors essentially make up the crypto and blockchain world, encompassing what different projects are building and working on. As the industry grows, the meaningful areas to watch will change and rotate, which is why understanding the entire industry is important.
The 11 Cryptocurrency Sectors
Cryptocurrency sectors include value, layer ones, twos and zeros, data and infrastructure, metaverse and gaming, yield, defi, remittance and settlements, smart contracts and memes. Each sector experiences plenty of volatility. The vital aspect of the cryptocurrency market to understand is that the market moves in cycles, where money rotates from sector to sector. Oftentimes capital begins to flow into Bitcoin first, later rotating to alt-coins. The alt-coin rotation was largely directed by size and market cap previously but has been moving per sector the past few years as well.
Bitcoin is the leading player in the market with right around 40% dominance over the entire industry at any given time. This is why smaller coins tend to follow in Bitcoin’s footsteps and see gains after Bitcoin does. Patterns have started to emerge on how this capital flows around to different assets and we have begun seeing what industries are being disrupted first by this exciting technology.
The first cryptocurrency sector is Value. This is largely made up of Bitcoin and includes digital assets created and developed to drive value. Plenty of blockchains and projects have cryptocurrency tokens that may provide value, although this sector is for coins and tokens specifically built to maintain value.
Bitcoin was originally created with the idea of being a remittance service, offering a Peer-to-Peer solution for financial transactions without an intermediary. The POW (Proof-of-Work) consensus mechanism, has made Bitcoin the perfect driver of value with its simplified supply and demand rules. Bitcoin was very quickly outpaced in terms of technological innovation in the Peer-to-Peer aspect of things but has never been outdone when it comes to providing and maintaining value.
Bitcoin has a limited, fixed supply of 21 million Bitcoins. These are released in “blocks” to miners (really just computers and mining technology) approximately every ten minutes. The “block” reward is halved every four years, currently at 6.25BTC per block. This number will halve as expected in 2024 to 3.125, and continue halving every four years. This goes until around 2150 when all Bitcoin will be released.
After another decade, 2032 will see the block reward for miners go down to 0.78125BTC. After this happens new Bitcoin entering the ecosystem will slow down drastically. In April of 2022, we saw the 19 millionth Bitcoin be mined, leaving only two million left to be mined over the next 100+ years. With the incoming supply decreasing regularly and demand continuing to rise, Bitcoin offers the perfect “Value” opportunity.
Layer one blockchains are essentially trying to do everything in the cryptocurrency space. From implementing smart contracts to allowing developers to build dApps and other services on the network, layer ones really do encompass many other sectors mentioned on this list. The best example of a layer one application is the Ethereum blockchain.
Ethereum is best thought of, as being very similar to the internet. The Ethereum network has its own teams of developers constantly working on the ecosystem and updating it, as well as teams of developers building alternative applications on top of the network. A developer can build on top of Ethereum and take advantage of its security and decentralization while taking a shot at decreasing fees and transaction times for itself.
Ethereum is home to many DeFi applications as well as other types of assets. Being similar to the internet, the blockchain has a multitude of use cases and even potential use cases, still not yet seen.
A layer one blockchain is the launch pad for smaller applications more narrowly focused. Other layer ones include Algorand and Solana. All layer one blockchains provide a place for developers to build and launch alternative applications of their own, without having to develop their own entire blockchain network.
Layer two applications are built off of layer one blockchains and are often used to enhance the layer one it is built on. Take Polygon, for example, the popular Ethereum layer two application.
Polygon utilizes Ethereum’s security and decentralization while improving transaction speeds and network gas fees (transaction costs). With its own applications and developers, Polygon is a completely different project benefiting from Ethereum and attempting to fix some of the problems around the network.
One important note for layer two networks is that they are not perfect. With the Polygon example, Polygon does sacrifice some decentralization and security in order to increase transaction speed and cost.
Layer zero is also referred to as interoperability. Both terms essentially mean bringing together information and being able to use that information. Different blockchains are not interoperable, to begin with right now, leading to a disconnect between each chain. Many people believe there will not only be one winner in the blockchain space, but several, making it even more important to be able to transfer information, data and assets between blockchains.
Polkadot is a well-known layer zero-project focused on making the entire cryptocurrency ecosystem interoperable through its parachains. Polkadot sold, or really rented, its parachain slots to different projects developing within the ecosystem. These projects will become interoperable with each other utilizing the side chains to transact information.
Projects like Polkadot and Cosmos focused on interoperability, and are critical to blockchain mainstream success down the road as an adopted technology. Assuming different blockchains will do different things best, interoperability will be the toughest challenge to solve for a simple and easy user interface.
Just like in equities markets, crypto and blockchain companies also have a data and infrastructure sector. Potentially one of the most important aspects of the space today, these projects are building value by building out and strengthening the entire ecosystem.
Projects in this sector include Chainlink, the data oracle that allows decentralized applications and networks to remain decentralized, by aggregating real-time data and feeding it to the blockchain. If you wanted a blockchain network to tell you who won the Bruins game last night, or who won the Nobel prize in 1932, Chainlink would allow the network to retrieve answers from dozens of different reputable sources online and aggregate those answers into one, keeping the entire network decentralized.
Companies like Arweave, the Solana native storage application, store and save data in a decentralized way, indefinitely more secure than any centralized way of storing data in one place. These decentralized data storage companies provide much-needed security to the world of personalized information.
The Graph, or GRT, is comparable to Google in how it works. Developers have indexed information from hundreds of blockchain networks and projects. If a consumer, or oftentimes another developer working on a project, would like to query search that information, they can do so without having any data collected or stored.
Oh, the metaverse! The real world and the physical world collide, is an exciting and often scary thought. People think we will live in a metaverse and the virtual worlds will take over our lives, or that the metaverse is irrelevant because it’s a fantasy. Both of these realities are simply wrong.
The metaverse is not being built to replace our everyday lives, nor is this technology being designed in a dream world. The metaverse, or the idea of it, is a virtual world where people can hang out and interact. A rational expectation for the future of the metaverse could be that there is a good chance it replaces our screen time and social media.
Humans will always require physical and social interaction. Imagine technology where, instead of face timing your best friend, it was similar to a hologram scenario with it feeling and sounding like that friend is in the room with you. What if all movies could be experienced in 5D, with moving seats, wind in your hair, and aromas filling the room? These types of experiences would be much more desirable than our current options and would most likely be highly in demand.
Play-to-Earn, or P2E, are typically metaverse-style games where users play the game to earn blockchain assets. These games offer ownership of in-game assets as well as the ability to make real money while spending time on the game. Revolutionizing the gaming industry, P2E games are only getting more popular as people realize they can make a living playing a video game.
Sandbox and Gala are two cryptocurrency projects building in this space. Sandbox is a highly popular metaverse world, open for anyone to buy land. Several reputable brands own land here, including Tesla, Roblox, Atari, Ubisoft, Binance, CoinmarketCap, Warner music, Snoop Dogg, The Smurfs, The Walking Dead and more. Sandbox offers the option for participants to buy and sell the land or build experiences on top of the owned land that can drive passive income through participation or rental income.
Gala Games was actually founded by a successful and experienced gaming expert, the co-founder of Zynga Games, Eric Shiermeyer. Gala Games aims to be similar to Zynga Games, releasing exciting P2E games regularly and becoming the P2E video game creation house. With several top games already, including Town Star (a popular farming simulation game), Gala Games is well-positioned in the Play-to-Earn space. Gala Games has also partnered with Snoop Dogg and Death Row Records to release musically inspired products and services on the blockchain.
Equities have dividends and interest payments while cryptocurrencies offer yield for income. Oftentimes based on participation and always based on holding size, some cryptocurrency projects are largely focused on providing an income for their users. These will come in the form of DAOs and governance as well as staking and mining pools.
Governance tokens, or DAO tokens, are sometimes accompanied by a yield based on how many tokens are held and how active you are on the network. DAOs are Decentralized Autonomous Organizations without a central figure in control. They utilize smart contracts for decision-making and conduct governance votes with the token holders. Since these tokens rely heavily on holders participating in governance, income-producing yield is a popular incentive.
Lending and borrowing inside DeFi applications is one more way to earn yield. Decentralized financing requires both a lender and a borrower. Traditionally, loaning money meant having millions of dollars in capital and assessing the risk on your own. DeFi applications give almost anybody the ability to lend a digital asset they own, and smart contracts mitigate the majority of the personal risk.
Staking and mining pools offer a great income in the cryptocurrency space. Proof-of-Stake and Proof-of-Work consensus mechanisms work by participants forming pools and teaming up. These pools pay a certain yield, depending on hash power (POW) or tokens held/delegated (POS). Decentralized networks feed off of continued participation to run without a centralized entity in authority, causing many to offer economic incentives in the form of yield.
Decentralized finance is perhaps the most disruptive of all the sectors. Traditional finance is extremely slow, bureaucratic, expensive and in a sense, risky. On top of that, Americans and citizens of other developed, first-world countries may not realize that much of the world does not have access to a bank account. This presents many problems like an inability to send and receive money, take loans and plenty more.
Plenty of citizens around the world simply do not trust their governments, and rightfully so, with maintaining the value of their currency and their bank accounts. China, Russia and Canada are all densely populated, first-world countries known for freezing and canceling bank accounts for little to no reason. Venezuela, Zimbabwe and Argentina are countries recognized as operating failing economies with extremely high inflation, causing most citizens to lose the value of their savings fairly quickly.
1inch and Kava are two great examples of DeFi platforms. 1inch is a DEX, or decentralized exchange, that uses an automated market maker (AMM) to aggregate asset prices and utilizes user-based liquidity pools to facilitate transactions. This means that 1inch, or any other DEX, remains fully decentralized from showing you real-time data to executing the asset swap.
Kava is a lending and borrowing platform, similar to the Ethereum DeFi lending protocol Aave. Operating as its own layer one application, Kava is an interoperable, decentralized lending and borrowing platform. Borrowers can enter the site and put up a digital asset for collateral damage. They can then borrow on a certain percentage of the value of that collateral asset. This is nearly instantaneous and does not require a credit score or high income. Fast, cheap and convenient loans available to anyone will shape the way the industry moves forward.
Remittance and Settlements
Remittances include sending or receiving money while settlements refer to traditional financial institutions transacting between themselves in large amounts of capital. Think of Cashapp, Venmo or Apple Pay for remittances, how each service is unable to process large transaction amounts, and you are often charged a 1-5% fee on each transaction.
Bank settlements take several business days to arrive and cost similar prices to remittance transactions. Financial institutions are often faced with utilizing less operating capital than they would prefer because it is tied up in settlements with other institutions, presenting an even larger problem for the banks.
Blockchain protocols can scale to handle billions of dollars in a single transaction and still keep transaction costs far below 0.5% while completing in under sixty seconds. Considering enhanced security and decentralization, blockchain is certainly superior to the current hardware being used. Blockchains’ speed and cost are impressive and advanced compared to the current SWIFT settlement system or typical remittance apps like Venmo.
NFTs and DAOs are both smart contract-based and caught a lot of excitement in 2021. Smart contracts automate processes and remove the need for trust within virtual agreements and transactions. NFTs often utilize smart contracts to mint and deploy the token originally. DAOs use smart contracts for governance, general decision-making and often other areas of the organization.
Smart contracts should be thought of as automatic, digital contracts. This contract gets executed when certain prerequisites are met, previously agreed upon by the different parties involved. Trust and security within decentralized networks are of utmost importance and are extremely difficult to maintain at large scales. Smart contracts allow protocols to remain decentralized, placing trust in the hands of the algorithm.
Smart contracts may be used for more use cases down the road, like completing real estate transactions on the blockchain or even for general contract enforcement. Removing trust from a transaction is a complex problem in the traditional world, easily solved with blockchain protocols in the Web3 space. Taking away this required trust allows you to transact seamlessly with anyone in the world, from neighbors to strangers speaking different languages.
Meme culture is a major aspect of blockchain and Web3, including within cryptocurrencies and NFTs. Dating back to early cryptography, blockchain enthusiasts have always held a sense of community and humor.
Some of the first big NFTs to sell were previously popular memes including the “Pepe” meme character. Other memes have taken up residency in the NFT space as well, and have become staples of the entire industry. Memes are involved with almost all NFTs, directly or indirectly.
Two very popular and large market cap cryptocurrencies are literal meme tokens. They have broken through the “Top 10 Biggest Cryptos” list and have no purpose or use case behind them. Shiba Inu coin and Dogecoin are two cryptocurrencies with extreme followings that were created as a meme and jokes and took off in popularity as the industry grew to love them. Dogecoin was the first meme coin and actually pictures a Shiba Inu breed dog for an image, hence where the Shiba Inu meme cryptocurrency later came from.
With strong influence over the web3 space, memes are not going anywhere anytime soon. Meme creation can now be monetized through NFTs as well, providing enough reason for them to continue growing in popularity.
Important Things to Remember
It’s important to remember that Bitcoin can be considered layer one and Ethereum can be considered a defi application or smart contract, although their main purposes are as value and a layer one respectively. The cryptocurrency space is constantly evolving and requires an open mind to comprehend the different ideas, theories and protocols that come with decentralization, transparency and true ownership.
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