Crypto Ecosystem 2021
Some of the interesting categories and projects worth reading about. For higher-level introductions see the A16Z Crypto Canon and Startup School. Gemini and Kraken also have great introductions to all the currencies and projects. I also wrote a doc on Bitcoin.
It’s useful to play around with these protocols. My suggestion is to download the Metamask Chrome extension, buy some Ethereum on Coinbase, send it to your Metamask wallet, and then visit Compound for lending, Uniswap for trading, or OpenSea to buy some digital art (NFTs).
Layer 1 Protocols
Layer 2 Protocols
Centralized Exchanges (CEX)
Decentralized Exchanges (DEX)
Other Financial Applications
Digital alternatives to fiat currencies or store of values like gold and silver. While there are many medium-of-exchange tokens (tokens used to pay fees on an internal blockchain network), there are only a few promising store of value assets (Bitcoin, Ether, ZCash, etc). Stablecoins seem to have taken over the unit-of-account function, although Ether is widely used to price NFTs.
* Bitcoin - Whitepaper - Store of Value, Digital Gold. It’s unlikely to achieve mass adoption as a medium of exchange, especially since transactions are taxable events, but it may be used as a settlement layer between banks, with transactions happening in layer 2 or centralized networks like VISA. You can see more of my Bitcoin thoughts here.
* Ethereum - Whitepaper - Smart contracts
* ZCash - Whitepaper - Privacy coin, but regulator friendly. It has the best privacy technology around, while also providing a way for regulators to request access to their citizens transactions, if needed.
* Dogecoin - Web - “Future currency of Mars” - Initially a joke, forked from Litecoin. It’s become an internet legend, which makes it valuable despite not being actively developed. I expect it to stay around for a long time.
Coins backed by stable assets like USD, EUR, or gold to reduce volatility. Stablecoins form the backbone of Decentralized Finance (DeFi) protocols. The most popular stablecoins rely on centralized organizations like Coinbase or BitFinex, who custody real US Dollars before “minting” and distributing a digital equivalent.
* Dai - https://makerdao.com/en/ - Decentralized, multi-collateral backed stablecoin, pinned to USD. Uses a network of price oracles to provide the exchange rates for collateral pairs (ETH/USD, BTC/USD, etc). Users deposit collateral and receive a low-interest loan of Dai. From there, Dai trades on the open market, which means its value can fluctuate based on supply and demand. To keep the peg, Dai relies on arbitrageurs who buy/sell DAI on exchanges, redeem/load collateral and pocket the difference. Maker incentivizes these arbitrageurs by providing (or charging) a small interest rate. The system works because people trust they can always exchange 1 DAI, for the corresponding amount of collateral from the Maker smart contract.
* USDC - https://www.centre.io/usdc - Centralized stablecoin backed 1:1 with USD. Coinbase buys US Dollars and mints USDC based on customer demand. Users trust they can always redeem 1 USDC for 1 US Dollar.
* Tether - https://tether.to/ - Centralized stablecoin backed 1:1 with USD. This is the largest stablecoin, but the institution BitFinex minting these coins has a shady history.
Layer 1 Protocols
Protocols that run their own blockchain network. Ethereum is dominant and has huge network effects (developer tools, ERC-20 tokens), but high fees and slow transactions. Ethereum is here to stay, but newcomers can capture market share with differentiating features, especially as cross-chain infrastructure matures. The winners will depend on how fast Ethereum can scale via side chains or Layer-2 solutions. The most likely outcome will be a multi-blockchain world with many winners, especially as cross-chain interoperability solutions (Polkadot, Ren) improve.
* Ethereum - Web, Whitepaper - Biggest smart contract platform with widest adoption and biggest developer community. In-progress migration to Proof-of-Stake consensus and layer 2 scaling solutions which hopes to increase throughput to 100k TPS.
* Solana - Web, Whitepaper - Uses Proof-of-history consensus to scale transactions up to 65K TPS vs Ethereum’s 15 TPS. Small, but growing developer ecosystem, backed by some big names, including FTX / Alameda Research.
* Zilliqa - Web, Overview, Whitepaper - A sharding-first approach which scales linearly with the number of nodes, increasing throughput and reducing costs. A subset of nodes process transactions in a shard and then bubble up the results to a central pool of validators who run PoW to confirm the blocks. It also provides computational sharding (Map-Reduce), for compute-intensive workloads. It’s smart contract language isn’t user-friendly, but they plan to implement a higher-level framework similar to Solidity. The team is based in Singapore, without any name-brand backers.
* Flow - Web, Whitepaper - Created by Dapper Labs (CryptoKitties, NBA top-shot) to improve scalability (5k TPS) and useability (friendly smart-contract language) with built-in logging and smart-contract upgrading. The chain is new, but supported by one of the strongest teams in Crypto and backed by some reputable investors. The chain scales by separating consensus from compute, allocating work across different node types (Consensus, Verification, Execution, Collection), where each type is optimized for its particular job.
* Binance Chain - Web, Whitepaper - Binance-developed blockchain for non-custodial trading and smart contract execution. It powers the Binance DEX which allows fast and cheap order-book style trading and swaps. The original Binance Chain is based on the Tendermint consensus algorithm used by Cosmos and focused on payments/trading use cases. The Binance Smart Chain provides EVM-compatible smart contract support, for fully-functional dapps like PancakeSwap. It sacrifices decentralization for speed, however, with only 21 validator nodes elected for consensus.
Layer 2 Protocols
Build on top of a layer 1 protocol to improve scalability, lower fees, or add other features. There are many approaches and each has pros/cons. We will likely see multiple successful solutions operating in parallel, with each layer 2 protocol optimizing for different types of transactions (e.g. asset transfer, data transfer, privacy, etc). For Ethereum, the community is rallying around rollups (optimistic rollup, zk-rollup) as the preferred scaling approach.
* Lightning Network - Scaling solution for Bitcoin payments. Users open private, off-chain payment channels with merchants/dapps where they can transact instantly with near-zero fees.
* Ethereum Scaling - A number of approaches to scaling ethereum are in development. We will see multiple different approaches deployed and adopted for different use cases (transactions, smart-contracts, privacy, etc). The winners will be the solutions adopted by the biggest applications (Uniswap, Compound, Aave, Balancer, Synthetix).
* Matic - Web, Whitepaper - A plasma-based approach to scaling via sidechains. Similar to the Bitcoin Lightning network, it enables users to open state channels with merchants and dapps for rapid, zero-fee transactions. As of 2/2021 they now consider this existing sidechain an "out-of-favor Layer-2 solution" and are pivoting to an aggregator SDK.
* Loopring - Web, Exchange - A ZK-rollup scaling solution, which uses relayers (nodes) to batch transactions which are verified with ZK-Snark proofs. It’s the first Ethereum Layer 2 solution to launch a mainnet. It has an order-book exchange, uniswap swap/pool, and wallet. The user first deposits money from MetaMask (Layer 1) to Loopring (Layer 2), and then you can make instant swap/trades for extremely low fees (comparable to centralized exchanges). I swapped 400 DAI for $0.36 on Loopring, while Uniswap cost me $60 in fees (gas, liquidity).
* ZKSync - Web, Docs - ZK-rollup solution, launched on MainNet. Allow writing mostly general smart contracts, but only using their custom smart-contract language, Zinc. Buterin thinks ZK-rollops will win in the long-term, but Optimistic rollups may dominate short-term, since they’re more compatible with Solidity/EVM. SushiSwap and Yearn Finance seem to be supportive of this protocol.
* Optimistic Ethereum - Docs - Highly anticipated optimistic rollup solution, but still no MainNet. Synthetix seems to be adopting this solution, citing how easy it is to migrate their existing smart contracts, without major changes.
* StarkWare - Backed by ZCash team. Another ZK-rollup team that uses ZK-STARK (I think) instead of ZK-SNARK.
Layer 1 protocols designed to connect multiple blockchains together. As we move towards a multi-blockchain world, interoperability protocols will play a big role. The winners will be the ones who are most developer-friendly and best integrate with the Ethereum ecosystem.
* Polkadot - Web, Whitepaper - An ecosystem of interconnected blockchains from the co-founder of Ethereum, and an SDK for creating your own blockchain in any language that compiles to WebAssembly.The architecture includes a main parent Relay Chain which handles consensus and a number of child networks (parachaine) which execute transactions. The parachains can pass arbitrary messages and trigger smart contracts on different networks in the same transaction. Notably, the smaller parachains benefit from the security of the main chain, so they don’t have to bootstrap their own ecosys