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LAYER 1 CHAINS
A Layer 1 Blockchain is a Blockchain that supports Smart Contracts. A Blockchain Platform can be Established in the DeFi Industry or Emerging. Established in DeFi means that it already has at least DeFi 2.0 or higher. Emerging means that it has a DeFi level of 0 or 1 and projects are being built on it. In this case DeFi focused dApps. DeFi 1.0 means a Chain has at least one DEX dApp( Decentralized Exchange ). DeFi 2.0 means that a Chain has DEX, Lending ( Decentralized Lending of course ) and Synthetics ( a Synthetic is a cryptocurrency that follows the price of a certain asset ) Platforms, preferably including a Wrapped version of itself ( a Wrapped token of the Chain’s coin ). Also it needs to have support for at least one Stablecoin, preferably a Decentralized Algorithmic Stablecoin. DeFi 3.0 means that a chain has all of the above plus things like Decentralized Yield Aggregators / Optimizer, Decentralized Insurance, Decentralized Reserve Currencies and many other. Emerging in DeFi means that it has potential to grow. Here you need to make a decision whether you want to Invest in a Platform where DeFi is already established or you want a higher Risk but also higher reward by Investing into a Platform where DeFi is only emerging. Once you Invest in a Cryptocurrency with at least DeFi 2.0, you can do a lot more then just stake it ( which is very recommended because the majority of Blockchain Platforms have inflation which only affects those who do not stake. Since by staking you help secure the Chain you are rewarded with passive income which is always higher then the protocol’s inflation ). You could put your Capital into a DEX Liquidity Pool to earn from trading fees and or Liquidity Mining Programs on that DEX or other dApps. You could lend your Cryptocurrency or Stablecoin and borrow against it. You could use your Cryptocurrency as collateral for minting Synthetics or Liquidate others who are undercollaterized. And many more other things. There is plenty you could do, but the safest and easiest way of them all is to Stake. Staking not only brings you passive income, it can bring in the power of compound for certain Chains. Different Chains use different approaches to offer compounding, so you need to research those things for yourself. Stakingrewards.com is a great way you can visualize and compare different APRs ( Annual Percentage Rate, i.e without compounding ). TVL ( Total Value Locked ) can also help you decide which Chain has potential to grow. By comparing the TVL in DeFi of all the Chains you can have a rough Idea of how many dApps and which kind of dApps certain Chains have. There you can view how much TVL is locked in certain dApps and whether they are Audited.
LAYER 2 CHAINS
Layer 2 Blockchain Platforms ( aka side chains ) are complementary Platforms that aid a Layer 1 in regards to Scalability and may offer additional features such as compatibility. Currently ( at the time of writing this article ) the Ethereum Platform is congested and has Layer 2 Chains helping offload transactions. You can view all the Layer 2 Platforms in l2beat.com and their corresponding TVL. I won’t explain here why the Ethereum Chain is so congested that it requires additional Layer 2 complementary Chains. The only thing to know here is that these Chains have a lot of potential because they are all helping something that has grown too big. So by investing in them you are Investing into the future of the Layer 1 Chains that they support, which benefits both the Layer 1 and the Layer 2. Another Layer 2 example is the Lighting Network for Bitcoin, which just like Ethereum’s Layer 2, helps with the congested Bitcoin Network. You can read more about Layer 2 in Binance Academy and many other places to understand the significance, necessity and strengths of Layer 2 Platforms.
LAYER 0 CHAINS ( HUBS / ZONES )
The next generation of Chains. Layer 0 Chains ( also called Hubs ) are ones that focus on Interoperability and have a different approach to Scalability ( Vertical instead of Horizontal ) These Chains can interconnect Layer 1s and 2s together along with all the dApps and protocols running on top of them. Different Layer 0 Chains use different approaches to how they work and what they offer. You can think of it this way : In a Layer 1 Blockchain you create two dApps, a DEX and a Lending Platform. Both of those dApps require the Main Chain ( the one on top of which they were created ) to function properly and use its Cryptocurrency coin for transaction fees. When something bad happens with the DEX, the Lending Platform will also be affected. If one dApp is spamming transactions and congesting the network, the other dApp will also be affected by it, because they all run on the same Layer 1 Chain. What happens in Layer 0 is that instead of making a dApp on the main Chain, you create a whole new Chain, which you then interconnect either directly with other chains or use some sort of Hub ( the Main Layer 0 Chain through which others are interconnected ). In the Example, the DEX becomes its own Chain and the Lending Platform become their own Chain, yet they can communicate with each other. This way they do not affect each other negatively and have many other advantages such as Sovereignty ( in certain cases ). Different Layer 0 Chains have different approaches. Some allow you to build on top of them only if you pay them a lot of money. This ensures that you are not a malicious actor and that you have good intents, it is however costly. Other Layer 0 Chains allow full sovereignty. You can create your own Chain completely for free and all the features are Modular. You can be in charge of everything, from Governance to having your own Consensus Mechanism. After that you can even connect other Layer 1 and thus Layer 2 Chains if they meet certain requirements. There are currently not many Layer 0 Chains, but ones that exist are building the next Generation of Cryptocurrencies. If and how successful they will be remains to be seen. But you can think of it as a new Emerging Technology in the Cryptocurrency Industry. Chains built on top of a Layer 0 Hub can be thought of as complete Layer 1 Chains ( in certain cases ), that way the whole Ecosystem achieves higher Scalability while offering the same things that normal Layer 1 Chains offer and more, while still being sovereign and in complete control of everything. You can Invest in the Chains that are a part of the Layer 0 Ecosystem or in the Main Hub itself which offers many Services to the Chains that are connected to it thus bringing a unique Value Proposition. So just keep in mind that a Chain can be a Layer 1 that is part of a Layer 0 Ecosystem. I suggest reading “A Comparison of Heterogeneous Blockchain Networks” by Burak Arikan.
DIGITAL CURRENCIES
These are Cryptocurrencies that are intended for value transfer, some of them are even completely private and anonymous. Note: Any Layer 0/1/2 Cryptocurrency Coin / Token could also be used as currency. Since their focus is solely on Value Transfer they do not have Smart Contracts or any form of DeFi, and many do not even have staking. Any Layer x Chain Cryptocurrency coin / token can also be used for value transfer, it is however not intended for it and you might be loosing value on it due to inflation. Currencies do not offer staking nor have inflation ( in most cases ). It is difficult to think of them as a form of Investment because their value accrual is rather limited. However some of them are used in certain ecosystems and have that as their value accrual use case. You can still make profit off of buying and selling them, but you must decide for yourself if you see potential in them.
MEME / HYPE COINS
Cryptocurrency coins with no use case other then Hype and speculation. It does not mean that you wont get rich by buying and selling them, you might. But you probably won’t. But if gambling is your thing, feel free to buy them. Almost of them also fall into the Category of Currencies ( yet most of them perform a very poor job in that aspect, compared to full on Currencies ), thus the only thing you can do with them is send from one wallet to another. Their only advantage over Currencies is that they have Hype ( which is a form of marketing ) Cycles.
CENTRALIZED STABLECOINS
A stablecoin is a Cryptocurrency coin that follows the price of a FIAT currency such as $ Dollar or € Euro etc. These stablecoins are backed by Centralized entities ( for example a CEX Centralized Exchange ) and their most of the time non Cryptocurrency related collateral. A centralized stablecoin can be backed 1:1 by real $ US Dollars or other assets such as Gold to maintain its peg. In summary when a Centralized Entity wants to create 1$ in a Cryptocurrency stablecoin, they must add 1$ US Dollar to their treasury as collateral. Different Centralized Entities back their stablecoins with different kinds of assets. These will not go up in price so do not think about buying them and simply holding. By simply holding them you loose value due to real world inflation of the currency the stablecoin follows. You can however lend your stablecoin in a centralized or decentralized manner. If you lend your stablecoins to a CEX ( centralized exchange ) you can expect a much lower % APR ( no compounding ) than if you would lend your stablecoin to a decentralized Lending Protocol. By lending Centralized stablecoins you can expect a rate between 1%-5% APR ( means you get that % per Year ). You may find higher rates ( and even find Decentralized Lending that might offer APY, i.e Lending with Compound Interest ) but in general there is a lower demand for centralized stablecoins in the Cryptocurrency Industry. It is however MUCH HIGHER than any Bank would offer you, so think about it.
DECENTRALIZED STABLECOINS
Mostly referred to Algorithmic Stablecoins. These usually are decentralized, as they have an algorithm to make sure that the peg ( they keep the price of the currency they are pegged to ) is kept. They have a DAO ( Decentralized Autonomous Organization ), which ensures that the holders of the DAO token ( which can be literally anyone ) can decide on changes to the protocol, and they are usually backed by various Cryptocurrency assets or even other stablecoins. The demand for these stablecoins is much higher in the DeFi world than with centralized stablecoins and they also have a way for you to directly invest in their success. You can lend these stablecoins in a centralized or decentralized manner. If you lend them in a centralized manner you can expect a range of 2%-10% APR. If you lend them in a decentralized manner you can expect anywhere from 2%-20% APY ( i.e with compounding ). Getting 20% APY on your Capital might sound strange, but it is not only safe it can even be insured ( using decentralized insurance of course ). You should also read and understand the incredible power of Compound Interest which is one of the Wonders of the World. Needless to say, lending your stablecoins in the Cryptocurrency world is much better than Lending it to banks. Since Stablecoins are Cryptocurrencies, you can also use them in Liquidity Pools in a DEX, you can Lend them and use them as collateral to borrow more or you can use them as collateral to mint Synthetic Cryptocurrency Assets. You can also Invest in the Protocol’s token that is responsible for Governing the Stablecoin. Since there is no centralized authority, all the participants ( literally anybody ) are the ones minting ( creating the stablecoin ) and using their Cryptocurrencies as collateral. Thus the more TVL is locked inside the Algorithmic Stablecoin the more secure it becomes and the more value the Protocol’s token responsible for it accrues and goes up in price if the demand is high.
DEFI dAPP TOKENS ( PROTOCOLS )
If a dApp is created on a Layer 1 Blockchain ( or a side Chain on a Layer 0 ) it can be called a Protocol. This Protocol will eventually have a token which will be used to Govern it ( if it wants to be truly decentralized ). Anybody can buy that Token and Invest in that Protocol’s future and success and also vote in Governance and even create Governance Proposals. Like a share in a Company you and others who have the Token will be in charge of deciding what happens to the Protocol. The more value is locked into that dApp or the more activity it has ( depending on the dApp ) the more that Protocol’s Token becomes valuable. There are dApps for everything, from Finance to Insurance, from Gaming to Gambling and even Social Media Platforms. Some places where you can search for dApps are : Defillama.com, Dappradar.com and Dapp.com. There you can also find NFT Marketplaces and the Layer 1 Chains they are on. See Coingecko for the Category of dApps that fits you.
DAO TOKENS
DAOs are programmable organisations of people. There are DAOs that govern something and there are ones that buy something and invest it. DAOs are collectives of people who want to do something together in a decentralized, completely transparent and fair way. They have a token that represents one’s ownership of the DAO which anybody can buy and then use it to vote for Governance proposals. A DAO can manage an Index Fund, and people who vote can choose what the Index includes. A Protocol can have a DAO to govern an algorithmic Stablecoin, which requires a lot of decisions and changes, since the stablecoin is decentralized so is the entity that controls it. There are even DAOs that act as a decentralized Reserve Currency that buy up Liquidity to give its token more value by locking it up inside the DAO controlled Protocol. You can search for DAOs on deepdao.io or openorgs.info. These DAOs exist on Layer 1 / 2 Chains ( which can be within a Layer 0 Ecosystem ), and some of them have the goal of benefiting the Platform they are run on. So if a Chain has many DAOs it could be a sign of a healthy Ecosystem.
SYNTHETICS
The term “synthetic asset” refers to a mix of assets that have the same value as another asset. A Synthetic is simply something of value but in form of a Cryptocurrency. As Example there is a Synthetic of Gold. This allows you as the holder of the Synthetic to participate in DeFi and use the value as collateral in many different Protocols across different Chains. Since more and more Chains are becoming interconnected through Bridges or Layer 0 Ecosystems, these Synthetics will be available to more Protocols and the best part ? You can send it almost instantaneously no matter where you are, it is available in the entire world ( as long as you have an internet connection ) and available 24/7 without any limits. Since you can make a Synthetic out of anything that has value, many Chains have Protocols solely focused on creating, collateralize and maintaining these Synthetics. These are all created in a decentralized manner where you as a User can create a Synthetic using another Cryptocurrency as collateral. Everything is open, transparent and requires no trust in a centralized authority. There are even Synthetics of Stocks, that way you can buy them and send them to somebody, or use them to earn Yield through different DeFi Protocols. Wrapped Tokens are Synthetics of another Cryptocurrencies. There are many reasons why those were created and are necessary. One example is the Wrapped Bitcoin, which has always the same price as the real Bitcoin but is represented in form of an ERC-20 Token on the Ethereum Chain. Since Bitcoin is not able to communicate with Ethereum, wrapped tokens were created so that the Value of the Bitcoin can be used in DeFi for Yield, Collateral and many other things. Another Reason some Layer 1 Chains have a Wrapped token of their own Chain ( as example there is a wrapped Version of the Ethereum coin that is an ERC-20 token, thus it exists on the Ethereum Chain ). There are many reasons for having a Wrapped token of a coin existing on its Chain, like being able to participate in DeFi and able to vote at the same time. ( since when you put your Cryptocurrency in DeFi you actually send them to a smart contract, you can’t use those coins at the moment they are inside of a smart contract, however some Chains and Protocols give you wrapped Versions of the Cryptocurrency Coins / Tokens as soon as you put them into smart contracts, this way you can use the Wrapped tokens to vote while your original Cryptocurrency coins / tokens are earning yield ). Another reason is so that the Cryptocurrency you put in DeFi / Staking will accrue Yield with the compounding effect. There are Wrapped tokens of certain Protocols that continuously compound staking rewards and trading fees, are flash loan resistant and the original unwrapped tokens are then proportionally distributed to those who locked them according to the amount of their staked tokens and staking duration. Normally with staking you either lock or don’t lock ( in Liquid Forms of Proof of Stake your coins are not locked and can be moved at any time ) your coins / tokens and then withdraw your rewards to restake them again. Using the wrapping system the compounding is automatic and you do not need to interact with things as much, thus you save money on transaction fees. So usually you should not buy Wrapped Coins because they follow the price of something you should buy instead, unless you are experienced and know what to do of course. ( instead of buying the wrapped version of the Ethereum coin, you should buy the Ethereum coin itself, it is just better and safer ). You can recognize Wrapped tokens when they have a prefix to them before the Coin they represent. For example aETH, bETH, xETH, aBTC, bBTC, xBTC etc. ( these are just examples, some of them don’t even exist, but its just to show you how to recognize them ).
CEX COINS
Centralized Exchange Tokens are coins / tokens issued by Centralized Cryptocurrency Exchanges. These are Companies that offer the Service of buying Cryptocurrencies with FIAT money. Some Cryptocurrency exchanges offer different perks like discounts, rewards and chargebacks. You can’t use them to vote on any Governance proposals since the Entities issuing them are centralized. But these Exchanges make a lot of money and these tokens represent their growth and have some form of value proposition. It is not the same as Investing in the Stock of a Company, but it is similar since the growth of the Exchange will mean a higher price for the Cryptocurrency coin / token. Some of them even offer staking which can be viewed as passive income similar to Dividends. Some Exchanges even have Launchpads ( places where new Projects can get funding ) on which you can participate with your CEX coins / tokens.