The underlying technology of crypto and blockchain can theoretically be applied to any type of market sector/industry. It is simply a matter of introducing the technology correctly, somewhere in the supply chain/business model.
Whether service-based, physical goods, or informational products there are touchpoints at which the presence of a digital asset or distributed ledger can serve beneficially towards improving a system.
The natively digital economy is composed of a slew of different markets. Given the financial/accounting nature of cryptocurrency in general, a large portion of sectors stem from similar primitives and in turn overlap, due to the commonalities in infrastructural/ design elements.
Let's look at 18 of the most popular sectors of the crypto economy:
Decentralized Finance. The holy grail of crypto and blockchain applications. Decentralized Finance is an incredibly broad term that encompasses a multitude of different sub-categories relating to finance including insurance, exchanges, lending/borrowing, payments, liquid staking, and others.
What set decentralized finance apart from traditional finance is the “operating system” upon which it runs and the distribution of ownership over the application and the industry; in the case of a crypto-based DEFI, that system is a blockchain network.
At the highest level decentralization is the diffusion of power throughout multiple parties, decentralization in regards to finance exists across two paradigms; the application level, where a single protocol is decentralized, and at the industry level, where it is possible to create competing protocols without having regulatory moats deny access to regular people.
Application of Crypto: Strong
- Incentive for bootstrapping liquidity into protocol.
- Distributing governance rights
Ex: UniSwap (UNI), Compound (COMP)
A commodity of the digital economy. This is basically a class of monetary assets that specifically serve the function of facilitating the protection of buying power over the course of time.
The purpose of projects in this space should be to minimize any technical complexities in their networks (which reduce risk vectors and the surface area of potential hacks) and focus on optimizing monolithic architectures that heavily prefer maximizing security.
Generally speaking in order to classify as a store of value, the economic design that underpins a digital/crypto asset must exhibit characteristics superior to fiat systems with concepts such as deflation, fixed supply policy, and resistance against being controlled by any geographic entity.
Application of crypto: Very Strong
- Tool to represent digital claims on a repository of tokens (UTXO)
- Object of attributing energy storage
Ex: Bitcoin (BTC), Litecoin (LTC)
Distributed ledger networks that allow for the instantiation/deployment of code with arbitrary logic to create general-purpose programs. Also commonly called, Layer 1’s, smart contract platforms allow for applications to be built on top of them while providing them with security and computation.
The timeless interest in scalability has brought a new generation of blockchain technology to the forefront with modularity called L2. There has been insane hype around this and funding by venture capitalists attempting to introduce even newer L3’s modular scalability technology trying to garner its own sector of the digital economy, however, I personally do not think that it will last. My thesis is that while L2s will survive and thrive, the modular narrative will die; rollups don't need tokens.
Application of Crypto: Very Strong
- Incentive for node management
Ex: Ethereum (ETH), Solana (SOL), Polygon (MATIC)
Pipelines that connect on-chain and off-chain data sources to feed information between siloed digital environments that are otherwise not capable of transferring information. Oracles are a middleware that exists somewhere between the fabrics of Web2 and Web3 which act as an added layer of trust for providing accurate, timely, and relevant information to applications.
Applicable to every industry/business model, Oracles are generalized automatons that have strict input-output demands. Giving an Oracle a hard set of “if-then” rules helps create a monitoring system for guaranteeing arbitrarily anything.
The dominant application of oracles within crypto has been to provide price feeds. Since blockchains are not “aware” of themselves they need external prompts in order to trigger some kind of action. Ethereum the blockchain does not know the price that society is paying for ETH. Thus for an application such as decentralized exchange, oracles are needed in order to fetch information about the prices of assets and bring them on-chain.
Application of Crypto: Very Strong
- Incentive for node management
- payment method for requests
Ex: ChainLink (LINK), Band Protocol (BAND), UMA (UMA)
Tricky terminology with two categories of meanings that depends on the context and the group of people talking.
At the most basic level, the term stablecoin is used to express a token that is stable in price, relative to the asset which it represents. While 99% of the conversations around stablecoins relate to pegged fiat currencies; stablecoin is also the terminology used to describe wrapped crypto assets across chains and representative commodities such as gold-backed cryptos.
Ultimately, stablecoins are just tokens that represent the price of its underlying asset. Technically this is a very intuitive sector to comprehend, the complexity in this sector arises from over-ambitious testing (ahem, algorithmic stablecoins {basically money out of thin air}) and political intrigues relating to the countries that issue the underlying assets.
Application of Crypto: Strong
- Tool to track price
Ex1: USDT, USDC, BUSD, DAI, TUSD,
Ex2: WBTC, WETH, DGX, PAXG
Centralized Exchanges. Possibly the most common interface for onboarding traders and investors.
CEX’s provide the industry with a wealth of important services and information. They are venues where users can engage in exotic financial operations (such as 100x margin), they are the primary sources of price data for oracles, they typically.
Many modern-day, crypto-centric centralized exchanges also tend to issue their own tokens. The utilities are of their tokens tend to be over-imaginative, but generally, they are just fee discounts for using the exchange.
Starting from the shenanigans of Mt. Gox in 2014 and rolling into the crazy FTX saga of 2022, centralized Exchanges have a muddled history in the crypto industry of constant consumer allegations and regulatory scrutiny for fraudulent behavior, faking data, fund misappropriation, and other undesirable things.
Application of Crypto: Moderate
- Tool to track price
- discounts on trading fees
Ex: KuCoin (KCS), Phemex, MEXC, Binance (BNB)
Decentralized Exchanges. One of the many sub-categories of DEFI and the potentially better twin sister of CEXs.
Decentralized exchanges are the facilitators of trade for digital assets in the crypto economy. Within the context of exchanges, decentralization exists in two major ways; decentralization of the control over order flow with the utilization of AMM bonding curves (allowing anybody to become an LP), and decentralization over the ownership of the platforms through a DAO.
There are two general models of placing bids/trades in a DEX, AMM and order books. Automated Market Making involves pricing assets on a bonding curve based on the ratio of assets within a pool. Orderbooks are the traditional model where bids/asks are organized according to wherever users set their prices. Both models have merit and both models have been getting a lot of innovation taking place around them.
Application of Crypto: Moderate — Strong
- Incentivizing LP’s for liquidity provisioning
- Mechanism to offset hacks
- DAO membership
Ex: Balancer (BAL), Pancake (CAKE), ThorChain (RUNE), 1inch (1INCH), Bancor (BNT), SushiSwap (SUSHI), TraderJoe (JOE)
One of the most actively pursued areas of development within the crypto industry is gaming.
Beyond crypto, gaming has always been one of the most sought-after industries by investors and startups due to its extremely high rate of growth. Even in 2023, the gaming industry, as a whole, is anticipating a CAGR of over 13% over the next 5 years.
The reason that gaming is such a hot topic is due to the fact that it holds the promise of incredibly high user retention, high transaction frequency, and near-zero costs for new product releases. Once a game penetrates society, the incremental costs of releasing new products (such as skins in a game) are laughable in comparison to the income that it brings for the game.
Application of Crypto: Weak
- In-game currency
Ex: Gala (GALA), Enjin (ENJ), Illuvium (ILV)
Grossly misunderstood and misappropriated term, Metaverse is a generic, broad word typically used to drive conversations around AR/VR, gaming, and the intersection of human evolution with technology.
So many startups in the space just throw out Metaverse as a buzzword in an attempt to appeal to unknowing retail users, meanwhile, there is more worthless vaporware projects in the Metaverse category than nearly any other.
There is only one sub-category of “meta-verse” assets that hold potential and that is digital land. Land in cyberspace might be valid, but then again, this teeters quickly from the catchphrase of metaverse into gaming, as these lands are typically used for and belong in, games.
Application of Crypto: uncertain
- Reward for users participating
- promise of DAO membership
- promise of abstract, non-tangible things
Ex: Decentraland (MANA), Sandbox (SAND)
A pioneering OG sector of the digital economy, wallets were one of the first applications to exist and remain as possibly the most important.
Wallets core functions of managing Public/Private key pairs, and storing, receiving, and transferring cryptocurrency puts it at the very heart of basically all other applications. They are the foundation for onboarding and retaining users.
Decentralization of wallets is a vitally important aspect to the creation of a holistic crypto economy because the presence of a decentralized enough system of ownership will protect a wallets users from nefarious governments trying to monitor their activities.
Application of Crypto: Moderate
- Incentive for attracting users to hold deposits on their platforms
- Vehicle for distributing protocol/application ownership
Ex: TrustWallet (TWT), SafePal (SFP), TokenPocket (TPT), XDEFI Wallet (XDEFI), Klever (KLV)
One of the most intuitive applications of blockchain technology relates to its properties of transparency and auditability. The ability to prove product provenance and trace its tracks from origination to end consumer without having to worry about any of the potential liabilities relating to malicious parties in the supply chain manipulating the product is a tremendous natural benefit to all businesses.
Application of crypto: Very Weak
Application of blockchain: timestamping
Ex: Origin Trail (TRAC), TE-Foods (TONE)
Platforms that provide engaging interfaces for communities to build and users to connect with one another.
Savagely competitive sector.
Thus far all of the attempts in this niche have been failures. Primarily due to easily manipulable incentive designs and not being able to reach inflection points in adoption.
Whenever a platforms only differentiator is the presence of an incentive, odds are that platform will never reach mass adoption. Mercenary actors would come to platforms such as Steemit and manipulate their systems via astroturfing/sybil attacks and extrapolate all of the value. Once all of the rewards are gone, those early users that joined just for the rewards leave and new users don't want to go somewhere where there are no users.
Whenever a platform's only differentiator is the presence of an incentive, odds are that platform will never reach mass adoption.
The trickiest part of building social platforms from scratch is the fact that this sector is dependent on an adoption flywheel. Users will go wherever their friends already are. Bootstrapping a new social media platform would mean having to compete with existing platforms and take away their user market share; this requires strong enough drivers for user behavioral adaptions (having to get familiarized with new platforms) and users will typically not want to leave behind the reputations they have already spent time building in order to start all over again.
Application of crypto: Weak
- access to platform (pay/hold for use)
- mechanism to secure identity (staking)
- rewards for creator/audience engagement
Ex: SocialEX, DESO, GM.xyz, Torum
Prediction markets allow for the creation of markets around arbitrary, non-financial objects of social interest.
From outcomes on new regulations to environmental turnovers to the results of sporting events, prediction markets are exactly what they sound like, predictions. Anything that can be predicted can have a market created.
Will Manchester United win this year?
Will they place in top 10?
Will RFK jr become the next president?
Will Beyonce release a new Album?
Will Eminem find a new girlfriend?
Literally, anything the mind can conceive and society can measure, can be transformed into a market.
I am a huge fan of this sector and believe that this form of market has simply yet to be properly understood by the general public or perhaps might have just not had enough proper innovation due to potential regulator hurdles.
Application of crypto: Moderate
- DAO ownership/membership
- Asset for placing wagers
- Reward for payouts
Ex: Augur (REP), Prosper (PROS), Numeraire (NMR)
A very underappreciated industry sector with massive potential, yet it has been hardly addressed by the crypto industry.
The main reason this sector lags behind in terms of adoption/innovation is that implementing insurance in crypto gets tricky when the elements of decentralization and pseudonymity invite dis-honest, malicious actors looking to subvert the system. Users can get creative in orchestrating systems of failure just to collect the potentially outsized insurance claims.
That said, the size of the surface area of what insurance can be used for in crypto is MASSIVE. From smart contract failures to Oracle misbehavior and even exotic uses such as hedging yield, the raw amount of demand vectors for decentralized insurance products are insane.
Highly recommend this area for startups looking to enter and provide genuine value with solutions to burning problems.
Application of crypto: Strong
- tools for DAO membership
- Pool of assets to balance out potential claims
- backstop mechanism to offset funds lost in hacks
Ex: InsureDEFI (SURE), Nexus Mutual (NXM), Etherisc (DIP), UnoRe (UNO)
Primarily CDN (content delivery networks) the media sector within the digital economy is among the few that remains relatively quiet even during moments of peak euphoria in bull markets.
From music to visual entertainment to active engagement, the Media/Entertainment sector exists with heavy overlap into the gaming and social media sectors.
I would pose that this is a general pseudo-category similar to what DEFI is.
The main distinction for quality projects in Media would depend on the nature of their product designs; building a CDN is high value with strong arguments for the presence of a toke, meanwhile building applications that merely use CDNs are more abstract and likely should not have their own digital assets.
Application of crypto: Moderate
- Depends on exact application
- Reward for use
- Incentive for node operators to become relayers/providers
Ex: Theta (THETA), LivePeer (LPT), LBRY (LBRY)
The storage sector of the crypto economy has only begun to gain traction. One of the potentially limitless sectors in terms of size, as humanity continues to exponentially grow its digital footprint, the demand for storage will only continue to grow in tandem.
Application of crypto: Moderate
- Incentive for node operators to dedicate storage space on their hardware
Ex: FileCoin (FIL), Arweave (AR), Storj (STORJ), SiaCoin (SC)
Regenerative Finance. A somewhat strange morphology of DEFI regarding a class of financial products that serve as a vehicle to provide environmental benefits as a byproduct of its operations.
Driven by a model of doing good for the environment, REFI focuses on creating a “sustainable” financial system that takes into account its impact on ecological aspects of social life and looks to address climate change.
Application of crypto: Moderate
- Incentives for carbon emission controls
Application of blockchain: Record Keeping, Auditing
Providers of information about the industry.
Analytics tools are the backbone of organized data; every grade of market participant, from the most Degen retail investor to sophisticated high-frequency trading firms all rely on some kind of empirical and statistical data to help them drive their decision-making.
By the nature of the products themselves, analytics contribute to basically all other sectors.
Application of crypto: Weak
- DAO Acces
Ex: DexTools, DexCheck, Nansen
We have just covered 18 sectors of the crypto economy; roughly half of the total ~36–40 that exist.
Categories that have not been included in the list are: Gambling, Art, AI, Memes, DAOs, Health, Launchpads/incubators, Real Estate, RWA, lending/borrowing, derivatives, energy, IOT, AR/VR, and a few others.
I hope this information can serve you well in understanding just how nuanced and broad the landscape of the digital economy really is.
Live long & prosper 🥂
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Andrey Didovskiy
