The Ultimate Blockchain Ecosystem Playbook
New blockchains go live regularly and they require an ecosystem of applications to be successful. In this article, we're laying out the essential building blocks of blockchain ecosystems to help you define a strategy.
While Bitcoin was the first blockchain, Ethereum ushered in the concept of a blockchain ecosystem. Let's first start with what a blockchain ecosystem is.
A blockchain is a public ledger, an accounting system that tracks who owns what and what transactions occur. The who owns what the users and their wallets are, and the transactions between them. More and better-decentralized applications (Dapps) are available on top of a blockchain. The more transactions take place. You can see the blockchain as an app store and the dapps as the apps. Together, they form a digital economy, or, as the crypto industry calls it, a blockchain ecosystem—the more economic activity in the ecosystem, the more valuable the blockchain and its leading dapps.
Ethereum enabled the first blockchain ecosystem because it allowed for the creation of smart contracts. These autonomous pieces of software allow for the creation of dapps and tokens, leading to economic activity. While the ICO boom of 2017 already led to substantial economic activity, the advent of DeFi in the summer of 2020 truly established a digital economy on top of Ethereum. However, the Ethereum blockchain rapidly became a victim of its success...
As Ethereum's blockchain started being used increasingly, transaction fees skyrocketed. We'll now explain why this happened, as it's the key reason there are so many different blockchains.
There is a limit to how much data each blockchain block can contain, the so-called block space. As transactions increase, the demand for block space increases, and miners start charging higher and higher fees as it's limited. The explosive increase in transactions on Ethereum led to an explosive increase in demand for block space, leading to sky-high transaction fees. This limit as to how many transactions a blockchain can process is called the blockchain scalability problem.
The blockchain scalability problem remains one of the most significant challenges facing the crypto industry today. The vision of a decentralized financial internet is hindered by high transaction fees and limited throughput, which prevent mass adoption and limit the utility of cryptocurrencies for everyday use. In the case of Ethereum, the explosion of activity due to DeFi and NFTs has led to escalating gas fees. This has rendered the blockchain virtually inaccessible for most users, particularly those with smaller portfolios.
At the time, scaling Ethereum was comparable to trying to upgrade the entire power grid of a bustling metropolis during peak usage hours, all while the city supports the population of a moderate-sized country. What if there was a way to bypass the need to scale Ethereum and not worry about maintaining decentralization? This simplifies the problem at hand.
This line of thinking led to the birth of many new blockchains over the past years. The core of the value proposition of each new blockchain is quite similar; more transactions and lower fees. While there are many differentiating factors of blockchains, such as the ease for developers to build new dapps, the wallet infrastructure, the programming language, and the usability for the non-hardcore blockchainers, the cost and speed remains the most resonating difference.
What started with EOS led to over a hundred different blockchains. Throughout the 2020-2021 bull run, the alternative blockchains Avalanche, Solana and Terra Luna especially gained traction. However, blockchains such as Polkadot, Cardano, Cosmos, Harmony and many more had their moment in the sun. It's important to realize this as many chains have come and gone. Bear markets always flush out speculation, and most of the once highly promising blockchains have become ghost chains when the hype and fresh capital dried up.
While many of the different chains typically had a unique feature or slight technical improvement, a blockchain ecosystem takes a lot more to survive long term. The dapps have to be unique and leverage the unique features of a blockchain, users need to stick around during bear markets and continue using the chain and hence demand block space, and this can only be done through a sticky and valuable ecosystem of dapps.
Nonetheless, many new blockchains are still introduced regularly. This time, however, the market has wisened up and demanded truly unique features of the blockchain. These dapps bring real value with thoughtfully designed and sustainable tokenomics and, of course, a lot of cash that can boost users' returns.
That brings us to the blockchain ecosystem playbook, your guide to help you strategize your positioning in a new layer 1 blockchain such as Sui, Aptos or Radix or even a layer 2 such as ZKsync or Starkware. While all different, they all need a specific set of dapps to bootstrap their digital economy.
For economic activity to take place on a blockchain, you need decentralized applications (if you're not Bitcoin). These dapps facilitate actions such as trading, staking, gaming, borrowing, etc. The more and better dapps a blockchain has, the more users and transactions it will attract and the more valuable the ecosystem's economy will become.
Each blockchain has its native token. For example, Ethereum has $Ether, Solana has $SOL, and Avalanche has $AVAX.
Find a suitable bridge for transferring assets between Ethereum and the new one. There were times when there was no bridge, and you had to use an exchange as the bridge. When there is no suitable bridge, you are super early, and being this early means you have a significant advantage before the hype comes. Once you have bridged buy the native gas token of the chain, you can allocate as much as you want here. The more you buy the gas token, the less risky the portfolio is. If there is no gas token, it could also mean that they are going to airdrop a token at a later date.
DeFi is the foundational layer for every blockchain by offering a transparent, permissionless and accessible ecosystem for monetary transactions. This interoperability fosters a more robust and valuable economy, though it may also pose risks akin to a house of cards if not properly maintained.
The second part of my ecosystem index was Dex coins. I usually bought the two biggest DEX coins. One will be a Uniswap fork, and the other will have a unique design. In most cases, the DEX with a unique design will outperform the Uniswap fork. But because we want to have exposure to the ecosystem, we buy both the DEX coins.
Lending platforms were an essential primitive of every blockchain. The hype surrounding a blockchain started when a trustworthy lending protocol like AAVE was deployed. The reason is that you could deposit your assets and start farming around the ecosystem, and it was a way to obtain on-chain leverage to buy other projects.
On-chain stablecoins like USDC and USDT provide stability and liquidity within various blockchain ecosystems. However, decentralized stablecoins unique to specific ecosystems occasionally emerge, offering their incentives and use cases within that chain's DeFi landscape. Acquiring these decentralized stablecoins can be riskier, but they also hold the potential for substantial profits. These ecosystem-specific stablecoins enable seamless transactions and contribute to the overall growth and development of their native platforms.
Yield optimizers are tools that help to manage investments to maximize returns much more efficiently than manual means. They are an on-chain asset management protocol that uses data analysis and optimization techniques to auto-compound rewards to earn the highest compound interest rate possible. Typically, yields generated from protocols are not reinvested automatically, and users must collect and reinvest them manually. Using a yield optimizer also comes with added risks. Instead of interacting with one protocol, you are now effectively interacting with two protocols and different smart contracts. Smart contracts are susceptible to attack and bugs in code hence the added risks. Many yield optimizers have been a target of attack and lost millions of dollars. In short, high risks equal high rewards.
Every chain has a high APR DeFi project that can be highly profitable in the short term. This is a risky part of the playbook but can be highly profitable. The idea behind this is that when a blockchain starts gaining traction, users desperate for exponential gains will want exposure to an asset like this. It was first food farms, then Olympus Dao forks, and now Solidly forks. The idea is to buy and farm the token if you are early. Buying the high-risk DeFi project is extremely risky but is a part of the ecosystem. The trade should be concise, and you should only allocate a percentage of your portfolio you seem comfortable losing.
NFTs matter because they revolutionize the way we perceive and interact with digital content. They provide a new method for creators to monetize their work while allowing collectors to own a piece of digital history. NFTs have found use cases in various sectors, such as art, music, virtual real estate, and gaming. The NFT landscape has created a thriving ecosystem that fosters creativity, collaboration, and innovation. This new digital culture encourages artists, musicians, and creators from different backgrounds to explore fresh avenues for expression and revenue generation. NFTs have also captured the imagination of collectors, who see value in owning scarce digital assets that are easily transferable and potentially appreciable.
As NFTs continue gaining traction, numerous NFT marketplaces have emerged to facilitate buying, selling, and trading of these unique digital assets. Platforms such as OpenSea, Rarible, and Foundation are among the most well-known marketplaces, offering a wide range of NFTs across various industries. Within a blockchain, the original marketplace has been deployed before a blue chip marketplace arrives. What is important is that within the marketplace, you find the ecosystem bluechip NFT.
Find a Well-Known PFP NFT with a Strong Community. Explore the NFT market within the new ecosystem to discover an NFT project with an enthusiastic and dedicated community supporting it. Evaluate the project's potential for long-term value, cultural significance, and relevance in the ecosystem. Be wary of potential rug pulls. The idea behind this part of the playbook is to try to find the crypto punk or BAYC of the new ecosystem. Every ecosystem has an NFT with a strong community; as an investor, you want to be a part of it.
For anybody that doesn't know, a cryptocurrency launchpad is a decentralized platform on which new tokens and projects can organize and launch a private sale. Launchpads allow new projects to acquire more exposure and interest. The launchpad platform will advertise and list a new ICO or IDO weeks before the initial whitelist opens up, and during this time, many users will research the new token. This allows people to do their due diligence before signing up for the whitelist and attracts new investors. Launchpads allow new projects to acquire more exposure and interest.
Launchpads are a great way to get exposure to up-and-coming projects in the ecosystem. When a new token gets approved to be released on a certain launchpad, there is a short whitelist period before the release occurs. During this time, users can sign up for a raffle which determines who gets to participate in the initial coin offering. In each ecosystem, there are many launchpads. Which one do we buy? Buy the launchpad where most projects have currently launched. Buying the launchpad token can be extremely profitable when user traction grows in the ecosystem.
Every chain has its meme coin, and I only allocated a percentage of my portfolio that I felt comfortable losing. The idea of buying the meme coin is the same as purchasing the high apr DeFi project, which was the most profitable strategy on certain chains. The idea is simple. Everyone wants exponential gains, and it would be best if you were earlier than the next buyer. Just don't deposit your entire portfolio into this. Allocate only a small percentage of your portfolio.
As blockchain technology continues to evolve, numerous new chains are coming online, each offering unique features and capabilities. Factors such as consensus mechanisms, scalability, security, and interoperability distinguish one chain from another, shaping their specific use cases and target markets. Despite these differences, every blockchain ecosystem requires the same fundamental building blocks to thrive, such as DeFi primitives, launchpads, stablecoins, and NFT marketplaces. By closely examining and understanding these core components, investors can make informed decisions when assessing the potential of emerging chains like Radix, ZKsync, Sui, Conflux, or Sei. Evaluating the strength of these building blocks within each ecosystem will enable investors to capitalize on the next big ecosystem.
All this knowledge can serve as a starting point for exploring and engaging with new blockchain ecosystems. However, to successfully navigate and potentially invest in these ecosystems, you would need to perform thorough research, stay updated on market trends, and develop a deep understanding of the specific projects involved.
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