I have been reading up a lot on Crypto lately, watching videos and reading news etc. There are a lot of unique plays out there with new projects cropping up daily. This series of blogs aims to outline my take on crypto right now. This is the 3rd blog in the crypto series: Blog 1 covers some basics about what crypto is, some important terminologies and my investments in crypto. Blog 2 covers my take on why the crypto ecosystem is much better positioned in 2021 than in 2017 and it’s just a scam.

Players

Stable-coins

Stable-coins are one of the most interesting aspects of crypto world. These are coins or tokens that are tracking a given currency like USD or EUR 1:1 while being a native blockchain token. This allows people to keep money in the crypto-ecosystem without having to buy a particular (and usually volatile) token. This allows people to buy and sell at an opportune time without having to transfer money from their banks immediately. Some of the most famous stablecoins are USDT (Tether), USDC, BUSD, GUSD etc.

For example, you can wire or ACH BlockFi 100 USD and you will get 100 GUSD which is a USD stablecoin. You can then hold these 100 GUSD until you are ready to buy or sell. GUSD is a native crypto currency on Ethereum blockchain so when you want to buy it’s like executing any other transaction on ETH blockchain.

Not only that, but these days various crypto banks offer interest rates of 8%+ to hold your money as USD stablecoin. In essence, these Stablecoins don’t offer any asset price increases but provide you a mechanism to keep liquidity while staying in crypto world and having to bring the money bank to traditional banks. At the same time you get better than normal yields on your deposits, hence increasing the value proposition.

The Top 2

The top 2 as of right now are: Bitcoin and Ethereum. BTC is almost $1 trillion market cap while ETH is usually about $200+ billion. The other cryptocurrencies are way behind in terms of market cap with number 3 usually staying at around $30-40 billion.

Bitcoin as I mentioned in previous blog posts is the oldest and most famous cryptocurrency. It’s technology consists mostly of a transaction layer. Many changes have been proposed over the years to Bitcoin. A group of core bitcoin developers decide whether to undertake the changes or not. If there is lack of consensus and strong opinions on both sides, this can lead to hard-forks like the one that created Bitcoin cash. For most part though Bitcoin has stayed the same.

Ethereum on the other hand allows both transaction and computation layers in the same blockchain. This enables smart contracts that are the driving force of many big value propositions in Ethereum ecosystem like DeFi, NFT etc. It’s been around for almost 6 years now.

As per Lindy effect, the longer a technology has been around the more likely it is to stay around. Hence the chances of Bitcoin and Ethereum outlasting the others are high. Between these 2, I like ethereum more because of the value it provides and technological flexibility it brings. At the same time, the ecosystem that already exists on Ethereum makes it valuable.

The Top 10

Tether(USDT): Tether is one of the biggest stablecoins tracking USD.

Binance coin (BNB): BNB is a utility token that can be used to pay for fees on all Binance products like trading, conversions, gas fees on binance smart chain (BSC) etc. The idea of utility tokens is that they provide an increasing value in accessing various products by a company or an ecosystem thus increasing in value based on network growth.

Chainlink (LINK): This token tracks Chainlink product that provide oracle services. Oracle refers to a software product that provides off-chain data like let’s say Oil prices to on-chain contracts in Ethereum that allow smart contracts to be created or executed as required. Oracles serve as an important bridge to allow blockchain to interact with rest of the information systems world and Chainlink is one of the leading players in the space.

Polkadot (DOT): I don’t know much about it except that it’s its own blockchain and an ethereum competitor.

Cardano (ADA): Cardano is also it’s own blockchain trying to compete with Ethereum. It was built out by one of the original ethereum devs.

Ripple (XRP): Ripple has been a bit mired in controversy but was supposed to an efficient payment system.

Uniswap (UNI): This token is a utility token that can be used on the DEX (decentralized exchange) called Uniswap that allows for token exchanges across various tokens generally not found on centralized exchanges.

Litecoin (LTC): I don’t know much about this one as well. It’s also supposed to be a cheap payment system

Why Ethereum?

Network affects: With any product in the last few decades, we have seen the value of network effects. The more people on a network – the more valuable the network is. And it is not a linear but an exponential curve. From that perspective, Ethereum stands out just because it has one of the biggest community of people developing on it, and one of the most comprehensive set of solutions already built out on top of it.

ETH2.0: The biggest challenge with ETH right now is transaction fee cost (called gas fees) and the network congestion since ETH only supports 10-30 txn/s. The other concern is the energy intensive usage of proof-of-work to mine ethereum blocks. ETH2.0 is an upgrade to the system that will move to proof-of-stake solution that’s much more energy efficient and introduces new solutions like sharding that will allow the network to scale to 1000s of txn/s. This along with some of the other proposed improvements should bring down gas fees as well hence making ethereum network even more lucrative.

DeFi / NFT: So many pieces of decentralized finance and NFT solutions have been built on top of ethereum. Ethereum is often referred to as layer 1 solution. Any solutions built on top of it are called Layer 2. We now have DeFi pieces at layer 3s working with each other that use layer 2 tech which internally uses Ethereum. To sum it up, a lot of economy generating value and revenue is built on ethereum and if ETH can scale to support them, there is no reason these would move away. These will continue to attract more people, and money to ETH network.

Smart Contracts: Smart contracts are not specific to Ether but they are missing in Bitcoin. This gives Ether a big advantage. You can do crazy things with smart contracts which will only evolve in complexity. For example, I want to create an insurance product that if the average weather is below 10 C for entire January, it would pay out 1 Ether to the contract holder automatically. There is no human involved, no filing claims, no disputing data. Just simple intelligent contract that gets auto-executed when conditions are met. The entire world of DeFi is built on smart contracts. One day, I hope, even houses are bought and sold on Ethereum with deeds, titles and all the legal stuff auto-settled as part of the payment process on Ethereum blockchain.

Deflation: Bitcoin is fixed money supply. That means only 21 million BTCs will ever be mined. Ethereum is and will for near future be inflationary in the sense that each year 18 million ETHs are mined. But with some of the upcoming proposed changes in 2021, we would see Ether that are used to pay for gas fees on congested network will get burnt. This means that those ETH will be taken out of circulation which means a deflationary asset. Over time this should also result in better asset value.

Summary: There are a lot of other reasons I like Ethereum but these are the main ones. For the same reasons, about 60-70% of my crypto investment is in Ethereum. As with anything crypto, it is not unlikely I might see a 80% drop or Ether dies in next 10 years (we never imagined nokia dying after all). But it’s one of my highest conviction investments so hopefully it will 10x in next 5 years.
Next Blog: The risks to crypto world
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