Crypto Ecosystem Growth Drivers – The 5 Step System

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Disclaimer: Crypto is a fast-paced economy and things change quickly. Information on this post might be outdated even if written today. Do your own due diligence and stay safe. I might get affiliate commissions for purchases made through links in this post. Read the disclosure.

What makes crypto ecosystems grow? What makes one ecosystem thrive while others fail and lose value completely. A lot of the ecosystem’s growth is dependent on use cases and users, but without funding and developers, there wouldn’t be use cases and therefore users.

Funding

Almost every single blockchain development starts with some sort of funding. Without money, you can’t pay salaries. Blockchain development requires time, knowledge, engineering skills, and a lot of money. Money pretty much goes to the team salaries that build the product.

Funding can come from many sources, from private investors to big venture capital companies. Also, the funding amount can be anything from $100,000 to $1,000,000,000 (Luna Foundation Guard received – 22/2/2022). With this funding, the company can further expand the ecosystem, develop it in a new direction, and stay in the race of becoming a widely used ecosystem.

One of the best places to check new projects is Dove Metrics. From this site, you can see what kind of projects have received what kind of funding. If you are interested in for example for the latest Web3 project, you can use Dove Metrics and filter which companies got the juiciest funding and then go from there.

Also, one good site to use is Messari as it lists different funding companies’ portfolios so you can make some comparisons against your own crypto portfolio. See which projects you don’t have exposure to and which tokens might be a burden in your portfolio.

Some of the biggest VC funding companies in crypto:

  • Pantera Capital
  • Draper Associates
  • FBG Capital
  • a16z Crypto
  • Digital Currency Group
  • Union Square Ventures

Building The Crypto Ecosystems

Now that a company has received funding from a VC or from some other source, it’s time to start building the ecosystem further. Usually, the (as with Cardano and Kadena for example) first step is to create the actual blockchain, infrastructure, and consensus mechanism. When the blockchain is up and running, the blockchain needs validators and nodes to make sure it becomes decentralized as fast as possible (to fulfill the promise of a decentralized money policy as that’s the whole point of cryptocurrency).

At first, the blockchain is only a skeleton with bones in it. It functions but there’s not much to enjoy about. Blockchain needs smart contract support for developers to be able to expand that chain to different use cases. If you think about Ethereum or Solana, you can see that the adoption happens as soon as there is some reason to use that chain for.

When you see a chain company creating different events for developers to compete for prices and for top spots in the blockchain ecosystem, it means more adoption for the chain. Solana has arranged multiple different hackathons and ignition events to further expand their chains ecosystem.

And when these events are informed, it usually already pump up the price of the token. As the information that you get is that the chain is being expanded with new use cases and with every new use case comes new users and the ecosystem expands and thus the price of the underlying token usually expands.

Different ecosystem expansion events:

Decentralized Application Developers

Now that we have the blockchain and we have funding from the blockchain, then we need those coveted developers to develop decentralized applications for the blockchain. As mentioned before hackathons and different seed fundings enable developers to start building for the blockchain.

There are always those projects that have been forked and require small or if any capital to deploy to the blockchain. Those are however the projects that you should be careful with. The projects that have VC funding and or that have received top prizes in a hackathon event for example are the ones that are a bit more trustworthy inside the crypto industry.

As the source code of a dapp is usually public and anyone can check the code from GitHub, it also means that anyone can copy that code and create their own project with different visuals and a slightly different tokenomics (these are called forks).

If we want to know what ecosystem is growing or will grow in the near future, we only need to know what type of developers are high in demand. We also need to know where the developers are migrating to or are developing dapps to.

Outlier Ventures did a report on this very topic in 2021 (so it’s a bit outdated already, but shows that these kinds of reports are made). When we know where developers are flocking into, then we know which chains will get new dapps, and with new dapps hopefully comes new users, and with new users comes price appreciation for the chains coin.

Blockchains that saw a decline in project commits (image source)
Blockchains that saw a rise in project commits (image source)

We now have some more data to chew on, make some decisions on where the money is flowing into. Whether Cardano is still a valid blockchain or could Terra ecosystem be something to invest into. Ultimately it’s the developers that make or break a blockchain. If there are no developers to build on top of a blockchain, then there can’t be users either.

Smart Contract Coding Languages

One of the most important things to understand is the smart contract coding language and the effects it has. Solidity is one of the most used SCC languages out there and the reason for that is because Ethereum uses that. Polkadot, Solana, and Terra use Rust as their SCC language and that is also one of the biggest reasons why don’t see so many OHM and TOMB forks on those chains. 

So why do you see so many forks in Ethereum, Avalanche, and Fantom chains? The reason is that Avalanche, Metis, Polygon, Fantom, and Ethereum all use Solidity as their SCC language. When you have the same programming language base, then (as mentioned before) you can easily fork a code and create your own copycat version of a successful project (rug pull some money and there we go again, another scam in the crypto space).

So it is important to understand why things work the way they work. When you know that forking is that easy and you see project after a project launched in different chains, know that they are all forks of another. Forks don’t require that much work as someone before you made the work already. So scamming becomes super easy and super fast for the ones who know how forking works.

Building something from the ground up requires time, money, and knowledge and that is the very reason you don’t see that many OHM forks in Terra for example. The projects that build something from the ground up are the ones that have the most potential to succeed.

Different smart contract coding languages

  • Solidity (Ethereum, Avalanche, Fantom, Polygon, Metis)
  • Rust (Solana, Terra, Cosmos, Near)
  • Haskell (Cardano)
  • JavaScript (Hyperledger)
  • Vyper (Ethereum)
  • AssemblyScript (Near)
  • Ride (Waves)

Decentralized Applications (Dapps – The Use Cases)

We now have funding for the blockchain, the blockchain is up and running, developers are developing for the blockchain, and also has funding. Then it’s a matter of what is being built to the blockchain. The very basics that a blockchain needs to have is a DEX (decentralized exchange) and the reason for this is that when a blockchain is created the dapps are built on top of that or inside the blockchain and those dapps have tokens that offer some kind of utility. But you need a DEX to swap those blockchain coins for those dapp tokens. For example, in Avalanche you usually swap AVAX (or wAVAX) for a token like MIM, THOR, PTP. So you need a DEX and that is the first one you see a blockchain getting when it is launched.

Another one is an NFT platform. It is already (almost common knowledge) established that NFTs drive user adoption for a chain. When there’s a hot new NFT collection surfacing to a new blockchain that collection is sold pretty fast and that creates user engagement for the blockchain. The more users a chain will have, the faster it will become large and the more TVL it will gather to itself.

What also needs to be remembered are those forks. Metis L2 blockchain is a prime example of how the chain quickly got different projects to itself and that was because of all the forks out there already available in the Ethereum chain. Remember, the SCC language plays a huge part in the adoption of the chain. As more dapps create more use cases and the more use cases you have, the more users you potentially have.

So when a chain’s SCC language is Solidity, you can bet there will be a massive amount of forks in a new chain and possibly users if they see the projects worth using and investing into.

The most popular dapps that are built to a new blockchain:

  • Decentralized Exchange (DEX) -multiple (so you can trade/swap/exchange tokens)
  • NFT platform (NFTs drive adoption)
  • Launchpads (new projects to launch from – seed money from the blockchain users)
  • Bridges (so you can bridge assets from one chain to another)

Users

Crypto is still new to the majority of the people and thus the ones who are in crypto do move money from one protocol to another. This can be seen from TVL fluctuations as money moves from one chain to another. While users are not the same as money, the TVL does give a clue on where users are currently and if there are new chains worth looking into (growing TVL).

Crypto does heavily influence people to join the space with high yields, play to earn games and NFTs. The adoption of crypto is exponential as a majority of the people on this planet have access to the internet. Because crypto is accessible through the internet, users are able to get into crypto when they so desire.

Without users, not a single project can go anywhere. Crypto projects and blockchains need users and money to grow as an ecosystem. Users eventually create the ecosystem and the success of a blockchain.

Also, the ecosystem growth ends at the user, the user being the final step and a building block for successful blockchain adoption. Crypto will grow the more people come into the space and the more people start to use blockchains.

It is already seen multiple times (Avalanche got congested when Wonderland protocol suffered some bad news, Fantom got congested when some major DeFi developers left the scene, and the Ethereum chain has been congested a long time already) that not one single chain can handle the number of users and use cases currently available in the real world.

What we can already see is that different companies and even blockchains are building blockchains for a specific task, a chain for gaming, or a subnet (Avalanche) for different use cases. And this all reminds me of how Polkadot was created, but this time it’s on a larger scale and not limited to 100 parachains.

The future won’t be one chain to rule them all, but rather a multichain ecosystem working together to achieve a decentralized economy for everyone.

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Written By Juha Ekman

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