Spotlight on the emerging players in crypto. What you need to know about the complex landscape of crypto currencies and why. Let’s delve into the different layers and explore why this knowledge matters to investors. I will also pass on to you what assets I have heard are particularly interesting in each category. But please be advised, this is not investment advice.
Firstly, a crypto currency can be a multilayer currency but generally blockchains are divided into different layers. If you are new to crypto, all you need to know is that a blockchain is a digital ledger. If you want to be a smart investor you need to dive deeper.
Layer 1 – Blockchain: Establishing the Foundation
At the foundational layer of cryptocurrencies, lies the blockchain—the backbone of this revolutionary technology. Think of it as a secure, transparent digital ledger that records all transactions. Bitcoin operates at this layer. It employs a proof-of-work consensus mechanism, wherein miners solve complex puzzles to validate transactions and secure the network. Ethereum, another major player, goes beyond being just a cryptocurrency; it introduced the concept of smart contracts, paving the way for more complex functionalities. Solana is also on the lips on many investors.
Layer 2 – Network: Beyond Proof-of-Work
The network layer introduces alternative consensus mechanisms to the energy-intensive proof-of-work model. Ethereum’s shifted to proof-of-stake in September 2022 as it reduces energy consumption while maintaining security. Cardano is another contender in this layer, focusing on proof-of-stake for scalability and sustainability. Algorand has been hit hard by the bear market and is considered riskier but is also on the playing field. These networks enhance transaction speeds and energy efficiency, addressing some of the scalability issues associated with the traditional proof-of-work model. In short, layers 2 crypto currencies are needed to onboard as many people as possible to the blockchain. For example, if a nation would decide to run an election on a blockchain to limit voting tampering and increase transparency it would need to be done on blockchain that runs on proof-of-stake. A proof-of-work would soon become congested and expensive to use.
Layer 3 – Smart Contracts: Powering Programmable Transactions
Smart contracts are basically a computer program that is programmed to do something automatically if something specific happens. Moreover, it can also use multiple technologies in the process. Smart contracts were invented in the early 1990´s but was brought to the Ethereum’s architecture to potentially revolutionize automating processes, reducing cost, and increasing efficiency in industries such as the insurance, banking, health care, real estate, and the government. Smart contracts have a significant role in shaping the future of digital transactions. These self-executing contracts enable programmable transactions without intermediaries, revolutionizing industries like decentralized finance (DeFi) and non-fungible tokens (NFTs). Developers can also create decentralized applications (DApps) that leverage smart contracts for tasks ranging from crowdfunding to tokenized art. Ethereum, Solana and Cardano and Algorand use smart contracts to power their blockchain.
Layer 4 – Applications: Tailoring Cryptocurrencies to Real-World Needs
Cryptocurrencies at the application layer are designed with specific use cases in mind. Ripple (XRP) stands out for its emphasis on cross-border payments, aiming to revolutionize the remittance industry. Binance Coin (BNB) initially served as a utility token for the Binance exchange but morphed into a versatile asset powering various ecosystem features. This layer exemplifies the adaptability of cryptocurrencies to real-world challenges. Layer 4 cryptocurrencies are designed to enhance different blockchains abilities to interact with each other. As the crypto community grows into a complex network each blockchain needs to be flexible to work together. Polygon and Chainlink, are frequently mentioned in the crypto space as strong contenders.
Knowledge of these layers allows investors to make informed decisions. The layers offer a roadmap for assessing a cryptocurrency’s strengths, weaknesses, and its potential fit within an investment strategy. For instance, a cryptocurrency built on a robust layer 1 blockchain might possess a strong foundation but could face scalability issues. Conversely, a cryptocurrency in the smart contract layer, could offer immense potential for innovation, but regulatory hurdles might be a concern. You see why we need to stay in tune with what happens in this dynamic industry.