Transcription
Crypto can feel like chaos. You've got thousands of different coins, dozens of blockchains, new tokens, new narratives, new hype every day.
But underneath all that noise, there is real structure, a very well-crafted design, an entire thriving financial ecosystem that's being built piece by piece on the back of code rather than institutions. And if you had someone to give you that structure, the map, you can stop seeing crypto as just some speculative bubble and start seeing it for what it really is, which is the next version of the internet, one that includes a native financial system built within.
In this video, I'm going to give you that map. I'm going to walk you through the entire crypto ecosystem piece by piece, from Bitcoin and Ethereum at the base to the infrastructure that connects them to the tokens and the DeFi protocols that are creating opportunities for passive income, also the apps that touch the real world. By the end, you'll finally understand why this whole crypto Web3 thing is happening and how these pieces fit together. I'm Keith D, here to talk everything money and markets. This is the complete crypto map. Let's begin.
So, let's dig into this complete crypto map and how everything in Web3 connects. So, the first thing that we have to get a grip on is this idea of layer ones or what we could call the base layer or the blockchains. And so, here we have the traditional blockchains that you hear about, such as Bitcoin. And now, each of these particular blockchains essentially serves its own purpose to some degree. Um, these are the basic ideas of why these blockchains exist and what they do for the entire space.
Bitcoin, for instance, serves as a store of value. The consensus mechanism called proof of work makes all of this come together to where Bitcoin can be seen as this digitally scarce asset. And in that regard, it acts as a store of value.
So, then you have Ethereum, which has a completely different use case as it is a smart contract platform. So, not only could you potentially say that it's probably scarce, it's not in the same way that Bitcoin is, but you could say that it's probably scarce, and that it actually has functionality on top of that.
So, the next one is Solana. The big use case there is that it has a much higher throughput. We'll talk a little bit more about what the trade-offs are of that in just a second.
Then you have Avalanche, where you have these idea of of subnets. So, you have these different networks within the overall greater network.
BNB. You have Binance's blockchain. So, this can serve as essentially a place where you can get rewards on Binance's platform, just as an example.
The XRPL, the XRP ledger, which is really built for institutional infrastructure.
Then you have Cardano, which one of the major benefits of it is that it has peer-reviewed, fully researched consensus mechanism that is meant to last and stand through the test of time as a proof of stake mechanism.
So, these are all individual blockchains upon which we will talk about things can be built on top of.
So, before we move into all of that, let's talk about this concept called the blockchain trilemma that was offered by Vitalik Buterin, the founder, one of the founders of Ethereum and the core designer of the network. So, uh, when it comes to these blockchains themselves, right? These are the overall greater networks where we're trying to create transactions that do not need any sort of intermediary. So, in that we have a few different things that we have to trade off. We have decentralization on one end. We have security on another end, and then we have the scalability of that blockchain.
So, decentralization is something that's a lot harder to um quantify, right? Like, decentralization means that the validators of the network, for instance, are not uh particularly dependent upon one another. For instance, we just had this AWS blackout. And when that happened, did a blockchain go down? If so, then it probably wasn't uh sufficiently decentralized, right? Just as an example.
And then you have the tokenomics of the actual token throughout the network as well, right? So, for instance, in uh Bitcoin, there's a very large amount of Bitcoin that's held in very few hands. Now, the way that that occurred was technically through natural market mechanisms, so you can't just say that it wasn't fair to some degree in the same way that you might have a project that releases a token, and 80% of that token is actually just allocated to the founding team anyways, right? So, with Bitcoin, at least, the distribution happened naturally. It's just that no one knew about it besides the people who happened to know about it at the time.
So, anyways, uh, the things that we're trying to get outside of just the decentralization are also security. So, we want to make sure that the blockchain is secure because we don't want to have transactions going through that shouldn't be going through, or have transactions being rolled back that shouldn't be rolled back. Uh, another thing about this is the uptime, right? Like, if you're going to have a global financial network, you want to make sure that it's not just going down, right?
Um, this is an issue that you see with blockchains like Solana, where instead of that side of it being valued, you have the scalability. That's the third uh piece of this trilemma, where you might want to get a network to have 10,000 transactions per second. If we're going to build out a network that everyone in the world can use, then you would want it to have a high level of TPS so that it doesn't get clogged up whenever people are just trying to do their normal everyday transactions.
So, Bitcoin, for instance, sits on the security and decentralization side of this trilemma, whereas things like Ripple and their XRP stand more on the scalability and security side, right? And um, in that essentially you you have also at the bottom something like IOTA or even Vechain where decentralization and scalability are the things that are valued.
So, um, the important thing to understand about how all of this really comes together is this concept called the consensus mechanism. So, the consensus mechanism for Bitcoin is called proof of work. And the idea is that these miners, essentially the validators or miners on the network specifically rather, are the ones who are competing with one another to solve a puzzle, and whoever solves that puzzle fastest gets rewarded with Bitcoin. And so, that's one of the major pieces of the components of what makes Bitcoin secure because all of these networks, or excuse me, all of these computers are essentially competing with one another providing resources and energy to the network in order to secure it through this game called proof of work.
Now, on other blockchains, there's different types of consensus mechanisms. For instance, there's some called proof of stake where instead of it being about providing exogenous, resources from outside the network, it actually has to do with resources that are already within the network such as, for instance, in Ethereum today. Ethereum's on the left over here, but it's not really over there anymore. It's more on the right. Where you have um >> [clears throat] >> proof of stake where essentially if you have more tokens, you can put them up as a stake to say, "Hey, I'm willing to lose my stake if I were to do something nefarious or if I were to lie." So, it's a different form of consensus, and these are very basic rough kind of ideas of how the stuff works, by the way.
But, the point here is that the consensus mechanism is what really makes all of this come together. Are you sacrificing decentralization for scalability? Right? And this consensus mechanism is where that decision is being made, and it's how the entire network comes to agreement around what the order of transactions are throughout the network, and that's why it's such a fundamental piece of this whole blockchain system. Is what is the underlying consensus for how the order of transactions comes about, and what does that mean for the scalability, decentralization, and security of the network? Because once again, we're trying to create a network where we can have financial transactions taking place without having to have any intermediary within that process.
So, let's move on. Let's talk a little bit more about how crypto actually scales and connects. So, once you get to the idea of like, all right, you've got Bitcoin, and Bitcoin doesn't necessarily have any functionality to it. At least for now, that's not really what it's meant for. It's meant to be used as a store value. So, once we move beyond that, and we go into what I call blockchain 2.0, which is things like Ethereum, where you can actually have smart contracts built into that network, then we start to get all of these different pieces that can really kind of come together and compose and make a total financial ecosystem.
So, let's break down some of the pieces of this one by one. So, the first thing that you have on Ethereum is you have smart contracts. And these are essentially self-executing lines of code that automate trust. They automatically execute or run when programmed, and when pre-programmed conditions are met. And their execution is enforced by the blockchain network, not by a third party. Right?
So, what's happening here is now that I have this idea of a smart contract, what I can do is I can create an agreement with someone without any intermediary other than lines of code that are pre-programmed to act when there is a condition that is met. So, for instance, if I'm going to give you money, then you need to have a certain amount of money already in your account so that I know that if there's some event where it seems like you're not going to be able to pay me back, I will get that those assets as collateral. And that's what smart contracts do but programmatically. So, no one has to go into the back end and make the decision and say, "Oh, I'm going to take your assets cuz you didn't pay your loan." No. If you do not pay your loan, then your collateral will be taken as just an example, right?
Now, there are, because of this, so many different use cases. Okay, this is just the most bland, boring thing. It's just like a loan. And it's what we see a lot of in DeFi today. But, this will allow, for instance, there to be agreements around the settlement of insurance contracts, right? Based upon real-world events that happen in real time.
Now, the only way that we get to that world is if these smart contracts are actually smart. Meaning that they actually have access to data that's not just on the blockchain on which these smart contracts exist. And to be clear, smart contracts, there are there are many different smart contract platforms or blockchains. So, you have Ethereum, you have other ones as well that also have smart contracts like AVAX and so on.
So, with that, we need to have a way to bring real-world information into the blockchain. And that is what oracles do. So, oracles are third-party services that connect blockchains to external off-chain systems, which enable smart contracts to use real-world data like, for instance, prices that come from outside of the blockchain itself. The blockchain is a siloed ecosystem. If you want to get information about the weather or prices or the result of the next game, then you have to have some way to bring that information into the smart contract so that it can then execute based upon that information.
Now, there's a ton of different ecosystems for how to do this in a way that is effective and that is appropriate, right? So, you have Chainlink and then you have Band are two of the major oracle solutions out there that have their own protocols for how to actually do this in a way that is safe and secure. Because when we're talking about financial transactions, we have to make sure that this data is coming into these networks in a way that is one, we're trying to keep this as decentralized as possible as possible, and we also want it to be um as secure as possible, right? So, you don't want there to be any security vulnerabilities in this process.
So, after that, we also have what are called L2s or layer two solutions. And what L2 L2s are is secondary networks that are built on top of a main blockchain, which is the layer one. Like Ethereum, for example, is a layer one. And the idea is to improve the scalability by processing transactions off-chain, which will increase the speed and lower fees while inheriting the security that comes with the main chain.
So, a layer two, as an example, would be Optimism or even Base Chain on Ethereum. So, the idea here is that you have the security of the main network being Ethereum, but you have a subnet, is kind of how you could look at it, or a side chain, where there are um transactions that can take place off of the original chain, and instead you kind of clump all of these transactions into one, and then you submit those transactions to the larger chain. So, that you have the security of all of what's happening on that chain, but you have the scalability of this ecosystem that can do whatever it wants internally and has its own rules.
So, that's a rough explanation of what an L2 is, but the reason for this is because a lot of L1s security in this blockchain space can be extremely expensive and it can be extremely slow. And so, if you want to maintain decentralization and security while having a way to transact a little bit faster, then this is one solution for that. Now, there are L1s, there are layer ones that try to solve that problem on its own, but that's a different way of going about it. The reason that these L2s have become so popular is because Ethereum has been the space where a lot of different networks and you see me applications have already been built. And so, when you can take advantage of the liquidity that these apps already have, for instance, like Ave and Compound, and also just the functionality, right, that's already built into the network, then now you can just use these L2s as a way to increase the efficiency of all of that without having to like completely migrate this entire ecosystem to another chain where there will be different security vulnerabilities and different things to think about. So, that's what that's all about.
Now, let's talk about bridges. Bridges are protocols that connect different blockchains to one another, allowing them to transfer assets, data, and tokens between them, and also enabling cross-chain communication. So, there's there's really two major types of bridges that I want to point out. You have bridges that connect two different layer ones, but then you have bridges that connect a layer one to a layer two. Okay? So, if you wanted to use Ethereum from the Ethereum L1 and you wanted to get that Ethereum on Arbitrum, which is an L2 on Ethereum, right, a subnet you could look at it as a side chain of Ethereum, then you you need to bridge the assets from the main chain to the L2. So, that's what bridges are all about. These are protocols that each have their own ways of going about doing this, but essentially, uh, what you're doing is essentially, you're going to lock funds on one side and then mint them on the other side. That is the most basic way that that can occur. I'm not saying that's how all of them work, but just as an example.
So, let's look at some visualizations so that you can hopefully get a better grip on something. So, this is an oracle, right? The idea here is that blockchains do not have access to real-world data and events. And oracles will help you to get that information into the blockchain so that you can do stuff with that real-world information. Now, this isn't an illustration of an actual oracle itself, but I just wanted to give you an idea of why this matters and what's is important about oracles.
Now, moving on, we have this concept of uh side chains or L2s and also bridges, right? So, this inherently also shows you what a bridge does, right? So, these arrows going back and forth are essentially a bridge. You can think of it as and that's how you get assets from the main blockchain to these L2s. Let's move on.
All right. So, another thing about this is like there's a financial aspect of all of this crypto stuff, and there are two different ways of looking at this. So, you have what are called coins, and the coins are typically referred to as the native asset of the blockchain. So, for Bitcoin, it's a bad example cuz there's only the coin Bitcoin, but on Ethereum, you have Ethereum, which is the coin of the Ethereum blockchain, but then you have different tokens that exist on that blockchain. So, let's break down what some of the different tokens on that blockchain can look like.
So, you have two major types. The first type that we'll go over is financial or utility types of tokens. So, a utility token provides access to a specific product or service within a blockchain's ecosystem. Similar to how a concert ticket grants entry to a show. So, for instance, Ethereum, right, is used as the gas on Ethereum. Now, this is where, you know, token versus coin can be a little bit confusing. And in this example, I shouldn't have put it there because it is just a coin. But, Ethereum does serve as an actual as a utility on the Ethereum network. That's what's important to understand.
Now, the Uniswap token, for instance, is a is a better one because you're going to earn Uniswap, for instance. You can earn Uniswap for participating in some of the decentralized finance that's happening on that protocol on that app, which is a decentralized exchange. So, utility tokens do something is the idea. And these examples are not even like the greatest examples, but the idea is that you need the token in order to access a feature of the network.
And then you have governance tokens, which give holders the right to vote on the future direction and decisions of a decentralized product or project like Aave or Compound. So, we have what are called decentralized autonomous organizations, meaning that you have people that can own these tokens and then vote on the future of what happens with these protocols with those tokens. Each token can equal a vote depending upon what exactly the protocol has as the rules for the voting process. I'm not confused about the time. And we can't have that.
So, we also have security tokens, which represent ownership in an external asset such as a share in a company and are subject to securities regulations. So, you can tokenize stocks, you can tokenize real estate, and these tokens can actually be represented on a blockchain.
And then you have stablecoins, and stablecoins are designed to be stable. And they are often pegged to a fiat currency like the US dollar, which makes them useful for hedging against volatility and for transactions that you may want to make across uh overseas, for instance.
So, those are the financial / utility side of tokens and what they mean. There's this financial aspect to all of this, which usually basically means that you can use these assets over these networks to do the things that we talked about earlier.
Now, another side of this that we want to make sure that we talk about is that there's also this cultural speculative type of tokens. And so, we have non-fungible tokens, often referred to as NFTs. Now, it's not just pictures of art or JPEGs. That's not what NFTs are. What they are is unique non-interchangeable tokens used to represent ownership of digital or even potentially physical items, such as digital art or collectibles.
So, to understand non-fungible tokens, you need to understand fungible. So, fungible is, for instance, if you have a $100 bill. If I have a $100 bill and you have a $100 bill, then we can trade with one another and like no one loses anything because these dollar bills are fungible, right? They are the same thing. An NFT means that it is a non-fungible token, so that the token is unique and it has its own characteristics, like a fingerprint or snowflake. And so, with that, there is no uniform value to each NFT. Now, there can be a marketplace where there are the same group or class of NFTs that can be traded in a similar way, but each and every one of the individual units can have its own individual unique characteristics. So, the the real use cases for this, we'll talk about that in a second, are not like JPEGs and art, but rather membership and identity.
So, the other side of the speculative cultural side of the financial aspect of blockchain is the meme coins. So, these are completely speculative, community-driven assets often created as a joke or based on some sort of internet meme. You have Doge and Pepe and then all of the myriad of other ones.
Now, the truth about the speculative nature of these assets is that a lot of crypto is also very speculative at the moment as well. So, it's hard to say that oh, these other tokens are like real financial utilities and these are just you know, speculative cultural phenomena when really all of crypto as it stands, you can get mad at me in the comments. It's all very speculative and we don't really have the valuations of these tokens being based on their utility at the moment. Now, does that change at some point in the future? That's the real question and that is what people are betting on as they are speculating on the future of digital assets.
So, when it comes down to thinking about how to allocate towards these types of opportunities, it's like if we believe in the utility or the future utility of some of these tokens in their in these networks, then that's a one way to think about it. So, just to give it an example, if I think that there will be more activity on Ethereum in the future, understanding that Ethereum will be necessary to use as gas over the network. So, I can't post a transaction to Ethereum without there being Ethereum being used as gas in that transaction. Therefore, if I believe that the amount of transactions that will occur over the Ethereum network will go up 10x in the future, then it may make sense for me to own Ethereum because the demand for Ethereum will then rise over time as a utility over this network. Hopefully, that made some sense. Um, versus a meme coin it's like oh, well, we're just going to buy it because I think that other people are going to buy it. Cool.
Moving on. Um, so there's a whole financial system in crypto natively on these blockchains. So, we have what are called decentralized exchanges. You have Uniswap, Curve, SushiSwap, and many others where for instance, you can swap tokens on a blockchain. You also have decentralized lending protocols like Aave and Compound where you can borrow cryptocurrency without any intermediary just code or you can lend your cryptocurrency and start earning passive income on that crypto. There are also staking protocols and liquid staking protocols where you can basically mm deposit your assets into a into a pool of some sort and actually earn yield off of those tokens and potentially even get a token that represents the fact that you've deposited something there and then do things with that token like staking that. And that's called liquid staking specifically. And then you have these yield aggregators where they kind of go out and like figure out the best way to go and get yield for you. You have things like Yearn and Beefy and this can allow you to compound your returns really quickly. And these are just a few examples. There are so many different types of applications in the decentralized finance world where you can go out there and programmatically or algorithmically go and earn passive income 24/7 and this is a real thing that is happening all the time right now and institutions are participating in this.
Um, so just to kind of give you a couple of examples of like what a decentralized exchange can look like. Decentralized exchanges work on what are called automated market makers. And so instead of basically there being a market maker as an entity that's an intermediary helping people to buy and sell from one another when they don't necessarily know each other's bid and ask prices meaning what I'm willing to sell for what I'm willing to buy for, we have these algorithmic automated market makers that do this on behalf of others. So what happens is is people deposit their tokens to these liquidity pools. So you have for instance um I might want to trade my USDC for your Tether. And so for that to take place in a decentralized exchange, there needs to be a pool of both of these assets that are just sitting there at all times. And what happens is is people like you and I will go in and deposit these assets into these liquidity pools, and when someone needs tether for USDC, they can trade over this pool, and we will earn fees off of that because that part is baked into these decentralized exchanges. And so, this is just an example of what this actually looks like. You have a liquidity provider who's depositing tokens, and these tokens sit into a reserve, and a trader will then swap one token for another using this liquidity that's just sitting there inside of that liquidity pool.
Now, uh, just as an example here of like decentralized lending and how it works and why it's different, uh, over here on the left side you have the traditional lending scenario where you have a bank that is responsible for facilitating the uh credit risk analysis first off of whether or not uh someone should be or wants to get uh a loan from them. Uh, and then you have these depositors that give the money to the bank. The bank then makes it assessment of whether or not they want to give money to the borrower. And there's a bunch of governance and compliance that goes into that where also the bank could do things that are not fair. They could say, "Ah, you don't I don't want to give you a loan because of what you look like." Or I don't want to give you a loan because of how short you are. Or whatever it is, you know what I mean? It doesn't really matter. So, um, the idea here is that there are two different pieces of this. The bank can do whatever it wants, and this governance and compliance section of this like doesn't have to be enforced, right? Banks break rules all the time, and the credit risk analysis could also be faulty process. It It could be based upon arbitrary things. It could be based upon the fact that they think that uh people uh >> [snorts] >> their risk models could be bad. In 2008 what happened? Banks had faulty risk models, and everything blew up. Right? So, um, those are that's another issue that can occur here.
Now, with a decentralized lending platform, you have people that deposit into a smart contract. And that smart contract can basically, based upon algorithmic decisions that everyone else has agreed upon, decide whether or not someone gets a loan. It doesn't decide, by the way. It's just if you have collateral that you've posted, then you are able to borrow. And instead of having um some lengthy review process, you can instantly get a loan off of your assets because you've proved that you own these assets. And so, uh, also the liquidation process can be done algorithmically so that if your the collateral that you have posted gets too low in value, then your assets can be liquidated and given to the people uh who have essentially uh done the process of of figuring out that that occurred, they get paid fees, and then the depositor will get paid back in whole. So, there's obviously a lot more to this, but hopefully that paints the picture of like why this is different. You don't have to deal with the bank who's coming up with rules or breaking rules or that has a risk model that doesn't make sense. The risk model is agreed upon by everyone who's using the platform, and it's acted upon in an algorithmic manner.
So, let's talk a little bit about the applications and the reasons for blockchain and crypto. What does this actually do for us? Well, the first thing is cross-border payments and stablecoin applications. So, we have Circle, we have PayPal, USD, and then we have uh all of these different platforms that are essentially offering stablecoins. And what you can do with this is you can now, instead of having to wait days and days for the plumbing in the traditional financial system to get your dollars from one place to another in any part of the world, you can send your dollars and money across the world instantly in a stable format, right?
So, there's two major uses to stablecoins. One of them is just having a stable place to put your value, which in a lot of different countries is a really big deal. Uh, a lot of countries suffer from hyperinflation. And in that scenario, I need somewhere to go where I can put my money and actually know that I'm going to be safe. The problem with that is in that in a lot of these countries, they don't want you to have access. They don't want you to be able to get rid of the local currency, to further devalue in that currency. So, they want you instead to just stay within that currency and suffer with everyone else. So, what do people do? They go online and they take their money and they go and buy things like Bitcoin or even just stable coins so that they can make sure that at least if their money's going down in value, it's only going down in value at the rate at which the US dollar, for instance, is going down in value on a global scale. Um, so, there's that. And then there's also this idea of sending money across borders as cheaply as possible as well. So, instead of having to pay the bank crazy amounts of fees in order to make sure that your money gets from one place to another, you can use stable coins and it get there very fast and very cheaply.
There's also these uh applications with gaming and collectibles. So, for instance, having an entire in-game ecosystem where the assets in that system can actually be traded for other real-world assets in real life. That's another thing that blockchain makes possible.
Another big thing there is social and identity sorts of use cases where imagine you can have a uh digital identity. When you log into your uh software wallet like a MetaMask or a Phantom, that actually also gives you access to potentially real services in real life. It could be your digital passport in a sense. And that is something that can be done with the blockchain because you can verifiably prove digitally that you, for instance, are who you say you are and that could allow you to not have to carry around a physical passport everywhere you go and instead just have a digital footprint that exists on your phone. As an example.
And then you have real-world assets. So, now that we can uh digitally represent assets and do, for instance, security tokens, uh, we can now uh pay out yield, for instance, of a treasury bill on chain. Right? So, you can 24/7 be earning, right, on a treasury bill rather than having to get a monthly payment or having to get a yearly payment. And you could take that value and do whatever you wanted with it on chain. Right? So, if you wanted to even potentially sell the yield-bearing token itself, like you could on Ondo with USDY, you could do some really interesting things. And that's just, like, security tokens specifically, um, and that's just a treasury bill. But there's a lot of different types of securities that are already very complex instruments. And we're going to see here that we get really, really interesting use cases of having a security token, a tokenized version of a security, that you can do all kinds of fancy things with. Like, for instance, also using it in decentralized finance. Imagine that you and I could take our Tesla stock and post it as collateral and then get back from that, right, um, a loan. In the form of Ethereum, as just an example, or in the form of some other asset that we wanted to own, like Nvidia stock. Just imagine that.
Anyways, um, we also have decentralized autonomous organizations. Not an incredibly huge use case at the moment. I think in the future we could see some very interesting use cases where, for instance, the self-regulating organizations, like the Nasdaq, could potentially become DAOs in the future, where the members and the participants of these different exchanges could actually, uh, play a role in the future of how the rules are written moving forward.
So, just, um, a couple of ideas of what crypto looks like in the real world.