Drixx Academy/The Evolution of the Cryptocurrency Ecosystem - Bitcoin, ICO, DeFI and NFT/

The Evolution of the Cryptocurrency Ecosystem - Bitcoin, ICO, DeFI and NFT

Edwin Munyui
Head of Content
April 2, 2021

The Evolution of the Cryptocurrency Ecosystem

It’s now been over a decade since Bitcoin was invented by the pseudonym Satoshi Nakamoto - this individual or group is still anonymous up to date. Nonetheless, Bitcoin has developed to become a powerhouse in today’s financial market, spurring the innovation of other cryptocurrencies as well. There are currently over 6,500 cryptocurrencies listed in the digital asset market, and the number continues to grow on a daily basis - especially with the emergence of decentralized exchanges such as Uniswap and Sushiswap.

Let’s take a step back to understand the evolution of this potential market, it all began in 2007 when Satoshi Nakamoto started writing the Bitcoin source code. Bitcoin’s whitepaper was later released in October 2008 with the title ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. At the time, the U.S subprime mortgage crisis was at its peak with big players like the Lehman brothers going down. It wasn’t long until Satoshi mined Bitcoin’s first block with an embedded text that read ‘The Times 03/Jan/2009 chancellor on brink of a second bailout for banks’.

In its first two years, Bitcoin was only mined by a small number of enthusiasts who included Satoshi - the initial reward per block was set at 50 BTC. This has since reduced to 6.25 BTC following the halvings (reducing the block reward by double after every four years); the first BTC halving in 2012 saw the block reward reduced to 25 BTC. It was followed by another halving in 2016 and the most recent one being 2020 - the block rewards reduced to 12.5 BTC and 6.25 BTC, respectively.

It is quite noteworthy that Satoshi stepped back from active involvement in Bitcoin mining as early as 2010, having mined around 1 million coins. Interestingly, these coins have never been moved ever since the pseudonym cut off ties - Bitcoin’s control was also handed over to the source repository code while the network alert key was given to Gavin Andresen, a software developer who was involved with Bitcoin from the early days.

The first BTC peer-to-peer transaction took place in 2010 through the Bitcointalk forum with one of the most popular transactions being the purchase of two pizzas for 10,000 BTC - worth a fortune as per the prevailing market prices. Over time, Bitcoin became popular and its price skyrocketed to $30 by June, 2011. This growth was partly attributed to Bitcoin’s popularity in the online black marketplace dubbed ‘Silk Road’ - participants engaged in all sorts of illegal activities, while using BTC to make ‘anonymous’ settlements.

Initial Coin Offering (ICO) Era

As Bitcoin gained popularity, other cryptocurrencies started to emerge - today they are known as altcoins. Litecoin was among the pioneer altcoins to debut in the crypto market. This Bitcoin fork was designed as an improvement to Bitcoin’s infrastructure by touting better anonymity and speed. With innovation picking up, altcoin projects sought alternative means of raising capital, and ultimately led to the invention of Initial Coin Offerings (ICO) - a form of crowdfunding through cryptocurrencies.

The first ICO was held in 2013 by a project named Mastercoin, marking the start of a new era in crypto financing. Ethereum, the second largest cryptocurrency in market cap, would later issue its own token sale in 2014. This initiative saw Ethereum raise around 3,700 BTC within one day - roughly $2.3 million back then. As we will see in later sections, this project has grown to be the pillar of most innovations that are happening in today’s crypto ecosystem.

The ICO era peaked in 2017 when token sales became a common way to raise financing within the crypto market. By then, Bitcoin’s price had already hit $1000 and more retail investors were now paying attention to the digital asset marketplace. Some of the fundamental projects that raised funding through an ICO include privacy-oriented browser, Brave. This innovation managed to secure around $35 million within a minute of launching its ICO in May, 2017. By the end of the year, Bitcoin’s price had hit an all-time high of $20,000 while ICO projects were launching left, right and center.

However, this party would not go on for a long time - the ICO bubble burst in 2018 as most of the token sale issuers went missing with investors funds. Regulatory authorities led by the U.S Securities Exchange Commission (SEC) started investigations into some of the ICO projects for illegal sale of unregistered securities. The crackdown saw most ICO projects close shop while others like Telegram’s Open Network (TON) were forced to return investors funds. This turn of events was followed by a long three year ‘winter’ bear market - up until late 2020 when crypto prices started to gain momentum.

Smart Contract Platforms

While Bitcoin had proven to have some intrinsic value, it’s blockchain infrastructure could not facilitate the development of decentralized applications (DApps). This led to the innovation of smart contract platforms such as the Ethereum and NEO blockchain networks. The two projects were the first smart contract enabled ecosystems - developers could now build decentralized projects on top of either. Ethereum’s early years between 2014 and 2017 mostly involved the development of core infrastructure. This blockchain ecosystem would later set the stage for innovations such as Decentralized Finance (DeFi) and Non-fungible Tokens (NFTs).

Decentralized Finance (DeFi)

DeFi is one the hottest topics within the crypto market as of press time - this young ecosystem is a replica of the traditional finance market structure, only this time there are no intermediaries or central authorities. Most DeFi projects currently reside on the Ethereum blockchain which means that operations are decentralized and happen on-chain. In simpler terms, the DeFi market allows anyone to participate regardless of their geographical positions or access to traditional financial institutions.

This area of innovation is among the main beneficiaries of smart contract platforms - ideally, DeFi projects leverage smart contracts to create applications and tools that can automatically execute according to the on-chain or off-chain data provided. The latter type of data is normally integrated into the smart contract through blockchain oracles.

As for DeFi products, they come in various forms that basically resemble their counterparts in traditional finance markets. This ecosystem features products such as lending & borrowing, decentralized exchanges and derivative trading platforms. While most of these are still in the experimental phases, some DeFi projects have gained a large traction - both from users and venture capital investors. One such innovation is the Compound lending and borrowing protocol which enjoys the backing of prominent VC’s such as a16z and Polychain capital.

Despite the risks attributed to DeFi, the action keeps growing by the day - probably because of the ease of launching a smart contract project. In addition, there are multiple opportunities to generate significant amounts of income through activities such as yield farming and liquidity mining. That said, a lot still has to be done on Ethereum to facilitate the scalability of DeFi innovations.

Non-fungible Tokens (NFTs)

Non-fungible tokens (NFTs) are another popular crypto trend that seem to be taking the market wave in 2021. However, they made headlines as early as 2017 when the famous collectibles game ‘cryptokitties’ congested Ethereum’s network. These digital assets are basically cryptographic tokens with distinct inherent properties - each has a unique value.

Unlike other crypto assets, the unique nature of NFT tokens means that one cannot be directly traded for another unit. This is not the case for Bitcoin where one BTC is equivalent to another BTC unit. NFTs represent ownership of digital collectibles like cryptokitties, online art or gaming tools on a blockchain ecosystem. As such, there can only be one NFT representing a particular online art or cryptokitty.

While most DeFi projects assume the ERC-20 standard on Ethereum, NFTs built on this blockchain base their fundamental infrastructure on the ERC-721 standard. Alternatively, they can also leverage the ERC-115 standard that allows the combination of non-fungible and fungible tokens within a single smart contract. These digital collectibles can be bought or sold in some of the emerging NFT marketplaces.

Conclusion

Going by these developments, the crypto ecosystem is proving to be one of the most innovative spaces in the world. Stakeholders in this market continue to grow on a daily basis - we are now seeing action from regulators and traditional financial institutions. However, there is still a lot that needs to be done before innovators can convince relevant authorities that the ecosystem is ready and safe for mainstream adoption. Keep tabs on our academy to get more development features!

Disclaimer: The information presented here is for educational purposes only and should not be construed as investment advice. Cryptocurrency trading involves high risk. Drixx will always strive to do it’s best in educating customers and providing high quality products but will not be held responsible for their trading and investment decisions, losses or profits.