In 2024, the cryptocurrency market continues to grow rapidly, with over 10,000 cryptocurrencies in circulation worldwide. This growth reflects the increasing interest in digital currencies and their potential to transform industries. Cryptocurrencies are now a major part of the Web3 ecosystem, which emphasizes decentralization and blockchain technology.
To fully understand the impact of these digital assets, it is crucial to distinguish between the different types of cryptocurrencies. The most common categories are Layer-1, Layer-2, stablecoins, and DeFi (Decentralized Finance) tokens. Each category serves a unique purpose, ranging from basic transactional use to supporting decentralized financial systems and enhancing blockchain performance.
This article aims to explore the primary functions and applications of these cryptocurrencies in 2024. We will delve into how they are used, their real-world examples, and their potential to shape the future of digital finance and Web3 development.
For further reference, you can check the latest data on the cryptocurrency market here: CoinMarketCap.
As mentioned in the previous section, cryptocurrencies come in different types, each with its own function. One of the most important categories is Layer-1 cryptocurrencies. Layer-1 is the base layer of blockchain networks. It serves as the primary blockchain where all transactions take place and are validated. In simple terms, it is the "main" blockchain that secures and processes transactions. Without Layer-1 blockchains, other types of cryptocurrencies would not exist.
Layer-1 blockchains are responsible for transaction validation, the creation of new blocks, and the security of the network. They ensure that each transaction is verified by multiple participants in the network (also known as nodes). Once a transaction is validated, it is recorded in a block and added to the blockchain, making it permanent and tamper-proof.
In addition to validating transactions, Layer-1 blockchains are used to run decentralized applications (dApps) and smart contracts. Smart contracts are self-executing contracts with the terms of the agreement directly written into code. dApps are applications that run on a blockchain instead of a centralized server, offering users greater security and control over their data.
Some of the most well-known Layer-1 cryptocurrencies include Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), and Solana (SOL). Each of these plays a significant role in the cryptocurrency ecosystem.
Bitcoin (BTC) was created in 2009 by an anonymous person (or group of people) known as Satoshi Nakamoto. It was the first cryptocurrency to use blockchain technology and remains the most widely recognized and valuable cryptocurrency today. Bitcoin operates on a proof-of-work (PoW) consensus mechanism, where miners use computational power to solve complex mathematical problems in order to validate transactions and secure the network. This system makes Bitcoin highly secure and resistant to tampering.
However, the PoW system also leads to slower transaction speeds and higher energy consumption compared to other cryptocurrencies. Bitcoin transactions can take several minutes to complete, and the network can handle only around 7 transactions per second (tps).
Despite these limitations, Bitcoin remains a store of value and a hedge against inflation. It is often referred to as "digital gold" because many investors see it as a safe asset, especially during times of economic uncertainty. Bitcoin's limited supply (only 21 million BTC will ever exist) and its decentralized nature continue to make it attractive for both individual and institutional investors.
Bitcoin is primarily used as a store of value, an investment asset, and a medium of exchange in certain areas of the world where traditional banking is less accessible.
Ethereum (ETH), created by Vitalik Buterin and launched in 2015, is the second-largest cryptocurrency by market cap. Unlike Bitcoin, Ethereum was designed to be more than just a digital currency—it provides a platform for decentralized applications (dApps) and smart contracts. Smart contracts are self-executing contracts with terms written directly into lines of code. Ethereum's ability to support these contracts makes it a key player in the decentralized finance (DeFi) ecosystem.
Ethereum initially operated on a proof-of-work (PoW) system, similar to Bitcoin, but it is in the process of transitioning to proof-of-stake (PoS) with the introduction of Ethereum 2.0. PoS is a more energy-efficient consensus mechanism where validators stake their ETH as collateral to verify transactions, rather than using computational power to mine. This shift aims to improve scalability, reduce energy consumption, and lower transaction costs.
Ethereum's smart contract functionality has enabled the creation of DeFi protocols, decentralized exchanges (DEXs), and non-fungible tokens (NFTs), significantly expanding the use cases of blockchain technology.
Ethereum is the foundation for many DeFi projects, NFTs, and blockchain-based applications. It’s used for creating tokens, launching Initial Coin Offerings (ICOs), and enabling smart contract-based automation.
Binance Coin (BNB) was launched in 2017 by Binance, one of the world’s largest cryptocurrency exchanges. Initially, BNB was an ERC-20 token built on Ethereum's blockchain, but it later migrated to its own blockchain, Binance Chain, to facilitate faster and cheaper transactions within the Binance ecosystem.
BNB is primarily used as a utility token to pay for transaction fees on the Binance exchange, both for trading and withdrawals. Binance users receive discounts when paying fees with BNB, making it a popular choice for active traders. Beyond the exchange, BNB has also been integrated into Binance's decentralized exchange (DEX) and the Binance Smart Chain (BSC), a blockchain that supports the development of decentralized applications (dApps) and smart contracts.
Binance Coin's use cases have expanded beyond just trading fee discounts. It is also used for token sales on Binance Launchpad, as well as for staking and governance in the Binance ecosystem.
BNB is used for trading fee discounts, staking on Binance Smart Chain (BSC), and participating in token sales through Binance Launchpad. It also powers decentralized finance (DeFi) applications on BSC.
Solana (SOL) is a relatively newer blockchain that has gained attention for its high-speed transaction capabilities and low transaction fees. Solana was designed to address some of the scalability issues faced by Ethereum and other blockchain networks. It uses a unique consensus mechanism called Proof-of-History (PoH), which enables faster block production times and more efficient transaction processing.
With the ability to handle over 50,000 transactions per second (tps), Solana is one of the fastest blockchains in the cryptocurrency space. This makes it highly attractive for applications that require high throughput, such as decentralized exchanges (DEXs) and NFT platforms. Solana's transaction fees are also significantly lower than Ethereum's, making it a more cost-effective choice for developers and users.
Solana's speed and low costs have attracted a growing number of developers, and the ecosystem has rapidly expanded with the launch of numerous dApps, DeFi projects, and NFTs.
Solana is used in high-frequency trading, DeFi applications, decentralized exchanges (DEXs), and NFT marketplaces due to its fast processing and low fees.
Layer-1 blockchains are the backbone of the entire cryptocurrency ecosystem. They provide the foundational infrastructure for decentralized networks, ensuring security, transaction validation, and the execution of smart contracts. These blockchains serve as the primary platform where all transactions are processed, recorded, and verified, making them crucial for maintaining the integrity and decentralization of digital currencies.
By operating as independent networks, Layer-1 blockchains like Bitcoin and Ethereum enable the creation of decentralized applications (dApps), smart contracts, and various blockchain-based services. Without these foundational blockchains, there would be no platform to build on or to ensure the trustless execution of transactions. For example, Bitcoin’s Layer-1 blockchain ensures the immutability of the BTC ledger, while Ethereum's Layer-1 blockchain supports the deployment of smart contracts and the operation of decentralized finance (DeFi) protocols.
Furthermore, Layer-1 blockchains are essential for supporting the security and decentralization of the overall network. The consensus mechanisms they use—whether proof-of-work (PoW) or proof-of-stake (PoS)—enable the network to verify transactions without relying on a central authority, which is a core feature of blockchain technology. These mechanisms make it possible for participants to trust the network without needing to know each other or rely on intermediaries.
In summary, Layer-1 blockchains are the core infrastructure that enables the entire cryptocurrency ecosystem to function securely and decentralized. They provide the security, scalability, and reliability needed for more complex applications, and their importance cannot be overstated in the development of Web3 and decentralized finance.
While Layer-1 blockchains form the foundation of the cryptocurrency ecosystem, Layer-2 solutions are designed to improve the performance of these networks. Layer-2 works on top of Layer-1 blockchains, enhancing their speed, reducing costs, and making them more scalable. This is particularly important because as more people use blockchain networks, the transaction volume increases, leading to slower processing times and higher fees.
Layer-2 solutions focus on two main features: off-chain transactions and faster execution speeds. Off-chain transactions refer to transactions that occur outside the main blockchain. These transactions are later settled on the Layer-1 blockchain, which helps prevent the main blockchain from becoming overloaded. As a result, Layer-2 solutions can process a large number of transactions quickly and efficiently without slowing down the main network.
By offloading a significant number of transactions from the main blockchain, Layer-2 solutions greatly improve the scalability of the entire network. This also reduces congestion on Layer-1, allowing it to focus on its core functions while Layer-2 handles the bulk of the transaction volume.
There are several well-known Layer-2 cryptocurrencies that have gained traction in the market:
Polygon is one of the most widely used Layer-2 solutions designed to improve the performance of the Ethereum network. Ethereum, while revolutionary in its capabilities, often faces issues of slow transaction speeds and high fees, especially when the network is congested. Polygon helps alleviate these problems by providing a scalability solution that works alongside Ethereum.
Polygon enables faster and cheaper transactions through the use of sidechains. Sidechains are blockchains that run in parallel to Ethereum, but they are not constrained by its limitations. Transactions on these sidechains can be processed more quickly and at a lower cost, and then later settled on the main Ethereum blockchain. This allows Ethereum to handle more transactions without slowing down or increasing fees for users.
One of Polygon's key features is its compatibility with Ethereum, meaning that it can support existing Ethereum dApps (decentralized applications) without requiring developers to learn new tools or rewrite their code. This has made Polygon a popular choice for DeFi projects, NFTs, and other dApp developers looking to improve their user experience.
Polygon has rapidly become a top Layer-2 solution in the crypto space. In 2024, its ecosystem continues to grow, with numerous projects building on its infrastructure, making it a central part of Ethereum's scaling strategy.For more information, check out the official website of Polygon: Polygon.io.
Stacks (STX) is a Layer-2 solution built on top of Bitcoin, the largest and most secure cryptocurrency. While Bitcoin is known for being a robust and decentralized store of value, it does not natively support smart contracts or dApps. Stacks solves this by bringing smart contracts and decentralized applications to Bitcoin without changing Bitcoin’s core blockchain.
The unique approach of Stacks is that it leverages Bitcoin's security and decentralization while allowing developers to build new features and applications on top of it. Stacks uses a protocol called Proof of Transfer (PoX), which anchors the Stacks blockchain to Bitcoin. By doing so, Stacks inherits Bitcoin’s security, while also enabling new functionalities like smart contracts, tokenization, and DeFi applications.
Stacks makes it possible for developers to create smart contracts and dApps using Clarity, a new programming language designed for predictability and security. These smart contracts can be used to create decentralized finance (DeFi) solutions, tokenized assets, and more, all while leveraging Bitcoin’s robust network.For more information, you can visit Stacks’ official website: Stacks.org.
Mantle is a relatively new Layer-2 solution designed to improve the scalability and speed of decentralized applications (dApps). It is optimized for decentralized finance (DeFi) applications and non-fungible tokens (NFTs), which require fast transaction speeds and low costs. Mantle aims to provide a highly scalable infrastructure for developers looking to build DeFi protocols and NFT platforms without facing the performance bottlenecks common on Layer-1 blockchains like Ethereum.
One of Mantle’s key features is its multi-chain architecture, which enables it to interact with several blockchains, including Ethereum. This provides a flexible environment for dApp developers and ensures that Mantle can offer faster transaction times while maintaining interoperability with other blockchain networks.
In particular, Mantle’s focus on DeFi and NFTs has made it an attractive platform for developers looking to build high-performance applications. By reducing transaction fees and improving transaction speeds, Mantle is positioning itself as a go-to solution for both DeFi protocols and NFT marketplaces that demand a high level of scalability.For more information, visit the official Mantle website: Mantle.
Layer-2 solutions can either be independent blockchains or networks that connect to Layer-1. In some cases, Layer-2 can operate as a payment channel, where two or more users transact without waiting for every transaction to be recorded on the main blockchain. Instead, users trust that the final settlement will be recorded on the Layer-1 blockchain.
This flexibility allows Layer-2 to serve a wide range of use cases, from simple payments to complex decentralized finance (DeFi) applications. Layer-2 solutions also provide a way for blockchain networks to handle higher transaction volumes and provide faster confirmation times, which is essential for mainstream adoption.
As we discussed earlier, cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) have revolutionized the digital world, but they come with one major issue: volatility. The value of these cryptocurrencies can change rapidly, which makes them difficult to use for everyday transactions or as a stable store of value. This is where stablecoins come in.
Stablecoins are a type of cryptocurrency designed to minimize price fluctuations. Unlike Bitcoin, whose value can rise or fall by thousands of dollars in a single day, stablecoins are pegged to a stable asset, such as a fiat currency like the US Dollar. This means that 1 stablecoin is always worth 1 dollar, or close to it, making them much more predictable.
Stablecoins maintain their value by being backed by a reserve of fiat currency or other assets. For example, Tether (USDT), one of the most widely used stablecoins, is backed by the US dollar. This means that for every USDT issued, there is an equivalent amount of US dollars in reserves to ensure its value stays stable.
Another type of stablecoin is the algorithmic stablecoin, which uses smart contracts to control its supply based on demand. For example, DAI is a decentralized stablecoin whose value is maintained by collateralized assets and smart contracts, rather than being directly backed by fiat currency.
Some of the most popular stablecoins with the highest market capitalizations include:
Stablecoins play an essential role in making cryptocurrencies more suitable for daily transactions and as a store of value. For instance, businesses can use stablecoins to receive payments, knowing that the value of the coin will remain consistent and won't fluctuate like Bitcoin or Ethereum.
They are also widely used in DeFi (Decentralized Finance) applications, where users lend, borrow, or earn interest on stablecoins. Because their value remains relatively stable, they offer a safer option than other cryptocurrencies for these activities.
Following the rise of stablecoins, another significant development in the cryptocurrency space is DeFi (Decentralized Finance). DeFi aims to recreate traditional financial services, such as lending, borrowing, and trading, but without relying on centralized institutions like banks. DeFi is built on blockchain technology, and the tokens associated with it are essential to its functionality.
DeFi tokens are digital assets used to power decentralized finance applications. These tokens serve various purposes within the DeFi ecosystem, such as governance, staking, and rewarding participants. Unlike traditional financial systems, where banks and institutions control transactions and decision-making, DeFi tokens allow users to take control. They enable the decentralized nature of finance by ensuring that participants have a say in the system's rules and governance.
DeFi tokens play a crucial role in supporting decentralized financial services. For example, many DeFi platforms use their native tokens to allow users to vote on governance decisions, such as protocol upgrades or changes to interest rates. These tokens can also be used to stake and participate in liquidity pools, which provide liquidity for DeFi platforms to function. In return, users can earn rewards in the form of additional tokens, which incentivize participation in the ecosystem.
DeFi tokens are often designed to reward users for their participation. In many cases, users can earn tokens by providing liquidity to decentralized exchanges (DEXs), lending cryptocurrencies on lending platforms, or voting on important decisions through governance mechanisms. These incentives help encourage active participation and the growth of the DeFi ecosystem.
Some DeFi tokens are also used for staking, where users lock their tokens into a smart contract to help secure the network and earn rewards in return. This is similar to earning interest in a traditional savings account, but the process is decentralized and does not involve any centralized authority.
Several DeFi tokens are leading the market in terms of usage and market capitalization. These include:
While many tokens in the cryptocurrency space are often seen as speculative assets, DeFi tokens have unique roles that go beyond price speculation. They are not just traded for profit but serve as the backbone of decentralized financial systems. DeFi tokens facilitate real financial activities like lending, borrowing, staking, and governance, creating a financial ecosystem that operates independently of traditional financial institutions.
In addition, DeFi tokens provide opportunities for financial inclusion by allowing anyone with an internet connection to access financial services without needing a bank account. This can be particularly valuable for individuals in regions with limited access to traditional banking.
Layer 1 refers to the base blockchain architecture, responsible for the main functions of a cryptocurrency. These blockchains manage transaction processing, security, and smart contract execution. Common Layer 1 cryptocurrencies include Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), and Solana (SOL). They are often the foundational building blocks of the blockchain ecosystem and support decentralized applications (dApps) and transactions.
Layer 2 solutions are built on top of Layer 1 blockchains to enhance their scalability, speed, and efficiency. Layer 2 networks handle transactions off-chain, allowing for faster execution while reducing congestion on the main blockchain. Popular Layer 2 solutions include Polygon (MATIC), Stacks (STX), and Immutable X (IMX). These networks help improve the performance of Layer 1 blockchains without compromising security.
Stablecoins are cryptocurrencies designed to maintain a stable value by being pegged to a traditional asset, such as the US Dollar. Unlike volatile cryptocurrencies like Bitcoin, stablecoins offer price stability, making them ideal for everyday transactions and as a store of value. Common examples of stablecoins include Tether (USDT), USD Coin (USDC), DAI, and FDUSD. Stablecoins are widely used in decentralized finance (DeFi) applications and as a medium of exchange in crypto markets.
Stablecoins maintain their value through collateralization with fiat currency or other assets. For example, USDT is backed by US dollars held in reserve, and DAI is collateralized by other cryptocurrencies. Some stablecoins, like DAI, also use smart contracts to manage their supply and keep the price stable. These mechanisms help ensure that 1 stablecoin equals approximately 1 USD, regardless of market fluctuations.
DeFi (Decentralized Finance) tokens are digital assets used within decentralized financial platforms to facilitate services like lending, borrowing, staking, and governance. These tokens power DeFi applications (dApps) and are often used for governance voting, staking to secure the network, or earning rewards. Examples of popular DeFi tokens include Avalanche (AVAX), Chainlink (LINK), Internet Computer (ICP), and DAI.
DeFi tokens are not just for speculation but have real-world applications within the decentralized finance ecosystem. They allow users to participate in decentralized governance, secure networks through staking, and earn rewards for providing liquidity.
DeFi tokens are crucial to the growth of the Web3.0 ecosystem because they enable decentralized financial services without relying on traditional banks or financial institutions. They offer financial inclusion to anyone with an internet connection, and their decentralized nature ensures transparency and security. DeFi tokens also provide incentives for users to participate in the ecosystem through staking, liquidity provision, and governance voting.
