Crypto Categories: Identifying Infrastructure Applications
December 28, 2021
Read Time 4 MIN
In Sorting Out the Crypto World, we identified the need for a classification system for crypto coins and introduced the categorization scheme developed by MarketVector Indexes (MVIS), a VanEck subsidiary. This crypto categorization series will offer a closer look at several of these digital assets categories: smart contract platforms, media and entertainment (metaverse), DeFi and infrastructure applications.1 Here we explore infrastructure application protocols.
Understanding Infrastructure Application Protocols
A decentralized application (dApp) is an application whose backend code runs on a distributed computer network. Typically, dApps combine a smart contract with a frontend user interface, and generally support one or more of the smart contract protocols. For the purposes of MVIS’s crypto categories, infrastructure application protocols are akin to B2B services commissioned by dApps and/or smart contracts, rather than end consumers. We separate infrastructure application protocols into the following sub-categories:
- Shared compute (Filecoin, Arweave): A network of computers working together to perform a specific task. Each participant (or computer) donates part of its processing power and/or other resources (eg. storage) to help achieve the task.
- Oracles (Chainlink, Augur): Oracles provide a framework for smart contracts to fetch data not contained in the blockchain. They help connect off-chain external data, like the price of a stock or the winner of an election, to other open-source blockchains.
- Scaling solutions (Polygon, OMG Network): A scaling solution is fundamentally a method of enabling a system’s expansion, such as improving efficiency and output, without hurting existing operations. In the blockchain space, a scaling solution typically takes the form of a so-called “layer-2” protocol, also known as sidechains and off-chain layers. These subsequent blockchains are typically built to be interoperable with and perhaps share the governance attributes of a larger smart contract platform, thus increasing transaction throughput.
- Internet of Things (IOT) (Helium, IOTA): IOT is the concept of connecting any device to the internet or other connected devices. IOT infrastructure applications include those that collect and send information (sensors), receive information and act on it (3D printers), and those that do both.
- Miscellaneous tools (Ocean Protocol, NEAR Network): B2B infrastructure application platforms which are marketed to blockchain developers but do not fit neatly into any of the above categories.
Valuing Infrastructure Applications
Infrastructure application protocols charge users transaction fees similar to other blockchains' tokenomics as discussed above. For example, the Chainlink protocol, a decentralized data oracle network, uses LINK as both a payments token and a work token. As a payments token, LINK is used to pay Chainklink node operators for providing oracle services. As a work token, LINK can be staked2 by node operators as collateral to provide oracle services, with node operators' staking rewards being reduced ("slashed") as a penalty in the case of mistakes or downtime. Filecoin, a competing data oracle, works in a similar fashion. Collectively, the current constituents of the MVIS CryptoCompare Infrastructure Application Leaders Index comprise $56B in market cap on a reported $190M in annualized revenues (as of last 30 days on 11/23/2021, does not include Chainlink)3. However, similar to the media & entertainment category, many infrastructure application protocols currently reveal limited data regarding their fees, users and assets secured. As infrastructure application protocols scale and enable functionality across multiple smart contract protocols, we expect the data availability and thus valuation visibility to improve.
MVIS CryptoCompare Infrastructure Application Leaders Index as of 11/22/2021
|Token||What Is It?||Circulating Market Cap/ADV|
|Chainlink||Decentralized oracle network that connects smart contracts on blockchains with the real world. Using a system of nodes and operators, it is able to answer data requests from smart contracts by collecting data from multiple sources and reconciling it to provide a single reliable piece of information.||$16B / $320M|
|Polygon||Layer-2 network designed to bring mass scalability to Ethereum and interoperability between other blockchains.||$14B / $370M|
|VeChain||Blockchain-based platform that records the truth of what happens at every stage of the supply chain. It combines physical tracking with blockchain records to keep tabs on real-world products from production to delivery, helping to prevent fraud and increase transparency.||$11B / $160M|
|Filecoin||Filecoin aims to store data in a decentralized manner. Unlike cloud storage companies like Amazon Web Services or Cloudflare, which are prone to the problems of centralization, Filecoin leverages its decentralized nature to protect the integrity of a data’s location, making it easily retrievable and hard to censor.||$8B / $280M|
|Kusama||Public pre-production environment for Polkadot that runs on an early unaudited release of the Polkadot blockchain. Kusama functions as a sandbox that allows any developer to test early versions of Polkadot projects in a live, realistic environment.||$3B /$40M|
|Quant Network||Blockchain operating system project that looks to facilitate interoperability between blockchains with the Overledger OS.||$3B / $80M|
|OMG Network||Layer-2 scaling solution for Ethereum aiming to achieve high transaction throughput at a lower cost leveraging the security of its underlying layer.||$1.3B / $160M|
|Ren||Open protocol that enables the permissionless and private transfer of value between any blockchain. Ren's core product RenVM, brings interoperability to decentralized finance (DeFi).||$1B / $75M|
Sources: Messari, A Deep Dive into Smart Contracts. Learn more about Smart Contracts — the… | by _kitchen | ThunderCore | Medium, Smart Contract Applications, Limitations and Future Outlook - Itransition, DappRadar.com, StateoftheDapps.com, Nonfungible.com, DeFi Beyond the Hype (upenn.edu), Cryptobriefing.com, TokenTerminal.com, Solscan, LINK Token Contracts | Chainlink Documentation
MVIS CryptoCompare Infrastructure Application Leaders Index is designed to track the performance of the largest and most liquid infrastructure application assets.
MarketVector Indexes (MVIS®) develops, monitors and markets the MVIS Indices, a focused selection pf pure-play and investable indices designed to underlie financial products. They cover several asset classes including hard assets, the internal equity markets, fixed income markets and digital assets. MVIS is the index business of VanEck, a U.S. based investment management firm and provider of VanEck ETFs.
Important Information Regarding Cryptocurrencies.
The information herein represents the opinion of the author(s), an employee of the advisor, but not necessarily those of VanEck. The cryptocurrencies discussed in this material may not be appropriate for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any cryptocurrencies, or to participate in any trading strategy.
Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. References to specific securities and their issuers or sectors are for illustrative purposes only.
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
Investing in cryptocurrencies, such as Bitcoin, comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.
Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.
- Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
- An investment in cryptocurrency is not suitable or desirable for all investors.
- Cryptocurrency has limited operating history or performance.
- Fees and expenses associated with a cryptocurrency investment may be substantial.
There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies. Past performance is no guarantee of future results.
1 Smart contract are programs stored on a blockchain that run when predetermined conditions are met, and smart contract platforms are open-source blockchain software protocols that enable these programs. Media and entertainment (metaverse) protocols are tokens that are used to reward users for content, games, gambling or social media. Decentralized finance (DeFi) protocols are software programs that run on top of another cryptocurrency as a means to automate a financial service.
2 Staking is when someone contributes a portion of their tokens for use by the blockchain network for a period of time.
3 Source: TokenTerminal.com.
Information provided by VanEck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.
December 22, 2021
December 15, 2021
November 30, 2023
November 30, 2023
If you’re a tax sensitive investor looking for long-term exposure to Ethereum and Bitcoin futures, a fund structured as a C-Corp may result in higher after-tax returns.