What is a Blockchain Ecosystem and How to Invest Effectively?

You must have heard a lot about blockchain ecosystems in the crypto market, for example we have big ecosystems like Ethereum, BNB Chain, Solana or Near – all of which are top blockchain ecosystems with great growth in 2021. Or like recently we have Optimism system with OP coin increased x3 within 1 month, from July to September.

But did you know that at the same time, the coins in the Optimism system increased even more, typically Velo x10, Lyra x5, Thales x3, … all projects received the growth wave according to the main token. Therefore, the method of investing hidden gems according to the ecosystem is pursued by many investors because of its ability to bring great profits.

But how can we seize such an investment opportunity, especially when there are so many blockchain ecosystems on the market? How can we capture the money flowing into the ecosystems?

What is a Blockchain ecosystem?

Ecosystem is a term used a lot in different fields, I take a simple example in business – VinGroup’s ecosystem with a chain of business systems from the field of real estate, agriculture industry, retail, entertainment, technology. Almost everyone in Vietnam has used products from this large corporation

It is no coincidence that empires always want to create an ecosystem for themselves because it brings a lot of benefits:

• For users: meet most of their needs and easily use related products because of the integration and synchronization

• For the company: serving users both in and out → stick with the brand for a longer time. You can also take advantage of existing data sources and customer files to grow your business.

And of course this is completely the same for a Blockchain ecosystem – Blockchain (Layer 1) is an infrastructure and above that Layer we will have a series of dApp (Decentralized Application) applications to meet user needs.

And to be able to retain users and accumulate value, it is imperative that eacg blockchain can build their own ecosystem with all the pieces:

• Transactions & Payment: it is required to have basic pieces of payment and transactions for users to contact and use applications on the blockchain, such as wallets, tokens, smart contracts.

• DeFi: Decentralized Finance, the most focused segment and in my opinion this is a backbone for a blockchain ecosystem because it provides related financial services such as trading, borrowing, saving without need a 3rd party.

• Social/Entertainment: Next will be the need for community and entertainment, for example, recently with projects in the NFT and Gaming segments.

• Solutions for businesses: applications for other dApps such as in data storage, oracle, Insurance.

Follow the cash flow in the blockchain ecosystem

Ever since the concept of an ecosystem on a blockchain was born from Ethereum, investors have been constantly moving back and forth between ecosystems in search of profit opportunities. But for that blockchain to be able to pick up early users depends on the following conditions:

• It must have all the basic DeFi pieces: For new ecosystems, DeFi is the most basic and necessary platform for users to come to this ecosystem. Ae simply thought that in any country, there must always be banks and financial services for the national economy to have a basis for development. If the monetary system does not exist, how can other parties develop?
• Some basic DeFi pieces for a blockchain:

1. AMM, DEX (exchange)
2. Lending & Borrowing
3. Yield (Farm takes profit)
4. Payment (payment)
5. Derivatives (derivatives trading)
6. Stablecoins

• There must be bridges – in order to take on huge number of users flowing into the ecosystem, there must be a bridge that allows users to transfer money from other ecosystems and centralized exchanges. The more users there are at these bridges, the better the opportunity for stronger cash flow.

If you want to skin in the game and find early hidden gems in such an emerging ecosystem, you should focus on DeFi first, because this is usually an array of projects that must be built from the beginning, then focus on other areas such as NFT, gaming later on. Checking the puzzle pieces is also quite simple, you just need to go to DeFillama to check TVL as well as see all the DeFi projects currently in the system, see if all the puzzle pieces are complete.

How to predict which ecosystem are having the most cashflow?

Forecasting and understanding the cash flow from investors is extremely important to optimize your investment position. If you choose to buy a good project in an ecosystem that can receive large cash flows in the future, the probability of loss will be lower.

Considering ecosystem’s development periods, I will divide it into 3 main categories:

• Developed: Ethereum and BNB Chain – in these two systems, the DeFi puzzle pieces have developed comprehensively, but for further development, new “trends” are needed – if playing in the system then just focus on the new trends in these two systems. For example, Hooked’s Social Fi and Quiz 2Earn concept needs attention.

• Developing: new ecosystems are full of the same pieces as developed systems as well as other disruptive products. Some systems are developing such as Optimism, Arbitrum, Aptos, etc. Playing in this system, focus on investing in important DeFi puzzle pieces, hunting testnets of emerging projects in the system.

• Early: still developing the infrastructure, in the testnet phase, not all the pieces of the puzzle to receive the cash flow yet. For example, like Starknet, ZkSync, Aleo, etc. In this system, most of the projects are under construction, so the chances of winning the airdrop and plowing the testnet are quite high because of their position as an early entry.

Some signs that indicate that the cash flow may be strong (of course must meet the 2 basic conditions above) that you can refer to (I will rank from the earliest signs to the latest)

Netflow cash flow at Bridges – the most specific to check cash flow is to check the amount of money that is transferred back and forth between ecosystems on a daily basis. Money transfers will all have to go through bridges so all data will be recorded. You can check Netflow at DeFillama → Bridges → Chains, check Netflow in the past 7 days, and in the last 24 hours to see which system has the most money flowing in.

As shown in the picture, Arbitrum has the highest 24h netflow.

There are a number of outstanding projects that have caught the attention of the community – a product project that is groundbreaking and could create a new trend in the future. The project itself can also be a key factor in attracting TVL in the system and retaining users. For example, the last time there was Arbitrum’s native project, GMX, was listed on the Binance exchange – this alone has attracted a lot of attention from the community about the project as well as the Layer 2 Arbitrum system curious. for system

Huge APR: Those outstanding projects or DEXs, and lending protocols can offer huge APRs from reasonable tokenomics ⇒ attract TVL and retain users. The reasonable Tokenomics here is to ensure that there is real profit and less token price inflation, namely the “Real yield” mechanism. Because of the current downtrend, investors want a long-term source of return rather than the old high APR mechanism from token price inflation.

Huge airdrop: for example, the last Aptos made an airdrop of more than 200 million dollars → attracted the attention of the entire crypto community → investor money flowed in to continue hunting air, plow testnet, and invest. Or like the Optimism token airdrop for users and started to have a strong growth from $0.5 to $2.2, OP’s DeFi also thrived and a series of DeFi projects grew extremely hot. So if these events start happening you should start jumping in and grabbing them right away.

Launch packages and growth programs – hackathons to fund Dapps ⇒ attract developers to continue to build quality products and bring users back to the ecosystem. The more innovative the product, the easier it is to attract attention from the community, for example, the Step N project from Solana Hackathon has led the Move to Earn trend, pushing the Solana Ecosystem forward.

How money flows between DeFi puzzle pieces

When the cash flow has begun to flow into the ecosystem, it will flow again layer by layer according to the needs of investors. DeFi cash flow will flow according to a diagram like below:

Cash Flow → Layer 1 (base coin – one needs to buy platform coin for transaction fee)

→ Layer 2 (pieces built directly on Layer 1 such as Liquidity, AMM, Lending/Borrowing, Derivatives)

→ Layer 3 (the puzzle pieces are also built on Layer 1 as using Layer 2 resources, vs. Yield Aggregator, Asset management)

In general, the easiest to beat, when the platform token starts to pump strongly, it is recommended to keep an eye on the outstanding projects with good tvl, layer 2, dex, lending, derivatives…

Signs of money starting to withdraw from the ecosystem

Netflow money withdrawed at bridges – watching DeFillama and seeing that the cash flow is gradually being withdrawn shows that the system has not much left to play or users run to other systems to invest

The APR of DEX, Lending Or Key Projects of the system is drastically reduced – DEX and Lending projects are the basic DeFi platform, the Layer that receives the next cash flow after people have purchased the platform coins.

More people deposit ⇒ saturation ⇒ APR drops ⇒ new people don’t join anymore. Besides Dex, Lending, you should probably pay more attention to which projects are important in the system.

No new “games”: When the products in the system, especially DeFi, are saturated without any new trends in the ecosystem, the cash flow will be gradually withdrawn. Investors will switch to new systems in search of better returns.

Conclusion

The ecosystem in crypto is a fertile resource for us retail investors to exploit and understanding how it works and how the money moves will be the hoe to the real gold mine. Hope everyone understands the concepts related to the ecosystem as well as a platform to skin in the game and invest effectively in an ecosystem. Wishing you success!