Grayscale Crypto Sectors: Setting a Standard for the Crypto Asset Class
Crypto’s story may have started with Bitcoin, but this first innovation has since spurred something entirely new: a robust, fully functional digital economy leveraging blockchain technology.
For years, it was relatively easy for investors to ignore or downplay the emergence of new assets in the crypto ecosystem. However, today a completely different picture has emerged: Bitcoin is only one part of a complex, global blockchain ecosystem. While many parts of crypto share in the spirit of decentralization and transparency embodied by Bitcoin, most new projects have little to do with a global peer-to-peer payments system or a store of value. Instead, they demonstrate a wide range of possible uses of public blockchain technology including identity systems, digital artwork, file storage, web hosting, decentralized finance, user owned gaming platforms, and community-run applications. This emerging industry can be categorized into separate and distinct groupings.
In the pages to follow, we will (i) provide context on this ever-evolving crypto story, and (ii) offer a glimpse into how Grayscale organizes, understands, and defines this emerging asset class – introducing a comprehensive new framework called Grayscale Crypto Sectors (“Crypto Sectors”).
Crypto Sectors is a comprehensive new framework that identifies five distinct sectors, systematizing Grayscale’s specialized view of the crypto landscape. These five sectors are Currencies, Smart Contract Platforms, Financials, Consumer and Culture, and Utilities and Services. At Grayscale, we know that the crypto ecosystem – and thereby Crypto Sectors – will continue to evolve over time, so this systematization of the crypto landscape is designed to provide investors a framework to understand and monitor the evolution of each sector over time.
The Evolution of Technological Innovation
Throughout history, revolutionary technologies have transformed society. From the discovery of fire to the invention of Gutenberg’s printing press, technological advancements have pushed the upward bounds of human capabilities to new heights and have unleashed new levels of self-determination and upward mobility. In our opinion, the modern era has been largely influenced by four iterations of the industrial revolution, as illustrated above.
The first industrial revolution in the late 1700s was defined by mechanical production, as steam engines revolutionized transportation and production mechanisms. The application of this technology took the form of trains and ships, which enabled new levels of personal mobility for humans and rates of transport for goods. Building on this progress, the 1800s – or the second industrial revolution – was defined by the development of the internal combustion engine and industrial machinery, which modernized mass production and manufacturing processes. After millenia of watching birds soar in the air, humans themselves took flight in 1903. The first two industrial revolutions marked a monumental leap forward, changing human reality in ways that only decades before might have sounded implausible.
Advances from codebreaking during World War II paved the way for the third industrial revolution, where the invention of the integrated circuit and US defense department research led to the creation of the early internet.
By the late 1900s, tech companies in Silicon Valley commercialized these developments. The proliferation of computers, the internet, social media, and e-commerce enabled mass consumer adoption of technology, which transformed communication and business, and opened access to a truly global digital landscape. During this digital revolution, organizations and individuals around the world have gained, and continue to gain, new levels of influence and autonomy with personal, digital devices at their disposal – powering instant, global reach, distribution, and access to information and digital tools. Consistent with Moore’s Law, computational power started to double every two years, leading to an unprecedented rate of change: consider the iPhone, which possesses processing power ten thousand times greater than that of the Apollo 11 spacecraft and more than a million times the amount of storage. As a result of this new rapid pace of development in computation, with the third industrial revolution, humans started to merge with technology, as computers, phones, and wearables increasingly have become extensions of the human experience.
The fourth industrial revolution represents the next iteration of technological expansion and the increased human-tech connection. Today, we are only at the beginning of this new era. The fourth industrial revolution consists of intelligent computing, which involves autonomous systems that augment human capabilities and coordination mechanisms. Autonomous systems include AI-powered systems, like ChatGPT, robotics, autonomous vehicles, and smart devices, but also global decentralized systems governed by code, such as Bitcoin and Ethereum. In the fourth industrial revolution, some believe that code–not bureaucracies, institutions, or rules of tradition–will increasingly determine the ways humans provide value to one another.
What’s the role of crypto in the fourth industrial revolution?
Each iteration of the industrial revolution provided a faster and/or more cost effective means of providing value. Crypto is similar. Blockchains remove intermediaries and enable direct interactions between parties, which creates more efficient and less costly transactions for builders and users alike. As a result, we believe the crypto asset class is often motivated by a desire to update and improve legacy systems.
The traditional financial system is built on a web-like network of intermediaries, each charging fees, and thereby increasing costs and time for users. Banks may take days to settle payments using networks like SWIFT, which launched over 50 years ago. Crypto solves these inefficiencies by connecting individuals directly (peer to peer) through a protocol managed by code. By streamlining financial interactions, crypto can offer faster and cheaper ways to process value.
However, crypto is also relevant for use cases beyond just the legacy financial system. For example, it can address big tech’s user/platform alignment problems. Large tech companies often operate in closed ecosystems where they can enforce top-down control on user and developer access and data. While companies like Facebook, Instagram, Twitter, and YouTube gave content creators tremendous reach, the money generated by their content largely flows to the companies rather than the creators. Furthermore, data and content are owned by platforms rather than by the users. For example, X.com (formerly Twitter) could choose to “deplatform” a user, effectively kicking a user off of its network, rendering the user unable to access or export their content or followers. Finally, corporations can extract value from developers on their platforms. For example, Apple charges app-store developers 30% on all of their in-app revenue.
Unlike traditional models with intermediaries and closed ecosystems, crypto platforms are open-source and permissionless, allowing for any person in the world with internet access to use and any developer to build. This means no arbitrary deplatforming and more value accrual to network participants rather than to centralized intermediaries. The resulting effect is global collaboration, subsequent rapid innovation, and new levels of access for people in developing countries. It’s our belief that, over time, this could potentially unlock a redistribution of wealth and upward mobility.
This is particularly important as society faces unprecedented levels of income inequality and ventures further into the age of intelligent computing. Going forward, there is a risk that AI-powered systems will centralize power, data collection, and decision making to even greater levels. As we continue to integrate with technology through AI-assistants, wearables, and smart sensors made by companies such as Apple, Meta, Amazon, Tesla, and Open-AI, an increasing amount of personal data will be stored on centralized servers. This data is not only financial but social, biometric, and medical data, which presents notable risks around individual security and privacy. Crypto and the features inherent in blockchain technology (decentralization, transparency, and individual ownership of data) can help mitigate these risks.
Similar to eras of the past, in crypto, there will likely be applications in the future that have not yet even been imagined today. As this nascent space continues to evolve, Grayscale designed the Crypto Sectors framework to help investors better understand the developments of this increasingly important asset class.
Introducing Grayscale Crypto Sectors for Investors
Although crypto is less mature than many elements of the traditional global economy, it’s important to have frameworks to understand how each piece of the cryptocurrency puzzle complements each other, especially given that crypto can often appear highly technical. To better understand the crypto space, we created Grayscale Crypto Sectors, which groups crypto assets by function–both from a technical and user perspective.
In traditional assets, the Global Industry Classification Standard (GICS) was created by MSCI and Standard & Poor’s in 1999 to provide a global framework for companies. GICS divides the global economy into 11 different sectors, as can be seen below.
Source: MSCI.com as of March 17, 2023
We believe there are parallels in Grayscale Crypto Sectors to the way investors currently think about today’s financial markets. For example, in our framework, lending or trading crypto assets could fall under our “Financials” sector that perform similar functions to companies to the GICS “Financials” sector. Alternatively, many enterprise-level applications in crypto could fall under our “Utilities and Services” sector, similar to the GICS “Utilities” and “Industrials” sectors.
In the section to follow, we’ll outline our methodology and framework and then introduce each segment of the crypto ecosystem, sector by sector.
Framework and methodology
We believe that there are three primary considerations to understanding how crypto assets differ from one another: how the protocol works, its use case, and how it provides investable exposure.
Crypto assets differ largely in terms of function–both technically in terms of how the asset is constructed or built and in use case in terms of how it is used by the end user. Consider a Layer 1 smart contract blockchain, which can be thought of as a decentralized version of the Apple App store. While a Layer 1 smart contract blockchain differs in certain ways from a Layer 2 smart contract blockchain, both are grouped within the Smart Contract Platform Sector because both share a core use case: processing transactions of decentralized applications (“dApps”). Additionally, dApp users on a particular network (Layer 1 or Layer 2) must pay transaction fees in the native token for transacting on the network. In this way, its underlying token is linked to the usage and activity of the different decentralized applications built upon it.
Beyond a protocol’s core function, it’s also important to consider investable exposure, or the unique characteristics and distinct risk attributes associated with its particular sector. For example, activity in companies that would fall within the Grayscale Financials Crypto Sector had a significant uptick during the first half of 2020 (so much so that it was widely nicknamed “DeFi Summer”), while NFT volumes remained stagnant and low during the same time period. This illustrates that activity in crypto can be particular to a specific sector in a manner that is wholly different from activity and risk in a different sector or the broader crypto ecosystem at large. Here there are parallels to traditional finance; for example, during an economic downturn, activity in the Consumer Discretionary GICS Sector would be largely different from activity in non-cyclical or essential goods, such as the Healthcare GICS Sector.
Considering these factors, the next part of this paper is designed to be a journey through each element of the frontier of the crypto asset class. As with GICS in traditional finance, within crypto, each sector is distinct. The Grayscale Crypto Sectors can be categorized based on function, technical features, and investable exposure. However, the distinction here is that Crypto Sectors includes protocols that are permissionless, peer-to-peer, decentralized, community run, and open-source.
- Currencies: a medium of exchange and store of value
- Smart Contract Platforms: infrastructure that enables autonomy and accessibility for developers for building applications
- Financial: financial applications to lend, borrow, and trade assets directly with one another
- Consumer and Culture: gaming, art, music, and media applications.
- Utilities and Services: tooling that augments the functionality of existing smart contract applications.
Examples provided for illustrative purposes
Investors can think of the Grayscale Currencies Crypto Sector similar to how they might think of traditional currencies—with some critical distinctions. For many investors, a currency is typically defined as a (i) store of value, (ii) medium of exchange, and (iii) unit of account. The value of a currency reflects its perceived worth among users as well as aggregate demand in light of local, societal, and global macroeconomic risks. The same holds true with currencies in crypto.
There is, however, a key difference: cryptocurrencies are not issued or controlled by a central government but are instead programmatically generated. In the traditional sense of a currency, a central bank controls monetary policy and can decide to increase monetary supply. Notably, we experienced this when the Federal Reserve sought to counteract the economic effects of COVID between 2020 and 2021 to the tune of $3 trillion in quantitative easing. Central banks can also decide to raise or lower interest rates based on factors such as inflation and economic growth. In many crypto assets, by contrast, supply and inflation are predetermined in the code; they can’t be changed.
The open-sourced and decentralized nature of crypto inherently re`moves the need for an intermediary—traditionally a central bank. In this way, currencies in crypto are “trustless”; instead of needing a centralized authority or intermediary, network users need to trust the underlying code.
One obvious example of this is Bitcoin, the first and largest asset in the crypto space, created in 2009, with a current market cap of $554 billion as of October 18th, 2023. Because Bitcoin is global and decentralized in nature, it cannot be controlled or censored by any government or institution. Bitcoin could be viewed by some as a referendum on centralized and authoritarian governments as it has traditionally been correlated with monetary debasement. As a result, for individuals who live in countries like Argentina and Venezuela, which have upwards of 100% annual currency inflation, or countries whose governments and central banks have proven to not be trustworthy, Bitcoin may serve as a safe haven for asset value.
Other assets in the Grayscale Currencies Crypto Sector include Litecoin, Bitcoin Cash, and Ripple. While various currencies may vary across usage, adoption, and settlement time, the similarities across all is that the primary functions of the network are as a peer-to-peer payments system and store of value.
Smart Contract Platforms
Examples provided for illustrative purposes
Smart Contract blockchains broadened the scope of utility in the crypto ecosystem when Ethereum was created in 2015. These blockchains power decentralized applications (“dApps”) that run on smart contracts, or self-executing agreements between the underlying blockchain and the application to process transactions. These smart contract blockchains are the core piece of infrastructure that host decentralized applications, which vary from financial (e.g. Uniswap) to gaming (e.g. The Sandbox) to third-party services (e.g. Chainlink). You can think of these blockchains as decentralized versions of Amazon Web Services (“AWS”) or the Apple App Store in that they provide the platform, tooling, and resources for developer activity.
Giant tech platforms are able to take advantage of network effects and market dominance, often to the detriment of users and developers. For instance, many recall when Facebook kicked popular gaming developer Zynga off its platform in 2012. Another example is that Apple charges a high rate of 30% on app-store developer revenue. Smart contract blockchains, on the other hand, help protect against value extraction from centralized platforms by aligning incentives between developers and users. This promotes new levels of interoperability and inclusive development. The ability to copy underlying code (often called “hard fork”) unlocks new levels of competition and innovation not previously possible in web2 given centralization and network effects.
Today, Ethereum stands out as the largest and arguably most trusted Layer 1; security is structurally imbued into the functionality of Ethereum as its high fees serve as incentives for validators. Ethereum also benefits from network effects: more users and more liquidity relative to other chains give Ethereum a significant advantage in capturing more Layer 2s and decentralized applications. Solana, on the other hand, is regarded by many as technologically superior as far as speed. Solana’s 65k transactions per second throughput capacity currently dwarfs Layer 1 competitors and surpasses centralized players like Mastercard.
In the sections to follow we’ll explore various Crypto Sectors and use cases built on and executed by smart contract blockchains–whether they fall under the Financials, Consumer and Culture, or Utilities and Services sectors.
Examples provided for illustrative purposes
Applications in the Grayscale Financials Crypto Sector enable users to borrow, lend, and trade assets peer-to-peer rather than through intermediaries. As a result, the applications in this sector can offer sometimes more direct and efficient transactions than the traditional financial services. Oftentimes, these transactions are also cheaper. The Grayscale Financials Crypto Sector provides the economic backbone of the crypto economy as it facilitates ecosystem liquidity, leverage, and efficient capital allocation through trading, lending, and borrowing. Notably, there are several areas where blockchain-based finance is believed to have legitimate advantages over traditional forms of finance.
First, blockchain-based financial markets are “always on”, globally open 24/7 and 365 days a year—a stark contrast from the Monday to Friday workday hours of traditional finance. Second, these protocols offer significant advantages around the availability of real-time data. Unlike public companies, where financials are typically available quarterly, the transparency of blockchains allow for greater efficiency since investors can update their investment views daily with new information. Third, blockchain-based platforms are also globally inclusive. For example, individuals in countries with less developed financial systems might not have access to banking, however, so long as they have an internet connection, they may trade, borrow, or lend through protocols like Uniswap or Aave.
Lastly, in traditional finance, there is often an intermediary charging fees for financial transactions. In contrast, blockchain-based finance allows for direct financial transactions between individuals rather than through intermediaries. As a result, users can trade, lend, and borrow at significantly less expensive rates than before as their counterparty is an individual. In other words, blockchains streamline financial interactions, facilitating more efficient and less costly transactions. In the future, this could open up the marketplace for traditional financial services to a much larger audience of users at any point in time.
Consumer and Culture
Examples provided for illustrative purposes
The Grayscale Consumer and Culture Sector includes crypto applications that span creative industries such as entertainment, music, media, collectibles, sports, and art. These applications enable new levels of ownership over the platforms on which consumers devote their time and money.
At the heart of the Grayscale Consumer and Culture Crypto Sector’s value proposition are Non-Fungible Tokens (“NFTs”)—digital assets stored on a blockchain that represent ownership over a distinct, unique item. Dollars (or Bitcoin) are an example of “fungible” items as each unit is equivalent; conversely, every NFT is “non-fungible” as each is entirely unique in its characteristics. Because the blockchain is transparent, NFTs can guarantee the authenticity of a specific item. This might take the form of a rare collectible, a trading card, or piece of art. The blockchain also allows for traceability of an NFT’s provenance, or history of ownership.
Take gaming for example. When it comes to gaming, players traditionally can buy in-game items like “character skins” and work to achieve progress in a particular game, only for the gaming company to reveal a new title where the user loses all their progress. NFTs reverse this dynamic by enabling users to actually own the underlying in-game assets themselves—skins, experience points, a particular character—rather than the game’s developer.
Let’s also explore the art market. In the art world, centralized intermediaries facilitate auction processes. In most cases, the artist that created a particular piece of artwork doesn’t get to participate in the economics of any secondary marketplace trades of their art. Instead, only the seller and the auction house profit. However, in crypto, royalties can be programmed into digital NFT artwork, enabling artists to take a small share of each trade of the art into perpetuity. In the future, this model may become particularly relevant for other creative industries beyond digital art, such as music.
The Grayscale Consumer and Culture Crypto Sector also covers governance tokens, which empower users to vote on decisions affecting protocols or applications. For example, an owner of the APE token can vote on matters such as who to hire as a developer on certain projects and the future roadmap of the ApeCoin brand. Other examples of token governance include Arkive, a digital community that proposes and votes on physical pieces of artwork to purchase for a user-owned museum and LinksDAO, a digital community that voted to acquire a golf course in Scotland.
In this way, tokens allow for individual item ownership and bottom-up user-owned platforms. These assets are democratizing and reshaping our preconceived notions of ownership, unlocking fractional ownership and investing in a way never conceived, and redrawing the boundaries of owner and user.
Utilities and Services
Examples provided for illustrative purposes
The Grayscale Utilities and Services Crypto Sector is a crucial part of the crypto ecosystem as they augment the capabilities of each of the sectors mentioned above. In a sense, this sector represents the “picks-and-shovels'' for developers building in the ecosystem.
The majority of applications in this sector perform one of the following functions: (i) tie crypto applications to real world assets in real-time through oracles, (ii) increase liquidity and usability of assets through liquid staking solutions, (iii) aggregate physical, data, and computation-related services all over the world for consumers through decentralized networks.
Oracles are third-party services that connect decentralized applications with real-world data via price feeds. Prior to the advent of oracles in 2017, crypto was essentially siloed. The creation of Chainlink shifted this paradigm. Real world data from oracles can encompass a wide range of information: stock prices, geolocation and weather data, and event outcomes (like sports scores or election results). In allowing dApps to seamlessly incorporate data from activity throughout the internet, oracles exponentially expanded the use cases of crypto.
The Utilities and Services Sector also plays a significant role in staking, where token holders earn rewards in return for locking up tokens to help secure a network. Liquid Staking Derivatives (“LSDs”) are protocols that enable individuals to stake their assets and support a network’s security while also being able to hold, use, and trade a derivative of that capital. In doing so, liquid staking derivatives increase ecosystem liquidity. LSDs also enable smaller holders to pool their resources, lowering the barrier to participate in staking and contribute to network security.
In addition to staking, this sector plays a pivotal role in offering decentralized alternatives to services that have traditionally been monopolized by tech giants. In crypto, web services connect individuals seeking various services with independent providers of these services. Traditionally, capital requirements have led to market dominance by large corporate entities such as AWS for cloud computing or Google Cloud for data storage. This gets expensive, as market concentration can lead to restricted competition and, as a result, service fees. In crypto, however, tokens bootstrap independent service providers, which breaks down the barrier of capital requirements. This, in turn, allows for greater competition and pricing based on network supply and demand. Examples include data storage (Filecoin), Internet of Things (Helium) and compute power (Render).
This sector also includes other services for the crypto ecosystem such as wallets, bridges and payments. We believe each of these services substantially enhances capabilities of either existing or future crypto applications and their ability to integrate with the traditional financial ecosystem. Today, we are already seeing emerging real world use-cases arise. One example of this is how decentralized compute networks are helping solve a GPU shortage. This underscores our hypothesis that going forward, unforeseen future use-cases may arise as this nascent asset class continues to mature.
Over the course of human history, technological innovations have spurred societal changes. From Gutenburg’s printing press to the steam engine to the internet, each distinctive era was defined by groundbreaking technologies that shaped how we learn, work, and interact. The exponential growth of technology is built on the shoulders of past accomplishments, pushing the limits of what is achievable ever higher. Today’s digital age is defined by rapid innovation and the disruption of legacy systems.
In this current age, technologies like blockchain are leading this disruption, unlocking opportunities to democratize access to finance and information, transferring wealth, and challenging traditional notions of ownership. Crypto empowers individuals with autonomy denominated in tokens that serve as the economic asset, or network currency, that power public blockchains. Of fundamental importance, in crypto, the investment is completely democratized; everyone who participates in the network is an investor. Because of this new paradigm, it is paramount that investors understand the assets within this nascent space and stay abreast of relevant developments.
Blockchains and crypto assets are waving in what is heralded as the next generation of the internet. Crypto offers a new way of providing the same kinds of services we use in a more direct manner, offering more efficient and less costly transactions. Technological disruptions–from the steam engine to planes to the internet–have always enabled greater levels of efficiency, and crypto is, through many applications, already demonstrating examples of that.
Ultimately, crypto represents a meaningful shift in how we interact with technology. No longer do we have to go through intermediaries to facilitate trading or hold assets on our behalf. As developers continue to build across the Grayscale Crypto Sectors–from currencies to infrastructure to applications–we believe a rising tide will lift all boats, propelling society into new levels of individual ownership and self-sovereignty.
 Specifically, Layer 2s batch transaction data and rely on Layer 1 security
 Assets are subject to change in the future
 The capability to copy underlying code and apply it to create a new chain.
Indexes are unmanaged and one cannot invest directly in an index
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