The Overclock Labs team just finished a busy week at Messari Mainnet in NYC.

It’s been a whirlwind, and I’m still processing the massive influx of information from multiple days of talks, panels, networking events, drinks/dinners, and parties.

Here are a few pictures, along with some things I read this week.

What I’m Reading This Week

• Disney hiring transaction lawyer for 'aggressive' NFT and DeFi plans [The Block]

• The Network State

• Sufficient Decentralization for Social Networks [Varun Srinivasan]

• Sufficiently Decentralized [Matt Rickard]

The Ethereum Merge is 4 days, 2 hours, and 39 minutes away. This info is courtesy of the widget Google shows when you search “eth merge.” It’s incredible how far blockchain tech has come in the last few years. Google is building widgets to keep track of its milestones. The ups and downs of the markets and public sentiment distract from the technology’s steady ascension into mainstream culture. It has a long way to go, but its progress is impossible to ignore.

99.95% Less Energy Usage

Background reading on the Merge from Ethereum.org.

If the estimated timing is correct, the Merge will happen sometime late in the day this coming Wednesday. Once mainnet merges with the Beacon Chain, the network will immediately consume 99.95% less energy. The immediate impact of such a striking reduction in energy consumption is obvious—but there is a subtle secondary effect that I expect to play out over the coming years.

One of the largest sources of pushback against major blockchains, Ethereum and Bitcoin for the most part, has been disapproval of the excessive energy consumption of Proof of Work as a consensus mechanism. Many have tried to argue against the mainstream skepticism of these networks’ energy usage from an ever-shifting position—that the energy usage is necessary, that it doesn’t have as significant an impact as claimed, that it can be mitigated by targeting stranded energy, that it would spur the transition to renewables, that it would highlight the need for nuclear as part of the energy mix, and so on.

One by one, these arguments have not been successful. From my perspective, this is because each of these arguments attempts to override a popular social notion: The climate is changing, and we need to be mindful of energy usage.

You can argue with this statement if you would like, and I’m sure many could argue why it’s wrong or misguided in some ways. But no cohesive argument will get around the fact that most people will not study the data to inform themselves one way or the other—and this sentiment is something that many people feel in their bones. The mainstream will reject anything that runs contrary to this notion. Blockchains will have to adapt—as Ethereum is doing.

The Secondary Effect—Shifting Media Sentiment Leading to Further Mainstream Adoption

In the coverage leading up to the Merge, mainstream media outlets that have been previously critical of Ethereum, and blockchains in general, have already started to shift their coverage into a more positive light.

The Merge will not eliminate all the criticism because this tech contradicts some people’s vision of how a society should be organized (centralized vs. decentralized). But it will help tone down the vitriol that has characterized so much of the discussion of blockchain tech for the past few years. With a more rational discourse, we have a better chance to talk about the real obstacles to innovation and adoption over the coming decades. Watch for the shift in media sentiment to increase mainstream adoption and a broader acceptance in mainstream culture—now that the energy criticism has been mitigated.

They made it publicly known that Ethereum nodes (or any other nodes, or anything blockchain-related) are not welcome on their service. This was announced in a tweet reply, linking to a Reddit post, which waved vaguely towards their Terms of Service.

Here is the exchange:

Here is the Reddit post linked in the tweet:

The post says hosting an Ethereum node on Hetzner violates their Terms of Service (ToS). They also include “trading.” It also lumps together Proof of Work and Proof of Stake, which are entirely different consensus mechanisms with vastly different resource consumption.

From a PR perspective, this is an unforced error on Hetzner’s part. They host 16% of Ethereum nodes. Pushing these nodes away will send them searching for distributed hosting alternatives (like Akash Network). As distributed networks grow, they become viable alternatives to centralized cloud service providers like Hetzner. The more viable the distributed networks become, the more they undercut the market power of the centralized services. Hetzner is accelerating the transition to distributed networks—at their own expense.

This announcement is more flash than substance. It establishes that hosting Ethereum nodes on Hetzner violates their ToS. Then it states that Hetzner knows they are currently hosting Ethereum nodes and are “internally discussing how we can best address this issue.”

Ultimately, they have taken a public stance that alienates one of the fastest-growing market segments to grandstand for a small group of people who already agree with them.

An ‘elevator pitch’ for decentralization

Centralization concentrates power so that it can be wielded. Decentralization distributes power as a check against despotism.

Proponents of distributed networks are willing to sacrifice personal power to ensure a healthier, more stable society.

People who preserve centralized power structures envision themselves at the center. They are willing to accept a less stable society for a chance at greater personal power for themselves or their group.

We are entering a technological era that will reduce the inefficiency of decentralization enough to begin transitioning to distributed power structures.

Blockchain enables this transition. Computer hardware is becoming distributed enough to create distributed networks for computing power and resources (this is what Akash does). The combination of distributed hardware and distributed networks creates the means to decentralize our digital world—which is increasingly becoming as ‘real’ as the physical world.

• Cosmos without Tendermint: Exploring Narwhal and Bullshark [Paradigm]

• BlackRock Offers Bitcoin Investing to Big Institutional Clients [Bloomberg]

• Crypto: How the Code Rebels Beat the Government Saving Privacy in the Digital Age — by Steven Levy

• LP Letter Excerpt [Paradigm]

• Ethereum core developers suggest tentative dates for The Merge [The Block]

• The different types of ZK-EVMs [vitalik.ca]

• Why NFT Creators Are Going cc0 [a16z crypto]

• U.S. Treasury Sanctions Notorious Virtual Currency Mixer Tornado Cash [U.S. Treasury]

• ‘Crypto and DeFi Won’t Disappear’: Hong Kong Monetary Chief [CoinDesk]

Twitter

A note:

I’ll be publishing Vault biweekly going forward—in an effort to balance production between Vault, my personal substack (coming soon), and Akash.

This week, some personal news.

I recently joined the team at Akash Network to help them build out their content offerings, including their newsletter.

Akash is a decentralized peer-to-peer market for cloud compute.

Using Akash Network allows developers to launch applications such as DeFi apps, blogs, games, data visualizations, block explorers, blockchain nodes, and other blockchain network components on a decentralized cloud.

Akash’s mission is to democratize and decentralize the world’s access to the cloud. An open, peer-to-peer cloud marketplace fundamentally changes the nature of the internet—making it more robust, more decentralized, and more sovereign.

I’m excited to join the team and bring Akash to web3’s next billion users.

Subscribe here to join Akash’s list and receive my latest writing.

Here is my first post for Akash.

“Here’s to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes… the ones who see things differently — they’re not fond of rules… You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things… they push the human race forward, and while some may see them as the crazy ones, we see genius, because the ones who are crazy enough to think that they can change the world, are the ones who do.”

— Steve Jobs, 1997

Crypto is a strange industry.

It has drawn people from many different professions, backgrounds, and philosophies. It requires a passion for cryptography, computer science, politics, economics, culture, math, philosophy, and art. All of these play into various aspects of the technology and its revolution. Most of all, it requires an ability to walk against the crowd.

It doesn’t make sense to most. It is opaque, abstract, often indecipherable, and draped in a culture and language foreign to most on the outside, peering in.

It is setting the world on fire, or saving it. The harbinger of hypercapitalism, or the antidote to authoritarianism. Illusion, or freedom.

Scammers and fraudsters pile in to grift a quick buck. Researchers and technologists dedicate their days and nights designing the future of the internet.

We are heading toward a brave new world with fewer institutions and a broader and more even distribution of power. More to the individual than the group. More to the person than the corporation. More to the people than the government.

There is a heavy weight that comes with being new and being early. One must accept being misunderstood for years at a time.

To accept all of this is to ally oneself with a band of rebels, cowboys, visionaries, and misfits heading out onto the frontier.

The only thing they can’t do is ignore us.

I just finished reading Nat Eliason’s latest on web3 use-cases and was struck by his descriptive framing of blockchains.

“Crypto and ‘Web3’ are really all about blockchain tech. And what a blockchain lets you do is run perpetual decentralized applications.”

—Nat Eliason, Does Crypto Have Any Good Use Cases?

The framing of Perpetual Decentralized Application is worth exploring because it speaks to what blockchain can do well and what it can’t—and where those facts point the progression of this technology.

Breaking Down the Term

Let’s address one of the most common criticisms: Attempts to define new technology use too many buzzwords. In this case, the question is whether Perpetual, Decentralized, and Application are buzzwords—or whether they point to real underlying meaning.

Perpetual

Any information written into a blockchain lives as long as the chain does. Once the block containing the information has been accepted by the network and written into the permanent and distributed copy of the chain, it will be there as long as the chain exists. That data cannot be modified, and it cannot be deleted.

As an example, all of the code written into the Ethereum chain can be called by any other application. Each block adds information to the chain, and thus—the value of Ethereum’s information supply grows with every block.

Blockchains turn information into a public good using private market dynamics. (Public goods are typically funded through taxation). In this case, the term perpetual speaks to the ability of blockchains to store immutable information and make it available to anyone around the world. Blockchains preserve the information’s origin and prevent it from being altered by bad actors. The key feature of blockchains is permanence.

You might think of a blockchain as a loom.

Validators (or Miners) are the shuttle, weaving information across nodes into an immutable pattern that can be read by anyone, anywhere—forever. The shuttle can’t go back. It can only go forward. The pattern cannot be rewoven. The blockchain cannot be unwritten.

Decentralized

We already have information sources that anyone in the world can access. Take Wikipedia, for example—which is also a public good. What does blockchain tech add that Wikipedia doesn’t already do?

Wikipedia is centralized. All the information collected, edited, and organized over the years are stored on centralized servers controlled by the Wikimedia Foundation, the non-profit legal entity that owns and manages Wikipedia.

Wikipedia has decentralized its network of contributors, all volunteers, who donate their time to grow and maintain Wikipedia. But the decentralized network of volunteers overlies a centralized entity that is the single point of control over the data on their servers. They grant permission for editors to make changes to Wikipedia’s information—but they can terminate this permission at any time. There is no check on the Wikimedia Foundation’s power. Only our trust that they will continue to act in an altruistic way.

To be clear, I love Wikipedia. I believe it’s a wonder of the world, and I’ve been donating monthly for years. But we must be clear-eyed about the power structures that influence our society’s information sources.

How does a blockchain decentralize information?

A blockchain with a well-developed network is decentralized by its nature. The network of nodes that distribute the ledger would be controlled by many different actors. A sufficiently decentralized network is supported by so many nodes and maintained by so many different parties that it would be nearly impossible (or economically unjustifiable) to attempt to seize control of the network.

This network of nodes decentralizes the network by moving control from one central node to many interconnected nodes. No single entity can act unilaterally to modify or delete information. No changes can be made to the information without the consensus of the entire network. This foundational decentralization creates a robust network, resistant to bad actors and actions that work against the network's best interests.

Application

This is the most straightforward of the three terms. Simply, an application “is a computer program designed to help people perform an activity.” We’ve been developing applications since the invention of the computer—and nearly since the beginning—the open-source movement has been dedicated to keeping code open and available to everyone.

Open-source software has been fundamental to the modern internet. From servers software like the Apache HTTP server, browsers like Mozilla’s Firefox, to operating systems like Android and Linux—all of which are open-source projects.

Blockchain tech takes open-source to a new level. Not only is code written to a blockchain accessible by anyone in the world—other applications can call functions written into a blockchain. A blockchain like Ethereum is a supercomputer in the cloud—available for anyone to use.

Viewing blockchain tech through the lens of Perpetual Decentralized Applications opens the door for a new understanding of the direction this tech is heading.

All of these cycles are happening at once, making it very difficult to know where exactly we are at any time. The sheer amount of information that web3 combines and brings together exposes it to more types of cycles. web3 is subject to technology and financial cycles—which can overlap and magnify each other.

~

Gartner Hype Cycle

Note: Web 2.0 is how the term was written in prior years. I’ll be referring to web2 below because it’s easier to write—and is consistent with web3.

Web 2.0

The second era of the internet began with Tim O’Reilly’s Web 2.0 conference in late 2004. Although Darcy DiNucci coined the term in 1999, the Web 2.0 (web2) conference in 2004 began to separate the static websites of the early internet from the participatory websites that would come later. Early internet pioneers built with an open-source mindset. Their version of the internet encouraged the sharing of information and tools. The next wave of entrepreneurs dropped open-source in favor of walled gardens populated with user-generated content. These entrepreneurs created the web2 era.

This shift in internet culture from web1 to web2 brought millions of new users onto the internet. Social media companies, especially, could reach non-technical users by mapping onto their existing social networks (see: Facebook’s launch on Harvard’s campus, requiring a harvard.edu email address to sign up). Once the network was running, word of mouth through existing social channels did the rest.

These new users flooded onto the internet and into productized experiences, which provided intuitive and engaging new digital experiences. But it also siloed them within a corporation’s terms and conditions. The open-source technologies that had allowed those very corporations to come into existence began to fade out of sight of the average internet user. The era that has been retroactively called web1 was over. The culture had moved on to the web2.

web2 brought many valuable innovations to the public, building upon the technology pioneered during the web1 era. Massive corporations sprang up and brought new and novel value to consumers. The web2 wave created the current set of the largest companies in the world: Amazon, Meta (Facebook), Google, Netflix, and Apple. These companies are collectively called the Big Five or the FAANG companies.

web2 also brought centralization. As the FAANG companies got bigger, they became more centralized, and they began to concentrate more power and control in the hands of fewer people. Eventually, individual founders, or small leadership teams, directly controlled the data of hundreds of millions of users who existed within trillion-dollar market-cap corporations.

This is the core ethos of the web2 era: Centralized platforms provided in exchange for user data. Most are free—because you are the product.

Consumers are willing to make this trade because it’s become the cultural norm and the platforms generally provide a good experience. Problems emerge when users disagree with the company's decisions—and realize that their power as a consumer was eroded in exchange for free products. When users understand what they have given away and want to leave for better alternatives—they realize there is nowhere to go.

There is no official designation for the line between web2 and web3. I believe web2 ended when Facebook changed its name to Meta, and web3 began when “Sign in with wallet” became a common UX element.

Facebook’s name change was the first significant signal that the era of centralized web2 power and control was ending. Facebook was the company that pioneered the web2 style of value creation and capture. Mark Zuckerberg is one of the most prolific founders of all time. When he and the company he founded abandoned the web2 ethos—it marked the beginning of the end of that era. Now, it’s up to web3 to develop the next phase of the internet.

web3

It’s common online to see people debate the definition of web3. Some believe it’s a VC-created marketing term, and others think it’s the future.

I believe web3 is this:

1. User ownership and control of data.

2. Persistent data portability between applications.

3. Integrated online identities (social, financial, cultural, etc.).

4. An ethos of decentralization.

At the moment, web3 is a beacon for this collection of traits. Anyone who believes the internet should be steered in this direction will use the term web3 to describe this ethos. It’s a signal to work with a group of startups and DAOs aligned on a common mission. In that way, it’s a helpful word. We need some way to talk about ourselves.

It is still very early. People have trouble understanding macro tech shifts because most of what they have known over the past ten years has been product iterations and launches. Apple releases new products twice a year, every year. Once in the spring and once in the fall. People have come to expect these kinds of pre-planned timelines, while web3 is a macro tech shift. There are no planned timelines. Startups in the web3 space are experimenting in real-time with new technology primitives and finding (through trial and error) ways this new tech can be brought to market. The best practices are also being iterated in real-time as well. The rules aren’t set in stone—yet.

Some products in the web3 space have been too early to market. UX is still not where it needs to be. For most people, setting up wallets and moving tokens between wallets (or chains) is beyond what they can reasonably understand. The tech-native will be able to figure it out, but there is still a large portion of the population that didn’t grow up on the internet. This is changing, but we’re not there yet.

This issue curates a reading list you can use to gain a deeper understanding of crypto/web3. During bull markets, everything happens so quickly that you never feel like you have time to do the deep reading necessary to understand the space.

So, now is as good a time as ever to do just that. Here is an assortment of articles, tweets, books, and papers you can use to head deeper down the rabbit hole.

What I’m Reading

SBF’s thread on use-cases. Always a good sign when the market leaders and builders focus on use-cases and good products. This is how we get back to fundamentals. For what it’s worth, I agree with his take on payments. Moving towards peer-to-peer transfers with fewer intermediaries would be good for efficiency. Also, something resembling a decentralized, global WeChat would be wildly useful.

A Samurai, a Knight, and a Yankee — Arthur Hayes
Hayes presents a solid thesis contrasting Japan, Europe, and the U.S. on the topic of Yield Curve Control. Arthur Hayes is one of the most prolific writers in the crypto space. A few weeks ago, Vault featured Hayes’ article on the 3AC implosion. Note: the first section of this essay is hilariously overwritten, but it gets much stronger if you can make it through the opening.

The Sovereign Individual
A classic. This book is often cited for its clear presentation of one of the defining traits of crypto. Sovereignty is what we’re all about here, and this is the godfather of all books on the topic. I’ve read excerpts here and there and seen plenty of quotes, but I haven’t read it cover to cover.

Token Design for Serious People
This article from Jump Crypto provides an overview of tokenomics for protocol builders.

“The calm of winter can allow builders to craft well-grounded token designs. In turn, those designs can deliver sustainable outcomes for the next generation of protocols.

This piece offers a perspective for designers. In particular, we argue that protocol tokens should follow two basic design principles:

1. Tokenomics should coordinate common goods that participants would struggle to provide efficiently and economically on their own.

2. Tokenomics should channel value towards those who create that value, prioritizing value distribution (aligned with value creation) towards high-utility groups over value transfer between participants.”

What do I think about network states?
This is Vitalik’s response to the launch of Balaji Srinivasan’s The Network State. I’ve read about half of the article so far, but there are already many good points that refine the concept of the network state and propose new directions to take the idea. It also coins the term Balajian, to describe Balaji’s thoughts, which works surprisingly well in context — see the section on non-balajian network states.

Further reading from Vitalik’s archives:
Trust Models
Where to use a blockchain in non-financial applications?
Soulbound

Lightspeed raises over $7 billion across four funds, launches new 'crypto native' team [The Block]
Despite the bear market, there is still plenty of money flowing into the space. I like to keep an eye on fundraising announcements as one health metric for the ecosystem. The influx of builders and capital is the signal among the noise. Criticism, cynicism, snarkiness, media attacks, mean words on Twitter—all of this is noise. The only thing that matters is talent and money flowing into the space. The sentiment will turn around on a dime when the time is right.

Setting the record straight
Nic Carter got into some hot water for not being sufficiently maximalist enough for some Bitcoin folks. His article here is a well-reasoned response to these critics and represents the stance that I believe many in the space will adopt over time. His opinions here are much more relatable and sustainable than the maximalism that a small minority of the space tries to force onto everyone else. Most people want to participate broadly and have fun experimenting, not participate in strange technological zealotry.

Coinbase’s most recent 10-Q
Not exactly light beach reading. Coinbase is crypto’s foremost publicly-traded institution (at least in the U.S.). In my opinion, their financial health is a proxy for the current state of the industry. I’m hoping to dive into this more over the next week. At first glance, though, the $6 billion in current cash stands out as strong—especially in the face of the drama over the past week about Coinbase cutting their affiliate program.

Bitcoin Net Zero
This paper from Nic Carter and Ross Stevens lays out the environmental state of Bitcoin and the contrarian take on how the Bitcoin network will impact energy usage (contrarian compared to the media narrative). I’ve been meaning to read this one in its entirety for some time. It will be a herculean effort to convince the mainstream to get on board with the ideas laid out in this paper—but that would effort well spent.

The Rise of the Network State

Balaji Srinivasan’s hotly-anticipated book The Network State was released this past week. You can order it here, or read it online here.

The idea of the network state begins with the idea of a startup society and expands into a cryptographically-audited “city in the cloud” with its own census and economic metrics.

The story goes that with enough economic growth backed by verifiable numbers—a startup society would plant roots in the real world and seek recognition from the international community.

Srinivasan defines a network state in this way:

“A network state is a social network with a moral innovation, a sense of national consciousness, a recognized founder, a capacity for collective action, an in-person level of civility, an integrated cryptocurrency, a consensual government limited by a social smart contract, an archipelago of crowdfunded physical territories, a virtual capital, and an on-chain census that proves a large enough population, income, and real-estate footprint to attain a measure of diplomatic recognition.”

It’s not exactly an intuitive idea. But the more you think about it, the more it unfolds and begins to make more and more sense.

The concept, at least initially, is similar to a network of embassies. Take the U.S. Embassy in Paris as an example.

Despite residing within a French building, sitting on French soil, and being surrounded by the nation of France—the U.S. Embassy in Paris is granted a degree of sovereignty, exemption from French law, and allowed to enforce U.S. laws on its grounds. This status is only achieved through diplomatic mutual interest and recognition from the French government.

It is a common myth that embassies are considered ‘foreign soil.’ This isn’t strictly true. But it is true that the host country grants the embassy a special status and, for all intents and purposes, treats the embassy as if it was the foreign nation itself—by respecting its sovereignty, property rights, laws, and customs.

Theoretically, the French could rescind the embassy’s sovereignty and impose French law at any time, but in all likelihood—they won’t—because it wouldn’t be worth the diplomatic tensions or the shifting of precedent. Depending on the severity, an incursion on the embassy could be considered an invasion—tantamount to an act of war.

All of these rules are negotiated, and all of these customs form over time. An embassy is a shared story; a meme. It’s a concept that exists because everyone agrees that it exists within a set of shared rules.

A network state has a similar mimetic pathway to national, then international, recognition. With enough economic and social proof, the startup society could negotiate with the host country to grant the startup society some degree of sovereignty over property, a plot of land, or both. Initially, the territory would be treated like an embassy. Technically, the soil would belong to the host country, but partial exemption from the host nation’s legal system could be negotiated, or the startup society could be granted preferential tax treatment or trade agreements, as is already the case with Special Economic Zones around the world. At this stage, the startup society resembles the old concept of an entrepôt (cities that would grow from ports used in the days of wind-powered shipping; it means “warehouse” in modern French)—but refactored for highly-skilled knowledge workers with the ability to work remotely.

The old world traded spices, and the new world trades information.

Health Metrics

NFT trading volume on OpenSea has fallen over the past month, but has tapered off to a consistent level.

Music NFT releases have slowed as well. The chart below charts new releases against total supply for sound.xyz.

DEX volumes have tapered as well, but even with activity falling off—Uniswap is still doing nearly $1 billion per day in volume and remains the dominant DEX across all metrics (see the market share chart below).

ETH gas prices have dropped overall as the network sees less usage overall, but still remain within a steady range.

For the Long Weekend: Crypto Reads Worth Your Time

Now that the dust has settled a bit, a few intelligent analyses of the Three Arrows Capital (3AC) liquidation are being published. Solana announced its foray into hardware. DCinvestor pinpoints crypto on the long arc of tech innovation.

Number Three by Arthur Hayes
This article is the essential breakdown of the 3AC liquidation. Hayes was the former CEO and co-founder of BitMEX and a former Citibank derivatives trader. He operated in the same social milieu as Su Zhu and Kyle Davies (the principals of 3AC) during his time as an investment banker in the Asia-Pacific region.

Solana Mobile debuts Saga, a flagship Android phone for web3
Solana is jumping into the hardware market with a plan for a web3 phone which will be deeply integrated with the Solana chain. It seems to me that there is an intermediate step between full vertical integration via hardware and the current state of web3—which is virtually entirely undeveloped for mobile. Developing web apps and improving mobile UX seems the way the industry will end up going. But perhaps Solana is on to something with hardware integration. We’ll have to see.

The "dial-up" era of cryptocurrency by DCinvestor
In case you missed it: this comprehensive article from early June superimposes crypto’s arc against the development of the early internet. The surface-level parallels are obvious, but the implications are less obvious. This is a read well worth your time.

Lessons from the Last Cycle

I was wrong about several things.

That’s the thing about new technology and envisioning new futures. Those visions don’t always map onto reality. Cold, worldly pragmatism has a habit of dispelling idealism and airy visions. At the end of the day, people are people. Crypto is no exception.

But the space will keep going. People will keep working. It the long run, corrections like this are good for the industry.

Here are some things I learned from the past cycle, along with my new perspectives on the space.

Community, Price, or Longevity—Pick Two.

When the NFT boom started in the summer of last year, I developed a simple thesis around the idea that profile picture (PFP) NFT collections would enable a new kind of 21st-century community. A person could purchase an NFT from a given PFP collection, which would grant access to a robust, decentralized online community space. I believed this would be the next step in digital communities—broadly distributed online, independent of geography, and imbued with the value created by digital scarcity. That was my thesis.

I now believe that thesis is flawed.

Digital scarcity combined with wealth inequality destroys any potential community before it begins. If a collection gets too popular, too quickly, the price rises so sharply that early members become wealthy overnight, and the “asset” is now priced for a group of people with higher investable resources. If the price continues upwards, at some point, the early members must sell to realize their profits—to hold onto unrealized gains which represent 90% of their paper net worth is financial insanity. They must sell.

But the selling rotates a new group of people into the ‘community.’ Now, the group must re-form around its new membership. As this process repeats over and over, the original values of the community are lost (if they were ever there to begin with). The ‘community’ is now mostly transient, existing mostly as a vehicle for wealth capture via asset flipping—this brings us dangerously close to the Greater Fool theory. A few die-hard members may try to create and maintain some semblance of community, but they will find themselves overpowered by the financial motivations of the majority.

I still believe that experimenting with new forms of digital community is a worthwhile pursuit. Several types of communities are doing well at the moment. Friends with Benefits (FWB) is steadily building out a real community based on shared interest and a hybrid approach to digital and in-person events. Open-metaverse projects like Punk6529’s OM are also building for a robust, decentralized future. The key to both of these communities is that neither are built on the price of an asset. FWB requires token ownership to gain access, but the price of the tokens is far from the focus of the day-to-day community activity. OM is completely open to all, and members can port in whichever NFT collections they would like—which de-emphasizes the focus on price appreciation.

If we learn the lessons of the past cycle and move away from price speculation and toward shared values and authentic connections—blockchain-mediated digital communities may have a chance.

A Shallow Grave for Maximalism

Maximalism came into the lexicon as the crypto industry expanded, circa 2015. Ethereum created the ERC-20 technical standard, which made it much easier to launch a token. Many did. This led to the Initial Coin Offering (ICO) boom and crash in 2017. In response, purists rallied around their chosen token to the exclusion of all else. To them, this was the only path forward. This puritanical behavior was dubbed Maximalism.

Maximalism becomes toxic when it is used to stifle innovation. It makes little sense in a new, rapidly-growing technological space to insist that there is only one direction for progress. This attitude is not only short-sighted but is unlikely to ever be followed. People will experiment and make new things.

We must experiment and make new things.

To create a healthy, thriving ecosystem for crypto innovation, we need to do away with Maximalism. We must be able to have intelligent conversations from a plurality of viewpoints and backgrounds that point to a wide range of possible destinations. “My token, support it…or else”—is foolish.

Another Call for Intelligent Oversight

Terra. 3AC. Celsius. Voyager. VC/Retail token manipulation.

It is clear that we need regulatory guidance in the crypto space.

That regulation must be intelligent, it must be delegated to the right agencies, it must not stifle innovation, and it must preserve the free market while avoiding regulatory capture.

We also have to watch out for exposure to censorship and the removal of sovereign ownership. These are essential to crypto, and we cannot let them be eroded or removed by regulatory agencies in the name of “protecting investors.” We can have common sense rulemaking and oversight while preserving what is core to the industry and to crypto as a movement.

Product and Revenue Over Everything

There was a period of time over the past few years when I believed that we might have found a higher calling for speculation—some mix of efficient price discovery, exposure to assets as a way to democratize wealth distribution in an online world, and so on.

I now believe that speculation needs to fade into the background. In practice, the kinds of speculation that have become common in crypto veer too closely to gambling. And those that aren’t gambling tend toward active pump-and-dump schemes.

That said, the projects that have the most staying power have focused on product and driving real revenues by charging users for that product. The same way it’s been done for a long time. More projects will have to pivot to this time-tested model to remain relevant (and solvent) in what will likely be a protracted bear market.

Transparency, But For Real This Time

Many exploits from the past cycle are coming to light. Financial engineering led to massive leverage and was done in the dark. We only uncovered how interconnected everything was after things started to break. Clearly, we have strayed from the path. We need to reckon with the desire many have to use shadowy tactics and backroom dealing, and get back to building open and transparent systems. Robust systems should curtail the human pull toward greed, leverage, and self-dealing.

Blockchains are inherently transparent by the nature of how they record transactions and reach consensus. The information we need to be public wants to be public. Part of making sure that happens is demanding that large entities, like funds and institutions, be more public and open with their transactions. At the moment, there is too much secrecy. Retail investors need to know if VC funds have invested in a project and on what terms. Is there a token that will be sold to retail to cash out early VCs? This is vital information to preserve trust in the space, and to prevent conflicts of interest on the part of funds.

A good place to start would be choosing only to invest in projects that are transparent about taking funding and the terms of those investments. This applies especially to projects that will offer a token to retail investors.

Onward

I believe the 13-year period of U.S. market expansion coming to an end also marked the end of the beginning for crypto.

We will look back on crypto’s entire first chapter, from 2008 to 2022, as the ‘beginning.’ Now, all of the culture and technology created up to this point will have to refactor for a new financial reality. Plentiful excess liquidity is gone, and it’s not coming back anytime soon. So the space will have to adapt. Renewing focus on product and revenue will create healthy competition and weed out the bad projects.

Crypto will also have to face the regulators, and learn to work with DC in a productive way. Name calling and zealotry will only backfire. The regulators are coming whether the industry likes it or not. Preparing to work with regulators to draft intelligent oversight will be to our long-term benefit. We also have to fight for the few things that must not be regulated away, the most important of which is the right to self-custody.

I still believe this industry is going to change the world. I also believe it’s going to be a long and difficult process until it does. It’s going to be hard to stay committed and focused. There will be lots of back and forth. Lots of critics and naysayers. Lots of experimenting. Many of those experiments will fail. There will be plenty more bad actors and bad projects. But there will be good actors and good projects too. Over time, I believe we will see the long arc of history bend in our direction. Towards decentralization, sovereignty, sound digital currencies and assets, and a new culture for a new internet. If we continue to course correct and stay true to our core principles—then eventually, we’ll get where we are going.

As the market remains down, with further downside likely, it’s as good a time as ever to reflect on the why of this space. Why is this technology important? Which guiding principles should we focus on over the long term?

The Bitcoin whitepaper, all the way back from 2008, laid the ideas that eventually became the groundwork for a new, digitally-native network for transferring information and value. Three principles underpin this network:

Decentralized

This is the term you’ll hear most often. Decentralization has become so synonymous with the space that it’s hard to escape. Regardless of its constant use, it points to a fundamental principle that makes repetition worthwhile.

Decentralization is the reason for crypto’s existence. If these technologies continue to run their course, they will rebuild the global financial system on a new set of open payment rails. What are open rails? Payment rails refer to networks like ACH and card networks. The ways that currency flows around our economy and worldwide are currently privileged to the largest financial institutions and governments. For example, SWIFT - the messaging network banks use to send money transfer instructions - is reserved for the largest financial institutions. You can’t access it as an individual. This part of the financial system is utterly opaque to the general public. On the other hand, the Bitcoin network regularly handles $100+ million transfers between massive entities. But you can also send $20 to your friend to split the tab after dinner.

But we have Venmo, you say.

Yes, and Venmo works fine today. The app is essentially a highly abstracted user interface built on centralized financial rails. You can only go so far down in the banking system before you reach a system that is off-limits to you as an individual.

With Bitcoin, Ethereum, and other chains, you might use an app built on a Layer 2 network (like some crypto version of Venmo), but you can also use the base Layer 1 chain. The lowest levels of the new financial system are accessible. Everything is open to everyone.

Crypto is opening these closed systems. It is part way through the long process of creating a more robust, transparent, and open financial world. While this is happening, things will get less efficient while these systems become more open. Efficiency will come in time.

Open, decentralized systems are fairer and more robust. Governments and institutions can’t manipulate them. They function transparently and provide insight into flows of money that were previously unseen.

Decentralization is arguably the key trait of the cryptoeconomy.

Trustless

Trust is good. It’s necessary for many aspects of life. Up to now, we have embedded our social understanding of trust into our most prominent institutions. Mostly of necessity. Technology has accelerated many things up to this point, but it has not been able to remove the need for trust.

Blockchains make trustless networks possible. Participants in the current financial system engage in trust-based business relationships (as banks currently do with their customers, partner banks, and the government). Both parties must trust that the other will do what it says it will do, with social reputation and the legal system as a backstop to enforce breaches of trust.

With transactions recorded permanently on a distributed public ledger, parties no longer have to trust each other. All transactions can be verified, and transfers can occur without the parties knowing each other or needing to engage in any form of trust. Trustless networks make the financial system more resilient. They subject the entire system to scrutiny from the masses, which keeps participants honest.

Sovereign

Decentralization and trustlessness open the financial system and enable the third pillar of crypto—sovereignty.

At its core, sovereignty is about individual responsibility and ownership. Each individual in crypto can maintain custody of their assets. Not all will want to take on this responsibility, and many will choose to entrust their assets to centralized custodians, and that’s okay. The difference is that in crypto—you have the choice to remain independent.

At the moment, there is no way to digitally self-custody fiat currency. The closest you can come to sovereign control is to keep cash under your mattress. Depositing your money into a bank relinquishes sovereignty. Now you have to trust the bank and government to make your money available to you at the point you wish to withdraw it. While it’s deposited, the bank can lend it out and otherwise use it to profit. Optimistically, this is fine. But in reality, it enables many of the negatives of the fiat system: Overleverage, debasement, breaches of trust, and the like.

Sovereign control brings the power of ownership back to the people. It also keeps institutions from the tendency to overreach and overextend. Securing bearer assets is a responsibility, but one that makes possible a new digitally-native financial system that will underpin a new era of the internet.

Freefall

This week was long. The markets remain in freefall with no bottom in sight. Financial asset prices are deflating across the board. P/E multiples are crushed. Large tech companies are laying off staff. Some VC funds are putting a freeze on new investments. A wave of high-profile insolvencies in the crypto space is causing lasting damage to the space. The crypto market structure is changing. These crashes begin when something sparks fear. That fear begins to spread, and the spreading fear tips the scales. In this case, there were two causes.

First: crypto ran out of liquidity to absorb, followed by a run to the exit. After a sharp run-up led by Bitcoin reaching its all-time high of $69k in November last year, the market reached its blow-off top. There was no one left to buy. Prices fell by roughly 50% over the next six months. Wealth melted away as the market looked for buyers. Some bought at $45K expecting a new all-time high would be on the way. Bitcoin is down another 50% and then some since then. Sometimes the dip keeps dipping.

Second: the macro outlook and the shadow of a hawkish Fed. On Wednesday, the Fed raised interest rates by 75 bps, the largest rate hike since 1994. Rates are expected to reach 3.4% by the end of 2023.

The War in Ukraine also continues, putting pressure on global food and oil supplies. The West continues to supply Ukraine with advanced weaponry and maintains its sanctions against Russia. But there is growing evidence that the sanctions may not be as effective as we think, which leads to a fear of escalation. On the other hand, the head of Britain’s armed forces believes that Russia has already “strategically lost.”

Cracks in the global financial system are beginning to show as well. Japan’s bond market is under extreme pressure. As the largest holder of US Treasuries (UST), Japan may have to continue selling Treasuries due to the weakening Yen—Treasury sales which would likely have to be absorbed by the Fed. The Fed has $2 trillion in its Reverse Repurchase Agreement reserves for this purpose, but things get more desperate once those reserves run out. It’s a rock and a hard place kind of situation, and combined with everything else—it paints a dark financial picture.

Things are starting to break in strange places.

How Fear Spreads

At this point, market fears are spreading like a contagion. Lower prices cause more selling which lowers prices. It’s a vicious cycle that will continue until the market finds a bottom.

The interesting thing to watch is whether crypto or equities will find the market bottom first. If the view holds that crypto is a further out liquidity sponge (i.e., people invest in crypto with excess liquidity beyond their equity portfolios), then crypto would find the market bottom first, followed by equities.

The second thing to watch would be if crypto and equities still correlate as the market heads down or if they decouple at some point.

Taking Bitcoin (BTC) specifically, my view has always been that BTC’s price acts like a call option on a censorship-resistant network for information and money. The price may fluctuate wildly based on several factors, but fundamentally—Bitcoin is self-sovereign, non-government money backed by a robust, trustless network. If you buy it now, as it is still being adopted, it is difficult to say where the price will be within the next few years—much like a long-term call option. But the core technology works well, even in down markets.

That’s what is most revealing about this market downturn: Even when crypto hedge funds implode, projects become insolvent, and prices crash—the networks still work. Transactions are still processed. No central authority with overreaching powers can do Quantitative Easing or provide bailouts at the taxpayer’s expense. This is how free markets function. Market corrections will always be painful for those who lose money. But this is what crypto was always meant to solve.

Fundamentals

Over the long term, it’s unclear how crypto prices fare in a rising-rate environment with little to no money printing. Likely, prices will reset, and valuations will return to fundamentals. Companies and protocols with cash flows will survive, and those without—will not.

The projects that survive will do so by retaining loyal users and charging those users real, scarce money for their product or service. This produces steady cash flows. Offering inflationary tokens can work to a degree but is not sustainable over the long term. Most projects don’t need a token. Some will be able to use a project-owned token in novel ways, but most use it as a marketing tactic to draw in users.

Users will concentrate on the market-leading protocols, which will give those protocols massive moats to defend themselves against competitors.

Opensea

Looking at the NFT markets, the largest exchanges are OpenSea and LooksRare. It will be difficult for any new platform to unseat either of those two as the largest exchange. As anyone who has tried to sell an NFT knows, liquidity is essential and comes from users participating in the exchange. This effect is similar to that of social networks. It doesn’t matter how good the product is if no one is on the network. Getting the first users is beyond difficult—as we have seen with start-up social networks over the years. Market liquidity is the same. It doesn’t matter how good the exchange product is if there is no one buying or selling.

It will be near impossible for a new rival exchange to pull liquidity away from the top two exchanges. It’s not even clear if LooksRare will be able to maintain cash flows against OpenSea’s monopoly on the space.

The chart above tells a compelling story about how difficult it is to break into concentrated markets with network effects. If you look closely, you can see Coinbase NFT as the underbrush in the blue forest of Opensea.

Uniswap

The Decentralized Exchange (DEX) is the other DeFi primitive that was nearly perfected during the last cycle. A Decentralized Exchange provides the ability for users to create liquidity pools (LPs), and receive a portion of the trading fees from that pool. An Automated Market Maker (AMM), algorithmically sets the market clearing price, using current and historical data acquired across all the LPs on the exchange.

The proof that AMMs are the future of Decentralized Finance is being proven right now. DEXs continue to function and calculate the market clearing prices regardless of the state of the market at large. This is further proof that the concept works in a variety of market situations, and can withstand massive spikes in trading volume.

Uniswap is the market leader among DEXs by a wide margin.

Uniswap is in pink below. Curve is in dark green.

Uniswap gains a defensible position in a market downturn from the revenue it can capture via trading fees. Below are Uniswap’s 7-day fees across all trading pairs and the top 15 pairs. Uniswap currently brings in upwards of $1 billion in annual revenue. Even if trading volumes decline, causing a decline in trading fees—Uniswap will be able to maintain a strong balance sheet given its high margins.

Cash Flow is King

The commonality between these two companies is their cash flows via trading fees. They both charge users real money, and those users are happy to pay because the products are valuable. This is nothing new, and it is the way the space will need to grow as it matures.

The focus on real cash flows also lends itself to real valuations. Many of the valuations from the last cycle were based on theoretical Total Addressable Market (TAM) calculations, and hype-driven speculative bubbles. Solid crypto businesses with cash flows can be valued on more reliable Discounted Cash Flow (DCF) valuations—the same way that companies have been valued for a long time. In the short term, this is painful for companies and investors that will have to brace for collapsing valuations. But this is good in the long term. This will mean better opportunities for investors, and more realistic valuations for companies that can be defended in both up and down markets.

Things will likely get worse before they get better. We haven’t even started Quantitative Tightening yet. When that happens, things will uncomfortable for awhile. Maybe the Fed will be able to deleverage the economy without too much pain. But who knows? Do you trust the Fed to be able to deliver a soft landing?

Investing involves risk, including possible loss of principal.

I am not a financial advisor. The content sent in this newsletter or on the web at the Vault website (https://www.vaultdigital.xyz) is for educational purposes only and cites my own opinions. Reliance upon information in this newsletter is at the sole discretion of the reader. In order to make the best financial decision that suits your own needs, you must conduct your own research and seek the advice of a licensed financial advisor if necessary. All investments involve some form of risk and there is no guarantee that you will be successful in making, saving, or investing money; nor is there any guarantee that you won't experience any loss when investing.

Stepn faces its first reckoning. Jerome Powell & Co. are bringing the party to an end. All risk assets are selling off as we brace for Quantitative Tightening. Bracing begins with selling. Sustained selling pressure puts new assets in a difficult place.

Tulips

When Stepn found its earliest adopters, the app’s tokenomics were such that those users were making tons of money for participating. Most of this was price appreciation from new users buying into the app’s assets. Obviously, this creates an unhealthy dynamic where early users are making profits from new users. There were articles about people earning $400 a day for running outside. The most self-aware of those early adopters would admit this was unsustainable.

The old saying is still correct: “there ain’t no such thing as a free lunch.” The money has to come from somewhere, so where is it coming from? Using the technology adoption curve, we can show the cycle that happens for nearly all new things.

Here’s what happens: Early adopters enter when supply and demand are stable (but low), with low entry prices. As the curve progresses to the Early Adopters and Early Majority, rising demand and stable supply cause the price to rise. Early investors see their asset prices appreciate dramatically and move to take profits. Selling pressure from this profit-taking is absorbed by the demand flooding into the market from the Early Majority and, in some cases, the Late Majority. To enjoy the same asset price appreciation, later investors would need an influx of even more demand. But there is no more demand because the curve is heading down it backside of the slope. At this point, supply expands, or demand wanes, and the price stagnates or falls—leaving later investors in the red.

This is the Greater Fool theory. It’s also where the term “bagholder” comes from, to mean the investor left holding the asset when it falls in price. They take the loss, the other side of the early investor’s gain. The lesson here is that speculating if you aren’t an Innovator or Early Adopter is risky. It’s very difficult to know when the music is going to stop.

How do you know which category you’re in? If you’re an innovator or a laggard, you would know it. For everyone else in the middle of the curve: Who told you about it? If it was an innovator, you’re almost certainly an early adopter. If it was an early adopter, maybe you’re in the late half of the early adopters, but more likely, you’re in the early majority. If you read about it in the corporate media, proceed with caution.

A Kite Dancing in a Hurricane

Looking at the graph below, Stepn’s new daily active users (DAU) begin to slope downwards into June. Decreasing users is never ideal, but it is not entirely unexpected, given that Stepn is saturating the market for its current position on the adoption curve. The slow retention shown by the widening light blue band indicates a growing contingent of returning users.

Price action for GST, Stepn’s in-game currency, has steadily declined along with all other assets. As the exchange price for GST/fiat drops, it becomes more valuable for its use in the game. This incentivizes users to use their GST of taking an unfavorable exchange rate on the open market. This phenomenon plays out in the increasing returning DAU count that inverses the exchange price.

Put GST’s price chart in the context of the broader crypto price action over the past week. Below is ETH’s chart.

… and below is the S&P500. Note the two most recent candles.

As an aside on financial engineering, the paper below lays out the monetary strategies that happen at the highest levels of the government. (A few years after publishing this paper in 1998, Mankiw was named the Chairman of the Council of Economic Advisers in the Bush administration. Every administration since then has adopted the policy laid out within).

If you don’t have a JSTOR subscription, here is the relevant quote.

“We call [U.S. deficit spending] a Ponzi gamble because it is an attempt at a Ponzi scheme—a perpetual rollover of debt that is not certain to succeed.”

Back to Stepn.

Stepn’s in-game assets are likely experiencing the fallout from a tulip-adjacent bubble. The question is whether the app has a user base at whichever prices the market is able to find.

The Layers of Stepn

Everything laid out up to this point has dealt only with the in-game assets through the lens of speculative risk assets. Speculation is a behavior that can be projected onto any investable asset: Buying in hopes of profit, with the risk of loss. But Stepn is interesting more for its use case than its assets. The use case has layers, so let’s lay them out below.

Layer One: A movement tracking app

This is Stepn’s core product. You can use the core product without buying a shoe (or anything else) from the marketplace. You download the app, make an account, lace up your (actual) shoes, hit start in the app, and begin running or walking. The app will map your route, provide distance and speed totals, and even color-code the line you create on the map according to your movement speed. But that’s just Strava, you say.

Yes, so let’s go deeper.

Layer Two: A marketplace for in-game assets

Okay, so up to now, we have “web3 Strava.” Beyond the core route-tracking app, Stepn has a mechanic that allows users to own unique, scarce “shoes” with stats and traits. When a user equips a shoe, the same movement they were doing before now produces a reward depending on several factors.

If you equip a ‘walking’ shoe and go for a walk, you earn the in-game token GST. The GST you accrue for moving can be used to level up your shoe, repair it after use, unlock traits, and more.

Layer Three: Real Assets

Many products have in-app economies, but it’s all just monopoly money. Here’s what sets Stepn apart. GST has liquidity on exchanges. You can trade your earned GST on the open market. You can also exchange shoes for SOL. This is what Stepn is building, which is more than just a run-tracking app or speculative assets. Because the in-game economy is tied to the larger crypto economy, user activity can be priced by the market.

Using the App

Market connection is a major change from web2 apps. Old apps would “gamify” actions. web3 attempts to connect in-game economies to real markets.

I’ve been using the app for a few weeks now. Here’s what I can say.

Think in Terms of Spending, Not Investing

This is where most people trip up. They overinvest or try to speculate to get a return. I wouldn’t think about the app this way.

A healthier strategy is to consider any money you put into Stepn as “money spent.” I bought a shoe for ~3.8 SOL when SOL was at ~$40, so call it a $152 purchase. I don’t expect to see that $152 in cash ever again. I compared it to a year’s subscription for a web2 fitness app. In my mind, I’ll never see that money again. In reality, it’s there in the app, I could list the shoe for sale and potentially recoup the purchase price.

The screenshot below is from this morning. I was out for an hour or so and turned Stepn on for a few minutes. Earning is based on current energy, and I only had 1.6 accrued this morning. So I had Stepn tracking for around ten minutes. It’s worth reading Stepn’s docs to fully understand the energy and earning mechanics.

You can see that I earned 4.9 GST for my ten minutes of movement tracked. At current market prices, 4.9 GST = $1.35. At GST’s all-time high (ATH), 4.9 GST would have been $38.41.

With one shoe at current market prices, I can max out my daily energy for roughly 8 GST, or $2.26. With three shoes, the max earnings would be 16 GST/day, which is $4.43 at current prices or $136.16 at the ATH.

The only point of mentioning the ATH prices is to give a sense of where the market has been over the past few months. We may never see the ATH prices again. Also, there are mechanics built-in to control daily GST earnings. You can’t earn tens of thousands of dollars by walking for 14 hours daily. Again, best to read Stepn’s docs before diving in.

The Power of Small Incentives

So, a market price for walking and running outside. Not life-changing, but interesting. It’s not about ‘points’ earned, which are only good for status games. Now we can see if web2-style apps have a future if they are connected to real markets—which is one of web3’s visions.

It’s not about making lots of money. You might end up breaking even over time. You might lose money. Who knows? All I can say is the market connection makes the app compelling. Maybe this is overfinancialization. Or maybe there is a future for useful apps, that users like, which are connected to markets that aren’t limited to fake in-game point systems.

I’ve noticed that testing the app is making it easier to move more. Perhaps this is because its new and novel. Maybe it’s because there is something more here. I still work out (earning nothing) for the intrinsic reward of being healthy. But I also think that web3 has new ideas to bring to the table.

As always, thanks for reading. Your time and attention are greatly appreciated.

If you liked this post, please hit the heart icon—this helps Vault get traction and sort posts in the ‘top’ rankings.

This is not financial advice. It is not a solicitation to buy or sell any financial asset. Investing involves the risk of loss. Past performance does not guarantee future results. This post is for informational purposes only. Do your own research and consult with a financial advisor if necessary.

The landscape for algorithmic stablecoins has shifted since the collapse of Terra. The Terra ecosystem, worth over $60 billion at its peak, is now all but dead. Whether it can be resurrected remains to be seen. The collapse took nearly all of the trust accrued towards seignorage algorithmic stablecoins. But Terra also taught us lessons that we can take forward and use to evaluate both current and emerging stablecoin protocols to ensure that history doesn’t repeat itself.

Terra operated with the logic of a 2010s Silicon Valley startup. It had a founder with a big ego, it was willing to light cash on fire in the name of growth, and it was weighed down by overengineering and complexity. Ultimately, UST and its partner in crime, LUNC (née LUNA), came to a steep end.

The brash, ego-driven leadership style that drove Terra to dizzying heights should have been the first red flag. This leadership style burns the bridges and the boats (and $60 billion) and ends poorly when the hype and bravado start to wane. In the end, the whole thing collapses under the weight of all the smoldering resentment and scorched trust. It turns out those bridges and boats served a purpose after all.

We’ve heard this story before. It’s the tale of Travis Kalanick and Uber’s tailspin and the implosion of WeWork and its generously-egoed founder, Adam Neumann. At some point, we’ll have to learn that business fundamentals matter and that salesmanship and hype are not enough to sustain a massive corporation or billion-dollar financial product. The economic sugar rush always leads to a crash.

But through all the carnage, the stablecoin remains a valuable and innovative financial product. If we want stables1 to survive and prosper, we must turn to the incumbents with the lessons learned from Terra to derive a framework for what works and what does not.

To Be Stable in an Unstable World

Stablecoins exist to address the volatility of cryptocurrencies.

Aside from price stability, stables make it easy to transfer value across blockchains. While most commonly pegged to the US Dollar, stables can reflect the price of any currency or asset, including other fiat currencies or other physical assets like gold.

In large part, stables are issued into circulation by an entity that receives collateral in exchange for newly minted (read: created) tokens. These tokens can then be exchanged on the open market. Finally, the issuing entity offers redemptions for circulating tokens in exchange for the underlying collateral. This mechanism is how Tether works, but not how Terra worked.

Terra is a seignorage-style algorithmic stablecoin that is only partially collateralized. For an eerily-foreshadowing look at the thinking of Terra’s founder Do Kwon, see his article from 2018 explaining his theory for scaling seignorage. Bolding is mine, italicization is Kwon’s.

“The most popular flavor of stable-coins these days are those that are 100% fiat collateralized, such as Tether, Circle, Gemini and Paxos. Several decentralized stable-coin projects such as MakerDao go even further, and maintain well over 100% reserves in cryptocurrencies. Though this is a responsible approach in designing fault tolerant systems, I think it’s also equally uninspiring; such systems make zero assumptions about the demand floor for their currencies because they were not designed with serious consideration of go-to-market strategies to capture long-term demand. Here we can do better. If we could somehow drive deterministic demand for the stable-coin, we could lower the cost of collateral and capture value by printing money.”

It turns out you can also destroy value by printing money. Here, Kwon describes an under-collateralized stablecoin supported by marketing spending and hype. This also foreshadows Kwon’s plan to offer 20% APY on Terra’s lending platform Anchor (which was advertised as a savings product—I suspect this will be a hot topic of discussion in the coming hearings and regulation). The 20% APY was essentially a marketing expense for the Luna Foundation Gaurd (LFG). Clearly, 20% APY is not sustainable. The idea was to use the attractive APY to front-load demand into the system and decrease the APY over time as UST gained adoption.

This leads us to our framework for evaluating stablecoins. Below is the Stablecoin Trilemma, laid out by Multicoin Capital:

The Stablecoin Trilemma remains a good starting point for a stablecoin evaluation framework. I would add that under-collateralization poses an equal risk to long-term stability as capital inefficiency. Untested algorithmic mechanisms also pose significant risks at scale (as we have seen). The complexity required in maintaining price stability without the easy-to-understand collateral mechanism has posed significant risks to investors.

I propose the following framework that adds “Easy to Understand” as a fundamental criterion. Risk hides in complexity.

1. Price Stable

2. Capital Efficient

3. Easy to Understand

4. Decentralized

This framework serves as a guidepost for investors to evaluate stablecoins before allocating capital to a stablecoin product.

Now, let’s figure out which stablecoins deserve the focus of our analysis.

Isolating the Major Stables Within the Crypto Market

While Bitcoin remains the dominant coin with a market cap of $565 billion2, followed by Ethereum with a market cap of $214 billion, the third-largest cryptocurrency is Tether—a fully-backed stablecoin with a current market cap of $73 billion. Let’s take the top ten coins and compare the sum of their market caps to the total crypto market cap.

According to listings on Nomics, there are 13,984 cryptocurrencies in circulation. Referencing the breakdown above, we can see that 81.4% of the entire crypto market cap is concentrated within the top ten coins. The remaining 18.6% of value by market cap is relegated to the other 13,974.

Given the steep concentration of value towards the most well-known currencies, we will disregard the long tail in favor of the top ten. Among the top ten coins, three are stablecoins. These are Tether (#3 overall by mkt cap), USD Coin (USDC), and Binance USD (BUSD).

Let’s start by focusing on Tether.

Tether (USDT)

Arguably the best-known stablecoin on the market, Tether is fully backed by a reserve comprised of cash & cash equivalents, bonds, loans, and crypto. Tether can be redeemed 1:1 for fiat via Tether’s redemption portal. The breakdown of Tether’s audited reserves is below:

In addition to its stablecoin offering, Tether also offers exposure to gold via its XAUt token. Each token represents ownership of one fine troy ounce of gold on a specific gold bar. XAUt holders can match their holdings to specific gold bars via a serial number. Holders also have access to purity metrics and weight which can be accessed via a look-up site. Currently, the minimum investment is 50 XAUt, which is equivalent to 50 fine troy ounces, or about $90,000 as of January ’22. XAUt can also be acquired on the open market in fractions as small as the exchanges allow.

Tether’s Strengths

Trust and Stability. Tether is fully-backed, so investors can trust that Tether’s system is fully collateralized by an actively managed basket of reserve assets. Bank runs are less of a risk here.

Brand Name and Wide Adoption. Tether is well-known. This recognition leads to the potential for widespread adoption. Especially when institutional adoption is the marker for the arrival of crypto as a fully-fledged asset class. In this light, JP Morgan has upgraded crypto to its preferred alternative asset.

Tether’s Weaknesses

Tether is centralized. Decentralization is a big part of the Stablecoin Trilemma. Tether is not decentralized. There is a single entity that manages the reserves and thus entirely controls the fate of the stablecoin and relies on the trust of its investors. Remember, the premise of a global 24/7 financial system is that it’s supposed to be trustless. This may be fine in the short-term, but in the long-term, this makes Tether effectively a bank on the blockchain—which entails all of the risks that come with the old banking world.

Reporting is quarterly. Ideally, investors would be able to monitor Tether’s reserves in real time. Or at least monthly, as is the case with USDC. The quarterly delay in reporting does introduce some risk, as any material change in Tether’s reserves could take up to three months to be reported to investors.

USD Coin (USDC)

USDC is second to Tether, with a market cap of $54.2 billion. It also enjoys wide name recognition. Like Tether, USDC’s reserves are independently audited by Grant Thornton and posted monthly.

USDC holders have the option to invest in Circle Yield, a fixed-rate, variable-term yield program that is overcollateralized with bitcoin. In keeping with recent DeFi market teachings, we have learned to ask…

“Where does the yield come from?”

The yield in Circle Yield’s fixed-rate investment comes from Circle’s lending partners. Circle lends your USDC to investment partners, who lend it out to the crypto capital markets. A portion of the interest they receive is sent back to Circle, which returns a portion of that interest to you. Currently, Circle Yield’s shortest term of one month offers a 4% fixed rate. Its longest term, 12 months, offers 4.75%.

In addition, Circle’s reserves are independently audited by Grant Thornton. Below is a USDC’s most recent attestation.

USDC Strengths

Trust and Stability. Similar to USDT, USDC is also fully backed by a basket of reserve assets that fully collateralize all circulating USDC on the market. This provides trust and stability to the market and prevents panic-driven bank runs à la Terra.

Name recognition. Unlike other stables in the market, USDC plays directly to the name association people already have with the US Dollar—for better or worse. For many, this familiarity will ease the transition to global, non-government digital currencies—starting with USDC and moving on to less and less skeuomorphic coins. It’s a non-trivial reality that people like things that sound familiar. USDC has that familiar sound.

Volume at scale. USDC has transferred $4.20 trillion on-chain since it was introduced in 2018. It currently has 730K unique holders. The largest stables that achieve real institutional adoption will need to handle the volume that comes with the global financial system putting its weight on these coins. USDC has proven it can handle volume at an institutional scale.

USDC Weaknesses

Centralized. As you are beginning to see, USDT and USDC are similar in their strengths and weaknesses. They both have similar market caps, both are fully backed, both are liquid and widely traded across chains, and both are centralized. The ideal future that crypto is driving towards is global, non-government, trustless, and decentralized. As we have seen, we may have to prioritize those traits as the technology is built and adopted at scale. Both USDT and USDC are global and non-government (aside from the USDC’s name association). However, they are centralized and require some degree of trust, even though independent third-party audits mitigate this.

Delayed Reporting. USDC releases third-party auditing of its reserves monthly, which is more frequent than USDT but still slower than ideal. In a perfect system, reporting would be in real-time so that investors could precisely see how the reserves were allocated at the time of investment.

Binance USD (BUSD)

BUSD is similar to both USDC and USDT in that it is fully backed. The stable is also independently audited—in this case, by Paxos. Third-party auditing is becoming the industry standard for stablecoins at scale.

BUSD Strengths

Regulated by NYDFS via Paxos. This is either a strength or a weakness, depending on your perspective. Either way, it does provide an aspect of trust to investors, and we have established that although the ideals of crypto point to a trustless future—we still need some element of trust to ensure investor confidence.

Integration with a major exchange. Currently, Binance is one of the largest crypto exchanges in the world. For power users (and even casual users) of the exchange, having a native stablecoin within the ecosystem offers significant convenience in transferring value.

BUSD Weaknesses

Better alternatives. BUSD suffers from being third-place to both USDT and USDC, both of which offer similar exposure to a peg of the US Dollar. Perhaps this is not an issue for those deeply embedded in the Binance ecosystem, but for those with no allegiance to any specific exchange, USDT and USDC may be better options for investment.

Regulated by NYDFS via Paxos. This is listed twice on purpose. Regulation by the antiquated, slow-moving regulatory regime in New York is as much a liability as a strength in investor confidence. NYS recently passed a 2-year moratorium on bitcoin mining, signaling that our great state is doing everything possible to limit innovation and write itself out of the future of money. We’ll see how that plays out. Hopefully, saner heads prevail.

Moving Forward

Currently, there are three solid stablecoin options to choose from for investors looking to manage free cash, and those looking for an easy, price-stable way to transact and move value across chains. All three leading stablecoin options are fully backed by audited reserves, and are verified by third-parties to ensure the reserves exist as reported. Although this does not make these protocols decentralized, it does ensure some amount of trust in the short terms. In the aftermath of the Terra collapse, the crypto markets will have to regain investor trust, and this may be the best path to do so. Decentralization will come in time as the technology evolves, and bad actors are purged from the ecosystem. For now, we will have to tolerate imperfect systems, and build upon what we have to move the space forward in a better way.

Sources

1. Tether: March ‘22 Reserve Audit by MHA Cayman [PDF]
   Source: https://assets.ctfassets.net/vyse88cgwfbl/1np5dpcwuHrWJ4AgUgI3Vn/e0dac722de3cea07766e05c52773748b/Tether_Assurance_Consolidated_Reserves_Report_2022-03-31__3_.pdf

2. The Stablecoin Trilemma, Multicoin Capital
   Source: https://multicoin.capital/2021/09/02/solving-the-stablecoin-trilemma/

3. GSR, Chart of the Week: Solving the Stablecoin Trilemma with Algorithmic Stablecoins
   Source: https://www.gsr.io/insights/chart-of-the-week-solving-the-stablecoin-trilemma-with-algorithmic-stablecoins/

4. A Note on Cryptocurrency Stabilisation: Seigniorage Shares—Robert Sams [PDF]
   Source: https://blog.bitmex.com/wp-content/uploads/2018/06/A-Note-on-Cryptocurrency-Stabilisation-Seigniorage-Shares.pdf

5. USDC Attestation, Grant Thornton, Apr. ‘22 [PDF]
   Source: https://www.centre.io/hubfs/PDF/2022%20Circle%20Examination%20Report%20April%202022.pdf?hsLang=en

6. BUSD Attestations, Paxos [PDF]
   Source: https://paxos.com/attestations/

Ascendant web3 fitness-tracking app Stepn continues to see consistent growth as the app’s closed beta slowly opens to more users. The app crossed 600,000 cumulative users who have made a transaction with their in-app wallet as of Saturday, May 28th. There was also a notable increase in daily active users throughout Q2.

What is Stepn?

Stepn is a mobile app that uses GPS and your phone’s accelerometer to track movement distance, direction, and speed to gauge fitness output. Users are able to purchase Stepn’s in-game shoe NFTs, which allow the user to earn the platform’s native token, GST, as a reward for engaging in exercise. The NFTs currently correspond to three activities—walking, jogging, and running—each requiring the user to move within a speed range commensurate with each movement. Walking requires moving between 1-6 km/h, jogging requires 4-10 km/h, and running requires 8-20 km/h.

When the user completes an activity, they are rewarded with GST. GST can be used to repair your shoe NFT (which degrades over time with use), upgrade your shoe to higher levels to unlock greater earning power or mint new shoes. The chart below shows cumulative shoe minting, which has trended steadily upwards over Q2. This growth is both the expected result of sustained user growth, but also a sign of new and returning users reinvesting their activity rewards.

We can also see a slight upward trend in “Shoes Per User,” which is a further sign of reinvestment and a positive sign of the growth of the app’s ecosystem. Each user has the option to purchase multiple shoes from the in-app marketplace, or they can mint new shoes using GST earned by completing activities. An increase in shoes per user shows an increasing investment in the game—both from outside investment and reinvestment of in-game rewards. It is always an option for users to withdraw their GST or GMT (Stepn’s other native currency), so a steady rise in asset purchases points to increasing adoption.

What Is the Entry Price?

The entry price to buy a shoe NFT fluctuates day by day. As of this writing, the floor price for any shoe in the marketplace is 8 SOL, equivalent to $341.76. Over the past several days (from 5/25-5/28), SOL has stayed in a tight range between ~$42-44, while the floor price for any sneaker has ranged between a low of 8 SOL and a high of ~12 SOL.

How Do I Participate?

Currently, the only way to gain access to the app (which is still in beta) is to find an unused invite code. Registered users can send out two invite codes per account. Codes are also posted on Stepn’s Discord every 12 minutes, but these codes are first-come-first-serve, so you’ll have to be quick to beat the crowd.

Once you have a code, you can create an account in the Stepn app and enter your invite code when prompted. Once in the game, you can take a tour of the app, and set up your in-game wallet. This will allow you to transfer in SOL from an outside source, which is required to purchase assets in-game.

After transferring in a SOL balance, you can browse the app’s sneaker marketplace to find a shoe that works for your exercise preference and budget. Once you have purchased the sneaker, it can be equipped on the home page of the app. From there, you can press ‘start’ and begin exercising within the NFTs movement speed range. The app will track your activity and calculate rewards automatically, which will be reflected in your in-app wallet.

A friendly security reminder for web3 newcomers: do not respond to DM solicitations that request or offer unused codes or anything else. Scammers use this tactic to lure people into DMs to attempt to steal personal information.

Also, never reveal recovery keys/secret keys to anyone for any reason. Revealing your public wallet address is okay (but only if you want to dox yourself). Be careful where you post your public wallet address, though (it’s like publicly posting your email address).

Some Housekeeping for Vault:

Posts will now be published weekly on Sunday at 8am. This will ensure more time and effort are allocated to each post. The focus is more and more on quality over quantity, and this adjustment will help bring Vault to a new level of quality and depth.

As always, thanks for reading!

—Zach

• gTrade uses an incentivized token mechanism to achieve overcollaterization and has facilitated a total of $13.17 billion in cumulative trades.

• The platform marks prices using a custom oracle. This oracle creates synthetic prices, a process that differentiates gTrade from other decentralized non-custodial exchanges such as dYdX.

As the number of decentralized alternatives to traditionally centralized products heats up, we should begin to look for promising emerging protocols that help to decentralize offerings that are traditionally centralized in nature. One such protocol is gTrade, a decentralized trading platform enabled by the Gains Network.

A Brief Overview of the Platform

Gains Network launched gTrade in its current form in January 2021, when its V2 launch went live after a short hackathon. gTrade was initially based on Ethereum as an ETH pool, and the GFARM2/ETH pair.

The token was then bridged to the Polygon network to take advantage of lower fees and a faster trading experience. On Polygon, GFARM2 was deprecated in favor of the new ERC-20 token, GNS, which was split at a ratio of 1:1000.

How Do the GNS Tokenomics Work?

gTrade relies on a novel mechanism to regulate its trading activity. An ERC-20 token, GNS, is issued by Gains Network, which creates a GNS/DAI liquidity pool that collateralizes a DAI vault. Every time a trader closes a profitable trade, GNS is minted. Likewise, every losing trade results in GNS being burned. The platform charges trading fees on every trade and those fees are given entirely to holders of the GNS token. This incentivizes users to hold the token over the long term, as they are being rewarded with an ongoing stream of user-generated trading fees for holding the token.

gTrade’s Novel Pricing Model

gTrade relies on a novel pricing mechanism, developed by Gains Network, which is the first of its kind on a mainnet. gTrade uses a Chainlink oracle to create a network of exchanges that stream current prices to the oracle. This Decentralized Oracle Network (DON) then calculates the average price across all eight networks to arrive at a synthetic price.

This pricing mechanism provides several immediate benefits to traders. First, the oracle filters out sharp, single-candle spikes in price which can liquidate a position even though there was not a material directional move in price in the underlying asset.

Second, the gTrade smart contract is set up in such a way that gTrade cannot open, close, or alter your position in any way. This creates a trustless environment for traders, who no longer have to worry about platform interference in their trades. The only situations in which the smart contract can take action on your position are if you have granted explicit permission by setting a stop loss or a take profit, or if you reach the position’s liquidation price. The platform does reserve the ability to pause new trades, but this would not affect any open positions.

Third, because of the decentralized nature of the platform and its pricing mechanism, gTrade does not require a login or deposit to open trades. Users take sole custody of their funds at all times, the platform only works to facilitate trades—so gTrade does not require any user information to use the platform.

Integrating NFTs

Gains Network has integrated NFTs into its platform as well. Users can purchase these NFTs, which total 1500 and come in five tiers. These NFTs confer platform benefits to the user who holds them in their trading wallet, as indicated below:

These NFTs can also be staked into the GNS/DAI pool contract, which adds an additional percentage to the staking rewards the user would have otherwise received. These rewards are detailed in the “LP Boost” column in the chart above. As of this writing, the floor price for the Bronze NFTs is 0.73 ETH, while the price for the Diamond NFTs is 6.5 ETH.

Opportunities for Gains Network

Gains Network plans to launch stock trading and forex trading on gTrade. As of writing, 23 stocks have been launched for trading. Including:

$AMZN, $MSFT, $TSLA, $SNAP, $NVDA, $V, $MA, $PFE, $KO, $DIS, $GME, $NKE, $AMD, $PYPL, $ABNB, $BA, $SBUX, $WMT, $INTC, and $MCD.

This is possible because of gTrade’s synthetic pricing using their custom DON. Theoretically, the DON can derive any asset price given steady information flows from exchanges, potentially giving the platform the ability to host trading for any liquid asset that has sufficient price information.

If gTrade can continue to develop its vision of decentralized synthetic trading

Risks to Consider

Of course, these experimental new features are not without risk. The main risk to platforms like gTrade is regulatory crackdowns on decentralized synthetic exchanges like these. The platform does not at any point own the underlying asset, regulators may find these synthetic platforms to be too inherently risky for the average trader, and ban their use.

The other risk to consider is the incentive structure of the GNS minting/burning mechanism. Unlike other platforms that have tried to create to regulate a vault or treasury by implementing a minting/burning mechanism, gTrade has real revenue streams in the form of trading fees that it can use to incentivize people to hold GNS. This structure is inherently more stable than other projects that use new liquidity to provide rewards to previous stakers—a system that many have critiqued for being too Ponzi-like.

The platform also lags other similar decentralized trading protocols such as dYdX in users, as seen below. gTrade has had 4,851 unique users, compared to dYdX’s total user count of 57,077.

The Path Forward

Gains Network has real intellectual property with its DON. The network has a compelling model for incentivized token rewards based on real revenue streams. It has a small but loyal user base that has remained steady over time and throughout various market conditions. If the network can continue to execute on its vision, and navigate the changing regulatory environments in the locations where its users live, then it may be able to continue to grow and capture additional more and more of the market for decentralized leveraged trading.

Disclosure: This is not financial advice. This analysis is for informational purposes only. Experimental, unregulated platforms can carry unknown risks, including the risk of loss and potential legal risks. Users should understand the scope of any potential risk before engaging with any platform. The past performance of any asset does not dictate future performance. The risk of loss is possible with any investment. Do your own research and work with a registered financial advisor if necessary.

I do not own any GNS, nor do I have any stake in Gains Network or gTrade. I do not and will not receive any financial incentive to write about Gains Network or gTrade.

We have come to the end of the low interest rate era. A nearly 13-year bull market that saw massive economic expansion and covered nearly the entire existence of crypto—which sprang forth from the 2008 Bitcoin white paper. If you include the crash and recovery from the 2020 Pandemic, this is the longest bull market in history. But now it appears to be coming to an end.

The S&P 500 briefly entered bear market territory on Friday, crossing the threshold marked by a 20% drop from the trailing 12-month high on January 3rd. By the end of trading, the market had jumped back above the threshold, currently sitting just shy of 19% down from the previous year’s high.

A 20% drop from the previous year’s high is the traditional indicator of a bear market. But these times have been anything but traditional, which leads some to wonder if the 20% indicator signals anything except extreme volatility or simply an overheated equity market fueled by low rates.

The Pandemic Market Crash of 2020 caused a steep sell-off, crashing the market by 35.48% in less than two months. Equities rebounded seemingly overnight. The market recovered all losses within 147 days.

In the recovery from the Pandemic crash, Bitcoin saw its largest period of growth to date. The leading coin’s price shot up 1,057.78% in 392 days. The beginning of the blue window in the chart below is the lowest point of the Pandemic crash.

Notice the tight coupling between the bottom of the Pandemic crash, and the ensuing measures the U.S. government promised in order to prop up the economy and restore stability to the equity markets. Although the S&P 500 continued upwards in a nearly unbroken straight line, crypto experienced a sell-off from April ‘21 to June ‘21. Bitcoin tumbled back to $28,792 at the June ‘21 low, before exploding upwards to its all-time high of $69,044.77 in November ‘21.

By the time the S&P began its current downtrend (noted by the yellow line on the left half of the chart below), the total crypto market cap had already fallen over 24% (noted by the yellow line on the right half of the chart below).

The preemptive sell-off in the crypto market is largely attributed to the anticipation of the Fed raising rates and the effect that would have on high-risk assets, which categorically encompasses most if not all of crypto. In taking a step back to get some perspective, I consider the preemptive sell-off in crypto to simply be profit-taking and speculation around the performance of crypto as a risk asset in a higher-rate environment. I don’t view the euphoria of the last 24 months or the impending sell-off to indicate any structural risk to the long-term trend of digitization.

Digitization is crypto’s raison-d’être. We are not going back to an analog world, and much of the behind-the-scenes technology that controls the global financial system is so antiquated that it may as well be analog. SWIFT is outdated. Interbank transfers are slow and outmoded. These ancient systems carry the weight of our global economy. Meanwhile, distributed ledgers are decentralized, efficient, immutable, and anonymous. Any analysis of crypto as a risk asset misses the real narrative.

The only narrative worth investing in is digitization, and the analysis is simple. Is the world going to be more digitized than it is today in 10 years? 20 years? 30 years? 50, 100, 200 years? Hopefully, your answer is yes to all of the above. Another question: are nation-states, as an organizational concept, getting stronger or weaker? Will the future look like siloed economies within borders trading with each other?

If you believe in increasing digitization and a slowly dissolving nation-state, then the best technology we have to facilitate a global, distributed financial system is distributed ledgers—so if you have the appropriate investment horizon, there is no better narrative to bet on for the next 100 years.

Any rational participant in the crypto space wants to see people take chances to try new things, with an understanding that many things will not work. When things fail, we should take apart the rubble to figure out what went wrong, so that we don’t repeat the same mistakes. But we should stop short of disrespect and chaos, as mobs tend to form easily in the aftermath of financial meltdowns. We also have to contend with a larger issue. Past a certain point, attention is finite—we only have so much to give.

This begs the question: What kinds of projects merit our attention? We have to start with the understanding that we all have a bias for recency. Terra has been one of the only major news items lately, and so we have focused on it nearly to the exclusion of everything else. This generated hype around the project—agnostic as to whether the outcome is positive or negative—which ultimately gives Kwon exactly what he wants: To be in the spotlight.

As of today, a politician from South Korea’s ruling party called for hearings on the Terra collapse, indicating that Kwon should appear in front of the parliamentary committee.

I understand the irony of writing about Terra while simultaneously calling for us to direct our attention away from Terra. But really this piece is about the broader issue of hype-driven projects that rile people up and distract them with shiny things (20% risk-free yield, up-only price narrative, etc.)—bringing all that trapped attention to a euphoric high and inevitable crash.

We are also quick to forget the actions of bad actors, which allows those same actors to continue with their behavior. In light of all this, perhaps the best thing for the industry, DeFi especially, would be for us all to simply move on.

So the true subject of this piece, as referenced in the title, is the responsibility of voting with your attention. Everything you pay attention to casts a vote of its attention-worthiness. That doesn’t always mean approval, just that the given thing is worthy of attention. Be it a car crash on the highway, a clickbait news article, a person, or a company—anything you direct your attention towards is a tacit vote in its favor.

That attention is valuable. Anything or anyone that accrues enough attention can use that same attention to a number of ends. Some uses are better than others.

If we can individually focus on good projects and networks with solid fundamentals—we can collectively steer the space in a better direction.

The entire collapse took less than two days.

Luna’s all-time high price was $119.18 on 4/5/22. It fell to a current price of $0.00044927. UST depegged from $1 and is currently trading at $0.21.

Below is an explanation from Jack Niewold on the background and mechanics of the collapse.

What follows are my thoughts about how this collapse will affect DeFi and the surrounding crypto ecosystem. It is clear that the shockwave from the crash will cast outward and effect much more than DeFi alone. The downfall of Terra may end up being the harbinger the SEC needs to move on regulation of stablecoins.

From Hester Pierce directly:

I expect the aftermath of UST/LUNA will put a temporary chill over the entire space. The market needs time to digest. People have become skittish as a sense of doubt and uncertainty pervades the space. Those with the vision will remain steady, but casual participants will likely experience doubt and uncertainty.

People looked to the major coins for a sense of stability. USDC and Tether held their $1 pegs throughout the crash—a sign of strength when it was needed most.

In time, money will start moving again and new protocols will emerge.

Regulation is inevitable. We will have to do our best to take it in stride. The most strategic participants will learn to work with regulators to push for sensible regulation. It’s a fool’s game to pretend that crypto will not be regulated in the U.S. The priority is for the most essential aspects of the crypto space to remain intact.

Of the many essential aspects, the most fundamental is the self-custody of wallets. Regulation that would require third-party custody (as is done with equities/brokerage accounts) would destroy the space as it’s known today. It is crucial that crypto remain open and free. Individuals have the right to custody their own assets, even with the risk of theft and loss.

Third-party custodians provide a fine service to the market. At full adoption, most will choose to custody their assets with a third-party—willing to trade off sovereignty for convenience. This is a good trade for most people.

A small percentage will continue to take the responsibility of custody onto themselves, as many do now. This is a critical component of a thriving, global crypto ecosystem. The right to self-custody acts as a check on the concentration of economic power in the hands of the institutions. If you have the ability to withdraw your assets into your own custody, the check exists. If you must interact with a third party to engage with your assets, the check does not exist. The best a retail investor can do today is move their equities and related assets from broker to broker.

The right to self-custody is woven into the fabric of crypto. It must not be regulated away.

If there is a silver lining to the financial devastation of Terra’s demise, it is that people have learned what happens when a large financial structure implodes. It is a painful lesson, but a powerful one. Things that may have once been seen as “too big to fail” are now understood to be things that can fail. We have a shared and visceral understanding of what collapse looks like in a decentralized market.

The destruction of Terra carves a permanent reminder into the blockchain of the pitfalls of hubris, ego, greed, and poor design. Hopefully, this will become the cautionary tale that drives the ecosystem in a better direction and keeps it away from these pitfalls in the future.

Terra’s collapse will embolden the critics. They are already beginning to speak up. If the crash brings the entire space into a prolonged bear market, the critics will use take the opportunity to attack—as they did in 2018 and 2019. Prepare for loud criticism in the short term. The noise will die down as the critics lose interest and move on to other things. The core of the space will survive and continue to talk, build, and participate.

Critics will attempt to parlay vulnerabilities in DeFi into an indictment of all crypto technologies, including NFTs, GameFi, and more. This is nothing new— it’s simply an extension of dug-in opposition to crypto finding a new vector for criticism. Anyone in and around the space can separate the projects that get criticized most heavily in the corporate media from the innovative things happening deeper within the space. But communication fails because the loudest critics and the smartest people in the space are talking past each other.

Many of the NFT projects that became popular during the last bull market may fade away, but NFTs as a technology have a bright future. They will broaden into different applications as they are adopted by more industries. This is possibly the end for the profile picture (PFP) boom that brought projects like the Bored Ape Yacht Club to the mainstream. Now, NFT concepts with specific applications are rising in popularity—such as music NFTs that can share an artist’s royalties with fans.

We can’t forget that many people lost everything in the collapse.

It’s a terrible day when this much wealth vanishes nearly overnight. It also gives us an opportunity to explore ways to keep this from happening in the future. A common saying in crypto is, “don’t invest what you can’t afford to lose.” This takes the inherent volatility of the crypto markets into account in helping people to understand the importance of risk tolerance. A person must know how much risk they can afford to take. They must also remain skeptical of investments that proclaim to be low-risk, especially if they cannot explain how the investment works. No asset, currency, or protocol is “risk-free” in crypto. Everything has a risk profile. This becomes most obvious when taking the investment horizon into account. The shorter your investment horizon is, the lower your risk tolerance should be.

This is a difficult moment for crypto. But it is still early, and the space will continue to iterate and grow over time. As with any macro technology trend, it will take years (if not decades) for crypto to reach its full potential. We must keep a long-term focus, and not worry about short-term price movements. We must also tune out much of the hype as possible. Every investment must be understood, the same as it has ever been in all other markets and asset classes. We must focus on the best projects with the most potential, while also keeping an eye on new projects without giving into a frenzy and becoming blind to risk.

Most of all, we must remember that economies and markets have always been cyclical. Patience and conviction will be rewarded over time.

As decentralized finance (DeFi) grows, more and more value is locked in the smart contracts of various protocols. These large pools of capital are vulnerable to smart contract hacks and exploits. Nexus Mutual, founded in 2017, emerged as a way for people to cover themselves against loss.

Nexus Mutual offers decentralized insurance. Unlike the traditional insurance model, Nexus is owned entirely by its members. Everyone’s incentives are aligned with a community ownership model. The protocol issues a token (NXM), which provides an economic incentive for members to participate in risk assessment, claims assessment, and governance.

Coverage options are segmented into three use cases.

Yield token. If you hold a yield-bearing token, the token will often depend on other protocols to generate the yield. If there is a failure in any of those dependent protocols, you would be able to claim any losses greater than 10% via Nexus.

Individual protocols. You can also protect yourself against exploits and losses on any individual protocol where you have funds committed.

For individual protocols, Nexus covers losses due to exploits in the protocol’s smart contract or related code, flaws in the economic design of the protocol, vulnerabilities in governance set-up, or problems with the protocol’s oracles.

Custodians. This coverage protects against losses or frozen assets on third-party custodial platforms, such as centralized exchanges or custodial wallets.

Nexus Mutual’s Balance Sheet

Looking at the balance sheet, we can see the Total Value Locked (TVL) of $445,572,547.

TVL typically refers to the total amount of assets staked in a protocol. In the case of Nexus, TVL reflects the total assets in Nexus pools—which you can see below.

Take the Alchemix v2 pool as an example: The pool has a total coverage capacity of 3,400 ETH, equivalent to $8,005,538 at $2,354.57/ETH.

Getting a Quote

The user selects the protocol where they would like coverage to get a quote. Below, we can see inputs for Period and Amount, reflecting the period the user would like coverage for and the amount of coverage desired.

Next, the user would connect their wallet (mine isn’t connected, hence the ‘insufficient funds’ warning), input their coverage duration and the amount of coverage they would like, and complete the transaction. Note the fee of 0.5196 ETH for 20 ETH of coverage, representing an annualized fee rate of 2.598%.

Users can purchase coverage in ETH, DAI, or NXM. It is interesting to note that even with purchases in ETH or DAI, the smart contract will automatically exchange the ETH/DAI for NXM before purchasing coverage with the converted NXM.

Once the transaction is complete, Nexus Mutual covers the user, who can submit a claim if they reach the coverage threshold.

That’s a brief look at decentralized insurance with Nexus Mutual. There is more to cover here, including filing a claim, voting on claims, and protocol governance, all incentivized with NXM.

We’ll cover these additional aspects of the protocol in a future issue.