Lessons from the Last Cycle
Welcome to another edition of Vault. This week we’re going to round up a short reading list for the long weekend, take a look at the market, and I’ll write a brief editorial about a few lessons I learned this past crypto cycle.
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.
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.
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