Gaining Perspective While Losing Capital

There is nothing better than a rude awakening to regain one’s sense of reality. I’m talking about the latest market meltdown that might have caught many by surprise. 

What’s important is to gain a sense of perspective while trying to analyze what just happened. Taking it from the top, by now, we know what just happened: crypto’s market cap went from a peak of $2.5 Trillion on May 12 to about $1.3 Trillion on May 23, 11 days later. On the way up, the euphoria overtook the sense of reality. As we are down now, we must acquire some wisdom as we shed the reality distortion that accompanied the artificial part of rise that didn’t seem to be sustainable.

What can we learn, and what are my views about what just happened? The full impact and implications will only unravel over the next weeks and months ahead, but here are some thoughts.

The fundamentals behind the blockchain are intact. Due to the acceleration in rising prices, the narrative had gotten a little distorted along the way because there was some hype, and there were claims that were not going to be realized. 

To start with, here’s how I look at the overall blockchain market in terms of segmentation. It might be overly simplistic, but simplicity brings clarity. 

• Infrastructure - All the so-called L1 layers, and some L2 peripheral technology. 

• DeFi  - That segment is the locomotive pulling the financial revolution forward.

• NFT’s - The 2nd largest emerging market, after DeFi.

• Services - The oracles of the world, including any technologies that rely on blockchain infrastructure and serve the variety of apps or other market application segments. In other words, this is all blockchain middleware.

• Apps - Where cryptocurrency is used, from financial applications, exchanges and in-app use cases.

We need to go back to a place where adoption metrics matter, if one cares to look at these metrics, and not just at the technical momentum of token prices.

• If you’re an L1/infrastructure, the number of on-chain transactions, fees, and actual wallets / accounts matter. Speed doesn’t matter more than adoption. The faster car manufacturers are not the ones with the largest market share adoption. 

• If you’re in DeFi, TVL, volume of transactions, fees matter.

• If you’re in NFT, since NFTs are goods, it’s an ecommerce story. Revenues matter.

• If you’re a Services protocol or enabling technology, number of transactions / calls matter.

• If you’re an App, transaction volumes, number of users and wallets matter.

One of the factors that made the current situation unsustainable was the fact that valuations were a bit unrealistic because the good and the less good were rising in unisson, without discrimination. High valuations were giving a false sense of security to some projects who were thinking, “look, our market cap is high, so we must be doing well”. Meanwhile, upon on-chain transaction volume inspections, it turns out the Emperor had no clothes!

How will we know if the correction is over, or if we have acquired some sense of wisdom?

If everything continues to move up or down in unison, that’s a bad sign. If significant developments from market leaders don’t move prices forward, that’s a bad sign. The herd mentality is an artifact of dumb investing or FOMO jitters. Sell-offs are never rational, but in the aftermath, there is always an opportunity to find value where value is to be found, and to avoid re-investing where the value doesn’t exist. For example, DeFi protocols might be a good place, because DeFi isn’t going away anytime soon. Rather, DeFi is just getting started. Total Value Locked  will grow again, even if some of the yield farming might become harder to find and mine. Rising volumes will make-up for lower transactions fees as DeFi markets become more efficient. 

No more meme or cute animal coins. Please. Social, cultural artifacts are dangerous ingredients to responsible value-based investing.

I’d like to see some of the zombie chains (ones with low to no on-chain transactions) not recover as well as the rest of the market. Further separation between winners and losers needs to happen. In the latest run-up, Ethereum has distanced itself from other “competing” Layer 1 protocols. As Ethereum cemented this lead, it increased its overall dominance, and got closer to Bitcoin on a relative basis, even if the proverbial flippening may have been postponed for a while. 

The reality is that many projects’ treasuries are flush, and can show signs of life even without much to show for. Some protocol tokens have decades of runaway ahead of them, so they could continue faking a lot of activity, fooling supporters, and clouding the rest of the market.

Bitcoin mining is going to get more environmentally responsible, thanks to whistle-blower Elon Musk. The environmental responsibility narrative needs to gain even more awareness. Even if some Chinese miners are making progress in shedding the industry’s bad reputation around carbon emissions, the shift towards less reliance on Chinese mining is already underway, and is a good de-risking move for that whole sector. 

The naysayers are going to repeat their refrains - that you can lose all your money in crypto, and that’s a risky market. Traditional finance is either scared, or in the avoidance phase. However, the demand for cryptocurrency and its many applications is not abating, despite the crypto markets tendency for sadomasochistic behavior. What doesn’t kill you makes you stronger comes to mind.

A market correction is always a good thing when it serves to reset expectations. Hopefully some weaker projects won’t recover as quickly as others, if money gets smarter along the way. If everything starts rising again in unison, it means dumb money is still in the system, so we must be prepared for more erratic behavior.

We will know over the next few weeks.

There is no Web3...Until There is One.

The blockchain industry is flush with claims of Web 3.0’s arrival. There is no shortage of protocols, technologies or applications claiming to be the conduits to, or harbingers of this “next” version of the Web. 

However, the notion that Web3 is a logical evolution that arrives after Web2 can be challenged.

One of the flaws emanating from the Web3 cheerleaders is to start with a technical architecture vantage point. What ensues is a series of technical claims or features that appeal to technical stakeholders, and fall short from reaching a required mainstream to effectively make a dent in declaring the arrival of a new paradigm. 

Even the term Web 2.0 is technical jargon to the actual end-users that ended-up validating that era. If you ask common users that consume social media today, they will not be familiar with the term “Web 2.0”. What they know is they can post a photo, share a video, publish their thoughts, debate topics, or broadcast themselves doing silly or smart things. 

Other technically-driven revolutions with high paradigm shift expectations have had a history of failure. Two recent ones come to mind. 

In the mid-2000’s, SOA (Service Oriented Architecture) was all the rage, and it was going to change everything. It was a “do or die” for IT departments in mid to large companies. IBM and other big software companies were at the forefront of this trend. A few years later, that flame fizzled, because SOA didn’t deliver its revolutionary promises and remained a niche.

In the early 2010’s, the Semantic Web was another attempt at owning a “Web 3.0” narrative, and it was supposed to move us beyond Web 2.0, because linking content via meta depictions was going to be so important, and it was the original goal of the Web that Tim Berners-Lee had envisioned. Many readers probably don’t remember the semantic web. No worries, that promise also fell flat and fizzled away a few years later.  

Fast forward to now, and we have blockchain technology fueling another Web 3.0 resurgence. (and I’m not counting those that believe that AI and machine learning are rather the harbingers to a Web 3.0)

One of its most ardent flag bearers is the Web3 Foundation, but it is a front-house to Polkadot’s blockchain, and disguised as the industry’s next lighthouse. 

The problem with all these technically-driven so-called paradigm shifters is that they are of technical nature, and their scope is limited to a technical segment of the market. Technology is always an enabler for something bigger, and it is a lever. Technology alone cannot reach a mainstream market. Rather, it’s usually something else that is enabled by technology that makes it into the mainstream.

Web 2.0 happened because mainstream users started to share content on the web and get gratified from instant publishing. This was not a technical trend, but it was a powerful use case that reached societal and business levels.

Today, we take it for granted that anyone can write and immediately read on the web what they just wrote. But that wasn’t the case at the beginning of the Web. 

Do you know what this read/write feature was called when it first started? 

Well, it started being called the two-way web. 

I remember being at an O’Reilly P2P Conference in 2001 in San Francisco, where my friend Rohit Khare (from CommerceNet Labs) demoed this cool feature showing a screen where you type something and it was immediately re-published on the web. Wow. 

Imagine if we had continued to market this new new feature as “the two-way web”. Two-way web was just a technical depiction for an enabling fundamental technology that later became known as read/write web. Much later, Facebook, Twitter, Instagram and others didn’t even call it read/write. They called it “share”. 

Four years later after this seminal demo, in 2004, Web 2.0 was officially kicked-off via the first Web 2.0 conference, as the market started focusing more on the application of the technology instead of the technology itself.

I’m offering this historical backdrop as a useful perspective for those who are rushing in declaring ownership of, or leadership in Web 3.0. The reality is that no one will really own Web 3.0, just as no single organization owned Web 2.0. 

A new era is more visible by its applications, not its enabling technologies that later become largely invisible. If you are a technologist, all you see is technology. 

With all that being said, do I believe that the blockchain-driven Web 3.0 trend includes innovative technologies that have the potential to usher us into a really new Web era? 

Absolutely yes. 

However, until the patchwork of Web 3.0 technologies finds itself inside mainstream applications that have a broad and large market reach potential, we will not have a Web 3.0 yet.

This post was a part I and a precursor to another post that I will publish in a few days that will list the potential applications that have a promise of being the next mainstream drivers for blockchain-technology. It will be more than one, but less than 5. 

The real promise of Web 3.0 is still up for grabs, and there are options worth waiting for. 

There is no Web 3.0 future until there is a present one. 

The Elusive Value-to-Usage Linkage in Cryptocurrency Market Valuations

We continue being obsessed in wanting to draw rational relationships between the price of crypto-tokens and the value behind them. There is no shortage of research and analytical viewpoints from analysts, entrepreneurs, developers, pundits or investors attempting to draw definitive relationships that are reliable and widely applicable. Just Google “crypto tokens valuation metrics”, and you will see the variety of what has been written so far on this topic.

My own last attempt was from September 2019, as I enumerated 9 different variables for measuring the health of cryptocurrencies and tokens. But I didn’t profess to have cracked the code on a magical formula or found the magical equation that would become the telling star for these valuations. 

As I lamented in 2017 in The Darkness Side And Long Honeymoons Of Token Sales, we are in dire need for fundamental metrics that could be equated to how public companies’ stock prices are routinely valued:

In public companies, analysts and investors use metrics such as revenues, net income, EBITDA (earnings before interest, taxes, depreciation and amortization), EPS (earnings per share), P/E ratio (price to earnings ratio), and sales growth in order to correlate market capitalization justifications.

For ICOs and token-based projects, what are the equivalent performance metrics?

Some time at the end of 2017, there was hope that a turning point might occur, as the number of token users started to increase to the point where it might have surpassed the number of token speculators. That is when I wrote The Other Flippening: Token Users vs. Token Traders.The hope was that usage activity would eventually prevail as the driving force in token valuations. It was believed that the number of actual token users and the sheer usage inertia behind them would overrule the speculators’ sentiment who were thus far dictating the particular value trajectory of a given token. Fast forward to today, 3 years later. I believe we find ourselves caught in the same dilemma. 

Two promising blockchain metrics have struggled to become real prognosticators of token value that we could have banked on, because they failed the test of times. 

First, take gas fees on the Ethereum network, as an example. As the network became more popular (a good thing), it also became slower (a bad thing), resulting in increased gas fees to run the variety of smart contracts. The interpretation of the increased gas fees became a point of contention: on one hand, increased gas fees count as part of “network revenue” (a good thing), but on the other hand, it also meant that each given transaction became too expensive to run on the Ethereum network (a bad thing), and that forced some use cases to consider either moving to Ethereum side chains or other chains (a bad thing for Ethereum). 

What did the Ethereum token price do during this period? First it went up, then it went back down, but it was very hard to establish a real correlation via any type of equation or quantitative measure that could be followed reliably.

Second, take DeFi, a sector that has been described to be “on fire”, and on an aggressive growth trajectory. As recently as July 2020, it was commonly accepted that the DeFi Total Value Locked (TVL) was a good indicator for the valuation of the DeFi market. As TVL continued to grow, so did the total market cap of the top DeFi tokens, until that correlation broke-down shortly thereafter. At the time I wrote my last piece on DeFi in early September 2020, (For DeFi to Grow, CeFi Must Embrace It), the total DeFi market cap was hovering at $16B. Today, it is about $12B despite a TVL continued climb from $9B to $11B today. 

One could justify this pull-back by citing traditional market behavioral dynamics that typically price underlying instruments ahead of expectations, but deflate themselves after the news has been made public, and that is a common psychological yin and yang in markets behavior. Perhaps that was the case. 

That said, keep in mind that the DeFi “TVL-to-market cap” relationship I cited above draws on “macro” metrics, based on the health of the entire segment, and that is a lot easier to quantify than trying to apply metrics to individual tokens based on their own intrinsics. Good luck in trying to translate the macro view at individual token correlation level.

In addition, DeFi had the peculiar artificial reality that for many of these tokens, their price was often driven by automated market maker algorithms that do not factor prior judgement in, or knowledge about usage metrics, and rather derive their core from a given demand / supply dynamic curve and the presence of a variable liquidity pool. Tight liquidity/float pools create artificial price points that need to be tested over time.

This leaves me to conclude that, in the absence of correlatable metrics, we are only left with vanity metrics, or perhaps just “input-type” of data points that could one day find their way into some set of correlative equations that will make sense. 

The other peculiar anomaly between traditional stocks and crypto markets is the fact that, in crypto markets, the same currency that has actual (user) utility is the one that investors/speculators partake in owning. This is in contrast to stocks that are just a unit of account, but cannot be used to purchase related products or services from the underlying issuer. 

You would think that this intrinsic singularity within crypto markets should give room for an even tighter correlation to emerge between usage and value, but this hasn’t happened yet, at least not in a way that we can start to build a body of support behind it. 

Of course, we still have hope that one day, the usage of highly popular cryptocurrencies (whether via user or developer traffic) would append and dictate the actual value trajectory of the underlying token, but that day is yet to be expected sometime in the future. 

Imagine if you were mandated to pay for charging your Tesla via a fraction of a Tesla stock. In essence, you would need to keep buying Tesla stock, (therefore creating demand for Tesla stock and contributing to its eventual rise) in order to pay for an electric charge (excluding from your own charging station for example). Of course, as the Tesla stock price goes up, your actual cost for charging would go down, and that would be a good thing. If for some reason, Tesla owners stopped driving their cars, the ensuing decrease in activity would result in less demand for Tesla stock/currency and its price would dwindle accordingly. But at least, there would be a real linkage between usage and demand, something that is natively intrinsic to crypto tokens. 

In the blockchain space, on-chain fees/revenues still hold a good promise for being a leading indicator of blockchain network value. Ethereum has a proposal for making the fees schedule more dynamic (EIP 1550 and Fee Structure), which promises to make payments more equitable, but also potentially more difficult to correlate. That is certainly a development area to watch.

My friend Evan Van Ness aptly called a number of chains “Zombie Chains”, based on the little number of transactions that actually pass through them. That is an example of negative metric correlation that is nonetheless logical and easy to understand or validate. 

The top 7 🧟🧟‍♀️🧟‍♂️zombiechains have 30+ billion in market cap ($XRP/$BCH/$LTC/$ADA/$BSV/$EOS/$XTZ)

The top 7 DeFi protocols ($AAVE/$UNI/$YFI/$SNX/$MKR/$COMP/$UMA) have 1000x more users than the zombiechains and are together about $3.5b

Which do you think is overvalued? 🤔

— Evan Van Ness (@evan_van_ness) October 5, 2020

We continue to be in the iterative stages of finding the holy grail of correlation metrics between crypto tokens value and usage. 

For this reason, I believe we are still in the stage of qualitative crypto tokens valuation, where the price of tokens is primarily driven by speculative perceptions, brand value, and creator promises. 

How Will DeFi Enter the Mainstream?

I’ve been thinking a lot about DeFi, the latest significant emerging blockchain technology segment.

Despite the excitement and positivity surrounding it, DeFi is not on a good trajectory. DeFi users (just like its creators) are geeky. They are mostly crypto nerds or early adopters.

The innovation around DeFi merits that it grows beyond its early adopters beachhead, but it is facing headwinds because its growth will be limited if it doesn’t break out and start attracting more mainstream users.

For DeFi to thrive, it must enter the mainstream and attract those users who do not tolerate nor understand DeFi’s geekiness.

I’ve written a post on CoinDesk explaining why and how DeFi could grow further: For DeFi to Grow, CeFi Must Embrace it.

I do believe that the central exchanges have an opportunity to incorporate DeFi products into their offerings, but both sides have some work to accomplish, in terms of technical integration and market education.

Here’s the link to the article: For DeFi to Grow, CeFi Must Embrace it.

Ethereum’s Anniversary Is As Distributed As Its Technology

This week is being celebrated by many crypto enthusiasts as Ethereum’s 5-year anniversary, marking the first live release of the Ethereum project (called Frontier) that took place on July 30th 2015, when the first genesis block revealed itself, and developers were able to install the various clients.

In as much as that date marked the initial operations of the Ethereum blockchain, the birth of Ethereum was actually paved by a series of events that led to the July 30th more public manifestation.

For me, Ethereum was born when I first heard that Vitalik Buterin was writing the original white paper that defined it, and resulted in captivating the interests of thousands, and later millions of people around the world. I met Vitalik on January 1st 2014 when the paper wasn’t yet finalized, and became a believer a few minutes later.

For others, Ethereum’s launch became more visible when Vitalik later travelled to Miami, and made the first public presentation about Ethereum at the North American Bitcoin Conference at the end of January 2014.

Then I became closely associated with the Ethereum project and its founders during the ensuing period, leading-up to the launch of another key milestone: the launch of its public sale and its successful completion on Sept 2, 2014.

So, one could say that each one of these following events were important and necessary milestones, all of them leading-up to the “birth” of Ethereum according to any way you’d like to define it:

• First code commit (December 2013)

• White Paper (January 2014)

• Miami public announcement (January 2014)

• Legal formation in Switzerland (Feb-Jun 2014)

• Completion of public sale (Sept 2014)

• EthDev creation (Sept 2014)

• Intense development period (Sept 2014 - July 2015)

• Frontier Launch (July 30th 2015) <—- What we are celebrating today

• DevCon1, its first large-scale celebratory event (Nov 2015)

Contrasting 2015 to 2020, the level of buzz around Ethereum is the same today, and I would summarize it in two words: "Hope and Excitement".

Looking back at the past 5 years, Ethereum has more than delivered on growing the groundswell support from developers. Ethereum has always been about developers, and developers adoption has far exceeded original expectations. Ethereum layed out the vision, and they came.

In typical startup fashion, Ethereum launched on July 30th 2015 when the product wasn’t perfect, nor complete, and this was intentional. During that time, the Ethereum Foundation decided to launch it anyways, against the advice of some its board members, and it was a very good decision even when the product had its flaws. It was time for Ethereum to evolve and grow outside of its womb, not inside of it.

Looking forward while reflecting back, maybe Ethereum will never be entirely finished. Just as with the Internet and communications technology, we go on waiting for 4G and 5G after 3G, or IPv6 after IPv4, Ethereum will always have a “next next” thing, and that's not such a bad position to be in, for progress to take place. Today, the “next Ethereum” is undoubtedly Ethereum 2.0, and even Eth 2.0 will include several iterations.

In 2015, Bitcoin was the "competition", and Ethereum was this newcomer that tried to emulate some parts of Bitcoin, while doing other things better or differently. Today, Ethereum is in the leading position for blockchain development, and other blockchain technologies keep trying to emulate, mimick or differentiate from it, via diverse implementations.

From a market position, there will always be one Ethereum, just as there is one Bitcoin, one Amazon, one Google, one Netflix or one Tesla. Leaders within their own categories are not defined by others. They are defined by themselves.

Since the blockchain lives in dog years, Ethereum’s adolescent journey is now entering adulthood.

Happy 5th Anniversary, Ethereum!