Bad Actors or Failures Do Not Define The Crypto Industry

There is no point second-guessing the viability of the crypto industry. The industry's active participants are not going anywhere. The crypto/Blockchain industry is a complex set of technology pieces that are still maturing and growing, so it's common that it gets mischaracterized along the way. While its boundaries are still being defined, the ambitions of its dreams are not being lowered.

Increasingly More Severe, But Self-Inflicted Injuries

In retrospect, the tough moments that the crypto industry has endured in the past several years were self-inflicted. Mt. Gox, the DAO hack, Quadriga, every DeFi rug pull or vulnerability exploit and the recent UST/Terra situation were the result of bad/incompetent actors or projects from the industry itself.

What just happened with UST/Terra was not a symptom of a systemic matter. It was just one project. But since everything is interconnected, there is cause for concern because this last disaster and extent of the damages became bigger in scope.

Mt. Gox's losses were into the hundreds of millions, the DAO hack was $60 million, Quadriga was $200M, DeFi rug pulls or smart contract vulnerability exploits are typically in the $50-350M range. But the UST/Terra debacle was a $60B blow, accompanied by another $500B in overall market cap decrease.

That is an order of magnitude jump and it is not to be underestimated, but let’s not allow bad actors or failures to define the crypto industry. There are so many other good parts about crypto and the Blockchain industry that are still in the works:

Web3 is unraveling with its many pieces and use cases: the creator economy, smart contracts, GameFi, DeFi, DAOs, NFTs, token-based models, cryptocurrencies, self-custody wallets, the metaverse and much more. These are the artifacts and mashups of the blockchain economy from which web3 will emerge.

Extreme Enthusiasm or Excessive Hope?

There is no doubt the UST/Terra situation will be analyzed for months and years to come, just like the DAO hack and Mt. Gox fiascos were. Whether it was extreme enthusiasm or excessive hope in an unproven experiment, both of these factors were certainly responsible for compounding the gravity of the situation.

Longer term, we need to wonder if this incident was caused by a rare reckless driver or whether there are other projects or people with potential failures on the horizon.

There is a difference between experiments and fully proven and tested projects. The UST stablecoin relied on a protocol of algorithmic adjustment of supply (arbitrage) to stabilize its price. That type of algorithm is really at the experimental stage, and it did not pass the ultimate stress test that eventually killed it. The utopian thought of an algorithmic central bank is just that, for now.

Cryptocurrencies have given us innovative possibilities in the programmability of money, and it’s very exciting. This led to the field of smart contracts that codify business or technical logic into programs and commit them to auto-run on the blockchain. However, money protocols (e.g. UST) are at another level. They combine smart contracts and algorithms together in a compounded manner. If they work well, it’s great. But if they don’t, the failures can be spectacular.

The backers of Terra (or any other crypto project) shouldn’t be confused with an assurance of success. Backing a project simply means that you are willing to go down the risky path with them. It is an endorsement of the journey, not a guarantee for success. VCs are portfolio managers, and their true north is to diversify risk by investing in multiple projects so that the winner end-up offsetting the failures. It’s one thing if Terra/UST represented 5% of a given fund’s portfolio, but it’s another thing if it was 50% of someone’s investments or savings.

While experiments are necessary, we cannot just rely on the hope they succeed without knowing well what the impacts of failures might be. In retrospect, UST/Terra became too big too quickly due to excessive marketing and misleading analysts (that’s another subject I will cover in a subsequent post).

Stablecoins are essential and important for the future of cryptocurrency. Perhaps we should confine their constitution to the simple backing of verifiable assets, and refrain from exotic algorithms that are broadly at the experimental and risky trials stage.

“It takes a lifetime to build a good reputation, but you could lose it in a minute”. Such were the famous words of Will Rogers.

The crypto industry has been working hard to build a good reputation for the last 10 years, despite it being perceived to live in a closet as a fringe sector and not getting the respect it deserves.

We are still testing the boundaries of what's possible or not. Back in the early Web/Internet days there were many stupid ideas and failed ones. And there were spectacular failures as well (Pets.com, Enron, Webvan and others).

We should not let failures or over zealous / reckless entrepreneurs define the crypto industry. Let us extract the lessons, and spring forward without that baggage.

We Need to Let Crypto Come Out of The Closet

The crypto market just had a rough week in mid-May, like a hurricane or tornado hit it. 

As the overall market cap of cryptocurrencies shed billions of dollars in value, the doomsayers came out and repeated the same absurdities: this asset class has no backing, Bitcoin is useless, cryptocurrencies are going to zero. 

Amidst this backdrop, there is cause to wonder if the cryptocurrency revolution is progressing well or facing existential challenges? 

There is no denying that challenges exist. But a significant macro challenge has been lurking since the beginning:

the crypto industry and its participants are not getting enough acceptance or respect from the mainstream.

The sad reality is that many aspiring crypto businesses and participants are living in a closet, and it is time for crypto to come out of that closet. It’s time for the industry to be recognized and widely accepted as being credible, long-lasting, strong and fundamentally sound.

We are already in a vicious circle. Bad actors or spectacular failures continue to appear and give reason for the mainstream to disallow crypto to normally co-exist with the rest of the world. For these reasons, the establishment keeps pushing crypto to the edges of business and society, and forcing it to find refuge in jurisdictions with inherent lax regulation. 

A wild west of crypto is not the modus operandi we want, nor is it the desired final state for this industry. But the mainstream needs to start by being more welcoming. The best blockchain entrepreneurs prefer to operate inside more clement jurisdictions where certainty is not questionable.

Today, many businesses operating in the crypto industry are being discriminated against in more ways than one, a situation that is not stemming from their own making. 

Here are some data points:

• Blockchain startups can’t easily open a bank account at established financial institutions

• Startups have to choose legal constructs rooted in offshore jurisdictions, a situation that makes it even more difficult to be accepted by many Western financial institutions

• Fiat transfers from exchanges to banks are scrutinized, often resulting in sudden account closures

• The SEC has yet to approve a spot Bitcoin ETF, as they keep rejecting or placing on hold one application after another

• Many exchanges are not US-based and rely on external jurisdictions that are more relaxed or offer little oversight on safety or risk controls 

• US/Canadian consumers are often shut down from participating in token offerings

The opposite of this situation is exactly what needs to happen. 

Embracing or Repelling Crypto? 

I don’t understand why the US government keeps beating down crypto when the industry is at its doorstep begging for acceptance.

Bitcoin and the underlying blockchain technology are not a purely American invention, but it might as well have been. Most of the original core developers that worked with Satoshi Nakamoto were in the US. Nick Szabo, credited to be the original proposer of smart contracts is American. Ethereum took roots in Canada. Some of the most successful blockchain businesses are US-based. The largest and most successful VC funds supporting the blockchain are also in the US.

So why doesn’t the US government embrace an industry that can easily produce the next FAANG (Facebook, Amazon, Apple, Netflix, Google) set of companies, a fate that would hugely benefit the US economy at a scope of billions of dollars?

Instead, by pushing exchanges and blockchain projects to operate in less stringent regulatory environments, bad habits are being formed and excesses committed without adverse repercussions. 

Blockchain businesses should feel safe about being in the US. I regularly talk to smart US founders that wish they wouldn’t have to select offshore locations to concoct their legal structures, token offerings, or governance jurisdictions. 

Let’s Talk About Regulators

When it comes to regulators, there is a difference between protecting investors and preventing them from benefiting from available opportunities. When regulators get fixated on the bad side of crypto, they start to mold their frame of mind around protection at all costs, and that results in an unbalanced outcome and a self-fulfilling prophecy of negativity. 

Regulatory knee jerk reactions are not going to solve anything. This is a time when regulators need to be super smart and display a deep understanding, so they don’t throw the baby with the bath water. 

Actually, regulators need to let everybody in, to get closer to them, so they can regulate them better. Strictly practicing enforcement without clarifying the rules will only continue to frustrate industry participants and push many to jurisdictions that allow them to perpetuate bad behavior. The situation is not as simple as pounding the table while insisting the “tokens” debate is strictly about security vs. commodity vs. utility.

What if crypto were accepted and not discriminated against and became part of the normal business environment? Good things would happen. 

If you want to protect consumers, don't scare off companies, people and projects. Embrace them and learn from them so you can regulate the bad parts but let innovation thrive in the good parts. 

Now that the last hurricane has passed by, the good parts that remain are what counts. 

The proverbial - what doesn’t kill you makes you stronger - applies here. 

There is no doubt the crypto industry will continue building with a stronger base than before. 

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.

Publishing in the Decentralized World

I've been lurking around what's possible when you want to publish content across a peer-to-peer network, and not on a central server or one owned by a hosting company.

And I've been watching the new wave of "domain/name" registrations on the blockchain, as an alternative to using central registries as we are currently used to.

UnstoppableDomains recently approached me, asking if I would consider publishing content with a new domain wmougayar.crypto. They kindly offered that domain to me.

Yesterday, I took the dive. I connected my Metamask to a new account on UnstoppableDomains, claimed my domain and registered it on the Ethereum blockchain, chose a template, published it on IPFS, then wrote my first blog post.

The whole experience was like being into a new world. I compared it to publishing my first website in 1995, or my first crypto transaction in 2013. You only get it when you actually do it.

To read my journey on the decentralized web, head over to wmougayar.crypto, but here's the catch. If you're on Chrome and desktop, you need to install this special Extension. If you're on Android and mobile, you can use the Opera mobile browser where the capability for browsing .crypto domains is built-in. Both experiences become seamless.

This is clearly a v1 of what's possible, and certainly, this experience is not optimized for mainstream adoption yet. But like most new technologies, they often start being a bit awkward and are mostly used by early adopters.

To read my post on the other side of the web, head over to wmougayar.crypto and let me know what you think if you do take the same dive in publishing one.

Decentralized Autonomous Associations (DAAs): A Variation on the DAO Concept

There is no shortage of experimentation in trying to apply blockchain technology to organizational dynamics [this is different than governing technical blockchain protocols, reference: Let’s Be Clear About What is DAOable and What is Not. Decentralized autonomy in organizations (DAOs) is one popular metaphor that has seen a surge of entrepreneurial activity especially in the past year.

Recent interpretations of the Decentralized Autonomous Organizations (DAO) concept have lead to several implementation approaches, including notable ones by Aragon, MolochDAO, MarketingDAO, MetaCartel, LAO and others.

The differences between each DAO implementations abound, but the most common denominator is the desire to inject smart contract technology into how organizations/processes are run. And each one of the above named examples (and other unnamed ones) assumes a different set of assumptions as a starting point.

One new variation is the concept of Decentralized Autonomous Associations that takes roots from the Swiss Association legal structure (recently popularized as the choice for the Libra structure).

In my opinion, any successful "decentralized autonomy" initiative needs to be able to simultaneously satisfy the three key pillars:

• Technical
• Organizational
• Legal

The Swiss Association has lower startup hurdles than a Swiss Foundation. In the context of the DAA, the autonomous activity focuses on certain membership-related functions, which is a realistic scope that doesn't risk slipping into the abstract during implementation.

Swiss legal firm MME (who pioneered the implementation of the Swiss Foundation structure for launching blockchain protocols) has documented a process to allow DAAs to exist, aided by a set of smart contracts that Validity Labs has started to codify.

Along with Luka Müller and Thomas Linder of MME and Sebastian Bürgel of HOPR Network (formerly co-founder at Validity Labs), I will be discussing the DAA and many of its aspects tomorrow Thursday May 28th at 10:30AM EST / 16h30 Central European Time during a Zoom virtual session. You can register (free) by using this link.

I'm interested in diving further into the DAA concept. I don't pretend to have all the answers pertaining to how this might evolve, but it's definitely an area that deserves experimentation and implementation.