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Panoramic Interpretation of the Status Quo of the Encryption Market: Utopian Narrative and Sector Rotation

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During the course of the bull market cycle, more and more capital chases lower and lower quality projects.

Original title: "Encryption Market Status"

Original author: Kevin Zhou

Original compilation: Block unicorn

Overview

The last double bull cycle in 2020 and 2021 is characterized by "narrative" dominance, a new outstanding project token is The quality of their marketing and memes dictated that deal firms turned to VCs in the first part, and anonymous influencers dominated the traditional VC market in 2017 in the second part.

We have seen from DeFi, NFT, DAO, L2 (second layer), earning Metaverse while playing, to Web3, and then back to NFT, L1 ( Tier 1 mainnet) war spanning the last 5 common narratives. The cryptocurrency space is catching on to new narratives to justify the deployment of fresh capital to satisfy investors' appetite for outsized returns, returns that were fundamentally possible earlier but are now only achievable by reducing complex capital. Acts as each previous holder gradually exits liquidity.

Many years ago, I would have considered this a disgrace, misallocating capital with no productive value, predatory extraction from TikTok users who dreamed of getting rich A stimulus check to escape the monotony of day-to-day life. Every industry has bottom employees, and today, I think very differently. I see each bull cycle as an avatar of the natural life cycle in the animal kingdom, where we have a ravenous food chain being eaten by our slightly smarter but equally ravenous self. Ugly but inevitable, I now believe in crypto accelerationism.

For years we have been unable to make progress in the industry from logic, reasoning, or verbal dialectics of any kind. We can only learn by witnessing the results of most experiments that are doomed to fail (although some experiments do succeed, at least for now). Small block vs big block debate, PoW vs PoS, this PoS vs that PoS, this L1 vs that L1, L1 vs L2, (3,3) vs (-3,-3), Punks vs Apes, DOGE vs SHIB , CLOB vs. AMM etc. can't be solved without actually seeing how they behave in reality.

No amount of theory about mechanic design, drawing models and directions, using historical analogies or hardcore text can convince a community to drop their holy cow and join another an industry. As an industry, we have to viscerally experience the good and the bad, what works and what doesn’t, until it fits into our zeitgeist and forms our collective memory, and then we can move on.

The introduction of jargon is an interesting development in crypto culture, as it serves a dual purpose in traditionally protected and supply-constrained fields such as medicine and law.

First, it saves time when both communicating parties share a library of understanding languages. Second, it prevents outsiders from easily extracting value that "rightly" belongs to insiders. In cryptocurrencies, this is no different. As we become a richer industry, we further disguise ourselves with insider jargon so dirty outsiders can't come and eat our lunch. This should spark more M&A activity as non-crypto companies without in-house expertise look to penetrate this lucrative but very impenetrable space. It's only natural that I'm not making canonical judgments here whether it's good or bad.

Capital allocation always lags behind the emergence of new things and innovations. During the course of the bull market cycle, more and more capital chases lower and lower quality project. Entrepreneurs and scammers alike are more than happy to start new half-baked ideas, creating supply to meet demand from new fiat currencies (new users) that are about to enter the space.

It is when the counter-narrative naked emperor fears a backlash from hornet's nests and bags and people start self-censoring to the maximum extent that this narrative reaches its maximum upward reflectivity. At the height of the mania, people only buy what they think can pass on to the next marginal buyer; valuations become ridiculous, and common sense is drowned out by waves of tribal chants and rain dances, driving prices up. If it weren't for a turn in the macro environment, we might have reached even more absurd heights, and the frenzy has yet to reach its natural peak.

As the tides turned, both in the crypto space and beyond our shores, the "narrative" was weakened and many projects were revealed to be at best A scam; at worst, an outright scam. When madness is the rule, nuance and careful consideration are labeled heresy. Only after the "narrative" has waned can these ideas be published without policing for false ideas.

Currently, alternative tokens are still a bit too plentiful for the industry, and the market pricing seems reasonable. Fed rate hike talk was initially dismissed as not entirely credible, but is now mostly believed and priced in. Further fresh developments in Fed hawkish sentiment resulted in a small dip that was quickly bought. It looks like 4 or 5 rate hikes this year, no more and no less, at least in current expectations. Major assets such as speculative alternatives BTC and ETH have pulled back, but not as severely as in 2018. Most of the third or fourth mega-money raised by crypto VCs will likely go to new projects rather than the old ones they've always owned. If the macro improves, capital may get 10x or 100x from new projects, but old projects may not get the same sequence of growth from here.

Scam and Utopianism

I've been thinking about two new dimensions lately, we Therein various ciphers can be categorized: hoax and utopianism. For example, in the dimension of fraud, I think OHM is not as serious as TIME, and TIME is not as serious as OHM fork. Now I'm not making any absolute claims about how roughly each item is, only relatively, that they can be reasonably sorted in this way. In general, the rule is that copies are rougher than originals. In the dimension of utopianism, an example is that BTC is not as utopian as ETH, and ETH is not as utopian as SOL, LUNA, AVAX and other new L1s. In general, the rule is that new projects try to "solve" problems inherent in old projects, and are therefore more utopian. Now that we understand these dimensions, we can talk about investability, rate of return, and consideration time for each of the 4 projects:

1) Crude , Low Utopianism.

2) Vulgar, high utopian.

3) High pomposity, low utopianism.

4) Highly difficult; highly utopian.

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1 project (low scam, low utopianism)

1 represents the project is an honest effort to solve a solvable problems without some fundamental scientific or technological breakthrough. Examples include (past) cryptocurrency exchanges, new cryptocurrency infrastructure, and possibly some early successful cryptocurrencies like BTC. These tend to be good long-term investments while being considered poor short-term ones, especially during the frenetic phase of a bull market.

Project 2 (low deception, high utopianism)

2 represents honesty Strive hard to build projects of grand design to guide us into a brave new world. These designs usually require at least one, but sometimes multiple, technological breakthroughs to function. You'll often find that proponents of these items bash and discard items in item 1 because it doesn't justify why their item 2 was necessary in the first place.

Utopia is only worth pursuing if the world that already exists is seriously flawed. Project 2 tends to be a good investment in the early stages because the founders are serious and it passes approval. This allows for the creation of a founder myth, and should last long enough to secure at least one or two rounds of funding. At later stages, these projects are good investments only if they break through and "realize" utopia. It’s unclear whether these utopian pursuits will succeed, and to make up for all the failed investments, VCs only need to bet on one of them to win.

Part of the game here is to make 2 items look as much like 1 item as possible. This makes the project look less risky and makes investors feel better. From a game theory and mechanism design perspective, the real requirement for a breakthrough is often waved away, and the proposed design is continually reiterated as perfectly feasible and compatible with perfect incentives. These are higher risk, higher reward analogs of Project 1, diverging in risk but not in potential reward.

It's unclear whether these utopian pursuits will succeed, but VCs only need a few of them to win to make up for all the losers. Part of the game here is to make 2 items look as much like 1 item as possible. This makes the project look less risky and makes investors feel better.

3 items (high grandiosity, low utopianism)

3 represents money with weak execution Predatory projects, an example of this is Bitconnect (a scam project in 2018). It was obvious to everyone in the environment that this was a scam. This is exactly why Bitconnect is targeting people outside of the crypto community, and frankly less sophisticated in general, 3 projects seem more utopian to less sophisticated people, which is exactly what these projects are trying to do, Integrate with project 2. Ultimately, utopianism often masks deceit. That's why Project 3 represents the worst of our industry, the real bottom harvester, where the greedy cheat the stupid. Project debacles are what regulators eventually use to justify tougher regulation of the entire environment. Can you think of any other projects in the crypto environment right now that are intentionally only aimed at people outside the environment? If it quacks like a duck.

4 (highly exaggerated, highly utopian)

4 represents the Rube of our industry Goldberg (Assembly of Complex Mechanisms) machines and perpetual motion machines, which are like project 3. The execution is so good that even industry insiders have a hard time reasoning about these complex contraptions, and even skeptics can only conclude, "it probably doesn't work, but maybe it does because I can't be entirely sure what the problem is ". Does the Gordian Knot have a loose end? Can it be untied? Item 4 does its best to pretend to be in Item 2. Over time, if the project is successful in the short term, they will likely actually try to turn the scam into a real business and migrate to Project 2.

What's the difference between WeWork (shared office business) The former migrated from project 4 to project 2, the latter did not. The full 4 project is a good short term investment for many in the field, sad but true. Partly because project tokens are able to achieve liquidity faster than private companies have in the past, they can effectively "IPO". All the incentives of a public company come with "going public": short-term orientation a few quarters into the future, founders can retire before it's revealed whether the product actually works or whether it has real, unsubsidized product-market fit , especially when using the token itself to pay for usage. Most seemingly successful crypto projects are 4 projects because the incentive to cash out quickly is too great for participants to ignore. Founders, employees, investors, traders, exchanges, market makers, OTC desks, SAFT slingers, lawyers, other 3rd party service providers all benefited from these 4 project scams. The only people who don't benefit are the last ones in the car, drinking Kool-Aids in their crappy car and desperately clinging to a utopian dream sold to them by someone smarter and darker than themselves .

I find these illusory and utopian dimensions to have great explanatory power for the phenomena we see in this environment, cycle after cycle. All in all, project 1 is a long-term project, but not suitable for the short-term.

Project 2 pretends to be project 1, and if they solve a problem where a solution may not exist, they can move to project 1. Project 2 is profitable in the short term and has higher risk and higher reward in the long run. Item 3 pretends to be Item 2, but only for immature users. Project 4 is pretending to be Project 2, and if they want to cover their ass and become legit after some initial success, they might migrate to Project 2. If all you care about is money, they're by far the best short-term investment, and VCs benefit from entering a lot of arbitrage here.

NFT

We basically stay away from trading NFT and NFT-related tokens. We don't feel like we have enough competitive advantage to play that game. As far as aesthetics go, we don't have great taste. As far as imitation matters, we don't have enough Twitter followers to offer a lot of market deals for it.

First, let's look at the categories of art and NFT avatars. Since they are status/signal symbols, Veblen/luxury items, or heirloom/prestige items, we can say that some of them will hold value for a long time. Just like there are a dozen or two top fashion houses in the real world, we could see a similar number of NFT collections with enough brand value to sustain. Having said that, the top fashion houses certainly don't have over 1,000 of them, so most NFT collections probably don't have much value. So, at best, we have a power law distribution where the winner gets the most value. We could also argue that status symbols are only useful when shown to others. For fashion brands in real-world settings, this will be limited to foot traffic in the wearer's real-world space.

With NFTs, this will be limited to social media like Twitter and Discord . It's hard to say which display space will be bigger, although it's a valid argument that the virtual world is vaster than the physical world, especially as Twitter More time online. Likewise, it's no surprise that NFT avatars outperform general art, as they function better as avatars of online identities. Still, be cautious about investing in NFTs, as the industry has had the highest concentration of fraud of all recent narratives.

Secondly, I do think that vampire attacks similar to LOOKS have some reasonable chance of gaining market share. They were able to directly target the right demographic that would be the perfect user for their platform. Having said that, both the price and market cap of LOOKS have fallen sharply recently, most of the trading volume is wash volume, and the founders have been cashing out. If this is all a scam, it wouldn't be surprising considering the team is anonymous and the token price has reached very high prices in a very short period of time. Still, the idea of having multiple NFT exchanges competing makes a lot of sense, as fees are high and there is room for competition. Additionally, there are no order book-like liquidity network effects, so it is easier for challengers to compete with incumbents.

Finally, when it comes to non-art non-NFT avatars, the design space is largely unexplored. I think the adventure is worth it. As with all new paradigms, much of this is probably nonsense, but I'm optimistic that people will find something good and useful here.

L1s (one-tier public chain)

Because the technical advantages are completely irrelevant until it Eventually rearing its head at some indeterminate time in the future, we shouldn't waste time on that. Suffice it to say, it makes perfect sense what profile to use for each of the different L1s. HFT Chicago Prop Shop prefers SOL, Korean prefers LUNA. Graduate students prefer AVAX (after all it is the only professor token that does well). Disciple of Andre (AC) prefers FTM. VC prefers all L1s, because, only need to bet on one public chain, VC can get back the cost. Sometimes a smaller L1 like NEAR, because when its market cap is small, there are billions of dollars left to grow.

ETH extremists are now on the same side as old BTC extremists as they try to fend off attacks from "new" projects. Generally speaking, their defense has been unsuccessful because people like shiny new things. With the new, your greatest hopes and dreams become possible; as things unfold, you see only the cold reality of what actually is.

Behind the scenes of utopianism is the brutality of the truth and the ugly truth of human nature. Our innate desire for a perfect world, and our innate desire to exploit that desire in others. In the end, it takes a Girardian scapegoat to satisfy true believers, turned into disaffected disenchanted mobs who fulfill that role better than prophets whose promises never come true. That's not to say these L1s won't be successful, it's just that the founders are very aware of the sword of Damocles hanging over their heads. Best to win, second best to keep making bigger trade-offs in the principle of decentralization, because it doesn't matter until it happens, who knows when it will happen, and if it will happen. Maybe we're all just scared of Boogeyman; maybe not.

As we reshape the financial and monetary system, we come to empathize with past Fed chairs. The Fed chairs don't want the economy exploding under their watch, so why not pass the blame on to the next guy and kick the can down the line.

In any case, may the best L1 win. Considering the participants makes all the incentives useful, that's what I'm saying. Not everyone likes technology, in fact, not many. Maybe we're all just scared of Boogeyman; maybe not.

At this point, having waited 7+ years, I'm afraid to even ask if we'll actually deliver PoS on Ethereum this year. What Happens First: ETH 2.0 or Reawakening Frozen Markets? Haha, who knows.

When it comes to cross-chain bridges, the main challenge is to ensure that synthetic assets on one chain are not arbitrarily minted without proper support for the original chain, And the transmission process is safe. We recently witnessed a wormhole exploit between SOL and ETH due to issues with the former. I don't particularly care about this weakness as it's just a bug that can be fixed. The SOL wormhole exploit was saved by Jump Crypto, and while it could be a ton of their own money, their SOL purse would lose a lot of value if the bridge was allowed to fail, and I'm sure they'd take a pound of their money Salvage the flesh in the structure. However, don't worry too much. However, even if the code is perfectly written, if there is a fundamental problem with the bridge in general, I would be concerned, leaving it to be seen. Also, even if bridges are fairly centralized today, as long as there is a way to eventually decentralize without compromising security, it should be fine, we'll see, and I'll reserve my skepticism.

Decentralized Finance

DeFi 2.0 is similar to DeFi 1.0, but 2 is greater than 1, numba (an open source JIT compiler) the bigger the better. DeFi 2.0 is characterized by letting the protocol itself, control or own assets. Sometimes it's called PCV (Protocol Controlled Value) or POL (Protocol Owned Liquidity) or whatever. The idea is the same, you now have a DeFi protocol that also runs a hedge fund, good idea or bad idea? Left to the reader to decide, protocols now hold other protocol tokens in treasury and participate in each other's governance votes.

We are entering the era of systemic risk, check out the link below:

https: //twitter.com/Galois_Capital/status/1486937936054689793?s=20&t=LwBktrRBWNfCxqI9QQJmaA

For a larger combined product network, or rather, from 2008 Is this relatively small TIME-MIM-LUNA slice easier to reason about? Composability is great, it allows things to happen that were not possible before, but we need to be careful as systemic risk accumulates over time and entangled protocols become harder to reason about. Other than that, same shit, bigger numbers.

Earn while playing

You work to make money, you spend the money you earn Spending on games, isn't that always the case? Jobs are essentially things you don't do on your own terms, and you get paid for doing those unwelcome tasks. Gaming is essentially something you do voluntarily because you like it and maybe even pay for it.

So what the hell is P2E (Earn Money While Playing)? If you're someone who earns World of Warcraft gold for a living, that's work. If you play Warcraft and enjoy World of Warcraft, then you're going to buy gold from someone who produces World of Warcraft gold, and that's playing. In P2E, people are using wild nomenclature again, which is a cool-sounding buzzword that makes you look like you can have your cake and eat it. In most games, someone works to make money and someone gets paid to play, with little overlap between these two groups.

In the case of most "P2E" games, there are still people who work to earn money, but the second group is mostly replaced by a new group, namely Buy workers' jobs and eventually sell them to a new group of other people, the paid group. In other words, the difference between most games and P2E is that you go from being a player to being a worker and a speculator, and almost no one in the office really wants to play this game.

If there ever was a really interesting game in the P2E space, you'd be just a normal game with workers and players. There is no difference except for one subtle point.

On-chain bearer assets with virtual game assets allow for an active secondary market to operate outside of the game developer platform, but can still be easily accessed by the game Developer tax. The general consensus among game developers is that secondary markets are bad for revenue as they don't easily get a cut of every transaction and cannibalize the primary market. Now, with cryptocurrencies, they can easily collect taxes, although the primary market cannibalization problem cannot be solved. In my opinion, this is still a good thing, because the best games of the past did have active secondary markets, and now at least there is a greater incentive for game developers to go back to the good old days before the anti-secondary trend. Players get what they want, and developers get half of what they want. So, crypto and gaming may have some powerful synergies, but the current state of P2E is not.

Metaverse

We have already Have it, and it's a growing industry. If the term "metaverse" means more than just VR, then we have to define it precisely lest we start climbing the "sky's abstract ladder" and exaggerate the value of the ordinary. When people say AI, they mean ML; when people say ML, they mean statistical methods; when people say statistical methods, they mean linear regression. Money is already ballooning; let's not exaggerate either. If the "metaverse" means virtual communities, we already have it in Telegram chats, Discord communities, and even the company formerly known as Facebook. If "Metaverse" merely describes a trend that people generally spend more and more time in virtual worlds and less time in physical spaces, then it is happening, Japan's hikikomori ( nerds) is our future. When you print too much money, half the people stop having sex and become closed basement dwellers, while the other half become working-class giant zombie kiretsus, until they inevitably exhaust themselves to death.

Nevertheless, from a practical point of view, when we talk about investing in the "metaverse ", whatever that actually means, this usually has Two forms: Invest in specific virtual land/assets in the virtual world. For the former, encryption allows for two innovations that were not possible before.

First of all, as long as you have some anti-oracle mechanism in place, you can allow your users to take revenue ownership through the equivalent of Web3 methods.

Secondly, you can allow your users to transact commerce with each other without relying on a centralized payment rail. In other words, you can log into Decentraland (MANA), have your avatar walk into a virtual art gallery, find a punk you like, and click it to link directly to an auction on OpenSea. One more click and your Metamask wallet opens and you can buy it from the gallery. Once purchased, you can display it in the gallery or take it off to display in your virtual home, in two places.

Of course, cool. Still, as an example, VRChat could just integrate this functionality, even though their verses are centralized. Does Decentraland have unique strengths and weaknesses compared to VRChat (virtual reality games)? Hard to say, but maybe the next topic will shed some light. Does Decentraland have unique strengths and weaknesses compared to VRChat? Hard to say, but maybe the next topic will shed some light. Does Decentraland have unique strengths and weaknesses compared to VRChat? Hard to say, but maybe the next topic will shed some light.

What happens when we transfer land titles to bearer instruments? What happens when we turn virtual land titles into bearer instruments? This is indeed the core difference between Decentraland and Second Life. It creates a level of scarcity for virtual land and unforgeable, inalienable land titles. Although there is still a question of how much the value of the land near the transportation center is related to the value of the land far from the transportation center.

Virtual land value also benefits from the flow of people around the area, like real space land, but in virtual reality, people can teleport and fly. If you restrict users from teleporting or flying, then your competitors will not impose such restrictions. Because the virtual world doesn't need the laws of physics, I imagine the land can also be stacked vertically. So I don't see virtual land values reaching the same ratio of urban to rural land values in real space, but some virtual lands may still be worth more than others depending on how many eyeballs they can capture locally. Finally, is virtual land ownership inalienable? What if someone put something really gross or illegal on their Decentraland scene, like some gore or pornography? Can Decentraland take it down? A decentralized platform should not work.

Web3

Unlike Valve, we actually counted to three this time. To avoid concept/word bloat, let's use Chris Dixon's definition of Web3. Read Web1. Web2 is read/write. Web3 is read/write/own.

So basically, FCoin invented transaction fee mining, which was later popularized as yield farming in DeFi, so Web3 is yield farming. Just kidding, a paradigm shift isn't enough. Web3 is a broad-yield instrument that is a stock-like instrument, and enforcement action by securities regulators will be difficult. May or may not be good, depending on whether you are a regulator or not.

Imagine if Uber (or Lyft if you were Chris Dixon) could give riders and drivers a small amount for every ride on their platform Uber/Lyft stock, without the overhead of any paperwork or middlemen, or the possibility of trouble with regulators, could have actually been fine. A great way to build a two-sided or multi-sided market, a great way to solve the egg problem, and a great way to get customers turned evangelists. OK, let's see how it goes. Care still needs to be taken when aspiring entrepreneurs start putting Web3 on every hype platform, as happened with the “AI” and “Uber for X” trends.

Conclusion

So all is well in the crypto space. In the long run, I am, as always, optimistic about the cryptocurrency space. In the short term, there is some work and clearing to do. I know some people will call me: midwife, but I don't comment on them: