Hopium for the Masses: Where Crypto is Inevitable
As this bloodbath of a year comes to a close, the cycle certainly seems to be repeating itself. For the next bullrun to unfold, real progress needs to continue. Here's where I think it is happening.
As 2022 winds down, the eerie overtones of the market cycle persist. The collapse of Terra Luna in May and FTX in November, plus the market impact as a result, closely resembles the two death spirals experienced the last two market cycles, around roughly the same times (Q1 2014 + Q1 2015; Q1 2018 + Q4 2018; Q2 2022 + Q4 2022). I think the market cycle is gradually accelerating, which corroborates with the distance between death spirals, but that’s an entirely separate topic altogether.
And again like the last cycles, the perception around crypto shifts one and the same. The grifters and opportunists, plus the celebrities and influencers they employ, have largely been washed out. Fair weather friends have packed their bags, and mainstream media parades the death of crypto. Skeptics who missed each of the previous cycles once again are boasting that they were right all along.
And if history were to repeat, this means 2023 will be a boring year — a blessing for the long term thinkers and builders, and a curse for even the most stubborn of tourists who will continue to pack up before the imminent bullrun.
If 2023 were to behave like 2019 and 2015, it means that majors will largely crab, with some slight trend upwards. Most smaller caps will continue to bleed and more projects will call it quits. But unlike 2022, 2018, and 2014, money can and will be made. New projects will have their time in the spotlight, top performers will present opportunities for gains, and a lot of traders will roundtrip shorter lived pump-and-dumps.
But for predictoooors to justify 2023 as an archetype year of pre-bull preparation, there needs to be some understanding that there does still exist a future for crypto. This cycle is a little different in that we’ve grown too big for potential and speculation alone to drive a future bull market.
The honeymoon phase is well over. To have confidence in crypto today, one must have conviction that the industry is, in at least some meaningful applications, technology that will inevitably disrupt predecessors and achieve adoption. Where can one source conviction today?
Thousand Foot View: Unlocking Conviction in Crypto
My conviction in this regard is stronger than ever. This past market cycle has unlocked new utility across numerous major projects and buildouts that unequivocally offer some improvement in the lives of the global population. New products and services that didn’t, and couldn’t, otherwise exist, and see usage to the tune of non-negligible volume and users.
At the same time, scams, hacks, exploits, and otherwise have claimed more victims than ever before. It’s easier to discount the glimmers of brilliance with the overwhelming frequency of bullshit.
My assessment is pretty straightforward, and as follows: The good matters, the bad doesn’t. If you were to take a scatter plot of every crypto project, mapped as net impact over time, the top percentile is undoubtedly trending upwards (and likely at an exponential rate). The bottom percentile may be accelerating to negative infinity today, but the floor restrictions way harder than any potential ceiling.
Industry-wide improvement in areas like UI/UX, documentation, and education will continually restrict negative impact, as will increasingly competent regulation. I strongly believe he bad washes out in the long term. But at the same time, our best-of-the-best is flat out better than anything that can otherwise be conceived outside of blockchain. No regulation or competition can defeat such disruptions.
I’ve explained my confidence in the ability of crypto to permanently outcompete traditional alternatives when it is used optimally. If you’d like to see more of that philosophy, see the following:
DeFi Supercycle Squared: 100 Years Bullrun
Hard Times Create Good Ponzis, The Innovation Paradox
Blockchain, Environmentalism, and a more Equitable Future
Blockchain Mode of Production
Alas, the following outline areas in crypto where the best the industry has to offer and/or its greatest potential is an inevitable disruption that will massively impact the way the world operates tomorrow and into the future. And more succinctly, areas that I believe are smart niches to focus your energy into 2023.
The DeFi Renaissance is Near
Anyone who has looked into any of my content understands the importance I place on DeFi (See DeFi Supercycle Squared article above).
This is a narrative I feel supremely confident on. The top DeFi protocols (per Defi Llama) reflect meaningful applications that provide direct, tangible impact on the lives of its users.
Again, please see the referenced article for my in depth analysis. But at a high level: TradFi across the board sucks donkey dick for customers and is wildly inefficient. When crypto can replicate TradFi, it can do it magnitudes better. There is already evidence of this happening at a scale of multi-billions of dollars on certain individual usecases. DeFi innovation continues at a blistering speed, despite market sentiment.
I believe the DeFi Renaissance is imminent, and will be fueled by advances in LSD (and LSDeFi — a term I’ve pioneered) and on-chain leverage.
LSDeFi is a pretty obvious and massive improvement that quietly chugs along each day. You can sum it up as follows:
Most major networks (including Ethereum) pay out new emissions to stakers.
Liquid Staking Derivatives give users on-chain receipts of those staked positions that pay the users yield passively — about 5% APY for Ethereum.
These LSDs can be used in a growing number of DeFi integrations, allowing users to earn 5% on ETH + additional DeFi yield or otherwise additional exposure always-in-addition-to that underlying staking rewards.
Should LSDeFi take off, demand through lending markets powered by these LSD should establish some “APY floor”. Basically, yield drips down to stablecoins and naked ETH.
See more in depth on how this all works on my recent article: Bottom Shelf LSD: Your Ticket to Financial Prosperity.
An increasing, sustainable, not-ponzi DeFi yield standard coincides with the other DeFi innovation I am keen on: Leverage Yield Farming. I explain how Leverage Yield Farming works through the lens of Abracadabra in Green Jeff’s Magical 40% APY ETH Farm Bonanza.
The TL;DR is that existing DeFi users who feel good about where yield comes from and wants to get multiplied returns from those yield sources have an increasing access to do so. A very simple example is getting a leverage position on an ETH LSD (like stETH) and earning some multiplier on that 5% ETH staking APY. Abracadabra, Gearbox, Alchemix, and Alpaca Finance are all offering some form of Leverage Yield Farming through different architecture.
We (Bloq) are also building out an incredible product in Leverage Yield Farming through Vesper + Metronome which I will be sharing more about early 2023!
Anyways, DeFi good, and lots of incredible technology being shipped today that will make it sexy again. And when the yields become widely available, DeFi Renaissance shall commence.
Social Investing has just Begun
It’s an easy (and hilarious) dunk to poke fun at some of the overly ambitious dumpster fires across “social investing” over the past couple of years. DAOs today mostly suck or have already failed, and most of the open collaboration schemes have been totally rekt.
This spans beyond crypto, with WSB and ape stonking getting people rekt on stuff like Gamestop and Bed, Bath & Beyond.
But, like I said above, the failures don’t matter! There is something supremely powerful in the notion of crypto enabling more open collaborations at all stages of a project through the virtues of social investing.
Imagine for a second that there was a perfect DAO model that could facilitate the creation, growth, and maturation of a product or service in the same capacity as the traditional corporation. We should unlock that model ultimately. If we do, the implications are society-shattering.
Imagine if you could invest your time, energy, and capital into groups whose purpose and ethos match perfectly with your passions and skillset. Why would you ever again put your money into tired boomer stocks (all of which implicitly supporting the Western War Machine). If the experiment proves successful, everyone should have the opportunity for much higher upside investing and incentive-aligned employment.
In this new paradigm, everyone is an owner, investor, entrepreneur, and employee. And it totally kicks the ass of the existing capitalist structure, which keeps the vast majority poor and hungry and its keepers fat and greedy. Again, my arguments are laid out more thoroughly and eloquently elsewhere. This is my Northstar, and this thesis has largely remained unchanged for the past 4+ years. It’s the guiding light behind my ongoing ambitions with my own project, Governor DAO, and the reason why I likely remain deeply ingrained in the space indefinitely into the future.
This is definitely a more open-ended field, and spans DAOs, NFTs, shitcoins, and more. As I mention above, look at the best of the best. The Nouns ecosystem is really inspiring, and as good a place as any to dedicate research to fleshing out these convictions for yourself.
GameFi Sucks, but it won’t always.
Lastly, I have felt very strongly about blockchain gaming even longer than I have about DAOs. At the same time, I have a lot of complaints with the shape and form the niche has taken in crypto to date.
But, let’s hammer it home: The Bad Apples Don’t Matter.
I believe that the gaming sector in crypto suffers from almost all participants on both sides of the aisle lacking the nuance to actually understand where the synergy exists. NFT Bros think that their shitcoin should exist in every single game every now into the future. Gaming nerds would rather die than touch an NFT. Both are applying their own incredibly limited views as rule of God.
The unsexy reality is that almost all games are absolutely not positively impacted by crypto. Single player games are a major subset of games that present an obvious lack of synergy (and if you are a GameFi proponent that doesn’t already understand why, I suggest playing some real — not crypto — games yourself).
However, there are some gaming niches that go 10x with crypto integration. And even yet niches that haven’t been able to exist before that blockchain could unlock. Eve Online is the bread and butter example where crypto makes a lot of sense. Most gamers have no affinity to Eve, but the very very small fraction of gamers who are into the Spreadsheet Simulator are very very into that style of gameplay.
The winning advancements that push blockchain gaming in some meaningful direction have some understanding of the type of game that is made better with crypto, and are created by a team that are game developers first with an aggressive lust for building something new.
Honestly, there aren’t many good examples here. I like Aavegotchi a lot. They have a long ways to go, but their focus on an economics-sound gaming experience is a strong foundation. XAYA, a team I worked with many moons ago and the original creators of blockchain gaming, have their finger on the pulse with new gaming genres they are exploring through some of their developments, but those ambitions will continue to take a lot of time to come to fruition.
2023: We Survived
Above only spans the stuff I find personally impactful in the crypto space. I don’t have as much affinity to other sectors in the space, like payments/settlements, art, supply chain, IOT, and so on. But that doesn’t mean those sectors don’t have value.
Either way, 2022 is over, we made it through the worst of it. If you are here for the long haul, 2023 is where the money is made. Strap in, average in to positions, set your foundation, and when the fireworks take off in 2024 you’ll be prepared.
love this Jeff!