What do we need to do to escape crypto nihilism?

03-12

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We just need to start doing different things.

Author: Kyle

Compiled by: Luffy, Foresight News

The biggest problem in the cryptocurrency field is not the shortage of talent or lack of funding, but simply the lack of first-principle thinking. This culture needs to change, and the top 1% group needs to lead the field forward.

If you follow my Twitter, you'll find that I've been strongly advocating for paying attention to those seemingly low-hanging, high-leverage opportunities that look extremely simple but seem to be something that no one can truly "understand" or execute well.

In this article, I will specifically discuss some topics, including:

Compound interest assets, industry culture, short-termism
The universal Layer 1 Blockchain is dead, and it needs to be revolutionized
The relationship between liquidity tokens and investments
Buybacks and burns are just the least bad choice, not the best solution

I named this article "First Principles" because when I apply common sense to think about how to change this industry in the current situation, all these views come to mind.

The truth is not that profound. The definition of insanity is doing the same thing over and over again and expecting different results. In three market cycles, we have done the same thing over and over again: basically creating illusory, value-accumulating, highly exploitative tokens and applications, because for some stupid reason, we believe that every four years, this "casino" will open up in a frenetic way, attracting funds from all over the world to participate in gambling.

Guess what? After three market cycles, that's 10 years, people have finally woken up and realized that the house, the scammers, the fraudsters, the manipulators, and the people selling you overpriced food and drinks in the casino are taking all your money. After months of effort, all you can show is a history on the chain of how you lost everything. An industry where everyone thinks "I'll come in, make money, and then leave" cannot nurture any long-term compound interest assets.

This field used to have a beautiful side, it used to be a place of real financial innovation and cool technology. We used to be excited about novel and interesting applications, new technologies, and "changing the future of finance".

But due to some extreme short-termism, highly exploitative culture, and dishonest people, we have fallen into this perpetual cycle of financial nihilism, which is to some extent collectively caused by everyone thinking that buying the tokens issued by scammers who shout "I'll get out before the scam collapses" is a good idea.

You can say I don't have entrepreneurial experience, and that's true. This field is not very large in scale and not long in existence. I've been working in this field for four years, collaborating with some of the best and brightest funds, which has given me an understanding of what works and what doesn't.

I reiterate: insanity is doing the same thing over and over again and expecting different results. As an industry, we go through the same thing year after year: when prices inevitably crash, we all feel that sense of nihilism, feeling that everything is worthless. I've felt this way when the NFT market crashed; now, after the recent Memecoin chaos, people feel the same way; in the ICO era, people felt the same way.

The solution is actually very simple: we just need to start doing different things.

1. Compound Interest Assets, Industry Culture, Short-Termism

Compound interest assets are simply assets that appreciate in value over time, like Amazon, Coca-Cola, Google, etc. Companies that own compound interest assets have the potential to achieve sustainable long-term growth.

Why haven't we seen compound interest assets in the crypto field?

The answer is a bit complex, but the root cause is extreme short-termism and misaligned incentives. Kun raised a very good point here:

"This is also why most things get reasonably valued or even overvalued after growing a few times, because they are traded based on the valuation of growth tech stocks in traditional finance, but they are just getting started, and most startups fail to IPO successfully. But here (in the crypto field), every failed project can still issue tokens just on the basis of a promise."

https://x.com/0x_Kun/status/1898599628448387482

Indeed, there are many problems with the way incentives are structured, as Cobie's article eloquently explains. I won't go into depth, as the focus of this article is, as an individual, what can we do now?

For investors, the answer is clear. As Cobie pointed out in the article: you can choose to exit (and you probably should).

Indeed, people have chosen to exit. In this cycle, we've seen the decline of "centralized exchange (CEX) tokens" as retail investors no longer buy these tokens. While individuals may not be able to change this systemic problem, the good news is that financial markets are quite efficient: people want to make money, and when the existing mechanisms can't achieve that, they won't invest, and the whole process becomes unprofitable, forcing the mechanisms to change.

However, this is just the first step. To truly build compound interest assets, companies need to start instilling long-term thinking in this field. The problem is not just that "private market capture" is bad, but the entire chain of thinking that has led us to this point is flawed. Like a self-fulfilling prophecy, founders seem to collectively believe "I'm going to make money and then leave," with no one truly interested in long-term building, which means the charts always end up in a McDonald's "M" shape.

The most critical point that must change is: the quality of a company depends on its leadership. The reason most projects fail is not a lack of developers, but because the top-level decision is that it's time to leave. This industry must start to see those founders with high integrity, strong execution, and long-term thinking as the role models of effort, rather than idealizing those "pump and dump" founders.

The average quality of crypto founders is not high, which is no news. After all, calling people who hype up shitcoins "developers" doesn't set the bar very high. As long as you have a long-term vision in the first two months after token issuance, you're already ahead of the rest.

I also believe the market will start to economically incentivize long-termism, and we're already starting to see this trend. Despite the recent selloff, Hyperliquid's price is still 4 times the initial issue price, which is a feat that few projects in this cycle can boast about. When you know the founder's long-term growth goals are aligned with the product, it's easier to convince yourself to "hold this project long-term".

The natural conclusion drawn from this is that founders with high integrity and strong execution will start to capture the largest market share, because frankly, when everyone is tired of scams, they just want to work for someone with a vision who won't exit fraudulently, and such people are really too few.

In addition to having an excellent leader, building compound interest assets also depends on whether the product itself is excellent. In my view, this problem is easier to solve than finding an outstanding founder. One reason there are so many "shitcoin" projects in the crypto field is that the people creating these "shitcoins" also have the same "make money and leave" mentality, so they choose not to solve brand new problems, but to copy popular projects in an attempt to make money.

Here is the English translation of the text, with the specified terms preserved and not translated:

However, this industry does indeed reward such illusory ideas, such as the artificial intelligence agent hype in the fourth quarter of 2024. In such cases, once the hype subsides, we will see the common 'M-shaped' trajectory of McDonald's. Therefore, companies must also start focusing on developing profitable products.

No profit path = No long-term believers / holders = No asset buyers, because there is no future to bet on

This is not an impossible task, as crypto companies can indeed be profitable. Jito has an annual revenue of $900 million, Uniswap $700 million, Hyperliquid $500 million, and Aave $488 million, and they continue to be profitable even in a bear market (just not as much).

Looking ahead, I believe that the fleeting, narrative-driven speculative bubbles will become smaller and smaller. We have already seen this trend. In 2021, the valuations of gaming and NFTs reached hundreds of billions of dollars, but in this cycle, the valuations of Memecoins and artificial intelligence agents have only reached tens of billions of dollars at most.

I believe everyone is free to invest in the projects they want. But I also believe that people want their investments to generate returns. When the game becomes so obvious, becoming a 'hot potato that I must get rid of before it goes to zero', the roller coaster will get faster and faster, and the market size will get smaller and smaller as people choose to exit or lose all their money.

Profitability can solve this problem. As an investor, it allows you to understand that people are willing to pay for this product, thereby achieving long-term growth to a certain extent. When a project has no profit path, it is almost uninvestable in the long run. On the other hand, a profit path will bring a growth path, which will attract buyers who are willing to bet on the continued growth of the asset.

In summary, building a compounding asset requires:

Leaders with a long-term mindset
Focus on developing profitable products

2. The Universal L1 is Dead, Transformation is Urgently Needed

If you sort the CoinGecko website's homepage by market capitalization, you'll find that L1 blockchain projects account for more than half of the total. Apart from stablecoins, L1 occupies a large share of value in the crypto industry.

However, the price chart of Ethereum, the second-largest crypto asset after Bitcoin, looks like this:

If you bought Bitcoin in July 2023, your gains would be 163% at the current price.

If you bought Ethereum in July 2023, your gains would be 0% at the current price.

This is not the worst case. The 'everything bubble' of 2021 sparked a wave of 'Ethereum killers'. Some new L1 Block chain projects tried to surpass Ethereum in certain technical aspects, mainly focusing on speed, developer languages, block space, etc. But despite the constant hype and massive investment, the results have not met expectations.

Now, 4 years after 2021, we are still facing the impact of that hype. On CoinGecko, there are already 752 Non-Fungible Token (NFT) platforms that have issued tokens, and there may be even more platforms that have not issued tokens.

Unsurprisingly, the price charts of most of them look like this, while Ethereum's chart looks relatively good in comparison:

So, despite 4 years of effort and billions of dollars invested, with over 700 different Block chain projects, only a few L1s have decent activity, and even those haven't achieved the 'breakthrough user adoption' that was expected 4 years ago.

Why? Because the design philosophy of most of these projects is flawed. As Luca Netz pointed out in his article '

But this requires massive effort and ultimately leads to market fragmentation, as a product that tries to do everything usually ends up doing nothing well. It's a task that consumes a lot of money and time. Frankly, many Block chains can't even answer a simple question: 'Why should we develop on your Block chain instead of the 60th Block chain?'

The current state of L1 is another example of everyone following the same pattern but expecting different results. They compete for the same limited developer resources, trying to outdo each other in funding programs, hackathons, developer studios, and now it seems we're developing phones (?).

Suppose an L1 project succeeds. In each cycle, there will be some L1 projects that can achieve breakthroughs. But will that success be sustainable? The success story of this cycle is Solana. But here's a view that many may not like: What if Solana becomes the next Ethereum?

In the last cycle, many people were so convinced that Ethereum would succeed that they invested most of their net worth in it. Ethereum still has the highest Total Value Locked (TVL), and there are even Ethereum Exchange Traded Funds (ETFs) now, yet its price has stagnated. In this cycle, the same people are making the same claims, believing that Solana is the future of Block chains, and even anticipating a Solana ETF, and so on.

If history can be a reference, the real question is: Can today's success guarantee tomorrow's relevance?

Rethinking L1

My view is simple: Rather than building universal Block chains, it would be wiser for L1s to be built around a core focus. A Block chain doesn't need to meet everyone's every need; it just needs to serve a specific purpose. I believe the future of Block chains will be independent of the underlying Block chain, and people will only expect good performance, with the technical details not being as important.

Developers have already shown signs of this: For founders of decentralized applications, the main concern is no longer how fast the Block chain runs, but the user distribution and end-user usage of the Block chain. Does your Block chain have users? Does it have the user distribution needed to make the product appealing?

44% of web traffic comes from WordPress, yet its parent company Automattic is only valued at $7.5 billion. 4% of web traffic comes from Shopify, but its valuation is $120 billion, 16 times that of Automattic! I believe L1s will have a similar end state, where the value will accrue to the applications built on the Block chains.

So, I believe L1s should boldly build their own ecosystems. If we use cities as an analogy for Block chains, we can see that cities have risen due to their specific advantages, making them viable economic and social hubs, and over time these cities have specialized in certain leading industries or functions:

Foresight News Block Non-Fungible Token MEME Solana TRON Uniswap Aave SOL UNI HT AAVE OP AR meme APT RON ONG

Silicon Valley → Technology
New York → Finance
Las Vegas → Entertainment and Hospitality
Hong Kong and Singapore → Finance-focused trade centers
Shenzhen → China's hardware manufacturing and tech innovation hub
Paris → Fashion, art, and luxury
Seoul → K-pop, entertainment, and beauty industry

L1 is also like this, with demand driven by the appeal and activities they provide. Therefore, teams must start to focus more on being the best in a vertical, carefully crafting the appeal that can draw people into their ecosystem, rather than haphazardly building various different projects. Once you can attract people into your ecosystem, then you can build the entire ecosystem around that appeal. Similarly, Hyperliquid is a great example, they have done very well in this regard and iterated based on first principles. They first built all their internal components like their native perpetual decentralized exchange (perp-DEX) order book, spot DEX, staking mechanism, oracles, multi-sig etc, and then expanded to HyperEVM, which is a smart contract platform for people to build on top of. The simple reasons for their success are: Firstly, focus on "building appeal": By first building the perpetual trading product, Hyperliquid attracted traders and liquidity before scaling. Control the entire ecosystem architecture: Owning the critical infrastructure (oracles, staking) reduces vulnerabilities and creates competitive advantages. Ecosystem synergies: HyperEVM now becomes a permissionless development platform, leveraging Hyperliquid's existing user base and liquidity. This "build appeal first, then build ecosystem" pattern is similar to successful Web2 platforms (e.g. Amazon starting with books and then expanding to everything). Solve one problem exceptionally well, then let the ecosystem organically expand from that core value point. Therefore, I believe blockchains should start integrating their own products, building their own appeal, and controlling the entire ecosystem architecture. As the "captain of this ship", you are the visionary who can align this with your grander, longer-term vision for L1s; and it ensures the project won't be abandoned as soon as on-chain activity starts declining, because everything is built in-house. Most importantly, this process will give your token monetary properties. If we compare a blockchain to a city, the token is the currency people use to transact, and this value is conferred through usage. People need to buy your token to do interesting things on your chain. This gives your currency value, and gives people a reason to hold it. But also remember: Just because you focus on one domain, doesn't mean the market demands it. Another hard truth is that L1s must time and execute opportunities correctly. Blockchains must focus on developing products people want. Sometimes, people don't really want "Web3 games" or "more data availability".

3. Liquidity Token Investments

The next topic is discussing how liquidity token projects should evolve in crypto. Simply put, liquidity token projects need to start establishing investor relations roles and publishing quarterly reports, so that investors, both retail and institutional, can clearly understand what the company is doing. This role is not new or revolutionary, but it is severely lacking in this space. Yet, there is almost no investor relations to speak of in this space. Multiple business development leads from different projects have told me that if you have some kind of "quarterly investor call to pitch your liquidity token", you're already doing more than 99% of the projects in this space. Business development is great for attracting developers and ecosystem capital, but an investor relations role that can explain the token situation to the public is even better. If you're a project trying to attract buyers, you need to sell yourself; and the way you sell is not by renting the biggest booth at conferences or plastering ads in airports, but by pitching to capital-holding buyers. By publishing quarterly growth updates, you start demonstrating to investors that the product is legitimate and accruing value, giving them confidence in the long-term performance potential. As for how you should do this, here's a good checklist: - Publish reports on your blog/website, sharing quarterly expenses/revenue, protocol upgrades, relevant data, but no material non-public information. - Have monthly check-ins with liquidity fund managers to introduce your product. - Host more online AMAs.

4. Buybacks and Burns are Good, but Not the Best

The last point I want to make is about buybacks and burns. My view is: I think buybacks and burns are a decent option if there's nothing better to do with the capital. In my opinion, crypto is still not at the scale where companies can just rest on their laurels, there's still a lot of growth to be pursued. The primary and most important use of revenue should always be for product expansion, technology upgrades, and entering new markets. This aligns with driving long-term growth and building competitive advantages; a great example here is Jupiter's acquisition spree, using cash to acquire projects for their products and key talent. While I know some people love buybacks and burns and clamor for dividends, my view is that most crypto projects operate more like tech stocks, as their investor base is similar: high-return seeking, asymmetric upside-expecting investors. So directly returning value to token holders through dividends doesn't make as much sense, they can do that, but if they deploy the cash reserves to build stronger competitive moats, that will benefit the product over the next 5-10 years. Crypto is starting to go mainstream now. So it would be unwise to slow the pace of development; rather, capital should be pouring in to ensure the next winner dominates for a longer time horizon, as the crypto landscape has never been more institutionally robust: stablecoin adoption, blockchain tech, tokenization, etc. So while buybacks and burns are far better than just cashing out, considering there's still so much work to be done, it's still not the most effective use of capital.

Conclusion

This downturn has started to make people realize that developing revenue-generating products is a necessary path to profitability, and inevitably requires establishing proper investor relations roles to showcase the latest updates on your token. There's still a lot of work to be done in this space. I remain optimistic about crypto's future.

Sector:

Smart Contracts

Layer 1

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Disclaimer: The content above is only the author's opinion which does not represent any position of Followin, and is not intended as, and shall not be understood or construed as, investment advice from Followin.

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