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Some Hard Truths About Crypto
I've been doing a lot of soul-searching this month. Initially, it was pretty clear to me that I wanted to stay in the crypto space, but since unemployment has gifted me with a lot of free time I've been deliberating on precisely why I wanted to stay. Over the last week or so, I've been going back to the basics and checking if my initial assumptions about crypto are still correct and relevant. Part of that research output is a new video series I'm informally calling "Why Buy?", and each video focuses on the value proposition of a given coin or token. So far I've done videos for Bitcoin, Ethereum, USDT, and BNB, and plan to do videos for every crypto in the top 100. (You can check all of them out here.) But for this week's Cryptoday, I'm going to be going through some of my more difficult observations, and discuss the challenging realities of crypto in 2023.
Lightning Network still doesn't matter. Launched in 2018, Bitcoin's much-hyped Lightning network was supposed to be the solution for Bitcoin’s TPS problems – enabling fast and cheap transactions, and providing a scalable path for global Bitcoin adoption. Well, it's been 5 years and the Lightning network still carries just $120M in total value. It’s hovered in that zone for the better part of 2 years. To put that number into perspective, Ethereum's three biggest Layer 2 solutions each carry at least 7x – and as much as 10x – that amount. (Heck, even SkyMavis' Ronin chain was 10x the size of the Lightning network for a few months back in 2021.) But perhaps the most telling datapoint is that Bitcoiners themselves seem to have no interest in Lightning, with less than 0.03% of all Bitcoin shifting to the faster network layer.
The excitement around NFTs has passed. Many crypto beginners don’t know this, but by the tail-end of the 2017-2018 bull market, the excited narratives around ICOs had flipped in the opposite direction: suddenly all ICOs were being called scams … even the legit ones. The same thing is happening with NFT projects in 2023. Bored Apes and Azuki are both down 90% from their all-time highs, Cryptopunks are down 70%, Stoner Cats has been fined by the SEC, and Nouns has been abandoned by over 50% of its community. There’s literally no worse time to be launching an NFT project. The marketplace aggregator Blur has sucked all the remaining life out of the ecosystem, and with Opensea no longer enforcing creator royalties it makes it hard to imagine a substantive recovery. Although there are still plenty of interesting use cases for NFTs out there, the elation around the NFTart and the digital collectibles sector has largely evaporated.
Most Web3 games aren’t fun. The advent of play-to-earn games in 2020 shifted the focus to a little-discussed occupation within the video game industry: the farmer. Now, farmers have existed for as long as major games have had in-world economies. If there’s a currency or a rewards system in a popular game, then there’s usually a black-market farming operation focused on acquiring as many of those assets as possible and then reselling them to lazy players. Whether it’s Warcraft gold or Ragnarok items, there’s usually a guy who can hook you up with whatever you need. Play-to-earn games, whether by accident or by design, made these farmers the center of their growth strategy. Ultimately, it was this overemphasis on financial gain that made so many first-generation P2E games so bland – you didn’t need to make your game fun if you knew players could be incentivized directly by just throwing money at them. Of course, I’m not saying that ALL web3 games are bad, but the vast majority are undercooked and oversold.
A useful peso stablecoin has yet to be released. We’ve now seen 4 attempts at a peso stablecoin since 2020 – with two of them announced just this quarter. All of them have this distinct feeling of having been designed in a vacuum, with little to no external integrations. In terms of utility, they don’t seem to be any different from the traditional electronic money that we’ve had since the 2000’s … but with more complicated onboarding and fewer places to use them. The challenge really is that stablecoins are only useful if they’re accessible everywhere – both on-chain and off-chain – and that kind of reach takes a lot of time and effort to achieve. So it’s easy to kickstart your own stablecoin – it takes 30 seconds to deploy a modern stablecoin smart contract – but it’s hard to grow it and even harder still to maintain it.
You’re probably wondering why I’m sharing all of this negativity. I think we need to acknowledge where the mistakes and weaknesses are in order to move forward and grow stronger. The NFT hype showed us what was possible with non-fungible assets, and although I believe that very few projects from this era will survive into the next cycle, I think the technology and processes learned will eventually prove to be invaluable. The 2013 cycle punished us with a MtGox, but rewarded us with a Coinbase. The 2017 cycle punished us with thousands of ICOs, but rewarded us with household names like Binance, USDC, Crypto.com, and Tron. The 2021 cycle punished us with FTX, memecoins, and thousands of low-quality NFT projects, but rewarded us with Ethereum on Proof-of-stake, Solana, and genuine interest and participation from the lower-income brackets of our society for the first time.
My optimism about crypto is tempered by my understanding of how this industry moves. With each cycle, the global marketcap of crypto increases by 700-1000%, then retracts by as much as 75%. It’s two steps forward, one step back … but it’s still moving in the right direction. When I first started working in crypto in early 2014, the global marketcap was $10B. Now it’s $1.1T. Although I wish that the ups and downs in between weren’t quite so violent, I don’t believe it’s possible to rewrite the world’s financial systems without this rollercoaster ride. So if you’ve still got the stomach for it, the first thing you need to do is strap yourself in tight.
Stay safe out there, cryptofam!