Your application will thrive on a blockchain network that guarantees economic security, which is the most optimistic future for encryption.
Author: @long_solitude
Translation: Deep Tide TechFlow
Since 2016-2017, the entrepreneurial phenomenon of cryptocurrencies has been ongoing. In each cycle, the popularity of cryptocurrencies has continued to rise, with more and more people entering the field, while the potential returns have gradually decreased. So far, everyone has heard of cryptocurrencies.
Like any emerging industry, the most promising ideas do not necessarily require huge capital. But after the initial excitement and amazing returns, the accessibility of capital has increased, and the threshold for investment ideas has lowered. As long as capital flows, everyone can become a founder.
Since 2016, $100 billion in venture capital has been injected into the private cryptocurrency market, and founders have used tokens to enter almost every possible industry. As Abraham Maslow said, "If the only tool you have is a hammer, you tend to see every problem as a nail." This torch has now been passed to AI.
From finance and payments to identity, social networks, media and entertainment, gaming, cloud computing, artificial intelligence, healthcare and science, supply chain, storage, gambling, art, various types of physical infrastructure networks, and even satellites in space—cryptocurrencies have spread across all fields. No field has been overlooked.
Today, in addition to Bitcoin (BTC) and Ethereum (ETH), the circulating market value of other altcoins is $700 billion, and Coinbase's stock market value is $40 billion. For simplicity, assuming investors own 30% of the network and ignoring any unattributed tokens; in the case of Coinbase, investors own about 50% of the shares at its direct listing.
This means that the liquid value available to venture capital (VC) investors is approximately $230 billion. Of course, this is not entirely accurate because we have not considered all listed companies, nor have we considered companies that have not issued tokens, or the situation where investors sell at different times in different cycles.
But the reality is that most of the $230 billion (targeting $100 billion in investment) is driven by some outliers, such as Solana and Coinbase, initial coin offerings (ICOs), and meme tokens that venture capital (VC) does not have exclusive distribution. Calculate for yourself and see the importance of outliers in cryptocurrencies, which may be as high as or even higher than in other places.
Unique Properties of Cryptocurrencies
It should now be clear that cryptocurrencies are not a panacea for solving all global problems. The blockchain distributed system we call has some very unique properties, and these properties have remained basically unchanged since the invention of Ethereum.
The foundation of the blockchain is a powerful financial element to ensure network security, so it is not surprising that sustainable use cases must also move in this direction. This is why certain categories of projects can produce lasting winners, while others do not.
From 2017 to 2018, billions of dollars flowed into cryptocurrencies, including financial and consumer products, and the only products that survived were essentially financial products.
The current major trend has returned to the consumer and social fields, but the surviving products are still limited to financial products.
The less attractive truth, lost in the void of CT
What are these unique properties? Although this list is not exhaustive, we believe the main ones are:
Permissionless capital formation and the resulting token distribution;
Global consensus on distributed ledgers for financial assets.
Permissionless capital formation is the most important and universally applicable product market fit (PMF) for cryptocurrencies. This is why ICOs have been successful overall. This is also why pump.fun brought a bull market to the entire Solana ecosystem and made more money in 8 months than 99% of all encrypted projects combined. This is why encrypted capital is funding network states and longevity experiments. The creative space is unlimited, and all funded assets will be stored on the chain, ensuring the source of their owners.
Global consensus and distributed ledgers make open and permissionless finance possible. Founders have built all financial components in decentralized finance (DeFi)—lending, savings, trading, payment/stablecoins, and debit cards for consumption. From Blackstone Group, major banks to VISA and Mastercard, they are all paying attention to the characteristics of cryptocurrencies and DeFi, and looking for ways to integrate them into their businesses. Perhaps one day, bureaucracy can be outsourced on a large scale to global consensus.
Therefore, when we see founders complaining about the Ethereum Foundation's antagonistic attitude towards decentralized finance (DeFi), we cannot help but question whether it is ready to give up the second-best product market fit (PMF) discovered by cryptocurrencies so far, second only to Bitcoin's value storage.
If the only thing that has supported your chain in the past five years is DeFi, and the best you can do is barely tolerate it, then you are anti-DeFi. I'm sorry, but the default position should be absolutely to support and encourage it.
Although Vitalik would argue that decentralized finance (DeFi) is an ouroboros, an image of a snake devouring its own tail, we believe the opposite is true. DeFi may be the only positive category in crypto! It creates new capital markets and enables people to access credit and engage in consumption. Credit expansion is a fundamental force for creating consumption and investment. This is why the US abandoned the gold standard, and the US market did not collapse but instead rose significantly over decades. The key to the economy is maintaining a cycle for growth. Why can't DeFi be part of that cycle?
Since the market bottom in November 2022, which projects have most successfully utilized the unique properties of cryptocurrencies? Without a doubt, they have all focused on decentralized finance (DeFi) or capital formation:
The price of Solana has increased 15 times, and it has always prioritized DeFi. In fact, it was envisioned as a "decentralized Nasdaq" from the beginning.
Pump.fun has earned over $100 million for itself and created nearly $1 billion in profits for the ecosystem by enabling capital formation for speculative assets without barriers.
Ethena has expanded its base trading volume to billions of dollars.
Polymarket has provided new speculative markets for people.
Additionally, we have many centralized finance (CeFi) companies such as Tether and Coinbase that provide financial services and have significantly increased market share.
One of the most notable narratives this year is the shift towards consumer-facing cryptocurrencies. We can roughly divide it into hyper-speculative games (such as yield curves, casinos, and memes) and product-oriented digital ownership (such as Farcaster, Zora, etc.).
We first mentioned the necessity of consumer applications in the Fappening at the end of 2022, when we felt that the market was too focused on infrastructure. Now, it seems that all attention is focused on building consumer applications for cryptocurrencies, but many times without questioning the unique functionalities that the application can achieve.
Is a mini-game on TON more enabling and sustainable than the dull borderless encrypted payments? Probably not. This is not to say that mini-games are not useful, but they have not fully utilized the unique properties of cryptocurrencies because high data integrity for financial data is not necessary for these games. Token distribution, the fundamental principle of encrypted capital formation, is what initially made them interesting.
Cryptocurrencies Create New Markets
Now that we have confirmed that cryptocurrencies excel in capital formation and facilitating financial transactions, where does this take us? New markets.
Although Florence did not have maritime channels like Genoa and Venice, it became a trading superpower in medieval Europe, mainly due to its innovations in banking and financial instruments. The gold florin minted in Florence quickly became the dominant trade currency in the Western world.
The superpower of cryptocurrencies has been to find prices for assets that were previously unpriced. In other words, it is creating markets where there were none before, or at least significantly improving the trading experience by providing abundant liquidity in places lacking liquidity. Cryptocurrencies are a coordination tool for trading in opaque and emerging areas that require high specialization and are plagued by bureaucracy and multiple intermediaries.
Here are a few examples: Kettle is building a marketplace for tokenized watches, and the Kettle team is busy in the New York Diamond District, handling watch authentication, custody, and logistics. Baxus solves similar problems for collectible wines, with their team handling authentication and operating a central storage facility controlling humidity, temperature, etc. Ultimately, they both have the potential to replace Sotheby's. In the physical world, there are many highly specialized jobs being done, and the encrypted element (coordination of payments) makes it possible to solve the cold start problem earlier. We will see the physical world and the encrypted field mutually advancing each other.
On-chain and off-chain components complement each other as they both benefit from higher transaction volumes.
Cryptocurrencies enable people to focus on things they didn't know existed before. Uniswap made people focus on ERC20 tokens, and Opensea made people focus on NFTs.
One new case we like is SkyTrade, which allows landowners to sell or lease the airspace rights above their property. These airspace rights are tokenized as NFTs and then auctioned to real estate developers and drone delivery companies like Walmart, Amazon, or future professional aviation transport companies. Most property owners are not aware a) that they own airspace, and b) that this airspace is valuable to certain people. As the hottest form of capital, cryptocurrencies can quickly prove this.
The DePIN Market
Another market area with strong transactional characteristics is DePIN, which stands for decentralized physical infrastructure. Suppliers typically utilize potential or idle physical hardware, making it a relatively easier part of the bilateral market to launch. The existence of demand has not been validated—we can only speculate its existence based on demand for similar centralized services.
Essentially, DePIN is a market for service transactions. Unfortunately, we do not yet have enough demand and transaction value to indicate that it has found product-market fit (PMF).
Source: Dune and Helium Foundation
One of the main value propositions of DePIN is to shift the investment and maintenance of infrastructure to decentralized networks. The costs for centralized entities to do this are rising, with the growth rate of capital expenditure (capex) exceeding the growth rate of income. Higher expenses mean consumers need to pay higher service fees. Additionally, the better the network coverage, the more expenses are required, as the cost of the last mile grows exponentially in rural areas. If there is no price discrimination, someone will eventually subsidize this service.
Source: "The Imperfect Present and Bright Future of DePIN: A Deep Dive into Compound"
Another factor is the resilience of networks, as the US power grid is a great example. Even though the grid is not a single, cohesive network, no single company is responsible for its maintenance. Instead, it is made up of many different utility companies (both private and municipal) and is overseen by federal and state regulatory agencies. The grid is already fragmented, and it is precisely for resilience. And as long as the goals of affordability and resilience can be achieved while earning the required cost of capital for the companies investing in and operating the infrastructure, it can be further fragmented.
Why can DePIN effectively overcome the upfront investment costs of hardware? Because capital formation allows projects to quickly deploy tokens and distribute them to hardware operators.
Indeed, relying solely on tokens is not enough. But it is enough to get 100 suppliers who truly care about it to use it, to observe whether there is demand and revenue. If there is, as demand and network coverage increase, unit economics will improve, and the degree of reliance on token incentives will decrease. Ultimately, all sustainable encrypted markets will compete on a) price, and b) reliability and/or customer service, with revenue being the most important single metric.
Once again, the role of cryptocurrencies is to help markets, and the extended DePIN, reach the critical point of rapid development as early as possible, through the coordination of resources and payments.
Creating Markets People Want to Trade In
After experiencing multiple cycles of crypto investment, we gradually realize that the creativity in the crypto space is limited by the unique properties of crypto. We discussed these properties earlier.
The permissionless nature of crypto capital is both a blessing and a curse. The design space for crypto startups seems infinite until you realize that these ideas must include strong and explicit financial elements.
We believe the answer is very clear—find assets and markets that people want to trade in before everyone else realizes it. These ideas always sound controversial—whether it's the previous cycle's Helium (and earlier Uniswap) or today's SkyTrade. But that's the sign that you're exploring something worth paying attention to.
Unfortunately, not all types of assets will be traded. Time and time again, we see that users do not value their data, privacy, or swords in games. Markets related to "ownership" and equal compensation schemes for content creators have not succeeded. In the crypto space, enough time has passed for some areas to be proven ineffective, while great businesses have been built in others. In each cycle, explicit financial elements have been proven to be stronger than ever.
Crypto does not solve economically unreasonable ideas; instead, it further reinforces the capitalist features we already know. More money, more transactions, higher returns, and faster speed. Crypto is pushing us forward along the path that has been known and traveled since the late Middle Ages, forming late-stage capitalism.
Creating new markets, finding new assets, your application will thrive on a blockchain network that ensures economic security. This is the most optimistic future for crypto.
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