Hello and to whom it may concern,
I've been involved in the crypto-market since 2017 and it's taken me quite some time just to wrap my head around why BTC was valuable. Though I intuitively felt it so in 2017, I wouldn't say I had my own fully solidified opinion as to why it was worth buying until 2019. It was then that I had decided BTC was censorship resistant and that its vetted, algorithmic, known schedule of issuance and transparent functioning was something that was incredibly valuable when compared against government issued currencies -- which seem to be by-in-large corruptible and subject to serious debasement over my life time (the timeframe I care the most about).
With that established, I haven't felt it necessary to really evaluate the "merit" of Bitcoin so much as evaluate the timing of buying it (insofar as I have the luxury to do so because sometimes I need more $) as 50-80% corrections and bear markets still seem to be par for the course (though that could change in the coming years).
With a crystalizing/formative moment in the form of the March 2020 collapse in my rearview window, I'm now moving on to try and develop the same resonating/solidified concept around why altcoins are valuable long-term but admittedly, I'm having a lot of difficulty finalizing this for a multitude of reasons I'd like to share. Maybe there's something I don't know (well that's definitely true), maybe my fundamental understanding is seriously lacking, or maybe we are still largely in a voting system that is still very largely removed from "weight" aka merit and I'm noticing that. I'm not saying that with more merited principles established the values of cryptos become crystal clear, I'm just saying there seems to be a glaring hole in the altcoin space as to how we evaluate, as the only crypto that can make the claim as the binary alternative to fiat is BTC (because of its long-standing decentralization and trustless trust). Sure, other currencies can enjoy a similar existence, but that's still off the shoulders of the OG Bitcoin (and no I'm not a maximalist because I suspect value in alts).
So here's where I'm getting held-up, especially when I bother to contrast Layer 1 altcoins with Bitcoin:
Most of everything outside of BTC that is a Layer 1 has a conceptual value that is predicated on a tokenomic scheme coupled with circulation or quantity reducing mechanisms via utility/transactions -- would that be fair to say (further facilitated by smart contracts)? If so:
- Why are so many Layer 1s valued in the billions if not tens of billions when the "organic" mechanisms of their utility reducing circulating supply / quantity are not what is driving price? For example, these cryptos don't get to make -- in whole -- the same store of value claim as Bitcoin, they make their argument in terms of blockchain as a service but currently their speculation is rampantly outpacing their organic utility reducing supply mechanisms. By the time these "merited mechanisms" actually take some sort of hold, the speculative aspect of their value will be so incredibly exponentially above their utility-driving-value-mechanisms that it won't even matter. Furthermore, what is the merited way of evaluating utility/transactions?
- In the absence of utility driving value organically, we seem to favour re-scripted mechanisms of supply reduction (i.e. inorganic forms of reduction) like "burning of tokens". Why do we support these measures? Don't these measures take out of incentivization/stimulation and lend themselves more to speculation markets driving the price? Are we not sort of taking out of one merited hand (organic incentivization and utility) to feed another (inorganic/artificially imposed demand/supply discrepancies)? Doesn't this kind of sh*t make cryptocurrencies incredibly similar to fiat currencies? Except with a new wrinkle of corruptible money on a blockchain? And no observable real-world consequences like not having enough injection to stimulate essential functions services?
- We say we value "strength of ecosystems", "# of dApps", and "TVL" but these metrics seem very incomplete for evaluating a Layer 1s price:
First of all, almost no one is using any of the dApps on the service-based blockchains. In the lead we have BSC with 1,000,000 regular users, but how do we get there? We get there through a highly centralized chain and some novel DeFi applications, correct? So basically, we're incentivizing use of applications through short-term rewards on a highly-centralized chain, and our hook is compounding interest but surely this has an expiration, does it not? I mean we see already with liquidity pools the rewards go down drastically from their inception as more people come aboard. As well, our economic value proposition of BTC has been kind of thrown out the window because we sacrifice decentralization. The rewards we get are in a sense merited, as every market seems to have its scalpers but it feels kind of like we are on an immense freight train of rewards with no real grasp of where we're going or where we end up, or what or for how long our train can remain fueled. Basically, there's a whole lot of imperfection and with that there's opportunity, but we're doing it in a fundamentally centralized landscape and that makes everything just feel kind of weird to be honest. We are like a fundamental 180 degree pivot in the opposite direction of Bitcoin in a lot of cases (hello EOS, we still see you) but for whatever reason, we seem un-phased.
Regarding TVL, we see a lot of different layer 2s and layer 1s boasting some good numbers but... these TVLs do not have any nuanced analysis. For example, how many unique users make up the TVL? In Ethereum's most prominent DeFi example, over 15 billion worth of TVL is divided up a mere 800 users -- that's like $19,000,000 per user. Okay, so like if the top 2 whales of this group unbond how does that affect TVL? What's the likelihood that they do? How long have they been invested? And even if we do secure all of that information, why are we so comfortable investing on that basis when we again arrive at a fundamental problem -- the use of these applications is highly, highly concentrated to a select few. Now I understand the idea of thinking of the entire market as a single entity, but even still I think we should admit a mass exodus is almost certainly, entirely, spearheaded by a single whale blinking every single time throughout history. I don't think a "run on TVL" ever pre-empts a whale move, but maybe I'm wrong. Either way, I don't feel like it's something worth hanging my "secured value" hat on, though I understand if a couple of whales abandon ship my prospective lending/liquidity rewards should go up right, but what's the market have to say about 2 whales taking away 90% of the TVL?
Beyond these questions to which I have no answers, I'd like to move onto this "interoperable" future. A lot of Layer 1s have predicated their value on the dApps they host (with little to no users) and the TVL (again comprised of whales) they have -- but what happens to this utility-driving-value scenario in the interoperable future? I mean, I honestly don't understand this. If we're going to be swapping between chains in a seamless, automated fashion then who gets the keep within the Layer 1s? Is it more likely to be wherever most of the dApps and users started out? How will the autonomous automated systems decide between subsequent chains? Will it be in accordance with any of trilemma criteria we once cared about (decentralization, security, and scalability?). Also, why the hell does anyone bother to make a language other than solidity if we're just going to make "solidity compilers"? This is just bizarre to me, we set out to make something more secure, then we make it backwards compatible, the integration of which opens up even more holes for security weaknesses and bugs. I mean this one really does get me, it seems like the most important thing is whatever developers want to use, but whatever developers want to use isn't necessarily the most secure or bug free -- a problem which will be further exacerbated by interoperability, will it not? Other than that, we're seriously out-developing the actual scalability of the most popular chain, and as a solution to that we're by in large creating shiny new centralized Layer 1 solutions. which in recent prolific examples get shut down by a single bot-spam, or have to leverage an even more centralized Layer 2 -- that also isn't done yet -- to keep up. (I'm not naming names to avoid fan-boy down votes, but if you follow crypto on a weekly basis you are probably familiar with who and what events I am referencing).
So in the medium term we've gotten completely away from utility driving value and by the time utility does drive value some of the more merited Layer 1s won't be an option because the voting system is propping up the most marketed chains on half-baked concepts of ecosystem strength, TVL, # of dApps, TPS, scalability, gimmicky tokenomics, and arguably above all -- HYPE.
So I guess my real question in all of this is:
- If long-term meritocracy is our aim, how SHOULD we actually evaluate Layer 1 altcoins?
- How long will we persist n this dichotomy of Satoshi's Trilemma fulfillment and altcoins? Will there come a reckoning day where we realize we got way ahead of ourselves? Better yet will there come a reckoning day where we at least just trim off all of this fat? Or am I going to witness a machine of highly marketed and recycled altcoins in perpetuity? Will the equivalent of Shiba Inu still be a top 20 coin 5 years from now?
I mean, if it's not already apparent I really don't have solid answers for any of this. I'm just a guy with a better than layman but way less than expert understanding. Regardless, I get the sense I'm being a little naïve in all of this and most of everything is just going to come back to different-shades-of-hype driving market speculation and price. That said, I also think I might be onto something and that instead of getting caught up in all of these different shades of hype, I should just focus on who is truly winning the decentralized-regular-user race. After all, that is what it means to be Google, Facebook, Instagram, Whatsapp, Reddit, and the like. Who is truly going to make an on-chain, everyday user out of the masses?
TLDR:
I AM CONFUSED.
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