Thoughts Going Forward

Welcome back,

Things are currently looking bleak for the industry as a whole, and the collapse of FTX has had drastic implications that will continue to capitulate throughout the market and require additional years of work in order to return to the path of adoption that the technology had reached.

I haven't written much due to time constraints from other commitments, but I've continued keeping up with events and wanted to share some things I have been contemplating as well as give myself a chance to dive deeper. Rather than dwell on the bad we've all been hearing about, I wanted to express my thoughts on what is to come and how we can use past trends to see what may be to come.

Going Forward:

The recent events have delivered significant blows to the crypto industry as a whole. Still, as even J.P. Morgan has pointed out, all of the recent collapses in the crypto ecosystem have been from centralized entities rather than decentralized protocols. Everything about Bitcoin, Ethereum, and other blockchain networks has continued to work seamlessly, and this is especially impressive given the immense amount of financial activity and stress put on DeFi. This is largely ignored by the media and all others who only look at the price and then hear about these "banks" that go insolvent and think it's on the industry. Players in the industry have a leverage problem and this cycle is addressing that. However, things have gotten to a point in which a lot of trust and hopes of quickly getting rich have been vaporized. Literally, their funds have vanished. That is why I now believe even more strongly that Ethereum will lead the next bull market rather than Bitcoin. 

Bull markets have proven to be tests for crypto. In the past, bull markets were led by wild speculation and some exciting developments. The technology is still in its infancy and due to FTX's implosion, the next bull run will likely come out of a new exciting technology or application. The creation of and sustainment of a bull market will require the addressing of issues previous bull markets have exposed.

Ethereum was built in response to Bitcoin's original bull runs when the issue that arose was that there wasn't much one could do with the currency. People understand the importance of decentralization and believed that Bitcoin would accrue value as a better form of currency than a constantly inflating U.S. dollar; however, transferring it on the blockchain was clunky and you couldn't do anything but trade and exchange it. In the 2017 bull run, there were a bunch of Initial Coin Offerings (ICOs) and other tokens suddenly gaining value and popping up out of thin air, and they were often built on Ethereum. So we are suddenly tokenizing things and are able to use this system for capital and liquidity. With all of these tokens, we need ways to exchange them and use them financially if we are to use blockchain and smart contract platforms while adding this economic element to everything. This led to DeFi being made with DEXs to exchange tokens and innovations like Uniswap's AMM, which really blew DeFi up to start DeFi summer as there was also now lending and borrowing protocols and we have this whole financial ecosystem built out to support the tokenization of things and resolve some of the issues with the ICO bull run in 2017. DeFi gains traction right as we get into the Covid bull run so it gets tested. Growing pains would be expected when over $100 billion was put into DeFi on Ethereum within its first few years of existence. That is a ridiculous amount for such a new technology and young products, and it was fueled by crazy abilities to gamble with money. I'll acknowledge that NFTs also came along and that was polarizing in popularity, but one must admit it successfully took Ethereum (and Solana) mainstream. This all then led to the Covid bull market issues: so many people were using Ethereum that gas fees got way too high, there were a bunch of scams, it was slow, the user experience was just poor, and DAOs and tokenomics/governance was not adequate or sustainable. 

I’m not sure when the next bull run will be and it is not clear what is going to be the mainstream use case that gets it started but institutions are clearly interested now and the money is out there so I honestly don’t feel like it will be as long as some suspect. Here are some investment theories I have for the next bull run on concepts that should do well by helping to resolve some of these issues:

Layer 2s, or rollups, are Ethereum's chosen means of solving scalability and speed issues, making activities on a busy Ethereum network more accessible to all users. A lot of activity will move there and they will likely accrue value due to this increased usage and as they develop utility for their tokens. We may see the value migrate from the base layers to these novel applications as the increase in scalability, especially with updates such as EIP-4844, makes the protocol layers, which will likely be these Layer 2s come closer to reaching their full potential. Their interoperability with the secure and decentralized Ethereum network should make them more attractive than alternative Layer 1 blockchains such as Solana or Avalanche. Still, I do not think these other Layer 1s are by any means parasitic toward Ethereum. When budget airlines started popping up such as Spirit and Frontier, everyone thought they would merely run the expensive incumbents out of business. Instead, they increased the demand for air travel even further and all parties won. If alternative Layer 1s increase adoption of the industry as a whole, this will benefit Ethereum as much, if not more than others. As the incumbent and most battle-tested, big institutions and corporations, which are responsible for most of the economic activity in the world, will choose Ethereum to process their transactions.

Another concept within this theme of rollups that has been discussed with the adoption of blockchain technology is the Fat Protocol Thesis. I hope to write about this in the future as I think there are a few ways it can play out within these new ecosystems created on public blockchains, but, for now, I recommend reading that link, and I will return to it another time. 

Next, there needs to be an addressing scams, and this sort of ties in with the poor UX experience. Crypto is known for scams and hacks so more security and UX will have to start with wallets. The current ones are truly just hard to use and confusing. Making wallets and protocols easier to use is going to be critical for onboarding. There is work on improvements such as Account Abstraction, which show great promise towards improving the experience for users and the network as a whole. Wallets will become more easily managed with social recovery, but I see wallets as becoming one's guide through the ecosystem. A users experience with the wallet or encompassing application should be the base from where they explore DeFi, NFTs, and social media. I think there needs to be an wallet or application that builds out an interface that becomes the WeChat of crypto. The protocols run the backend and the interface ties it all together as a dashboard of everything you want to access financially, socially, and culturally. 

Finally, there is a need for more brainstorming on tokenomics as well as DAO infrastructure and platforms that make starting and running a DAO easier. Tokens that operate purely as governance or voting mechanisms do not have long-term cases to accrue value. The veToken model has gained attraction and has its pros and cons, but I feel there is a large hole to fill in the DAO infrastructure space.  The ability to coordinate large groups of people and raise funds is something that was just starting to be realized in the recent bull market. Effective and efficient mechanisms made accessible by established platforms that allow individuals to quickly set up and manage a DAO will become key infrastructure in the future. 

There are already many players taking innovative approaches to all of the concepts I have mentioned above and I am interested to see how they will play out as the next cycle of adoption inevitably comes.

I appreciate any comments, criticism, or feedback you all have, and would love to discuss things further. 

Thanks for reading,

Alex Farfel