On Crypto, This Time Is Different
When the crypto market started plummeting earlier this year, I and together with a host of others (I believe) thought that it was just one of those short-term market pullbacks. In fact, I remember vividly how the laser-eyed team of Bitcoin ran pools to ask if people still believe we will see Bitcoin at $100k. An overwhelming number of people believed in the possibility then and until 3 days ago, I might say maybe some of those still live in their bubbles. See this pool:
Of course, the same guy still says things like this:
That’s beside the point though. I am not here to talk about Twitter pools. But to highlight in some ways why this time is different for the crypto industry. It’s different from the 2018 collapse and includes every other collapse before then.
My thinking is that those who think it’s the same may have failed to engage in some thought-through to understand what might make this time different. And I am putting inflation besides the point now. Since it’s more of a global thing that is crypto-specific. When I say this time is different, I am talking about how much so notwithstanding macro realities like inflation, supply chain issues and so on.
In the following, I highlighted 5 things that make this time different. In the previous periods, these 5 things can be overlooked and have been overlooked. However, I do not believe it will be overlooked again nor do I think it will be a good thing for them to be overlooked again.
I concluded the article by stating that crypto needs some soul search and it needs to find what I call its “accomplished” state. That’s a state where it has either lived up to its hype, lived up to some hype, or dies a natural death.
What’s the use case?
Endlessly, we ask this question about both cryptocurrency and distributed ledger technology that powers it. “What are its use cases?”
Let me point out one clear and undeniable use case here; payments. I am from Nigeria and a good number of times, I’ve had to rely on Stablecoins for one thing and another. Beyond the shores of crypto adopters and enthusiasts, this use case is settled and undeniable. The number of special committees that have been set up by all the “who is who” in the world to examine the impact of stablecoins, potentially regulate it and even build their own is a testament to that. So we are clear, Stablecoin is a use case for crypto in the payment system. What else are we clear about?
Seriously, maybe I am not in the best position to answer this question. Considering I am more of an observer of the industry with little participation.
So I will allow one of the top participants in the industry to do justice to this. That’s SBF.
SBF made clear from the start of his Twitter thread that he would like to focus on substance and not the usual “you can buy tokens and maybe they’ll go up” type of use case which is what most people bought between 2019 to mid-2021. And in reality, those aren’t use cases at best, they are a gamble, at worst, a Ponzi scheme.
With those out of the way, he was able to put his potential use cases under 3 categories:
c) social media
Payment we all agree on. He made an interesting case for market structure use cases, but that’s more likely to be threatened by transaction per second (TPS) limitations in the near term. The same goes for social media but even if the TPS issue is fixed, I don’t see this use going anywhere. Defi, gaming is what makes up others.
If you are thinking what I am thinking now, you would have sensed an issue. In the last period, Defi was the holy grail that will revolutionise the whole of the financial industry. How come it is now being relegated to footnotes even by some as active as SBF. Well, time will tell, but one thing that’s certain now is that it is not a veritable use case as well.
And more than 10 years later, here’s the summary of the impact of crypto given by SBF:
“But taking a step back: how many of these areas has crypto revolutionized so far? I think the answer is “not really any of them”. It’s starting to impact some, but not in a widespread way yet.”
This forms the foundation of my belief that this time is different. Despite lavishing the industry with an overwhelming amount of dollars, the technology is still in the “impact some” stage. You really can’t compare it with the internet, as some have previously done, I don’t even want to go into all the reasons why you can’t do that but, come on, you can’t.
Exchanges are the only ones in the sweet spot, not sustainable
DeFi is great, asset management in crypto is great and even lending in crypto is fine. However, if this period has shown anything to me, it is how the exchanges (Binance, FTX, etc) are in the upper echelon of the hierarchy to benefit from the crypto trends.
I once famously 😉 said, “Your broker’s business model is designed such that they profit both from your intelligence and your foolishness.” Of course, they will make less money from foolishness than they would from your intelligence, but they still make money while everyone else might be losing. They seem to be the last man standing in this industry.
Well, that’s not sustainable. For an ecosystem to grow, the party adding the malt value should be getting the maximum income. Now, there’s a question around “isn’t exchanges the most value-adding industry of crypto?” Well, my submission is that if that is the case, we can as well pack up the whole crypto thing. Because I can’t imagine a universe where the New York Stock Exchange is richer than Apple. Or one where the London Stock Exchange makes more money than Barclays.
But this takes us back to finding use cases though.
The billion dollars rain has come to an end
I might be naive on this, but I pray I am not. I do not expect that investors would continue to rain billions of dollars into the crypto industry just as they did in the last period. For obvious reasons, 1) there’s been too much loss of capital for an industry that promised so much. 2) Investors will start to ask more critical questions that builders will most likely not have satisfactory answers to. This will mean lesser investment but wouldn’t mean the serious builders won’t continue to build. And that’s how it should be. An abundance of capital is not good for productivity, inflation will agree with me on that. 3)
Transaction per second is still a big challenge
Although this is a technology challenge, I believe it can be expanded. However, the question that remains is that with a blockchain, there’s always a trade-off between security and latency. So which one is acceptable is a long debate.
Why is TPS so important in crypto? A lot of the use cases that crypto will purportedly fix are high-volume activities. Take social media mentioned by SBF for instance, at a 50,000 TPS, the current highest TPS in the industry, how will a social media that combines Facebook, Instagram, Twitter and all else together perform? We will almost have to wait in queue for 7 days to post on a Blockchain-Twitter. God forbid that such a system is powered on the Ethereum network and you will have to pay an astronomically high gas price to get your post to jump the cue.
So that’s why TPS is very important in crypto.
A brilliant argument for how decentralised social media can be built, but not on blockchain exclusively.
Humans, unregulated, are at their worst. Crypto needs regulation
Have you seen the overwhelming number of people who lost a fortune to the collapse? Some school fees, some live savings, some retirement money and the list goes on. Imagine that the distribution of loss was in the magnitude of general adoption, by now, inevitably, the government would have to bail out those they are okay with to bail out.
For crypto to gain the mass adoption that it critically needs, regulation is needed. In my opinion, the most trusted stablecoin today has to be USDC. Why is that? Because Circle has from the beginning and until now attached itself to a regulatory domain. Where’s Terra? Why does USDT almost always never escape scepticism?
As I noted in this article, any coming together of two or more individuals creates a vacuum for power. And if the power is not consciously handed over to a trusted entity (individual or group of individuals), the most power-hungry entity will grab it for themselves and use it for their benefit. Smiles at Do Kwon.
Simply put, regulation is needed.
From here to where?
The 5 reasons above that range from use cases development to technical limitations and from the need for regulations to the end of the rain of dollars, require the crypto industry to engage in some more soul searching (it is doing so already, should intensify).
As with any technology that promises a lot, I am still hopeful about the eventual “accomplished” state of crypto. Even if it’s payment alone, that’s okay. Anything it is, it is okay. We have just heard enough of the hype, enough of bad people taking advantage of the hype and enough of cancel culture over this same technology. Now, we need real and scaled impact. If it will bank the unbanked, let it bank them, if it will become the world reserve currency, let it become, if it will be the operating system of the internet, let it be it. Because if it does not find an “accomplished” state, this time will persist. Not like that’s a bad thing, it would however just have been a huge disappointment for technology with so much hype (in my generation).
I hope that this time doesn’t persist for too long and that crypto finds its “accomplished” state.