Let’s start things off with a personal and somewhat embarrassing story… my journey with puberty.
When I entered middle school, I was one of the shorter guys in my class. Part of this was due to genetics (neither of my parents are that tall), while some of it had to do with age (I was a summer birthday, which made me young for my grade).
My height posed a disadvantage for me, as it made it more difficult to be competitive in certain sports, and as I quickly realized, many of the girls who had already hit puberty were not interested in dating a guy shorter than them.
To try to overcome this problem, I would do things like attempt to stretch my body out on the floor and sleep at least 9 hours every night. Anything to try to grow bigger and stronger.
By the time I entered high school, puberty had begun to kick in with full force. I would experience breakouts of acne (particularly pronounced during sports seasons) and at night my legs would be so sore that they would keep me up.
I was growing so fast that I developed a condition called Osgood-Schlatter in my knees, and even had a near death experience from a collapsed lung caused by my growth spurt (a story for another time).
When I finally came out of the other side of puberty, I was 6 feet tall, could bench press over 200 lbs, and even had some early signs of a beard — albeit patchy. And most importantly, I was confident in my own body.
At this point you might be asking yourself, why the hell is Alex starting off his Web3 newsletter with a TMI overview of his experience with puberty?
Well the answer is because it was the best analogy I could come up with for what is about to happen to crypto in the coming 2-3 years.
In short, the crypto industry is currently entering its equivalent of puberty. Which means it’s the digital version of the skinny, hormonal, pimple-covered teen, that’s about to begin it’s most important stage of growth and maturation.
Similar to how the teenage years are crucial for the development of humans, these next few years will be crucial for the development of Web3.
Teenagers can be dangerous, because unlike children, they possess the ability to do “adult things” such as drive cars or even buy guns.
Similarly, crypto is no longer a niche asset class that is only accessible to technically-literate cypherpunks. Instead, it is an $1 trillion+ ecosystem of companies, tokens, and NFTs that are accessible to 100s of millions of people through the click of a few buttons on apps like Coinbase, OpenSea, and Robinhood. At this scale, movements in the crypto markets can ripple into the wider global financial markets.
This means that crypto is no longer a fun little experiment, and countries & regulators are beginning to treat it differently as a result. Just as an 18 year old can be sent to prison for driving under the influence, an NFT or stablecoin gone wrong can be met with charges from the DOJ.
So where is the crypto industry headed? Is it a hormonal teenager that is about to go off the rails before its prefrontal cortex is fully developed?
Or will it emerge on the other side, as a valuable and more attractive alternative to the existing Web?
The truth is that nobody knows the answer to this question for sure. But in the spirit of exploration, let’s analyze where our industry is at now and see if it can give us any clues as to where it is going.
The Crypto Casino
Before we dive any deeper, we first need to agree on where Web3 is on its journey to become a viable alternative to the existing internet.
There’s a lot of different ways we could break this down, but I think the simplest way to approach this is to consider the speculation:utility ratio.
For all of the talk about how Web3 delivers valuable use-cases, the reality is that 99% of crypto use-cases are still built upon speculation. Full-stop.
If you don’t believe this to be the case, answer me this question: When was the last time you used a dapp (or crypto-related app) where the sole purpose of your engagement was to do something other than to make more $?
The answer to this question for the vast majority of people who hold crypto, is (sadly) probably never. This paradigm is clearly evident by taking a look at the charts on dappradar:
Not a single dapp in the top 10 has more than 1M WAUs. Meanwhile Facebook has ~2B DAUs.
For all of the talk about how Web3 has produced way more everyday use-cases for people, transactions began to drop off the moment liquidity began to dry up. Which meant that many of these daily use-cases were actually built off unsustainable yield and/or ponzi-nomics.
The good news is that there are glimmers of legitimate use cases ranging from borderless payments, DAOs, portable social graphs + content, censorship-resistant speech + money, etc. I’ve personally experienced all of these value props first-hand over the past 18 months.
The bad news is that these use cases were not able to reach any sort of mainstream adoption during this market cycle. Instead the masses were drawn to the more speculative games that catered to our system 1 thinking.
I say this is bad news, because if our industry is 99% speculative, it means that all of the assets contained within it are risk-on assets. In the wake of COVID, when the government was practicing QE to the tune of trillions of new dollars printed, crypto benefitted greatly. People took their stimmy checks, hopped on their phone, and yolo-ed into whichever coin or NFT was hottest. They were addicted to the crypto casino.
However, the macro environment has shifted drastically in the last 6 months. Lagging supply chain issues coupled with a destructive war in Ukraine, has crushed the supply of goods. In parallel, there hasn’t been nearly enough productive output to offset the trillions of $ printed during COVID. Which means that the so called “transitory inflation”, wasn’t so transitory after all.
All of this has put us on a path not only to recession, but actually an even worse economic situation known as stagflation.
Want to know which assets perform very poorly during stagflation?
*whispers* : Risky ones
Losing the script
It’s one thing for an asset class to go down during a wider macro-economic downturn. However, how you go down matters. And that's what has made the the past few weeks so painful.
It started with the collapse of the Terra/Luna ecosystem. The Terra collapse was especially detrimental for a number of reasons. The first, was that they tried to grow too big too fast. This meant that at the moment of their demise, they were already a top 10 project by market cap, which made them a black eye on the entire space. Had they been ranked outside of the top 25, people would have largely shrugged it off. However, this was supposed to be a bluechip project with bluechip investors.
The second, was that in his quest for growth at all costs, Do Kwon strategically began entangling his project in the wider Web3 ecosystem at both the protocol level and the institutional investment level. This meant that when Terra went down, it brought down many other crypto projects and investors with it. Cascading liquidations galore.
Lastly, the fact that UST was marketed as a safe haven inside the crypto-sphere, made it much more jarring when it went down. Unlike shit coins where people are mostly aware that they are gambling when they invest; many of the people with exposure to Terra, were (falsely) led to believe that those funds were safe. Which meant, that there were likely many people who were putting funds that they could not afford to lose into the ecosystem. Not good.
Moving on…
It’s been just over a month since the Terra/Luna fiasco, and we already have another possible crypto disaster on our hands. From the time I started writing this article over the weekend till now, the crypto market has plunged into another sell-off.
It turns out that there is once again another shady project tied to this sell-off, this time it’s Celsius.
Celsius is a centralized crypto lending platform that pays out interest to lenders who provide their crypto to them, and charges a higher rate to borrowers of their crypto assets.
To sustain the high yield they owed to lenders (10%+), Celsius had to take more risk with the assets on their balance sheet, getting themselves involved with other crypto projects and DeFi protocols.
In the wake of recent crypto sell-offs driven by Luna coupled with Fed hawkishness, many of the assets on their balance sheet decreased in value (including their Luna exposure) or were locked up in places like Ethereum staking. At the same time, many of their users were running for the exits and pulling their crypto off the platform in swaths.
This led to Celsius getting themselves into a liquidity crisis, as they were quickly reaching a point in which they were not going to be able to process the large amount of withdrawals from users.
This led to them taking the nuclear option, which involved halting all withdrawals from their platform:
To highlight how drastic this action is: Imagine if your bank were to call you one day, and tell you that for the unforeseeable future, you would not be able to remove your funds.
This was clearly the last resort for Celsius, as this action will almost certainly destroy their business for good. After all, if they ever do open withdrawals, who in their right mind would leave any of their assets on the platform after this nightmare?
To make matters worse, Twitter users quickly pointed out a clause in the Celsius user agreement that states that if they go under, users will lose their funds. Which is a great time to remind everyone of the important first rule in crypto:
Not your keys. Not your crypto.
Regardless of what happens next with Celsius, in many ways the damage has already been done.
Here we had another reckless founder, launching a company that was framed as “DeFi”, but in reality was just another centralized platform (basically a bank) with economics that could not sustain outside of a bull market.
For a portion of their userbase, Web3 will forever be tainted in their minds as just a new form of centralized bullshit, with even worse downside scenarios.
Clap if you want this all to go away
At this point you might be asking yourself, what is the fallout from these dangerous games that these crypto projects are playing?
I believe that I got a taste of where the crypto community’s collective heads are at while attending Consensus 2022 this past week in Austin.
During what I found to be the most intriguing talk of the entire conference, 4 members of congress discussed their approach to regulating crypto. This panel was important, because it included both Kirsten Gilibrand and Cynthia Lummis, who co-authored the most recent bi-partisan crypto bill.
To start the panel off, the host began by turning to the packed auditorium and saying with a smirk to the crowd:
“On the count of three, I want you to boo if you don’t want Washington to get involved with regulating crypto.”
After he said “three”, I let out a loud “BOOOO” at the top of lungs. I quickly turned red in embarrassment as I realized I was one of just a few people in the entire audience that had responded to the prompt.
The host laughed, and then turned to address the audience again.
“Ok. Now on the count of three, I want you to clap if you are ready for Washington to get involved with regulating crypto.”
To my surprise, I watched as the entire auditorium broke out in applause.
While I don’t know who Satoshi is (or if he/she is even alive), I am almost certain that he would have been very disappointed with the reaction from the crowd.
In that moment, I realized that despite being at one of the most renowned conferences in Web3, I was surrounded by complete crypto tourists.
These people were asking to be “saved” by the same elected officials who have repeatedly wreaked chaos on our economy through their legislation, and held back the average retail investor.
And in a moment when we are entering an economic recession and experiencing sky-high inflation (thanks in large part to their reckless spending) we’re supposed to go running to them to save us.
Are. you. fucking. kidding. me!?
But then again, maybe I shouldn’t be so tough on all of those attendees. After all, many of those people haven’t even gotten a real taste of what Web3 actually is. Most of them likely keep their assets on centralized exchanges and do not use any dapps on a daily basis.
They don’t understand the importance of self-custody or financial sovereignty, as they have spent most of their lives in a stable nation.
Furthermore, there were probably numerous attendees who had been burned by Terra (and now Celsius). Projects that had fronted as being true Web3 solutions, but in reality, were just reckless grifts with no regard for its users.
No longer the darling child
Make no mistake about it, we are about to reach a crucial inflection point in the evolution of Web3 and crypto, perhaps the most important one yet.
For the past few years, crypto has been the darling child that everyone wanted to play with.
Whether it was institutional investors pouring money into Web3 startups, big tech employees fleeing Silicon Valley monopolies to “fight the man”, or the average person transferring a chunk of their pay check into Coinbase, crypto has captured everyone’s attention over the past 2 years.
However, things are changing quickly. Crypto is no longer the cute kid; but instead, it’s now the teenager entering puberty. It now has pimples on its metaphorical face, in the form of collapses like Terra/Celsius, and a slew of tokens and crypto companies down over 90% from their all time highs.
Over the next few years, founders of NFT projects and DeFi protocols will go silent on Discord. Many developers will crawl back to their jobs at big tech, and likely be forced to return back to the office as their employer’s (who now control the power dynamic) will begin to exert their control.
Retail users will be less likely to spend thousands of dollars on a jpeg, as they grapple with trying to pay their gas and food bills. Many of them will be embarrassed to admit that their NFT investment is now worth $0, so they will remove their PFP and stop tweeting about crypto projects.
In parallel, law makers and politicians will smell the blood in the water, and work diligently to figure out a way to both personally benefit from crypto regulation, and make sure it becomes further controlled by the government. While the process will take a while, these politicians know that once these regulations roll out they will never be undone. And with each subsequent bill, they will further erode the value props that Web3 can provide.
Yet despite all these negative trends, there is still hope.
There will also be teams of smart and motivated missionaries still pushing hard for the advancement of Web3. Armed with a multi-million dollar war chests and a much better foundation of Web3 infrastructure in place, these teams will begin the mad dash to launch killers dapps and protocols.
The optimistic case for this bear market, is that it flushes out all of the bullshit ponzis and centralized solutions, and the truly valuable Web3 solutions rise to the top. With the right user-facing apps in place, by the time the next bull market comes around, users will buy crypto not only to speculate on price, but also because it is needed to engage on protocols that provide them real utility.
The pessimistic case for this bear market, is that frustrated retail investors and greedy crypto founders lead us straight into the hands of regulators, thus hampering our decentralized internet and financial system in the process.
Which of these two use cases will come to fruition remains to be seen, however I will end by saying this.
Unlike my personal journey with puberty, the fate of Web3 will be controlled by our collective actions and not circumstance. Those of us deep in the space have the power to decide how this industry matures, and what the final outcome will be.
As someone who has experienced what it is like to be both the nerdy outcast and one of the “cool” people, I know that I for one will not be walking away from Web3 any time soon. Even if it’s not the hot date right now, I know that one day it will be.
While a lot of you might be under a lot of emotional duress, be sure to burn this moment in your memory. It will be that much sweeter when we’re all back on top in a few years.
In the mean time, get ready for some growing pains.
Disclaimer:
None of the information above is meant to be financial advice. Please DYOR.
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