February 1st, 2015. Glendale, Arizona. The Seattle Seahawks are 2nd and goal at the New England 1 yard line with 26 seconds left to play. They will lift the Super Bowl in a matter of minutes.
The watching media are putting the finishing touches to their articles decrying the end of the New England Patriots dynasty. Tom Brady is finished. Bill Belichick has lost three Super Bowls in a row. The Seahawks are the new powerhouse, the heir apparent turned King. The narratives are set.
Malcolm Butler, an undrafted rookie, makes the game winning interception. Tom Brady is named MVP. The Patriots win their 4th Super Bowl and follow that up with a 5th two years later, cementing their place as one of the greatest NFL dynasties. In the blink of an eye pre-existing narratives are torn up and new ones furiously created, all thanks to something as inconsequential as two hands plucking a ball out of the air.
- Narratives are unreliable, driven by the interests of the author and those who propagate them
- Crypto is a particularly hard space to have true overarching long-term narratives due to the fragmented community, noise in the space and nascent nature
- I prefer to look at the progress of the space as a whole, and the rise towards true usage which I suspect is still 2–3 years away
- This progress can be boiled down to a few areas, such as infrastructure, investment, development, regulation, institutional support and ideology
- Without the required infrastructure and development we cannot expect DApps to go mainstream; the current failings to attract sizeable numbers of daily active users is less a reflection on the DApps themselves than it is the state of the ecosystem
- Although progress seems assured, we should be mindful of all the ways it could fail or be co-opted
- In the short term I don’t expect a great deal to change and expect the over the top speculation on alts to return
- In the long term I expect most protocols to fall away, leaving Bitcoin + 1/2 others. DApps will then rise and fall depending on popularity (because there will be true usage) and make up more and more of the top 20
Narratives and Crypto
This post was inspired both by Nathaniel Whittemore’s excellent discussion of many of the current contending narratives and the sheer volume of discussion on the varying narratives surfacing. That we now have an index of market narratives highlights just how much time and thought has been allocated to the topic of late.
Whittemore notes that the “Fat Monies concept feels ascendant at the moment as compared to Protocol Wars”, something I fully agree with. That is indeed what most seem to be backing as of today, at least the vocal minority of the VC/engaged investor base on Crypto Twitter.
However, it was not long ago that Joel Monegro’s “Fat Protocols” thesis was the narrative. Yet it has seen its stock fall widely and rapidly. Why? What has changed?
My short answer would be that probably not much has changed beyond price action and the general disillusionment at various stages of technology.
My long answer? That asking what has changed is the wrong question to ask.
The first problem is the nature of the narrative itself, a deeply flawed human construction. Even the historical narrative is simply a construction of a story about reality, rather than a direct representation of reality. It is a reconstruction imbued with the ideological perspective of the author and culture. And that is a narrative based on something that has already come to pass, unlike forward thinking narratives.
Creators of narratives seek to rationalise trends, to make them fit in with their own view of the world or to promulgate their beliefs. As such, narratives are highly subjective. Consider the fine edges that lead to with which sports journalists change their opinions. A ball glances a centimetre wide and the team are losers, disorganised, mentally weak. A centimetre in the other direction and they are heroes, perfection, clutch.
An historical narrative is a construction of a story about reality, rather than a direct representation of reality
— A Review of Narrative Methodology, M Mitchell and M Egudo
Financial markets are similar to sports, filled with experts whose job it is to explain to you what is happening and why. Sometimes there are obvious reasons why, a piece of news or a slump in sales. But all too often a reason is created to explain standard variances or plays on short term trends and is quickly rendered obsolete.
Furthermore, crypto suffers from several specific problems rendering narratives difficult:
- It is a nascent industry in which there is little usable history to base future conclusions from and we are still in discovery mode on a lot of topics (including both development and price) which means…
- Narratives are often obsolete before many have even heard about them as everything is still being formed which leads to…
- A lot of noise — there are very few true experts who understand both the technology and investment, everyone has vested interests, most aren’t capable of judging who is a reliable source and the market is a 24/7 global industry with unparalleled access to and interaction with the personnel and companies involved. This noise is amplified by…
- A fragmented community (in terms of motives and interest, communication medium, the world they have come from and linguistic differences) which rarely interlinks. The communities I follow on Twitter, Reddit and Telegram not only focus on different areas, but even when they cover the same news produce very different opinions. And these are just the English speaking communities — how different are the narratives in South Korea, China, Japan? Very few straddle all these communities. This all adds up to…
- A return to (1); it is a new space and many of these narratives simply haven’t had the time to be tested yet. Many talk about crypto being the next Internet (a revolution now 30+ years in which has gone through several iterations) and we’re disregarding narratives based on mere weeks or months’ worth of action?
I tend to ignore a lot of what can be quite an overly introspective exercise, preferring instead to focus on how crypto is evolving as a whole. While what is going to capture value is important, I think it is probably easier to understand how this value is going to be created by looking at the route to mainstream adoption and what I see as the unstoppable nature of the space.
The Progress of Crypto
The classical interpretation of the Enlightenment was that 17th and 18th century thinkers saw a linear and continuous progress of humanity, in which knowledge and light spread forth. Whilst progress slowed at times, it never halted. Humanity kept moving forward, even if sometimes knowledge and innovation had to be hidden from the darkness of backwards authorities (e.g. during the Middle Ages). This is how I think of crypto in many ways. Despite the challenges and the barren periods, it is moving ever forward.
Crypto has only really existed for a decade. It would be tempting to divide it up into various sections, the birth of Bitcoin, usage for criminal activities, the launch of Ethereum and smart contracts, the rise of the DApp and the ICO funding model, the entrance of institutional money and enterprise.
Instead, I see the entire first decade (and likely another two to three years) as being part of the same period.
There have been failed exchanges, hacks, immutability quickly reduced to just mutability. Governments have railed against it, regulated it, banned it. There have been enterprises saying it was useless, that they did not need it, that it would have no impact. There have been scams. So many scams. There have been not enough people using cryptoassets for their purpose, there have been too many using it for nefarious means, there have been not enough finished DApps, not enough good DApps, not enough good design, not enough, not enough, not enough.
These will be familiar charts to anyone following Bitcoin or cryptoassets of late:
However, this is what I see:
The progress accomplished in under a decade should not be underestimated and adds up to a march leaving us close to mainstream use. I believe this progress can be boiled down to six main areas, depicted below, which we need to reach a minimum level of sophistication in to achieve real usage. These categories mostly proceed in parallel. We are at varying stages of progress, and success in one category makes it easier in others.
One caveat — Bitcoin should be considered in its own category, as not all of the below will apply.
The base requirement for any city is access. Without the roads or rivers to provide access to a city, no-one will visit.
Cryptoassets were for a long time isolated. In the early days there were no exchanges to buy Bitcoin, no way to get your fiat into the system. Then there were exchanges, but they were hard to use and distinctly untrustworthy. Then they got a bit easier to use but were constantly hacked. Then the likes of Coinbase eventually made purchasing crypto (with the purpose of simply holding) easy for the average person, in many ways a vital first step because without it many would feel divorced from it — it might as well have been a separate world.
Buying crypto provides a vested interest in the growth of the whole system, but it is not enough — there needs to be easier ways of onboarding users who just want to use DApps. Every aspect of the decentralised user experience has to match up with the internet, beginning from onboarding new users. How else can we expect to convert people to DApps otherwise? No-one is going to go to Coinbase to buy ETH, then transfer that ETH to their Ledger or MetaMask account, then login to that and then use a DApp (which usually requires a PC, something people either don’t use or don’t want to use). Plus, as Joey Krug noted, you’re paying high fees along the way.
Furthermore, access is not enough, we also need the security and power; amongst other things, there are now wallets (how can one measure the impact of Ledger or Trezor in engendering confident storage?) payment processors and advisory services.
All of these remain unfinished — while the infrastructure has undoubtedly improved, it is not there yet.
Regulation, enterprise adoption and infrastructure have all brought investment. This can be seen in the money that has flooded in from VCs and other investors (I do not include retail investment in ICOs) and recent attention paid to crypto from traditional exchange platforms such as SIX and ICE. The rise of crypto first funds will also keep money flowing into the space to develop infrastructure and projects.
A counter-argument would be that Bitcoin did not need funds behind it to launch, nor to subsequently rise in usage. Could investment simply be a by-product of success rather than impetus? Perhaps. However, more investment allows for more resources for development and infrastructure. Even if Bitcoin could survive without investment, the wider cryptoasset base does need investment. Again, we are building DApps which need to compete against well funded and very good centralised offerings.
The aforementioned investment (along with the money donated to ICOs) has led to the funding of a raft of projects. We need the basic infrastructure to enable people to enter the world of crypto, but we need development of the ecosystem to enable users to actually use the decentralised networks being created. Think of it as the difference between the roads and rivers allowing people to settle, and the houses and businesses they then create once there.
Before any protocol can claim to be the new Internet it must first build up all of the different components that allow the Internet to work. We need decentralised storage, messaging, governance, protocols, identity, processing. These components of the Web3 stack will engender new possibilities, new ways to achieve what was previously impossible. Projects will build off one another. We need scaling above all.
Furthermore, one of the most vital elements, the user interface, has received comparatively little attention. We need working mobile browsers and we need a means to onboard users as easily as any app. A problem here may be the gatekeepers of Google and Apple in allowing crypto payment based apps on their stores. DApp browsers like Status are currently freely available on iOS and Android but it will become more of an issue if it begins to threaten their golden eggs.
Coinbase have a real chance to lock the market up with their rebranded Toshi browser. There has been much discussion of Facebook buying Coinbase for the buy/sell business. However, isn’t the thought of Facebook controlling what will be a crucial main user interface an even more foreboding prospect? Especially if you consider they could easily integrate it into WhatsApp and Facebook. It could be their route to the sort of experience that WeChat provides.
It should not be a surprise that DApps are barely used at present; the components needed to facilitate other DApps to easily run aren’t there yet. Progress may seem slow given the otherwise frenetic nature of the space but it is easy to forget that many developers only entered the space in the last 24 months. However, as a result of how we’re building, I think that it will be DApps that will (in two or three years) begin to take a greater and greater slice of the pie, with less proportionally flowing to the protocols.
A final thought; as a result of the often pointless tokens attached to them, we will also likely see fragmentation across the various competing decentralised technologies. This could slow progress.
4. Institutional support
Enterprise adoption leads to more resources being devoted to research and development. Skill bases begin to emerge, demand for developers rises and this creates a natural supply rising to meet it. I would accept the argument that institutional support isn’t necessary or could be a side effect rather than impetus. However, I would content it speeds the process to acceptance considerably.
While there are many organisations who will remain opposed to Bitcoin, many are now trialling and using DLT in some manner. The Enterprise Ethereum Alliance has grown from 30 to 500+ members in under 18 months. There are many other industry bodies. Dozens of banks and financial services organisations have trialled blockchain solutions and so too have organisations ranging from the likes of AXA to the United Nations.
Although it sounds a lot, much of this remains discussion bodies and small scale pilots. Actual enterprise usage remains borderline nonexistent.
Regulation is a double headed sword. While it can be negative, many of the countries which have banned crypto have either struggled to enforce their ruling or ultimately repealed or toned down initially harsh pronouncements. I believe:
- Regulation legitimises the space as it implies cryptoassets have risen to the level of importance where they need to be regulated; they are too important to be left alone
- It provides clarity, which allows for more users and organisations to invest and speculate which leads to more funds flowing to infrastructure and development
We are starting to see clarification from many governments, but there is plenty left to answer.
In writing this article I created a timeline of developments over the past decade. It is hard to avoid noticing that the timeline up to 2014 or so looks slightly devoid of activity in contrast to the bustling space today. However, this period was the most important phase of all. Just as we are weakest as new-borns, so too was this the period where Bitcoin was most likely to fail. The community was small, the odds large, the road to mass adoption long.
With every month that Bitcoin survived the entire space gained legitimacy. Bitcoin is the flagbearer by which the industry will be judged and its mere survival is testament to the resilience of decentralised currency, a far harder concept to impress upon the world than the likes of smart contracts.
This early period was necessary to get us to where we are today, where mainstream interest has formed. Many now believe in the idea of cryptoassets, even if they perhaps do not understand fully why. Many more accept that they are a ‘thing’ unlikely to die out.
Despite the recent tumultuous price action, it seems to me there has been a distinct decrease in declarations of Bitcoin’s death. Is this because people have become more guarded, lest they be wrong? Or could it be that there is a creeping change in mindset, that Bitcoin is not solely used for illicit transactions but rather maybe it is a store of value or could be a hedge against central bank policy and national decline?
Ideology is very hard to gauge progress on and doesn’t apply equally. Bitcoin has an extremely strong ideological core which has made it so resistant. It is less important for the adoption of smart contract protocols, for example, where the goal is to make the token element ultimately invisible to users. With Bitcoin, holding (or transacting) BTC is the core element.
The Perfect Storm
Although it may appear like I am being negative, I think that we are verging on a minimum viable ecosystem and it is a matter of when, not if. I think the change in many cases from “not quite there” to “there” will be quick, as we reach a tipping point of resources and development.
Further to the developments within crypto, I think there are also many external events which will lead to a greater chance of adoption. These include the decade long asset boom, growing inequality, cost of living outstripping wage increases, various countries struggling with severe inflation, economic slowdowns, deflationary fiscal policies and the proliferation of highly centralised platforms forcing society in a race to zero. I was already writing this when Jordan Cooper published a post called Chasing a Perfect Storm which covers a similar theme and is worth reading. I’ve gone on long enough and the myriad of external factors which could play into a rise in acceptance of decentralised networks are lengthy enough to warrant a separate post.
The Enlamboenment (*groan*)
I may have put forward the idea of inexorable progress but so too were Enlightenment thinkers convinced by the continued progression of humanity. In the following centuries humanity’s ‘progression’ saw science taken to a horrifying conclusion with the Holocaust and the dropping of the atomic bomb. Crypto will never be able to have such a horrendous impact on the world, but the point is that we should not assume neither progress nor a positive outcome.
There are many traps we could fall into. A co-opting by centralising forces, much like the Internet. A cause for rising inequality. Monopolised by the developed world, another tool with which to crush those less developed. An immutable ledger to provide governments with unprecedented access to your every purchase. A tool for totalitarian governments to use to further subject citizens.
More likely, it is simply something that never quite convinces users why it is preferable to their current centralised offerings, at least not in line with some of the idealistic and expansive original visions. We are competing with the Internet, and the Internet is fantastic. Every aspect of the decentralised user experience has to match up with it. How else can we expect to convert people to DApps? We are currently nowhere near that standard.
However, I believe we’re probably two or three years away from many of the visions being worked on coming to reality. Two or three years sounds a long time given the breakneck speed of the space (it’s only been just over two years since the DAO hack and less than five since Mt Gox!), but it will pass as quickly as a ball being caught from the sky in Arizona.
I have no doubt it will happen. But I am 100% in crypto, so this should not be a surprise. After all, this is my narrative.
Short and Long Term Investment
Since the whole point of most crypto narratives is to identify what people are going to do with their money I should put forward what I would do, even if it is unashamedly simplistic.
Many have recently proclaimed the death of alts, some using a few weeks of price action to affirm their belief that you are financially better to just hold BTC. I even saw some proudly reposting their comments from last October that the crash was coming. I would contend missing out on thousands of % of potential gains so you can drop ‘only’ 70% instead of 80–90% is not the most convincing of arguments.
The eternal winter of alts is one narrative I’m not buying as it would mean that cryptoassets valuations will suddenly become free from greed, speculation and manipulation. I am sceptical on this changing so quickly. As outlined above, I think in two to three years time, when there is usage to properly measure by, this will begin to end but I expect it to continue for the foreseeable future.
Therefore, either be passive and just hold BTC or be active and ride the very short term trends. These trends should not be confused with narratives, as short term trends are 1–4 week long bursts e.g. off the top of my head from last year:
- The Chinese coin boom
- The supply chain coin boom
- The privacy coin boom
- The all ICOs pump boom
- The perplexing — even for crypto — all high supply low priced coin boom
Combine that with spotting the relatively undervalued altcoins, cycle profits into Bitcoin and then take staggered profits to fiat or accept the large drops Bitcoin will inevitably have from time to time.
Looking slightly further out, most of the investment is currently going into protocols, with the rest going into DApps. I think a reason why protocols became popular with investors was because they offered a more immediate and comparable vision — DApps were a while away, but protocols had functioning or soon to be live mainnets with metrics to compare vs each other.
I think as more DApps go live and are concentrated on one or two platforms, the reality will set in that most of the platforms will be forever empty. This will lead many of the protocol valuations to plummet and I would be cautious about owning many of the smart contract platforms, given many offer nothing. Given there are 17 in the top 19 (ignoring Bitcoin), there are going to be some big losers when during the next crash we look back on the 2017–18 bull market top 20.
Conversely, while protocols currently dominate the top 20 I think that the first truly successful DApps will soar to huge valuations, taking off in a manner akin to Farmville on Facebook (and perhaps games will be the first to go mainstream), so identifying the early winners here will be key. It’s likely going to be a project not even in existence yet.
I think you can expect capital to flow towards BTC as a store of value whilst also expecting new industries and possibilities to spring up as a result of all the technology we are creating (albeit this might not be in the form of token prices). While I don’t think it has to be Bitcoin or the rest, I’ll always hold at least c. 30% BTC — although if I had to pick projects right now to hold for 10 years that would rise to 100%.
I would also expect a movement — albeit partial — away from tokens. I do not know quite what form this might take, but I think a better alternative will emerge to better align projects, teams and investors. Tokens are just a really bad solution for many projects and investors alike.
So, if I had to guess, I would expect protocols to begin to underperform the market average and a subset of DApps begin to outperform (many will die off), with BTC in its own category.
Is this as clean as some of the more elegant narratives that have sprung up? No, it’s not. But neither is crypto. Ultimately we’re still right at the start — who knows what new narratives will emerge next.
The aforementioned work on narratives by Nathaniel Whittemore:
Other narrative centric pieces:
- Fat Protocols by Joel Monegro
- Capturing Crypto Value (Part 3/3): Fattening the protocols & dApps by Duncan Chiah
- The Bullish Case for Bitcoin by Vijay Boyapati
On the Web3 stack: