OK, so here’s what may be crypto’s largest problem right now: It does not reward innovation. Instead, we have these weird hype cycles where suddenly one crypto project or use case becomes super successful and then it gets forked or copied ad nauseam until people ultimately realize that nobody on earth has asked for a hundred different Bitcoin forks, or a hundred different lending platforms, or one thousand instances of cutesy NFT drawings of anthropomorphic animals that wear fedoras and smoke cigarettes. No, I do not own this Pudgy Penguin, I just right-clicked it. Take that, NFT junkies! In an , I have noted that there is a certain logic behind these hype cycles. Well, except for dog-themed shitcoins. This is just an atrocity committed by degen speculators on crypto’s dev community that is actually working on solving problems. Seriously guys, these ARE shitcoins and you know that. Stop buying them for heaven’s sake! earlier article The shitcoin economy But in a world where basically anyone can create a fork of a successful project with only little effort and hype it up to a 100 million USD market cap, why should anyone go the extra mile of building something valuable that can actually improve the state of DeFi and the broader crypto economy? Take stablecoins for example: there is already a myriad of decentralized stablecoin projects and I have the impression that we could do just as well with only one-tenth of that. At the same time, it would not take much more effort to use the same method to create synthetic assets that can track the value of for example gold or silver, or even fancier stuff like interest rates or inflation. So why am I not seeing innovative projects like that? Why is it always the same few use cases I’ve already seen hundreds of times? As so often when analyzing human behavior, the answer is incentives. On the one hand, it is still easier to just fork a project than to actually do your homework and come up with an innovative use case and token model. On the other hand, effort is usually not rewarded in this environment thanks to the somewhat erratic behavior of degen investors, who often just randomly pick low market cap crypto assets in the hope of actually drawing one out that will make it big. Hey, we all know someone who received a huge windfall that way, right? Problem is, all you ever hear are stories about those who won in the shitcoin lottery, not the ones who lost. Bull markets are for HODLing, bear markets are for BUIDLing The sad result of this behavior is that the crypto market often rewards repetition over innovation. Right now, we’re coming off a huge bull market that likely still profited from 2020’s Bitcoin halving and practically every crypto asset was in the green over the course of the last year. This also meant that a lot of dumb capital has accumulated that both allowed speculators to keep up their random investments and otherwise useless projects to stay afloat for too long. At the same time, innovative projects did not receive the attention they deserved. Now that the halving rally seems to have subsided, we can expect things to change and if Bitcoin repeats its four-year cycle the same as last time, we’re heading for a very rough year until prices start going upwards again in anticipation of the 2024 halving. While it’s of course easier to make ends meet during a bull market, there is a silver lining in having a drawn-out crypto winter. Rough market conditions like these have a cleansing effect that prompts investors to choose which undertakings are worth supporting and which ones are not. In the wake of the 2018 crypto winter, not many projects that priorly carried out a successful token sale have survived, but those who do are now real powerhouses. Expect that 2022 will flush out most of the copycat projects in favor of the original DeFi innovators and make way for new concepts in the decentralized economy. What you can do to help Most importantly, educate yourself. This process takes a lot of time. Personally, I have been watching and writing about the DeFi industry for over four years now, and I am still learning more every day. Make it your rule to only invest in crypto assets if you know exactly what the project behind the token does, and how the asset actually plays into the tokenomic ecosystem that project is creating. If you can’t tell what a project is doing, what its goals are, and why it is an improvement over similar projects that have a larger market cap, stay away. There are some simple rules of thumb to discern the actually helpful and innovative projects from lazy copycats. For example, innovators typically refrain from talking about money. They know that what they are doing is experimental and that investing in their project is a risky affair. On the other hand, if a project boasts about how much money investors can earn or have earned, or tries to aggressively persuade you to make an investment, that’s usually a red flag. Also, innovators will typically provide you with all kinds of resources to help you understand what they are trying to accomplish. Usually, they compile the most helpful resources in their Medium blog, so this should be your go-to address to learn more about the industry. When you’re new to crypto assets, you will likely not understand all of the technical lingo that is used there and that’s OK. Take your time to learn. If you get stuck on trying to get your head around a certain project, try to understand the projects and technologies they’re building upon first. For example, if you’re researching decentralized exchanges or yield farming, you should already have a general understanding of how work. Automated Market Makers When you get started with crypto investments, try to understand the most basic building blocks of the crypto economy first. In other words, limit yourself to investing in layer 1 networks, learn how it feels like to be exposed to some of the most volatile but lucrative assets on the planet and try to understand how different blockchains work and what sets them apart from each other. Once you are done with that and you feel confident about taking the next step, think about layer 2 networks and other native crypto assets that reward you for some kind of resource contribution. Afterward, decentralized finance (DeFi) is the next step. Again, start with the fundamentals, such as decentralized exchanges, stablecoins, and lending protocols, then go on to the more advanced concepts (e.g. liquidity mining and yield farming). Conclusion Despite crypto’s apparent transparency, the world of crypto assets is actually a vast and opaque forest full of mud holes and pitfalls. In the end, the investment decisions you make do not only affect your personal wealth, but also the whole crypto ecosystem. So choose wisely which projects are worthwhile to support and which are merely quick cash-grabs that should be avoided. Learn what the industry is about and always do your own research before making any investment. Sure, this takes a lot of time, but it will ultimately pay off.
