Who Will Die and Who Will Thrive in the Upcoming Crypto Ice Age

TL;DR:

The crypto industry as we know it is dead.

Two major boom and bust cycles have been enough to uncover the truth—and the lies.

There's no turning back. No recovery is possible under the current scheme based on unregistered security tokens printed out of thin air, wash trading, and artificially-inflated market caps.

That game is over.

The Luna / Celcius / 3AC / FTX debacle is not just a free-market cleansing event; it's an extinction-level cataclysm. We are not facing a crypto winter; it's a full-on ice age.

In this piece, I substantiate the above claims before diving into what I believe will come next—which is the article's main focus. I'm brief on the "game over" argument and touch on the main points only, as I'm sure analysts will be a lot more thorough than me anyway.

Why Ice Age, Not Winter

All Sorts of Stakeholders Got Burnt

Unlike the 2017 ICO boom and bust cycle, when it was mostly retail investors that got screwed buying into promises over a whitepaper, the current debacle includes all sorts of institutions and personalities.

Let's gather a quick list:

• Celebrities, influencers, renowned investors, and business people tarnished their reputation by backing SBF, FTX, and other crypto businesses that went under in a painful display of reckless leverage, poor risk management, and outright fraud in some cases.
• Although VCs filled their pockets by dumping worthless tokens on retail investors during the last bull run, this time, they got burnt, particularly with Alameda and FTX.
• Institutions lost accredited investors' money.
• Pension funds lost savers' hard-earned cash.
• Politicians got dirty money from SBF and will get investigated.
• Regulators, lawmakers, and lobbyists courted by SBF were ridiculed and left hanging out to dry.

This time, everyone got burnt.

Most of these stakeholders will never touch crypto again. Not only because they are ashamed of their recklessness in investing millions without proper due diligence but because they won't be allowed to.

Ask yourself the obvious questions:

What board of directors or trustees will be willing to put their necks on the chopping block to vouch for investments in unregulated crypto securities issued by degens in a fiscal paradise again?

What celebrities will vouch for the next crypto unicorn when all the parties involved in promoting FTX face class-action lawsuits?

What politician or regulator will sit in public and take pictures with the next crypto genius, risking their integrity or at least terrible PR?

Regulation Will Come Hard and Fast

This bust cycle has made it obvious that the type of regulatory action required to protect investors in the crypto wild-west is not enforcing KYC or AML but enforcing securities laws.

There will be no more talk about the need for a light-handed approach to foster innovation. The SEC will come swinging and declare everything but Bitcoin to be securities. Regulators will hammer crypto companies like hail banging on a rose garden in a summer thunderstorm.

Exchanges servicing European and American jurisdictions will be barred from listing anything other than a few stablecoins, Bitcoin, and—eventually—CBDCs.

Litigation Will Take Years to Wind Down

The entanglement of relationships, responsibilities, as well as personal and corporate liabilities among the companies failing will take years to unravel. The mere act of figuring out what happened is a challenge in and of itself.

Cases will hit the courts all over the world. Both civil and criminal lawsuits, counter suits, class action suits… everything is on the menu.

Litigation will tie down for years a good chunk of the stakeholders that participated in the last boom and bust cycle. Many will be legally barred from touching crypto until the dust settles.

Illiquidity Will Drive Market Caps to Zero

So we've got institutions that can't even consider investing in crypto for the foreseeable future and centralized exchanges that are not allowed to list unregistered securities.

What happens next? Liquidity on unregistered security tokens drops to zero. No more market-making. No more wash trading to inflate prices and market caps.

Illiquidity is the final nail in the coffin of crypto.

With no more cash to throw at marketing, no paid market-makers, and no listings on CEXs, projects that haven't achieved product-market fit, haven't grown a user base, and haven't developed a sustainable business model will die a slow death in the cold, as they run out of cash.

Together with unsustainable projects, all sorts of lateral actors will perish, too, unless they manage to reinvent themselves. To name a few, think of the specialized crypto media, content creators, marketers, PR agencies, influencers, and so on.

Life During the Ice Age

Bitcoin is the soundest form of money that has ever existed. Adoption keeps growing, and all major foreseeable hurdles since the inception of the ultimate monetary network have been cleared.

But where do we stand in the quest to decentralize applications other than money?

Will we ever have sustainable decentralized finance or decentralized identity?

How about decentralized governance?

Will we ever be able to build application-specific, human-centric, frictionless networks where we all have better access to resources?

Will decentralized communities ever be able to compete with the centralized powers that be?

I say maybe, but certainly not under the current paradigm. We must discover a framework in which a new industry could thrive.

To do that, we need to understand what went wrong in the first place.

The Original Sin

The crypto industry was an opportunistic spinoff of bitcoin, doomed to fail. It may not have been obvious in the beginning, but it is now.

In a way, the industry was built on original sin.

The crypto industry took bitcoin's technological breakthrough, appropriated the freedom/decentralization narrative, and ran with it, all while discarding bitcoin's core principles. The thing is that it's those principles that make decentralization and freedom possible.

Jack Mallers put it best when he said, "The crypto industry and blockchain is an arbitrage on the trend… and the arbitrage has been margin-called."

The only way to redeem ourselves from the original sin is to repent and ensure we don't fall back into sin again.

How?

By embracing our roots: Bitcoin.

Back to Square One

The only way crypto will ever work is by adopting Bitcoin's core principles:

• Optimize for decentralization, openness, and permissionlessness. These are the principles that enable resilience and censorship resistance.
• Respect the first law of thermodynamics. You can't print tokens out of thin air and expect them to hold value. Tokens must be backed by some form of energy or work.
• Bootstrap until achieving product-market fit. This enables a fair launch, which is crucial to show new stakeholders that the system is just as they join the network over time.
• Go the open-source, meritocratic, community-owned, and user-centric route. This enables massive collaboration and the emergence of collective intelligence, a crucial feature that allows projects to compete with well-funded centralized entities.
• Design incentives to optimize for long-term goals. The smart design of incentives guarantees that the project will dominate a space.
• Predefine an economic policy. The policy may be described mathematically or algorithmically. The requirement is that it's set in stone from day one and that no one can alter it afterward. This makes the economy predictable and the rules fair, as they are the same for everyone forever.

Departures from these principles end up with a house of cards doomed to be blown away by the implacable polar winds.

Open Startups and Collective Business Models

So You Got Some Principles

That's a start! But how do those principles translate into a setup conducive to building and sustaining a network economy?

Let me paint a broad-brush picture of what the typical ice age crypto project will look like.

First of all, forget companies, early funding, angel investors, and venture capital. Instead, start with a typical bootstrapped open-source setup that you'll later boost with a native tokenized economy.

When I say a typical open-source setup, I mean an open-source project started by a few devs in their free time, building something they are passionate about.

You don't need capital, lawyers, accountants, licenses, a business plan, or backing of any sort. All you need is some time to spare and passion. Throw in a vision if you wish—but even that is not required early on.

Build something you want to use and that others may be interested in.

The Token

At some point, you will attract a first follower, meaning a user willing to put in some effort and contribute to the project. Now you're starting a grassroots movement!

That is the right time to consider deploying the project's token. You may do it then or later on, but never earlier.

The reason is that you will use the token to incentivize contributions. That is how you distribute the token fairly. The project doesn't sell tokens. Instead, it distributes it among open-source contributors in proportion to the value they add to the project.

There are no value added and no tokens to distribute when there are no contributions.

That's how you respect the first law of thermodynamics. Your token is backed by the human work required to produce something of value. In other words, each token is backed by the value entailed in the improvements made to the project by contributors.

You've established a meritocracy.

Each contributor accumulates tokens in proportion to the value of their contributions. Notice that the original devs become contributors like everyone else and get token rewards under the same rules. There is no pre-mine.

Also, notice that the type of work that adds value is not just technical. As the project grows, you'll need all sorts of skills deployed by people with different backgrounds.

Low Time Preference

For a long time, the token will have zero value, as there won't be a market nor demand, thus no price discovery. At this point, the token is merely a measure of the contributors' reputation within the project.

As you can see, the setup requires a low time preference from everyone involved. The project will attract people that are passionate about what you're building. It won't attract people with the get-rich-quick mindset.

Because you don't have money for marketing, speculators won't find you either. No one will come knocking on your door to buy your tokens, even if you are willing to sell them.

This is great for developing a low-time preference culture and aligning everyone's interests toward a long-term goal.

Grassroots open-source projects are inherently well-suited to build the infrastructure required for decentralization to flourish. It's the only way the movement can stay clear of the greed that drives all the scams and ill-conceived systems that the crypto industry has produced.

What Happens Next?

How do we end up with a sustainable economy?

How do builders with a low time preference get rewarded for their entrepreneurship?

If the product is good, the project will grow an organic user base purely by word-of-mouth. At some point, contributors may start considering setting up a liquidity pool on a decentralized exchange so that users who can't contribute work may support development by buying the token directly from holders.

That is a natural occurrence in open-source projects, and it's why GitHub, for instance, created the GitHub Sponsors program.

But there is no rush to open up a market. Contributors will do it when the user base starts asking for a way to chip in, particularly those who can't contribute work. Until then, be patient and keep building.

Premium Products and Services

The product or network you're building is open, permissionless, and free for everyone. This is crucial to lower entry barriers and reduce friction. The model accelerates adoption, contributions, and overall growth. It's also critical to disrupt centralized entities that may want to compete with you with inferior extractive business models.

As the user base grows and the overall quality of the offering improves, stakeholders should start thinking about building a use case for the token. A potential avenue is delivering premium products and services accessible only to token holders.

Such a line of business directly benefits contributors, a highly desirable and healthy underpinning of the meritocracy. The message to the world is "use our infrastructure free of charge, but if you wish to access these special perks, you need to contribute!"

Do we leave out users who can't contribute work?

No! That's what markets are for!

Users who can't contribute work may buy the token from contributors. They may do this in a peer-to-peer fashion or in a more convenient open market: a liquidity pool on a decentralized exchange.

Closing the Feedback Loop

So you've got contributors incentivized by a token that now has a market value.

Do you see how such a setup leads to an ever-improving network destined to conquer its target market?

As the user base grows, organic demand for the token increases, adding buying pressure in the market. User growth leads to organic token appreciation. Free market rules.

Then, a higher value of the token results in greater incentivization power for the project. More incentives attract more contributors, resulting in faster development and improvements. This, of course, makes the product more attractive and leads to further growth of the user base.

It's a positive feedback loop through the design of incentives.

Marketplaces and Payments

Notice how the use case of the token doesn't involve spending it. Tokens prove that the holder has contributed to the community and deserves the premium perks. Of course, different benefits may have specific token-holding requirements!

If your project features a marketplace or requires payments of any sort, don't reinvent the wheel. That's Bitcoin's and the Lightning Network's competency. No other form of money or electronic payment is superior to that combo.

What About Howey?

If you paid attention to the subtleties of how the token is issued, distributed, put in the market, and required to access specific goods and services, you may have noticed that it fails the Howey Test and is not an investment contract.

Let's quickly check the test:

• An investment of money. Fail. No one is investing money to get the token, as it's distributed as a reward for voluntary work. There is no private sale and no public sale. There is no marketing. The token may or not be listed in decentralized exchanges by independent parties— random contributors who hold tokens—not the project. Whoever buys the token does it either to support the development or to access premium products and services. Since there is no investment, the rest of the test becomes irrelevant.

Wrapping Up

Do you see how everything ties up together?

You've got a project with zero overheads driven by open-source contributions. You've got a collective business model around the token, with all incentives aligned toward a long-term goal. The goal is to conquer a target market with a self-sustained and ever-evolving organism that never stops improving.

Everything is organic, based on the premise that the project must satisfy specific market needs to succeed.

There's no centralized marketing, speculation, leverage, or scams.

If the project doesn't take off for whatever reason at any point, no one gets screwed. No one gets rug-pulled out of life savings.

There are plenty of things we haven't covered and thousands of details that escape this article. Think about distributed governance, how to value contributions, how to scale a human collaboration and many other specifics that may affect the success and viability of the project.

I won't go into those details in this article. However, I will leave you with a successful implementation of this framework: Superalgos, the project I've been involved with since 2017.

Indeed, there I was, in the times of the ICO frenzy, starting a low-time preference project that not only survived the 2018 crypto winter, Covid, the meltdown of supply chains and the global economy, inflation, and the current crypto debacle—but thrived.

Superalgos is an open-source project crowdsourcing superpower for retail traders. Today, it's first on GitHub when searching for "trading". It had over 50k downloads during the 12 beta releases and 2k monthly downloads since the launch on November 2021. We're now well over 100 contributors on GitHub.

If you wish to get down to the nitty-gritty of launching a sustainable open-source project anchoring an application-specific tokenized economy, drop by our community groups. Study our mistakes and successes, or simply join us for some serious algo trading using free and open-source software.

And please, we need to rebrand out of "crypto". Feel free to drop a comment with branding suggestions for the new ice age industry!