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Notes From a Bear Market (Crypto Edition)
New Narratives, Better Tokens, Talent Moats, and other random thoughts
So you’ve realized you’re in a bear market.
Welcome! You’ve probably lost more money in the past few weeks/months than you were used to in a long time. It turns out, numbers don’t only go up and if it smells like a ponzi, and tweets like an arrogant asshole, it probably is a ponzi.
There are a few things that everyone wants to talk about when bear markets happen and crypto has its blowout nuke day(s) that sends everyone into panic, stables, and out of the industry. The most important thing really is to zoom out, understand that this is part of the game you’ve signed up for by being early to this space, and to make sure you have tangible lessons. Last but not least, to be cliche, make sure you’re good personally. Investing is hard, getting wiped out from exogenous (seeming) factors is hard, but you can always work and there are more important things in life than what is or isn’t in your bank account.
steps off privileged soapbox
One of the most important things I hope we get out of this bear market/downturn is a maturation of the industry broadly. So what does this mean?
Here are a few quick ideas on what could come next:
A focus on shifting tokens to reflect value capture of a network
It’s likely that with LUNA blowing up (and now Celsius), we’re going to get more regulation in crypto faster than we anticipated (or at a minimum scrutiny). While I don’t love this on the surface, perhaps it will free up a variety of builders in the space to get more constructive with their tokens. This next cycle should be about revamped tokenomics that enable the token to act as a more direct form of value accrual of a given protocol. We went from utility tokens in the first cycle, to valueless governance tokens as well as an understanding of token velocity and emissions on price this cycle, and hopefully to value accruing tokens in next cycle that go hand in hand with clear revenue models for usage of a given protocol (and thus regulation).
Crypto continues to speedrun many dynamics however the one thing it has refused to speedrun thus far has been business model innovation. This needs to happen and it will be up the participants and users as much as the developers on how they think about choosing from core protocols and copy/paste protocols, as well as how they think about open source moving forward. Coming out of the bear market at some point in 2023 (see how optimistic I am that this will only last a year), hopefully we see founders and DAOs willing to experiment with entirely novel forms of token + NFT structures (ideas on these structures for another day).
A stronger allegiance to the Ethereum ecosystem
For better or for worse, the alt L1 narrative is dead. There will be new ones that emerge, but IMO the EVM compatible plays that mostly focus on accumulating TVL via ponzis will be DOA. The biggest opportunity still likely remains in gaming type plays that will create high transaction volume (and thus fee revenue to the network) in addition to protocol value (% of transactions on platform perhaps or more standard NFT type economics). That said, very few teams in the space right now have any clear understanding on how to build games, so I’m very bearish.
Right now FLOW, AVAX, and MATIC (and a bit SOL) capture those markets best. Time will tell if others do or these behaviors centralize to a single chain (I hope to god we don’t have more fragmentation of chains for specific applications). Of course, we are long Arbitrum and expect L2s to continue to capture more of the transaction volumes over time for non-gaming, though with likely lumpiness as gas costs fall on the L1.
A secondary (obvious) prediction is that new L1s will look to take the place of Solana in a meaningful way. While IMO the biggest attack vector is still commonality of programing language (we are investors in Agoric under this thesis), there are likely other points of attack that I haven’t thought through, assuming Solana fixes its uptime issue. Fwiw, I’m still bullish on Solana at these prices.
Talent Moats being viewed as real / a return to brand as a differentiator
I’ve long maintained that the core moat of Yearn has been the contributor talent level (in addition to early economies of scale related to Curve emissions/bribes pre-convex). People put billions of dollars into Yearn because they know it is managed by sophisticated, risk mitigating, technically savvy teams of people on the strategist and engineering side. In an open-source world, few people seem to appreciate how coming out of a bear market talent moats can compound market share due to better product velocity, inventiveness, and risk management. If we see multiple other blow ups, it wouldn’t shock me if “boomer” protocols that have shown an ability to safely manage billions of dollars have stronger moats than we once appreciated. The question will be if the teams of those protocols are able to be incentivized properly to stick around vs. start something new with an entirely clean token supply.
While this bear market was theoretically started by some combination of macro conditions in addition to crypto-centric blow ups, that doesn’t mean that once the world goes back to “risk on” crypto will correlate to the upside like it has the downside. While I do think there’s a large number of people that began trading equities and thought they knew what they were doing over the past two years (find them on twitter), and that those people will realize they have no alpha and perhaps move to crypto as a way to trade in a less efficient market, crypto bear markets usually are about inactivity and lack of narratives.
Because of this, we have to think about what narratives can emerge if/when we decouple from equities to kickstart the cycle. Outside of The Merge, there are a bunch of new narratives that could pick up steam over the next 6-18 months. My gut tells me the best ones to yank us out of a bear market will be those that focus on sustainable revenue for a protocol, as well as those that tout onboarding a variety of new users that have never interacted on-chain before.
The latter will be filled with domain transfer of ideas of other web2 primitives on the consumer side (e-commerce, gaming, super apps), distributed productivity/computation on the enterprise or B2B2C side (think Livepeer, Helium, Render, etc.), and institutional onboarding on the DeFi side. All will focus on abstracting away the UX of crypto today across security and transaction process.
While investors today are all falling back in love with infrastructure type investments, the other thing I’ll say is that post the emergence of the narratives above, I think we’re going to see a focus on B2B software entering crypto/web3 at scale as the second wave that helps kill off a bear market. The next wave will onboard a bunch of brands, companies, and institutions that want to contextualize on-chain data for a variety of use-cases. IMO this area is ripe for Web2 founders to build within as it will take the understanding of enterprise SaaS GTM motions paired with on-chain familiarity to execute at a high level.
These are just a few ideas and this is not really meant to be some definitive post, but instead a quick respite from other work I probably should be doing today.
Two other random thoughts
Nouns and Fatigue
Nouns in general rely upon the ability for people to proliferate their brand and narrative in order to accrue more value to the DAO (and thus outpace inflation that occurs daily). While the rage-quit functionality that should be implemented creates a nice “floor” similar to RFV dynamics, this misses a fundamental problem within bear markets which is….people are going to be really tired of crypto brands for awhile. Maybe only a year or so but I don’t think that Nouns will be immune to crypto fatigue and so as a DAO I would probably think about how to best position Nouns away from crypto and more towards a community/movement for the short-term. The low-hanging fruit is via some sort of entertainment brand, the next would be a studio focused on enabling creators of some kind, and the last could be philanthropy. Or of course, utilize the subDAO structure and build out LilNouns for each of these use-cases with competent leaders and a % of treasury directed towards the core Noun DAO. Again, half baked ideas here.
Dictatorships in Crypto & Bear Markets
At some point in every founder relationship I have (crypto or not), I talk through the important dynamics of understanding when to effectively become a dictator within your organization (and on the opposite end, when to delegate). Doing this in a tighter labor market felt scary because the line of being overruled (but heard) and being ignored is very thin to a lot of people (and the skill of toeing that line so employees/contributors/the community feel heard is a rare one). However, as the walls start closing in around you and the market feels bleak, often what kills teams is indecision and/or apathy.
It’s a bit sacrilegious to say but I think that full on democracy is net negative for most crypto projects today. The vast majority of projects will see general apathy/defeat from their community and governance participation will die in a bear market. Use this time to look at the projects with the best leaders and allow them to be closer to dictators in an effort to navigate the down market. Inactivity will kill a protocol. I wrote about in our recent investor update:
As the bear market continues to progress, the core thing we will watch is if the protocols that already have made material wealth continue to build, just as they did in 2018. If we see slowing development, we will likely evaluate network values and sell those that we have lost faith in, just as we did with (redacted) last year.
Anyways, the best protocols will recognize that the leaders need the leeway to make difficult but unilateral decisions at times, while keeping checks and balances on the wallets for those that will (and some inevitably will) run for the exits and try to take all the capital with them.
For more on this topic, I highly recommend this post.
- The Man With a Hole in His Head by Rick Bursky