The great reset
Reframing the state of crypto.
The last few months have been particularly challenging for our industry. In the midst of interest rate hikes, continuously high inflation and a hot war in Europe, FTX imploded with still unknown consequences in terms of contagion effects, reputational and potentially regulatory damage. We are deeply saddened by such developments and are doing our best to help affected parties cope with the fallout.
We observe a high variance amongst market participants when it comes to mental coping mechanisms in response to such events. Many founders and investors suffer from symptoms of high stress, fatigue and depression. In the field of positive psychology the reframing of thoughts is a powerful cognitive restructuring technique.
Let’s reframe our thoughts on the state of crypto and take a step back. In bull markets things are rarely as promising as they appear; in bear markets they are rarely as bad as they seem. So where are we as an industry?
The intimate core remains
Through bull cycles our communities get diluted and distracted. Same patterns, different scale: Once prices pick up shorttermism and greed undermine the hard work committed innovators put up. Ignorant mainstream media add fuel to the fire with over-blown hybris and flawed narratives seducing the broader public to speculate. Tourist investors join the market and bid up prices with low conviction and head to the doors as soon as things start to become more challenging. Founders fail by optimising for fast, easy money instead of challenging their investor's motivation, conviction and long term commitment to the company. Sophisticated investors continue to invest in such environment, often at accelerated deployment pace instead of sitting on their hands. The more hype, the more money is thrown around and the steeper and longer the bear remains. Yin and yang.
In between the cycles the bubble burst and clears the air. Tourists, opaque lenders and paid personalities are removed from the ecosystem.
We now have a time window to reflect, adapt our assumptions and move on. In that time window lies the incredible opportunity to create a culture of intimacy which can prepare us for future cycles. Intimacy can be achieved through strong inter-member empathy and an explicit commitment to our shared core values such as
transparency - e.g. proofs of solvency
self custody and user control
long termism - better vesting schemes, better incentive alignment between stakeholders
accountability
amongst others. Products > words. People > tech. Let's bond in difficult times; now is the time for bear market dinners, research and reflection groups. Reach out to your peers and check in on how they are doing. Let's cut the noise and shrink towards higher productivity and more purposeful building.
Back to the future: reducing agency costs is crypto’s killer feature
The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (agent) takes actions on behalf of another person or entity (principal). A principal-agent problem is exactly what unfolded in the case of FTX where an over-leveraged organisation turned out to be fraudulent. The original sin of FTX was an obvious conflict of interest rooted in the founder's ownership in the Alameda Hedge Fund which traded on the FTX exchange. These kinds of challenges are as old as human kind. The larger the agent's influence within a market, the worse the fallout in case of failure. Once it reaches a critical mass it can become 'system-relevant' or 'too big to fail' can lead to government bail outs - remember 2008. The patterns revealed through principal-agent problems inspired the creation of Bitcoin in the first place. We've come full circle.
The challenge of agent failures will increase in the future. Centralised agents controlling data and algorithms are growing their influence through data-network-effects and regulatory entry barriers. Data breaches will continue to accelerate in frequency and scope. Self sovereign data ownership and control over public infrastructure are the alternative path crypto is pioneering. This is as important as ever.
Self custody is finally embraced.
While Mt. Gox teached us the very same lessons as FTX the half-life of its learnings was disappointingly short. It seems that users need to be reminded of the importance of self-custody through pain every now and then. Experience > conventional wisdom. This reality is starting to sink in quickly, let's hope it last long.
Self-custody is be the bed-rock of our industry.
Crypto has escape velocity
In the context of physics an object has escape velocity once they reach the speed necessary in order to break away from the gravitational force of a large body. This concept can be abstracted and applied to crypto's market conditions. Velocity is defined by talent, capital, use cases and adoption. The large body's gravitational force is the status quo of big banks and big tech. Other than in previous cycles we can refer to quite a list of impressive achievements:
Individuals in need flock to Bitcoin and crypto infra - ukranian refugees, iranian protestors, Turks fighting with hyper inflation. Nation states and publicly listed companies hold Bitcoin. Ethereum merged smoothly. Defi protocols locking up >$40BN in assets; Dexes processed $100BN in October 2022. NFTs became a horizontal data wrapper and indicated their potential through POCs. >$10BN of patient capital are waiting on the sidelines to enter the industry - from venture funds alone. Regulators started taking our industry seriously and we developed a global network of advocacy groups defending our interests against big tech and big banks. We observe crypto technologies being deployed against problem spaces outside of speculative use cases like #DeSci, #Refi, #DAOs and #DeSo amongst others. In parallel we see a new wave of infrastructure innovation break into the industry such as #AI*Crypto, #ZKP systems with underpinning #hardware, #TSS as well as overall #security and #UX improvements.
The velocity of exploring new use cases and unlocking entirely new users groups is accelerating. An extended bear market slows down the industry for a while but this is almost a necessity given that our current infrastructure (aka scalability, privacy, security and UX) is still in beta stage.
“We’re convinced crypto will scale and be adopted. The problem is if it scales faster than self-custody becomes user-friendly. In that case we end up reproducing web2 with a new economic model.” - Henri Stern, CEO Privy
An extended bear market is a healthy and welcome breather. The core principles underpinning crypto technologies continue to gain momentum over time. Let's not lose sight of that. And most importantly,
Let's not lose hope.