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Tag: bubbles

Bad Actors or Failures Do Not Define The Crypto Industry

There is no point second-guessing the viability of the crypto industry. The industry’s active participants are not going anywhere. The crypto/Blockchain industry is a complex set of technology pieces that are still maturing and growing, so it’s common that it gets mischaracterized along the way. While its boundaries are still being defined, the ambitions of its dreams are not being lowered.

Increasingly More Severe, But Self-Inflicted Injuries

In retrospect, the tough moments that the crypto industry has endured in the past several years were self-inflicted. Mt. Gox, the DAO hack, Quadriga, every DeFi rug pull or vulnerability exploit and the recent UST/Terra situation were the result of bad/incompetent actors or projects from the industry itself.

What just happened with UST/Terra was not a symptom of a systemic matter. It was just one project. But since everything is interconnected, there is cause for concern because this last disaster and extent of the damages became bigger in scope.

Mt. Gox’s losses were into the hundreds of millions, the DAO hack was $60 million, Quadriga was $200M, DeFi rug pulls or smart contract vulnerability exploits are typically in the $50-350M range. But the UST/Terra debacle was a $60B blow, accompanied by another $500B in overall market cap decrease.

That is an order of magnitude jump and it is not to be underestimated, but let’s not allow bad actors or failures to define the crypto industry. There are so many other good parts about crypto and the Blockchain industry that are still in the works:

Web3 is unraveling with its many pieces and use cases: the creator economy, smart contracts, GameFi, DeFi, DAOs, NFTs, token-based models, cryptocurrencies, self-custody wallets, the metaverse and much more. These are the artifacts and mashups of the blockchain economy from which web3 will emerge.

Extreme Enthusiasm or Excessive Hope?

There is no doubt the UST/Terra situation will be analyzed for months and years to come, just like the DAO hack and Mt. Gox fiascos were. Whether it was extreme enthusiasm or excessive hope in an unproven experiment, both of these factors were certainly responsible for compounding the gravity of the situation.

Longer term, we need to wonder if this incident was caused by a rare reckless driver or whether there are other projects or people with potential failures on the horizon.

There is a difference between experiments and fully proven and tested projects. The UST stablecoin relied on a protocol of algorithmic adjustment of supply (arbitrage) to stabilize its price. That type of algorithm is really at the experimental stage, and it did not pass the ultimate stress test that eventually killed it. The utopian thought of an algorithmic central bank is just that, for now.

Cryptocurrencies have given us innovative possibilities in the programmability of money, and it’s very exciting. This led to the field of smart contracts that codify business or technical logic into programs and commit them to auto-run on the blockchain. However, money protocols (e.g. UST) are at another level. They combine smart contracts and algorithms together in a compounded manner. If they work well, it’s great. But if they don’t, the failures can be spectacular.

The backers of Terra (or any other crypto project) shouldn’t be confused with an assurance of success. Backing a project simply means that you are willing to go down the risky path with them. It is an endorsement of the journey, not a guarantee for success. VCs are portfolio managers, and their true north is to diversify risk by investing in multiple projects so that the winner end-up offsetting the failures. It’s one thing if Terra/UST represented 5% of a given fund’s portfolio, but it’s another thing if it was 50% of someone’s investments or savings.

While experiments are necessary, we cannot just rely on the hope they succeed without knowing well what the impacts of failures might be. In retrospect, UST/Terra became too big too quickly due to excessive marketing and misleading analysts (that’s another subject I will cover in a subsequent post).

Stablecoins are essential and important for the future of cryptocurrency. Perhaps we should confine their constitution to the simple backing of verifiable assets, and refrain from exotic algorithms that are broadly at the experimental and risky trials stage.

“It takes a lifetime to build a good reputation, but you could lose it in a minute”. Such were the famous words of Will Rogers.

The crypto industry has been working hard to build a good reputation for the last 10 years, despite it being perceived to live in a closet as a fringe sector and not getting the respect it deserves.

We are still testing the boundaries of what’s possible or not. Back in the early Web/Internet days there were many stupid ideas and failed ones. And there were spectacular failures as well (Pets.com, Enron, Webvan and others).

We should not let failures or over zealous / reckless entrepreneurs define the crypto industry. Let us extract the lessons, and spring forward without that baggage.

Small Bets vs. Big Bets: Another Take on Tech Bubbles Formation

“In theory, theory and practice are the same. In practice, they are not.” – Albert Einstein

bets-imageThere is an acceptable way to describe VC investments as bets. Venture investors “bet” on your idea, product, team, market. And that’s a perfectly good thing.

Some are small bets, and others are big bets. But there is a “big” difference between how small bets get big.

The difference is that big bets are more risky if they get big fast, whereas smaller bets that gradually become bigger are safer bets.

Smaller to bigger bets is the natural evolution of progressively commensurate funding rounds that have some orderly pattern to them, i.e. raising more capital as the company progresses with results.

But once in a while, there are aberrations and anomalies when the startup suddenly wants to raise a lot of money resulting in a bigger (assumptive) bet, before small results are achieved.

When lots of sudden big bets start to accumulate, there is a reason to start worrying that a bubble may be forming, because big jumps in valuations at early stages have a weak base, because they are generally prior to product/market fit, or prior to being reasonably confident that the startup will capture a large part of a given market.

Weak bases will crumble when things don’t go as planned, and when customers don’t adopt the new solutions as fast as the theoretical expectations.

Yes, you can accelerate user adoption with more money, but only up to a point, and usually after initial product/market, and if the market is big.

Memories of Webvan come to mind. Webvan raised close to $400M, reached $4.8B in valuation, only to produce $400K in sales, and then went bankrupt. The big bet preceded their practical market formation, because the conventional wisdom at the time was that you needed to invest that much money to capture that market opportunity. I’m hearing similar echoes of that “wisdom” in some blockchain related companies that are raising huge amounts of moneys to go after the financial services markets, as I wrote recently in Warning: Unrealistic Valuations in the Bitcoin and Blockchain Space.

Yes, Capital Markets do Matter for startups (Fred Wilson), and Public Stock Markets Will Affect your Funding Round Even if you Can’t Perceive it (Mark Suster), but ultimately, venture capital is an adult’s game. It’s a bit like hockey, football or rugby. Players get hurt all the time and it’s expected. Most of them get back in the game, bruised and often wiser. And that’s OK. But when spectators (the public) get hurt, then that’s not such a good thing.

Somewhere between the players and spectators analogy are the startups with high ambitions. I’m torn between cheering for their ambition so we can re-learn the lessons of extreme optimism, or whether to put a damper on that enthusiasm.


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