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MEMO W34 AUG 2024

One of the more important principles that a lot of people get wrong is the context in which market dynamics play out. - xh3b4sd

In crypto we suffer from the utility paradox. The space is full of speculators. And all of those speculators love to, well, speculate. Their imagination is what drives them. And in turn, anything you can explain and prove with data is not surrounded by that magic fairy dust of wishful thinking anymore. Anything we can explain becomes boring. Maybe this is just how our generation works. Most can only pay attention to one thing for five minutes at a time. And then the next toy is required in order to keep the excitement levels up. Maybe we have all become so jaded by a system that provides us with abundance. Maybe it is just another human fallacy of the greener grass on the other side of the fence. The utility paradox asks why the useful protocols have awful price action. For one, we can acknowledge that not everything that is useful must automatically be a good investment. There are real asymmetries in business and finance. A great company can be a bad investment. A bad product can make for great speculative returns, and be it temporarily. Founders may get rich while the street remains poor. The promise of utility does not automatically translate to a promising investment. And the reasons might be manifold. The nature of those kinds of systems, their circumstances and relationships within are the reasons why we always must try to understand said systems on a pure and fundamental level. There is always a time. There is always an opportunity. There is always a vehicle to carry out an investment. And there are narratives and seasons and other players with more or less equal knowledge about the systems they operate in. One dominant theme of useful protocols having poor price action is simply explained by frontloading. Frontloading says that in the past there was a time when way too much attention, money and people were flocking into the very same asset, creating a premature bubble that eventually stopped inflating. Those frontloading bubbles don't necessarily have to come crashing down in a single ball of fire. It might just be that frontloading makes for a very heavy instrument that, for all its baggage, is simply not able to perform as it used to. And be it for a very long time. Every hype will eventually run out. Every narrative will eventually cease to be hot. And all the magic fairy dust in the world will eventually subside, leaving everyone to see what's what. Note that this does not have to be the emperor without any clothes at all. Often the emperor has clothes, they might not be as fashionable as the crowd wanted us to believe in the first place. And so, while Maker and Aave are profitable onchain businesses, their tokens may not make for great investments, anymore. And while Solana was pumped through the revenge arch, its token may eventually stop to outperform, getting in line like everything else. And while Ethereum became the most hated blockchain network on the planet, despite running most of the onchain economy on top of it, the time will come when its token stops to underperform. In summary, the utility paradox describes economic activity that cannot be exploited for personal gain anymore. The inherent asymmetry described by the utility paradox created a natural equilibrium that is very very hard to circumvent again. The pathways to get there are usually a combination of wishful thinking and excessive frontloading. Money is thrown at a thing, for no apparent reason but blind hope. Do you want to be in that place? Well, there is a time for everything. The problem is usually not to get into a trade. The problem is, to get out of it again.


This past week I had a fantastic revelation that might be especially interesting for the founder and investor kind of archetypes. What I realized is the difference between owning an idea and owning a tool. Understanding that difference may be critical to find the perfect match as a co-founder. Understanding that difference may be critical to gauge the quality of a team that is supposed to fulfil wonders. And the difference is this. Owning an idea makes a human being aligned with a vision. That magic common understanding of how the future ought to look like. Together with this foundational understanding comes the responsibility that cannot be given, but must be taken. And it must be taken by an individual at every hour of the day. Owning an idea means to actively creating the future that you want to live in. Owning an idea means to make a way where there is none, moving forward, even without guidance in the dark. The counterpart of owning an idea is to merely own a tool. Owning a tool is often the equivalent of executing a plan under rather precise instructions. When you own a tool, you did not make the plan. You know then how to use a tool, but you get stuck quickly without the grander vision of that idea that you do not share. As a founder you always must own the idea. And it is you, and nobody else who has to push this idea every single day. Because it is you who owns the idea. If you do not own the idea, then you cannot be a founder type. If you constrain yourself to merely own a tool, then the excuses you make for yourself are the limiting factors that prevent your own horizon to expand. And by proxy, those excuses are the limiting factors of the effect you can then have on this world. Go out into the dark, and see the difference between owning an idea and owning a tool.


A rather short remark I want to leave here evolves around some new L1 blockchain thingy from which we have heard the following. The reason why they build their own L1 instead of building an L2 on top of Ethereum is apparently for "technical reasons". Without knowing any detail about it, without understanding those technical reasons, my gut reaction was immediately that this can't be right. Based on my technical understanding there should not be a single technical reason for not outsourcing trust and consensus to the Ethereum Layer 1. And all I am then left with is that rather bitter taste in my mouth that this is simply about making another overvalued L1 token, that frankly achieves nothing but generating a bunch of returns for some founders and investors. And the incentive systems in crypto, our industry, are as such that this kind of frontloading is supposed to be a feature. In reality it ends up being a curse, because all motivation to achieve any vision goes down the drain if you get payday literally on day one. One of the most obvious examples of that kind of incentive misalignment could always be seen during the good old days of NFT mania in 2021. Every day we have heard about another 10,000 profile picture collection that will do this and that and the other. And millions of United States Dollars were generated and minted on day one. And after that, nothing happened. Well, the creators of those collections made a bunch of money of course. And wasn't that nice!? But the matter of fact was that the reward was delivered instantly, without doing much for it in the first place. Well, I guess there is a time for everything. The bottom line here is simply this again. Stay away from frontloaded assets.


My number this week is 12. And that number is the spot by crypto market cap of ADA. I wrote about ADA dropping out of the top ten by market cap a while ago. It now so happened, by prophecy of the Powerlaw memo, that ADA fell finally to spot 12 for a couple of days. There is a little back and forth now between ADA and some of the other contenders for that spot. Those contenders here are namely TRX, their highness Justin Sun, and what a surprise, some ETH derivative, Lido's wrapped staked ETH. I think Cardano is barely hanging on by a thread and will never make it back into the top ten by crypto market cap anymore. Anyway, in other good news, this past week I saw Ethereum to be pushed on spot number ten by transactions per second within the Ethereum L2 ecosystem as reported by L2Beat. Now that means that there have been 9 rollups that served more economic activity than Ethereum mainnet itself. And that, dear reader, means that Ethereum is scaling. So onwards I say!

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