Protocols prevent disaster. Markets surface excellence. - xh3b4sd

Based on my own estimation we are about 60% through the crypto cycle right now. There are maybe another 6 to 12 months of insane price action left ahead of us. I am writing this down to emphasize that there are many overlapping cycles on a sector basis, which all have their own triggers and rhythms. While crypto as an asset class was historically guided by Bitcoin liquidity, every sector within crypto may start to show signs of their own micro-economy, and with it their own cycles. Various L1 and L2 ecosystems would be an example of that. Solana would be an example of that as well, as it had a lot going for itself as an ecosystem with retail interest in the memecoin casino. Polygon as another example may have shown signs of life based on Polymarket activity during the US election. Externalities like asset specific regulations that target either commodities or securities may fill a sector within crypto with life or scourge the earth around it entirely. We have seen many different takes over the past couple of months about whether we are in a bull market or not based on the performance of some specific asset. Voices coming out of the Ethereum camp have often provided fluctuating opinions on the state of the crypto market, based on ETH's price action alone. And I think that is a rather ignorant way to look at the situation in front of us. We always have to take the world for what it is, and not what we want it to be. The most ridiculous form of cognitive dissonance that I am seeing over and over again is best summarized by the following question. If you traded BTC between 50k and 100k, and you did not at least double your money by now, what the hell are you even doing? Financial markets are asymmetric, and somehow most people manage to confuse the long and the short end of that asymmetry, in pursuit of the ever greener grass. Retail never changes, and so with every broken all-time-high we find new participants entering the arena, falling for snake oil salesmen who are nothing but in search for another useful idiot. I was recently thinking to myself how absurdly stupid and financially dangerous public forums like Reddit are for unsophisticated everyday people. The tragedy here is not so much that normal people are looking for help in their journey to understand an industry or asset class. The tragedy in all of it is that the most average, the absolutely dumbest, and the most deceptive actors are free and readily available to provide their baseless opinions without any form of accountability whatsoever. This very setup reminds me of the concept "extractive institutions" as described in the book "Why Nations Fail". Malicious actors dominate an environment in order to extract as much value as possible, which is just another form of MEV for you right there, dear reader. And once more, it pays to understand systems. Take the world for what it is, not for what you want it to be.

I was recently thinking about the crossover between blockchain and gaming. Out of curiosity I wondered how you would build a realtime gaming experience on top of any blockchain network. Designing system architectures like these is a pretty fun exercise, and there are lots of parallels to our thought experiment around emotional granularity as we discussed in the previous Powerlaw memo. When we say "XYZ on onchain", then the question is always which part of XYZ should actually run on some blockchain. And then it simply helps to understand how systems work in general. We have to know which technical requirements XYZ has, and which technical capabilities blockchains have. Realtime games require immediate feedback and instant concurrent state synchronization between many clients. Blockchains as we have them readily available today cannot provide those services if we require a certain level of trustlessness and censorship resistance. That means we cannot represent every single game state onchain. No blockchain can do that for us today. L2s cannot do that, Solana cannot do that, and neither can your favourite alt L1. The question is then how you would design the system architecture for a blockchain based realtime game. What I always come back to are common patterns and best practices for which we know that they work in many different cases. Blockchains for instance are good at verifiability, because we can represent some parts of the game state onchain in a trustless smart contract. The data committed there cannot be manipulated to the extend that once data is reported, it stays there "as is". So that is already a very nice property for us to take advantage of, because blockchains allow us to create games with verifiable fairness and credible neutrality. The issue for us is now to figure out which game state we want to have reflected in a smart contract, because this also influences the power dynamics between the actors who have to report those game states from their own point of view. You may notice, dear reader, that we are navigating the deep trenches of distributed systems, a problem domain as old as mankind itself. How do we know who we can trust to report truthfully? How do we prevent malicious actors to say that they won the game, and not you? How to we prevent shadowy super coders to steal all your money? On the last part, we can design our realtime game in a way that all your money cannot be stolen at a time. We can imagine to have a deposit and withdraw functionality in our smart contract that allows users to add and remove money safely as they wish, without anyone else being able to steal it. Such an account based model is very simple by design, very easy to implement, and very safe to use onchain. The extend to which somebody may steal your money may only be the amount that it costs to enter one round of our game, and that may only be 1 USD. Let's assume our game is "pay to play" and "play to earn". Every player enters the game with 1 USD, and if you win, then I lose, meaning you get my money for that round. The challenge for us here is to define the mechanism by which we identify who truly won. If our mechanism is not designed well, then I may be able to convince the system that I won even though I didn't. And that would then enable me to steal your 1 USD. The mechanism that I came up with now on an abstract level works as follows. Imagine many clients playing the game. There are centralized guardian servers synchronizing game state in real time for different clients. Suppose our game has simple zero-sum dynamics where I win and you lose. Your client and my client, plus another set of random clients have to report the "kill" situation only. That means everyone reports what they see onchain at the very moment when my player kills your player. Once a minimum threshold of required reports has been committed onchain, the respective guardian server resolves the kill onchain based on its own understanding of the game state. The guardian is always the source of truth. This reconciliation does then decide who won and who lost, updating player balances in the process. What we have just achieved with our mechanism design is a game theoretical credible neutrality, because there can be multiple guardian servers run by various entities facilitating games for many different sets of players. This architecture is credibly neutral because the guardians have to resolve kills onchain, for everyone to see. If a guardian were ever to collude or act maliciously, you as a player could always simply choose to block it on the client side, meaning the malicious guardian loses reputation and with it all opportunity to earn money from serving clients. Our consensus mechanism is then also verifiably fair because multiple clients have to report the game state into a trustless smart contract based on what they see on the game map, for everyone to see. That way we know which clients report honestly, because their reports should always be in line with the game state resolved by honest guardians. Note that not all of the realtime game state is reflected onchain. And the beauty about it all is, it doesn't have to! The beauty of our verifiable guardian pattern is that a single smart contract enforces fair play within an adversarial environment, while we can harness all of the modern gaming capabilities that technology provides us with. In our game design, we are leveraging blockchain networks for what they are good for, without requiring millisecond blocktimes or millions of transactions per second. All we have to do is to manage user money and game state properly onchain, where publicly verifiable code guarantees trustless execution for only the most critical player values. What you see is what you get. A simple account based model allows users to serve themselves by depositing and withdrawing their money without any restrictions. And a simple guardian pattern assures a healthy equilibrium of game state reconciliation, enabling the system to just work.

Taking the world for what it is, I found some Ethereum related stablecoin metrics this past week that are particularly impressive. There is now a stablecoin TVL on Ethereum of about 105 billion USD, which is a 22% increase over the past 30 days. This 105 billion represents a 56% stablecoin marketshare of all of crypto, and it is not even close. Just anecdotally over 13 billion USD in stablecoins have been minted on Ethereum during the past week alone. Stablecoin issuance is particularly interesting as a metric because it is not easy to fake. For every issued stablecoin, there has to be an equivalent amount of US Dollars backing it. And I say higher!