5 Oct 2021
The fundamentals of ‘business’ and ‘economics’ have not changed much for well over three millennia. The principles of supply & demand, revenue generation, margin extraction, etc should all build a solid foundation which in turn results in scale and prosperity. These often simple identifiable indicators should be (in theory) the governing deciding factor(s) when evaluating potential investments.
So what has changed over the last 300 years? Beyond the industrial revolution, we have recently undergone the data and technological revolution largely driven by the internet and access to information.
The meteoric rise and adoption of the internet in comparison to other mediums led to drastic changes in business models [namely the rise of e-commerce]. In the latter part of the 20th century, the internet-enabled pretty much anyone with the necessary skills, and access to the internet to be able to set up shop and sell to a market that was no longer restricted by physical proximity. This meant massive opportunity which was followed by an incredible influx of e-prospectors seeking out their fortunes.
The next iteration of the web was - web 2.0. The launch and explosion of social media, allowed anyone with an internet connection to become a publisher or content provider. The social graph (how we are all connected) meant that people now had a relatively trusted 3rd party point of reference when deciding on what to buy online via peer-to-peer reviews and slowly online communities started to form around online businesses.
Take a step back and you will easily identify the trend of dispersion or control of information, data and in turn, potential ownership over a much wider playing field.
Enter web 3.0, or the era of blockchain. Decentralization now means that anyone with an internet connection can claim ownership through the issuance of a token.
The world is quickly becoming tokenized with so many industries facing an incredibly exciting evolution that will catapult interest, adoption and sources of funding. The first industry, which came to the surprise of many, was the Art World with the incredible uptake of NFTs or non-fungible tokens. And at the heart of every solid NFT project sits its beating heart...its community much like die-hard brand loyalists.
“Tokenizing communities basically says that we are all like-minded, interested people, we believe in this community, and we want to participate in it. And that gives you a direct relationship both financial and otherwise, with people in your network or community. Communities are just ways that humans socially congregate around ideas. Same as religions, states and a whole number of things that give certain benefits.” - Raoul Pal, CEO of RealVision.
Active communities create loyalists, lobbyists, enthusiasts and tribes. In most parts, the model can be extremely healthy where not only do the founders gain a wider supporter base and new streams of funding, but they have a community that is vested in the success who promote the idealism of said project which should theoretically lead to more prosperous growth.
That seems great right! Free advocacy, free promotion and free participation. Sadly this is not the case. With decentralization also comes the loss of centralized control of communication and positioning. Projects who have extremely vocal, highly committed community members, who might have had unreasonable expectations from the outset, can quickly turn into the ‘angry mob’.
The pitchforked detractors demanding things from their project directors that would have been deemed ridiculous in ‘traditional’ businesses like Apple, Microsoft, Amazon, etc. Imagine being able to pick up a direct line to Tim Cook and tell him you don't like the latest iPhone and that he and the team need to change direction or you will dump their stock. So why is this different in crypto?
Let us quickly go back to the evolution of the internet. The dot-com boom and eventual bubble ended with an infamous pop in 2000 when IPOs failed to deliver on their fundamental promise…that of making a genuine ‘return’ for their investors.
There are now remarkable similarities between the dot-com bubble and today's blockchain frenzy where there are thousands of ICOs (initial coin offerings) and IDOs (initial dex offerings), and it is not slowing down any time soon. Often, projects have been able to attract investment with their manifesto or whitepaper. A document that outlines the company's business and technological mission, a mini-business plan if you will.
The problem with whitepapers is that they often quickly get outdated as things rapidly unfold in the wild frontier of crypto. The project, much like most start-ups, has to pivot to survive which often means that what early investors bought into, is no longer relevant. So what does that then mean for the investor? Well, nothing much other than if you keep an eye on the fundamentals governing the likelihood of the project's success as earmarked in the opening paragraph.
There is a systemic rot within the world of crypto and it is being perpetuated by its own FUD! With such an oversupply of blockchain and cryptocurrency projects, the need to stand out has never been more important but at the same time so incredibly difficult!
As a result, many projects have to rely on making ‘announcements’ on a regular basis to feed their communities or risk facing them turning into an angry mob. These announcements act as a short-term prop or push on their token price. One step further is when a project is fully aware of the potential price pump and they position themselves with market-makers to liquidate tokens in order to keep cash flow ‘healthy’. So instead of building a solid business based on over 300 years worth of economic fundamentals, the project relies on ‘hype’ to keep their ships afloat.
This is such an industry norm, that often the project themselves get lost in all their own puffery and demand this at all cost, often fabricating the announcement for the need to stay alive.
That then becomes the project's northern star, or strategic objective and they completely forget about the fundamentals of a healthy business. A healthy business that generates real revenue, extracts healthy margins, pays its shareholders dividends and then seeks to reinvest into expansion and its environment.
The lines between feasibility, sustainability, and necessity have all been blurred into a ball of hot gas that will so easily burn up. The need to create as much ‘hype’ to chase token price will either intentionally (by the dubious) or unintentionally, be the demise of the investor and ultimately the project itself.
Don’t get me completely wrong! Making progress based on set milestones & achievements like signing partners, launching new staking programs & liquidity pools, being listed both on CEX & DEX, having promotional activation, hiring key talent, hitting revenue and funding targets, securing IP deals that will enhance the ecosystem, identifying similar projects that drive the interoperable experience that both communities will benefit from is absolutely and unquestionably needed! And yes they should be made in the form of public ‘announcements’ or press releases! After all, without growth, anything will regress, which is a basic law of nature. They just need to have substance, have a commitment by all stakeholders and drive the strategic imperative based on economic principles outlined in this paper.
In my opinion, the systemic rot in crypto is only going to be resolved through regulation, transparency, ethics and solid project management. Project fundamentals have to be sound, and the team behind the project needs to have the experience and commercial depth to deliver what real-world businesses have done for over 300 years. Only then will the industry stabilize and produce legitimate projects that will indeed have the not-so-secret ingredient to success...that being hard, solid work ethics, healthy revenue streams & a growing vibrant customer base. This is why DYOR (do your own research) is so incredibly important.
Look at the fundamentals of a project and not the ‘hype’ and of course the red flags that act as the canary in the ‘mine’. If something seems too good to be true, it often is! Or I am too naive and that is just the way the ‘token’ crumbles.
Let me know what you think about the above article and if you would like more!
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