The Wild West of Tokens
Bitcoin, Blockchain, Tokens — these are the new kids on the financial block.
“The essence of intelligence is the ability to make distinctions. The more you notice, the more you know. The more you know, the more options you have. The person with the most options usually prevails.” - Jim Cathcart
Years ago, the internet was a very black and white place. You had ‘old’ companies that were big and slow (AOL, Rediff, Yahoo), and you had startups that were young and took risks (AirBnB, UBER, Etsy). Startups were mostly apps or services with websites, built on a nice design, with fresh content. The internet today is transforming from a digital asset that was hard to grasp for many people, to a fundamental necessity in everyone’s life.
As the world is becoming more aware of cryptocurrencies, many have started to slowly dip their feet into the market. A byproduct of this is that there are more questions than answers for those who want to invest or understand this new World. Personally, I've been around since the beginning of cryptocurrency and have been fortunate enough to be involved in many great projects over the years.
The Wild West of Tokens
Crypto is an emerging asset class, but they have the potential to change/disrupt multiple industries fundamentally. One common phenomenon associated with emergent asset classes is volatility and the lack of proper frameworks to understand what is happening, especially from an investment point of view. However, like in traditional investments, a way to look at this system is to use mental models from other disciplines.
In the paragraphs below, we argue that a bit of history, economics, and tons of imagination are needed to build a framework.
We call this the "Wild West Framework". It's hugely inspired by games like Red Dead Redemption or movies like The Good, The Bad and the Ugly.
And to get the proper mood set to enjoy this Wild West NFT masterpiece Death by Jose Delbo.
The Infrastrucure Layer.
The Wild West became popular because few pioneers did the hard work of building railroads, building transportation services etc., in areas that were never known. Certain folks dug deep and established the first railroad tracks. They sat in their time and money for this project. Fast forward several years to today.
The earliest investors and builders in this Infra-Layer made fortunes as the market exploded. They also continued to mint riches as each movement enabled them to earn money. Today, millions are buying tickets because of the productive network those earlier pioneers build.
If we can now draw our imagination, Bitcoin (BTC), Ethereum (ETH), Solana (SOL), Monero (XMR), Binance Coin (BNB), Flow etc. represent this infra layer. While Bitcoin was the first cryptocurrency, and Ethereum built the first smart contract platform. Without these layers, it's almost impossible today to build anything.
And like builders of the wild west, these layers have now been battle-tested, their pros and cons known.
For foreseeable time as the crypto explodes, these layers will continue to benefit for a very long period.
To understand and evaluate a project in this layer, below are the few things to look out for
How Decentralised is the core infra? We can expect a fair bit of centralisation ahead, but this layer has to be widely decentralised. Any centralisation here puts a risk on the whole ecosystem.
How battle-ready is the layer? This is counter-intuitive but from anti-fragile thinking, the more bugs, hacks, issues the layer has faced, the more it's ready for complexity and security.
How many devs work on this layer? The infra layer is the core lego block upon which everything is built. Arguably the most and best dev talent should be working here.
We call this the Infrastructure Layer of Crypto.
The Enabler Layer.
In the journey, the laying of infrastructure led to creating other enablers on top of these. You had signalling systems; you had small motels; you had local small distance transport etc. etc. These enablers then allowed the infrastructure to be used in a more pervasive and accessible way for a much larger group of people. Examples of these would be the Decentralised Exchanges, Chain Link, which provides price feed or Graph or Matic and so on. All these projects leverage the infra built and then build enablers which make their usage simpler.
For a project to be successful following are the key things to look for.
What is the specific use case? Is it just a vanity item or really pushing the envelope? For example, post uniswap, you had tons of decentralised exchanges, but only a few large survived.
How is the adoption? An enabler is good enough only if you have projects using it. Matic is a good example of how they increased their adoption.
RoadMap - A project which is an enabler needs to constantly improve its offerings. One of the best ways to understand is to look at the roadmap. ideally, it should have elements of solving what is happening now but also speak about how they are positioned for changes. For example, a project which is allowing tokens to move from one chain to another could have just ETH<> Polygon bridge to start but should be speaking about multiple bridges in Future.
A combination of basic infra and few enablers triggered a migration towards the west. This led to a cambric explosion of cities, towns and villages. In this layer, economic systems started to come together, leading to creating wealth for anyone enterprising. This also meant that groups that could utilise the infra and enablers better became very quickly very large cities.
The end-product layer.
These are the end-products that we keep hearing about in crypto, from Defi Lending Protocols to NFT to Derivate products.
It is where the most exciting part of the crypto ecosystem resides. Phenomenal innovation is happening using the infra layer and enabling tools to build end products that can change the ways consumers think about everything digital.
From an investment perspective, the most important is to figure out whose team is behind the project. The brilliant teams can understand the compostability of infra and enabler have tremendous shipping speed. This enables them to quickly find use cases where consumers are most likely to interact with their platform. A good checklist for evaluating the team is given below.
Does the team have any member who has worked in the past on web3 projects?
How good is their community on discord/Telegram? Most teams in crypto hire people using communities on a temporary basis. Without a community, they will be lost. Like reading annual reports and charts this is the most important activity while analysing a project.
Who are the advisors to the project? Is any one of them legit OG of the crypto ecosystem? A good example of this is a project called PolyTrade. It has a couple of Crypto Native folks in the core team and has Sandeep Nailwal as one of the advisors.
Constructing a Portfolio
To summarise, when you look at your portfolio, you can now use the above framework to decide your strategy.
Infra Layer: This remains the foundation of crypto and is the strongest. But this also means days of 10-20X returns don't happen here.
Enabler Layer: Again, without this mass-scale, crypto adoption is next to impossible. While the risks are less, there is the potential of super-normal returns as much value of building mass markets will happen here.
End-Product Layer: The most fascinating and, of course, the riskiest. Investing here is almost akin to buying a completely out of money option. Returns here could be easily 100x, but you could lose all your invested money equally quickly.
Hopefully, you can construct a portfolio that matches your capital and risk allocation with that in mind. But remember:
Any commodity that is traded, be it either physical or digital, is subject to bubble and crash. This is due to the fact that every speculator has a different opinion on the value of a particular commodity. Price bubbles may occur when there is manipulation in price movement by big traders – causing big price spikes and crashes.
What about NFTs ..where do they fit in this framework...