Taking Stock of How Far Crypto Has Come

Crypto has financial, technological and human capital. But for now it lacks a compelling mainstream narrative, says a European VC.

AccessTimeIconFeb 16, 2021 at 6:51 p.m. UTC
Updated May 9, 2023 at 3:16 a.m. UTC
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Eleven years post-Bitcoin, six years post-launch of Ethereum, eight days after that announcement, the first signs of crypto product-market fit are before us. 

Michael Seibel (the co-founder at Twitch and president of Y Combinator) likes to say that product-market fit isn’t some kind of wishy-washy metric. “You have reached product/market fit when you are overwhelmed with usage –usually to the point where... you are swamped just keeping it up and running.” It’s when you have so much demand you can’t keep up with it. 

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  • Dermot O'Riordan is a Partner at Eden Block, a European VC firm investing in blockchain infrastructure and emerging crypto-networks.

    In Ethereum, we see that with the rise of decentralized finance (DeFi) and how much people pay for block space.

    Almost $60 for a deposit on Compound! Scaling Ethereum is a painful problem, but it’s a good problem to have. 

    I think it’s fair to say the crypto ecosystem has moved from concept – as per 2016 to 2018, when the space was mostly about white papers and marketing – to adoption. There’s real code. There’s serious capital at stake. And now there are serious cash flows, too.

    Taking a systems-level approach to understanding the crypto ecosystem, let’s take stock of some of its key stocks (not stonks): namely, financial capital, technological capital, human capital, and one more that I will come to.

    Stocktake #1: Financial Capital

    Yes, we’re in a bull market. But, first, some perspective on the importance of bubbles. 

    “What is perhaps the crucial role of the financial bubble is to facilitate the unavoidable over-investment in the new infrastructures,” says Carlota Perez, author of the influential book “Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages.”

    “The nature of these networks is such that they cannot provide enough service to be profitable unless they reach enough coverage for widespread usage. The bubble provides the necessary asset inflation for investors to expect capital gains, even if there are no profits or dividends yet.”

    Perez argues that we shouldn’t be ashamed of greed and speculation. Bubbles like Railway Mania in the 1840s, the dot-com bubble in the late-1990s and the current crypto bubble were essential revolutions. 

    Yes, all of us mighty apes might be serving a more noble cause after all.  

    Using Perez’s framework, new technology has two distinct stages: installation and deployment.

    The current technological wave of computers, which started in the 1970s, is at the tail end of its deployment period. Or in the words of Ben Thompson of Stratechery.com, it is at “The End of the Beginning.” 

    Crypto marks the beginning of a new technological paradigm, and it looks like it’s financial bubble time. 

    From a VC perspective, we see some sky-high valuations and this usually leads to bad outcomes for investors and LPs who show little discretion. And poor hygiene for builders of new crypto protocols and companies facing little scrutiny or oversight. At the same time, it’s never been a better time to be in this space for thoughtful builders and investors.

    Crypto financial capital in numbers

    Just look at a log scale of the respective market caps for BTC, ETH, and USDT, the dollar-pegged stablecoin, since inception. Is this what exponential growth looks like?

    There’s over $300 billion of yield-producing crypto assets, a figure which will increase significantly once ETH moves over to proof-of-stake as well. 

    It’s also important to mention what’s happened in DeFi over the last 12 months. Only 12 months ago, DeFi networks as a whole had about $800 million locked up on the supply sides of all of these networks. This number is over $37 billion as of today. 

    The longer the Bitcoin blockchain keeps our digital gold secure, the longer we can believe it should continue in that vein.

    Only one more measure of flow, for now, comparing the transaction volume on Ethereum to other financial networks: in 2020, the total transaction volume on Visa was roughly $8 trillion per year. As of today, the 30 days moving average for value transferred on Ethereum (after adjustments to remove some noise) is more than $8.5 billion per day, which is around $3.1 trillion on an annualized basis.

    In other words, Ethereum, the dinosaur of smart contract chains, today processes almost 40% of the value of the Visa network.  

    And we’re just getting started. Transaction growth is sky-rocketing, notwithstanding the shockingly high gas costs. 

    Stocktake #2: Technological capital

    There’s a Lindy effect in place for Bitcoin (and for Ethereum, too, to some extent) whereby every additional period of survival implies a longer remaining life expectancy. The longer the Bitcoin blockchain keeps our digital gold secure, the longer we can believe it should continue in that vein. 

    I’ll leave Nic Carter to do his thing and provide the data on how healthy the Bitcoin ecosystem is. TLDR: It was looking very rosy well before the price rises of the last two months. 

    As for Ethereum’s technological capital, the Beacon Chain has launched. The roadmap to ETH 2.0, or at least ETH 1.5 is becoming more apparent. And with more than 92,000 validators staking 32 ETH each, over $5 billion is locked into the beacon genesis chain, showing serious skin in the game. Notwithstanding, the competitive pressures from Polkadot, Near, Avalanche, Solana and the many other application-specific chains in the Cosmos ecosystem, this level of participation is a huge moat for Ethereum. And it feels like it’s all Ethereum’s to lose, at least in terms of its place as the home of DeFi and open financial markets.  

    There’s another more esoteric metric which I like to look at when thinking about the health of Ethereum’s technological capital – the 90-day moving average for internal contract calls – the measure for the interconnected nature of Ethereum’s smart contracts. In other words, how frequently Ethereum smart contracts interact with other Ethereum smart contracts. 

    This metric shows you how ETH’s native building blocks interact with each other and form more complex higher-order applications. The rate (in blue on the graph above) is growing exponentially. If you want to search for the locus of Ethereum’s network effects, look no further.

    Stocktake #3: Human capital

    On a human capital side, it’s important to look at this from a developer’s perspective. Developers contribute to the ecosystem’s open source code and enable it to be brought to life. 

    Fully 80% of all active developers in crypto today, arrived in the last two years, which shows that the hype cycle does bring in actual talent, not just capital.

    In terms of raw numbers:

    • In the Bitcoin ecosystem, there are 70% more developers than three years ago.
    • In Ethereum there are over 300 new developers contributing code per month
    • There are 70% more DeFi developers today (this figure is likely already wildly out of date) compared to this time last year.

    Blockchain ecosystems are getting broader and more diverse. Of course, there is Bitcoin and Ethereum and DeFi, but there are also emerging ecosystems around NFTs, privacy, Web 3, decentralized resource provisioning, and much more. 

    Sadly, Ethereum’s usage numbers are not so healthy. There are only 500,000 daily active addresses on Ethereum, out of about 130 million unique addresses. 

    Despite the rise of DeFi and everything that’s happened in the last 12 months, the number of daily active addresses really hasn’t changed that much. 

    Stocktake #4: What’s missing?

    The real question to ask is, what’s next? Are we at a tipping point? Should we keep calm and carry on, or is the answer to more adoption a technical matter? Are we just waiting for scaling to be solved and for gas costs to be reduced? Why then don’t we see more throughput on any of the Ethereum killers?

    Crypto has a narrative problem.

    People’s narratives when they hear Bitcoin, Ethereum, blockchain or crypto are simply nightmare stories of financial bogeymen, crooks, and digital robber barons.

    We’d like people to think about the importance of credibly neutral systems; the quality and integrity of the many great people in the space; the spirit of generosity and collaboration; how democratic and empowering this technology is, and a future utopia enabled by transparency, resilience, decentralization, and so much more.

    What people actually think about is the recent Guardian podcast that frames Bitcoin and the broader cryptocurrency industry as a scam. They think of actual scams too, the many hacks, the $280 million of BTC stuck in a dump in South Wales. They think of speculation and greed. 

    These narratives create barriers and massive friction for those who want to push the space forward. Unless we solve the narrative problem, efforts to attract an order of magnitude more users, builders, and capital into the space will start to hit a glass ceiling. Nevermind progressive regulation.

    One of the strongest criticisms about the mismatch between crypto expectations and reality is that such a theoretically empowering and democratic technology is incredibly elitist and undemocratic through how it leverages opaque and complex language to create an insider class. 

    What’s the answer to all this?

    First of all, we need to make it easier for people to opt into the new crypto paradigm and out of the status quo. 

    This starts with how clearly we express and live our values. 

    Social capital is the shared values that allow individuals to work together in a group to achieve a common purpose. 

    Developing our stock of social capital is essential as part of the next wave of crypto adoption. 

    Of course, you may have read Satoshi’s white paper, "Fat Protocols", "Why Decentralization Matters," the full crypto canon. Yet, how robust do you think crypto’s shared values really are?



    For example, the values of a crypto network include decisions around how information is disseminated and what is and isn’t shared to a network’s community (transparency), how team and foundation tokens are vested and sold (alignment), how conflicts are managed (integrity), how work is prioritized (progress), how new code gets accepted and who can contribute (community), how funds are allocated (sustainability), and so on.

    We have product-market fit. Now, let’s scale. 

    To get to mainstream adoption, we must break through crypto’s not so invisible asymptote, the ceiling created by bad narratives that crypto’s growth curve will continue to bump its head against, if we continue down our current path.

    Working together to build up crypto’s stock of social capital will create better alignment between all stakeholders, in turn, inspiring new and more positive narratives to attract the next wave of builders and users into the crypto ecosystem.


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