"Most technology tends to have workers perform menial tasks. However, blockchain is different in that its automation is decentralized. Instead of putting taxi drivers out of work, blockchain is putting Uber out of work, allowing taxi drivers to work directly with customers. ”
– Vitalik
How to explain everything about cryptocurrency
If you've been working in the crypto space long enough, you'll understand that trying to tell newbies what crypto is a pain can be.
After six years of working full-time in crypto, I still get upset when my parents ask me to describe what it is.
Usually, I default to Bitcoin-centric answers.
I'll start by describing the problem: central banks print too much money, so Bitcoin was created as a digital currency that cannot be devalued by a central entity.
But I'm starting to find this answer unsatisfactory, and although it's an objective fact, today's cryptocurrencies are actually much broader than this answer.
Nowadays, there are a lot of people in the cryptocurrency industry who don't interact with Bitcoin and don't care about solving money-related problems.
Cryptocurrencies are evolving so fast that it's hard to describe what the industry is and why it's so important with an overarching theory.
I've been struggling with this for a while now, and now I finally think I have a theory that ununiformly answers the question of what cryptocurrency is.
Innovation in Cryptocurrency: Creating a New Commodity
The fundamental innovation of cryptocurrencies lies in the creation of a new commodity: the block space.
To put it too simply, a chunk space is a storage that exists in cyberspace where any developer can run code or store data.
What makes the block space unique as software is that it is not subordinate to the centralized owner of the hardware.
Centralization is the status quo of all our software today. Companies like Google create extremely valuable software that we all use: Google Search, Gmail, Chrome, etc.
But if Google wants to, they can unilaterally change anything. However, this type of organization has proven to have many advantages.
As a centralized organization, Google can patch vulnerabilities quickly. They can hire great talent and take advantage of economies of scale.
However, there are some software applications that are not suitable for software that may be occupied by a single party, and these are often applications that are highly trusted and important to society.
For example, as much as we trust Google, we won't trust them to manage our currency. Why? Because they can change the amount at any time without supervision. No matter how much we trust Google, we all know that the motivation to cheat is too strong.
These high-trust applications that are not suitable for traditional software are where the block space can be very useful. Because it is independently verified by a large number of independent players around the world, it effectively subverts the existing rules and subordinates hardware operators to software. That's why I think a lot of Silicon Valley people don't understand crypto. It is essentially the opposite of their business model.
Different styles of block space
As it turns out, just like any commodity, there are many different ways to perfect the block space. For example, Bitcoin's block space has a number of unique characteristics that make it suitable for monetary use. Ironically, the properties of Bitcoin's block space make it particularly suitable for monetary use, but its performance is limited.
The Bitcoin network produces a block approximately every 10 minutes with a maximum capacity of 4 megabytes, and these limitations (and many others) make Bitcoin inaccessible to many use cases – high-frequency trading, gaming, etc. However, for monetary use, these limitations are actually an advantage, as it forces the network to shy away from the complexities required to accommodate these applications.
Other block space producers, such as Ethereum, have chosen a different set of trade-offs. Ethereum's block space is generic and more suitable for a wider range of applications. This decision gives Ethereum a wider consumer base facing the block space it produces. But the complexity it has to deal with as a network reduces its monetary attributes.
I could use multiple paragraphs to discuss different styles of block space (dedicated applications versus generic, subordinate block spaces to another blockchain sequence, e.g. Rollup, etc.).
The key point to remember here is that we are in the early stages of experimenting and refining the block space. In the future, my expectation is that there will be a large and diverse market of block space producers and consumers for different use cases.
Why do we care that block space is a commodity?
If you're considering investing in the tokens associated with it, it's important to understand the nature of the block space.
This is an important point to understand the product. While there are many commodity investors, almost all of them are traders. No one is going to buy and hold a commodity for 20 years because commodities are designed by society to stay flat, or more ideally, down. (Note: When I say "down", I mean that real purchasing power will go down)
The reason is obvious – we use commodities on a daily basis! If the price of oil rises too much, policymakers will eventually do everything they can to bring it back. The same goes for other important commodities such as steel, food, etc.
This is basically the opposite of stocks, which are designed to rise. If the stock market falls for an extended period of time, policymakers will begin to look for ways to get it up again.
Of course, this statement is simplified, and there are other reasons for the rise of the stock (compound interest, etc.), but this is a high-level reason.
But I was told to hold cryptocurrency
This means that almost every reader of the newsletter is very disliked by this.
If L1 block space is a commodity, then none of the assets we talk about at Blockworks (Bitcoin, Ethereum, Solana, Atom, etc.) are long-term investments. From the perspective we've just explained, these are short-term trades rather than long-term investments.
But wait a minute, you might say, the data doesn't support this theory!
I agree with the Fat Protocol.
Bitcoin and other L1 tokens, such as Ethereum, are the best-performing assets in cryptocurrency, far outpacing the stakes of the most successful companies like Coinbase. But I don't think this will last forever for a simple reason: the incentives for block space are similar to those for commodities. If Bitcoin is to become a successful currency, it cannot continue to grow by 100% per year. Similarly, for blockchains that produce block space for application consumption (e.g., Ethereum, Solana, etc.), the long-term incentive is that the price reaches its maximum at a certain point.
Some will point out that the block space market and the token market are not 1:1. I understand this, but they are relevant because the block space is denominated in tokens, so they are intrinsically linked.
I think the best analogy for crypto over the past decade is a traditional commodity boom.
You can look at some examples from recent history, but I think the most relevant is the commodity boom of the 1970s.
Due to the similar economic and geopolitical climate, I find the 1970s comparison most appropriate. The commodity boom was initially triggered by the Arab-Israeli conflict, but was exacerbated by an underlying inflationary climate.
During the same period, Nixon suspended the gold exchange window, which led to a rapid expansion of the monetary base and a surge in the price of gold.
Now, the point I'm trying to make is not exactly the same as it was in the 1970s and today, with currency depreciation and inflation driving cryptocurrency prices up (although that's part of that).
My point is that there have been various periods in history that have misled investors into believing that commodities can sustain stock-like returns over a long period of time.
An interesting comparison that will make crypto OG laugh is that in the 1970s and 2000s, people also started saying that we were going through a commodity supercycle (hats off to Su Zhu).
My take on the current period is that this is the first phase of the digital goods boom in the world. Block space is a novel commodity that can be used for an extremely wide range of applications, which is why it is expanding so rapidly.
But, like all commodity booms before that, financial gravity will eventually take effect. Over time, your favorite L1 will start trading like corn, steel, or soybeans.
The final comparison between the commodity boom of the 1970s and the digital commodity boom of the 2010s is their psychological impact on market participants.
There is a very interesting comparison between the gold standard and today's cryptographers.
For me, what's interesting about the gold standard is that after the amazing price hikes of the 70s, gold has basically underperformed all other assets in the world. But 40 years later, the community is more fervent than ever. If you really think about it, it's pretty incredible.
I think the same situation exists in cryptocurrency. When you own an asset that goes up 10 or 100 times, most people's brain chemistry changes, and it's hard to forget.
In the crypto space, I think there are two other under-recognized dynamics that fuel the prevailing tribalism.
Loneliness in the Internet Age. Young people are increasingly looking for community in an isolated world, and large cryptocurrency communities (e.g. Bitcoin, Solana, Ethereum) can provide this service.
Layer-1 requires large communities to come together to develop roadmaps that have very meaningful technical trade-offs that only a small percentage of engineers really understand. Therefore, the strategy is to create a narrative around these trade-offs to gain popular support (in the case of block-size wars).
So, my prediction for the foreseeable future is that tribalism will increase, not decrease, during this crypto commodity boom.
summary
To some, this forecast may sound pessimistic. Not for me.
I think we're still in the early stages of experimentation and expansion of L1 blockchains. So the good news is, I think we're nowhere near the end of this blockspace commodity boom. I expect that there will be 5 to 10 years left.
So if you're still like Ethereum, Solana, Celestia, or something else, there's still a lot of time left for you, and I'm guessing the existing and new L1, would be the best risky trade in a decade (it's not investment advice). But eventually, I expect the market to adjust to its desired block space style and will become commoditized.
To some, I would understand that this sounds bearish, but I disagree. I think that's a good thing. My long-term view of cryptocurrency is that it is an underlying foundation that enables new use cases and businesses that were previously impossible. In order to build generations of corporate waves, we need abundant, cheap, and useful block space. And that's exactly what is built today.
If you've read this far, here's a brief summary of the article:
- The fundamental innovation of cryptocurrencies is the innovation of a new commodity: the block space;
- Crypto over the past decade has been a blockspace commodity craze that is likely to continue over the next 5-10 years;
- But eventually, the block space will become commoditized, and Layer-1 will begin to trade sideways;
- This will pave the way for first-generation businesses built on the block space that will cross the chasm and enter the mainstream;
- The stakes of these backing block space companies will begin to outgrow the underlying Layer-1;
An exception to this theory could be a blockchain like Bitcoin, whose use case is not to build a business on it, but to act as a currency.
I think this is a valid exception, although, as I pointed out earlier, if Bitcoin were to be used as a currency, its volatility and returns would decrease over time.
So I end up thinking the results will be very similar. (Side note: I think this exception is understood by the crypto community, which is why Ethereum is trying to rebrand itself as an "ultrasonic currency.") ）
All in all, it's very exciting for me. Over the next decade, I expect to see the Cambrian explosion of block space continue. Both investors and users will do well (non-financial advice). Personally, I'm excited about what's coming next, which is a wave of businesses built on top of this block space.
I think when we look back ten years from now, we'll be amazed at how much has changed and what we've built.
As Bill Gates once famously said, "We overestimate what we can do in a year, but underestimate what we can do in a decade." ”