Over the past week I’ve been on Twitter watching the whole Filecoin fiasco, as someone without any bags the whole affair was pretty interesting to watch. The general cycle of events went from:
“Oh my”, $FIL is launching next week. Get ready.
$FIL is launching very soon, this is is going to be massive
$FIL’s FDV is now at <insert crazy high number here>
Oh wait, high $FIL FDV may not be good for the network
$FIL starts dumping due to 100x for early investors locked for 3 years
$FIL miners are stuck with a dumped token that’s still too expensive to actually acquire and use in the network
For those of you that don’t understand what I mean by the last two points, essentially $FIL miners needed to purchase specialised hardware in order to be part of the $FIL network. Each rig goes upwards of $30k USD and requires $FIL in addition. The thread below outlines this problem very well.
@Filecoin has transitioned from calibration net to mainnet at block 148,888 after a 200M ICO and 3 years of dev. Within 24h of launch a majority of miners are already on strike and talk about a failed wedding and forks. Why? (1/n)
October 18th 2020
297 Retweets893 Likes
This phenomena isn’t unique to Filecoin, there’s been discussion on this in the realms of DeFi as well:
We need a term for great projects that are unfortunately uninvestable due to their token economics/vesting schedules.
October 17th 2020
10 Retweets175 Likes
Why does this happen?
I’ve been thinking more about this at a deeper level and DeFi in its current form is creating networks that are lopsided in one dimension. Crypto networks are real life, living organisms. Just like our human bodies, they have a breadth of needs and neglecting them can be catastrophic. I decided to spend some time and come up with what I think is the Crypto network equivalent of Maslow’s Hierarchy of Needs.
Introducing “A Network’s Hierarchy of Needs”
I literally came up with this while writing this article and may not be perfect.
Okay so let’s break down each of these needs and what they mean:
Physiological needs: I like to think of this as what a network needs at its core to have any shot of long term surviving. In my opinion that’s a real product with differentiation. Many fast follow forks lack this since they’re ripping off someone else’s creation. You can skip this step by offering a speculative token but without this step everything else will crumble or the debt will need to be repaid in the future. SushiSwap is a good example of repaying this debt, Swerve is an example of being unable to do this step altogether.
Safety and security: The best way of thinking of this is that if someone gets skin in the game for your network, will they be burned? Many teams mess this up by doing two things: a) selling way too much to investors at highly favourable valuations relative to public markets b) hyping up the token at launch and having a tiny supply float. Sure your valuation will look great for the first 24 hours, but after that it’s all downhill. A consistently declining token price completely breaks community morale and can be a challenge to recover from. The more money you raise (and who you raise it from), impacts the long term price.
Love and belonging: This is the dark art that many are struggling to figure out, and that’s how can you actually make people feel a part of your network and be rewarded for it. Liquidity mining is mercenary capital with a small percentage that will stick around after rewards dry out, however the mercenary capital can extract majority of a network’s value and be a net drain sucking value from longer term holders. Incentivising contribution in other realms is a challenge that is yet to be solved.
Self-esteem: Acquiring users who reach this part of the funnel can be extremely challenging but rewarding when it comes into fruition. The clearest examples of this are users such as ChainlinkGod, DegenSpartan and BlueKirby. All these 3 persons have integrated the network they represent into part of their identity at a deeper level. Seeing this play out is fascinating but more importantly, these users become super cheerleaders of your network. The number of networks that achieve this is really tiny.
Maximalism: I personally view maximalism as a function of self-esteem exacerbated at scale. In order to have a true maximalist community you’ll need to reach mass psychological scale. Bitcoin has maximalists, Ethereum has them and Chainlink does as well. While some parts of maximalism are ugly, but it generally takes shared adversity and boom/bust cycles to form this group. The network they represent has struggled with some sort of anti-narrative and this group aims to fight it till death. Bitcoin fights against fiat issued money and accusing it of being worthless. Etheruem fights against the notion that it’s valueless because of the inflation schedule, see: “ETH is money”.
As you can see from the above, every action in a protocol’s conception impacts one or many of these factors. While it’s hard to get everything right, neglect at the bottom layers are much harder to fix and should be given the most case (aka build something people want and be sensible when it comes to raising).
The Past and Future
If we summarise crypto’s lifecycle in the past few years, it seems like Bitcoin was the first network to hit the mark on all of the above axis. Ethereum was the second one that managed to do so.
However, when we observe the 2017 boom we can see that many crypto networks had a very shaky base layer and the effects of those can be seen through 2017 ICOs that are struggling to stay relevant with their product or ghost chains that are very desperately hoping anyone builds on their chain.
👻 👻 👻 3 ghost chains with billions in market cap but zero use: $eos, $xtz, $xrp Academic paper finds: 💧 95% of EOS transactions from airdrop of valueless token 👩🍳 82% of Tezos throughput used for baking 📉 98% of XRP transactions have 0 value Link 👇
May 7th 2020
148 Retweets581 Likes
In this next cycle of DeFi, I think the hardest challenge most projects will face are ensuring the token metrics aren’t un-investable and that contribution beyond liquidity will be reward (looking at you massive yield farming campaigns with no lockups). I have some guesses as to how to solve them which I’ll be attempting to do with ARC that you’ll hear about, but for now the future is up for grabs.