Born to death, the possible fate of the Ethereum "killers"

Note: The original author is Chris Burnisk, a partner of the cryptocurrency investment firm Placeholder. In this article, it explores the background and current situation of the Ethereum “Killers” (EK), and he discusses the future of these projects. In the end, he concluded seven conclusions:

1. The 2017 cryptocurrency bubble was an irrational boom, but it led to many valuable experiments;
2. In a network of multi-stakeholders investing time and money, technology is not always the determining factor;
3. In addition to the number of stakeholders, ETH's diversity will also be a defensive advantage;
4. ETH slowly establishes liquidity, while mining creates a lower cost;
5. We understand the characteristics of PoW's creation of goods, but the understanding of the capital assets created by PoS is still in its infancy;
6. Unless high-throughput applications emerge, so-called high-throughput networks will create a weak fee market;
7. Before getting better, the situation may be worse, as many "Ethereum Killers" (EK) will go online at the same time, and the recent supply will outweigh the demand;

(Image courtesy of pexels.com)

The following is the translation:

In the coming quarters, many "Ethereum Killers" (EK) will get together to launch their main network and then release their assets to the cryptocurrency open market.

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From the private market to the public market, new price discovery will be an important shift worthy of attention and understanding, especially considering that many of the Ethereum Killer (EK) projects have a private equity market value of billions of dollars. .

Next, I will do some analysis on these "Ethereum Killers" (EK). Although the maximalist may think that this is a meaningless investigation of junk coins, these upcoming "Ethereum Killers" (EK) will indeed affect the development of our current horizontal market and the upcoming The arrival of the bull market.

First, I expect most "Ethereum Killers" (EK) to face extreme downward pressure after listing. The best examples are Algorand's ALGO and Hashgraph's HBAR (they are very badly priced).

When I wrote this article, I didn't have the attitude of gloating, because it actually affected the Placeholder and many entrepreneurs and investors in the industry.

Intuitively, most of the "Ethereum Killers" (EK) are set too high in the booming private equity market, and now they are trying to maintain these valuations in the open market. When the market is in a bull market, the price of the currency may rise after the listing due to wishful thinking, but in a bear market, it tends to move downwards, especially if there is a problem with the fundamentals. Fred Wilson recently wrote an article about how the public market provides valuation calculations for the private market , and I think we can expect a similar approach in the cryptocurrency market.

Why is the valuation of the private market so high? Many people have warned us about this model, Albert Wenger wrote in an article in May 2017:

“In the bubble, everything is assessed based on the rest of the bubble, not the whole world.”

From 2017 to the present, the most common way to evaluate a cryptocurrency network is through its market value, similar to comparing the company's market value [1]. In 2018, Ethereum's network market value exceeded $130 billion, while the "Ethereum Killer" (EK) (such as Cardano and EOS), which was not on the main line but publicly traded, was valued at $10-20 billion (see below). Market screenshots for January 2018).

In this environment, the seemingly reliable "Ethereum Killer" (EK) can reach a private market valuation of $6 billion. If it can reach the ETH level, it can be considered to have a 20-fold upside. Fast forward to today, the $6 billion valuation is uncomfortable. For example, the market value of EOS has fallen to 2.7 billion (down 55%), and Cardano has fallen to 980 million (down 83%), and even more low.

In addition, the "Ethereum Killer" (EK) may be further affected by the following factors:

1. As the project has “excellent technology”, he continues to have a wishful thinking about the valuation of Ethereum, but he does not understand what Ether Square’s network capital support is to date.
2. If the "Ethereum Killer" (EK) is unable to develop a strong expense market among its users, the market may not tolerate inflation;
3. The emerging game theory nightmare, that is, the "Ethereum Killers" (EK) have introduced too many homogenized systems in a short period of time, thus spreading developers and investors;

Before discussing these three factors in detail, I will give a more optimistic conclusion: all of the above factors will lead to excess processing capacity of smart contracts, reduce the cost of unlicensed network innovation, and attract more entrepreneurs. In the past few years, cryptocurrency technology has been trapped in a relatively high-cost innovation environment. I hope that Ethereum Killer (EK) and Ethereum 2.0 will help us enter a low-cost era.

This is not much different from the IT industry in the 1990s and 2000s. The IT industry over-allocated capital and over-constructed capacity, leading to asset collapse and oversupply in certain IT sub-sectors (such as the Internet backbone), enabling entrepreneurs to Experiment at a lower cost. These experiments were followed by further capital and labor injections, not to mention a large number of imitators with similar models to new markets. Under a fair system, the lower cost of infrastructure will also be passed on to consumers, thereby increasing demand. Investors are winning or losing, depending on their timing of participation, but entrepreneurs and consumers will always win.

Just relying on "excellent technology" does not prove that the network is valuable.

One common logic I see in almost all of the Ethereum Killer (EK) projects is:

"Our technology is better than Ethereum, so we should get a network valuation similar to Ethereum."

This logic may come from the perception of software as a means of gaining centralized control of profits (ie, monetization of technology through equity). In the stock market, superior technology makes the company's products unique and enables them to maintain profit margins, thereby driving the company's profitability and market value. But in the world of open source cryptocurrencies, technology is difficult to defend against market capitalization. An agreement that attempts to maximize profits from suppliers and consumers is destined to become an agreement to lose market share.

If a network technology is good enough to get enough third-party investment in aids and distribution, the potential benefits of these network effects may outweigh the shift to alternatives with better technology. This is not to say that Ethereum's leading edge cannot be overcome, but that the value of third-party investment and results takes time. To further clarify this concept, we will investigate the behavior of the early holders of the Ethereum Killer (EK) and compare it to the capitalization approach of Ethereum over the past four years.

Let us first agree that anyone who buys assets for profit purposes wants to sell them on top of the acquisition cost. Otherwise, why is he going to buy assets? Then, the cost of acquisition will become a psychological bottom line, and only when the hope for asset resilience gradually weakens, participants begin to consider selling assets under this bottom line [2]. For investors, the purchase price represents the cost of the acquisition, while for the mining company, the cost represents amortized cost and ongoing operating expenses.

When an "Ethereum Killer" (EK) goes on the market, the only visible cost in the market is the amount of money raised by the founding team. Since EK investors usually hold most of the currency tokens, the market price is determined by the investor. So far, the progress of EK's public listing indicates that investors are hoping to exit above cost. Without lock-in, we can expect that as each batch of investors tries to get out of the price at the time they participate, there will be a series of sell-offs [3].

What is the difference between Ethereum? The answer is proof of time and workload (PoW).

Since the launch of the main network in the summer of 2015, Ethereum has been building a strong stakeholder, which makes it more diverse than the investor-led EK market. Importantly, miners' costs provide an economic basis for the value of ETH, as BTC does. Only when miners are in trouble or lose confidence in the future prospects of the asset will they sell at a price below cost. Therefore, the cost of miners will naturally create a lower price limit for the asking price of miners' sales orders [4].

In the early days, the cost of ETH miners was low because the network was not as competitive, and ETH was mostly held by investors who started at $0.31. Therefore, the operation of the asset after half a year on the line is very unstable. That's okay, because at the time the global attention to cryptocurrencies was far less than it is now, and the market's expectations for Ethereum were relatively low at the beginning. For example, on October 21, 2015, Ethereum's currency price was $0.44, and its online market capitalization was only $33 million.

As Ethereum becomes more popular, people's expectations for it are getting higher and higher, and competition for mining is becoming more intense, which increases the cost of earning Ethanol per unit. The rising cost has led mining unions to increase their sales order asking prices and demand more sales to cover these costs. Forced selling has injected daily liquidity into the ETH market, encouraging organic price discovery [5]. Now, ETH is developing a monetary-premium, so the flywheel effect will continue.

A healthy multi-billion dollar network takes time to develop. With the private listing of private assets, high-quality EK will establish a benchmark to achieve market capitalization, and then increase market capitalization through adoption and sound cryptographic economics. But this does not mean that next year will not be ugly, especially the current EK private market valuation is much higher than ETH in 2015. In other words, those projects that survived the turmoil will be projects that achieve a better balance between investors and others. This is a good thing, because labor and sharing experience are more loyal than capital.

Everything I said above applies to the PoW world, where the market seems to be trying to value native assets as commodities. In contrast, almost all of the "Ethereum Killers" (EK) are looking for PoS, and I think the market will regard them as capital assets, and as capital assets, the value will be driven by the profitability of the suppliers in the network ( Assets are required to access tokens as a supplier.

I don't know if EK's pursuit of PoS conversion is a good thing or a bad thing. On the one hand, PoS is more up-to-date than PoW, and a skeptical market tends to be more contemptuous of new, unproven things. On the other hand, the value of capital assets should be more independent of production costs than commodity/PoW assets, but driven by the profitability of the supplier. If some EKs can provide high-value services to the world while requiring their suppliers to provide low-cost, then these networks may bring high profits to the supply side, making access to tokens a coveted asset. In this way, EK may not need to gradually increase its own cost curve like the PoW network.

In the long run, demand-side participants will be those who pay enough for the supply side. In addition, the high throughput characteristics of these networks may make the competitive demand side market difficult to develop.

Market intolerance to inflation, and potential price spirals

In any network, if the network has excess service (block space, smart contract processing capacity, storage), then the user has little incentive to pay too much for accessing the service (ie, a weak fee market). Talk to any staking service provider and they will tell you that so far, in high-throughput networks, inflation revenues are far lower than transaction costs, and talking to such staking service providers actually gives us Some conclusions from this article have been made.

Inflation has been widely used as a supply-side subsidy to guide the strong expense market, so that we forget to use it as a strategy. But in my opinion, the market should tolerate inflation only if there is a credible expectation that the fee market will develop to include inflation (for an explanation of EOS and other networks that do not charge for displaying transaction costs, see endnote [6]) .

If the market loses confidence in the ability of the network to charge users in some way, then the market may stop tolerating inflation, harm the network's native assets, and undermine the security of the PoS network. The fact that EK is aggressively marketing market throughput has made them tend to be in this model because oversupply in advertising creates resistance to a strong expense market.

If the purpose of these high-throughput networks is to make applications that require Facebook-sized transactions, then once the deployment and use of such applications, weak cost market issues will be resolved. The cost can be kept low because the supplier wins on a scale and the operating cost of the PoS is lower.

So it all comes down to "killer apps" and the developers who built them, which brings us to the next section.

Intensive listing plans distract developers and investors

This factor is self-evident, but its way of expression is a game theory nightmare for EK. In 2017, the success of Ethereum, coupled with many technical experts complaining about the shortcomings of Ethereum, led dozens of teams to raise a lot of money based on their commitment to become the next Ethereum.

These teams have been building for more than two years, and although a few have already launched the main network, most have not yet fulfilled their promises. Many teams feel the pressure, their development progress lags far behind their early roadmap (which is the result of raising too much money and losing attention), or they want to grab market share before competitors, so there are A collective up-and-coming boom.

Most of the engineers I met didn't like to speculate on the systems they built. They want to build and know that the infrastructure they are building will work reliably. If the developer is overwhelmed by the number of choices and then adopts a wait-and-see strategy, then I expect investors to do the same, which means there will be fewer bids to absorb the EK supply.

to sum up

Brad Burnham summarized some of his conclusions while reviewing this article, but I prefer my conclusion:

1. The 2017 cryptocurrency bubble was an irrational boom, but it led to many valuable experiments;
2. In a network of multi-stakeholders investing time and money, technology is not always the determining factor;
3. In addition to the number of stakeholders, ETH's diversity will also be a defensive advantage;
4. ETH slowly establishes liquidity, while mining creates a lower cost;
5. We understand the characteristics of PoW's creation of goods, but the understanding of the capital assets created by PoS is still in its infancy;
6. Unless high-throughput applications emerge, so-called high-throughput networks will create a weak fee market;
7. Before getting better, the situation may be worse, as many "Ethereum Killers" (EK) will go online at the same time, and the recent supply will outweigh the demand;

Although I don't think the recession of the Ethereum Killer (EK) will be interesting, sometimes in order to re-grow the saplings, there must be a fire through the forest.

Endnote:

[1] Although network value is a useful tool, it has many nuances and should not be used alone;

[2] Different acquirers have different time frames in their tolerable recovery period, which can be easily seen from the behavioral increment between traders and venture capital;

[3] Long-term investors, such as Placeholder, USV, and a16z, are used to the J curve. If they participate in a project, they will continue to hold in the initial plunge and expect to be a beneficiary within 5 years. Unfortunately, in the hot money boom of 2017, such investors are a minority;

[4] This idea is consistent with the notion that the lower price limit for a commodity should be marginal cost, because marginal cost is where the supplier begins to shut down, reduce supply, and rebalance supply and demand. Any PoW-based asset (commodity) generally follows this rule. However, if funds are raised in the bitcoin market, the marginal cost as a lower price limit is often questioned because it is theoretically difficult to adjust, and if the miners continue to go offline, a recursive downward adjustment can be made. But in the two big bear markets I have experienced, the price of Bitcoin bottoms is basically at the cost of many miners ($200 in 2015, $3,000 in 2018/2019), recent experience of Ethereum miners The same is true of the bear market;

[5] As a participant in the cryptocurrency market in the past five years, I have heard that a network that allows a large number of assets to earn revenue has developed the healthiest market in this field. Profitability means a cost structure that then forces the sale of assets to cover costs. Forced sales are essential, similar to the interest of putting friends in the water to attract fish, sharks, and whales in the cryptocurrency market. As the market grew, the event attracted more participants, tools and standardization, all of which increased price discovery. If compulsory selling is not used as a starting mechanism, the market for cryptocurrency assets tends to remain relatively weak, inactive and vulnerable (XRP is heterogeneous here);

[6] If you do not need to pay for the transaction, but staking to ensure capacity, as long as the demand for using the network continues to increase (and the capacity is constant), then the value of the pledge should still rise. The rise in staking value should offset the impact of supply inflation. If demand growth (PQ) exceeds asset supply growth (M), one would expect the value of the asset (capital gain) to rise at a constant rate. In this sense, the development of a fee market is based on the number of stakes required, so the market can tolerate and absorb inflation.

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