Author: DoctorStrange
Editors: Vincero, YL, CloudY, Sihan
Review: Crystal
1. What kind of animals are we?
Suppose there is an orangutan, whether it is a highly intelligent bonobo or a muscular and smart silverback gorilla, how can it quickly become the leader of the population?
The answer is simple: give it an oil barrel or a tire. Zoologists found in the primeval forest that when the first gorilla learns to roll a barrel, other gorillas will find it incredible and scare away, thus this gorilla will gain a higher status in the population. Afterwards, other gorillas try to learn this "most advanced barrel rolling technique", just like the post-80s and post-90s generation followed their peers in elementary school to learn to roll hoops and spin books with their middle fingers.
Picture: Beast King's barrel rolling shakes all directions
When a nightingale sings in a tree, it triggers a chorus; the first monkey to jump into the water curtain cave can be called the king, because other monkeys follow it into the cave. There is a similar phenomenon of imitating similar behaviors in human behavior, which is called the meme effect. Bitcoin (BTC) was initially circulated among programmers and geek enthusiasts because of the MEME effect. Dogecoin (DOGE) and Shiba Inu coin (SHIB) are rising stars, relying on the development of social media to become widely known.
The narrative logic of these MEME tokens is simple and direct, the slogans are extremely provocative, and with the support of celebrities such as Elon Musk, followers have bought them one after another. The popularity of non-fungible tokens (NFTs) whose main content is pictures was initially due to the need for identity recognition in social scenarios, such as Crypto Punk avatars and BAYC avatars. Therefore, encryption is not the main feature of MEME coins, but more like the herd effect of fans in star concerts.
Blockchain technology based on cryptography constitutes the main part of cryptocurrency, and the abbreviation "Crypto" has therefore changed its name. Although cryptography can be used offline (such as offline communication between agents and spies from various countries), blockchain technology cannot exist alone and needs to be connected to the Internet, otherwise the block information sent between nodes cannot be synchronized in real time on other nodes. Of course, Bitcoin transfers between single nodes can still be done offline for a short period of time, and can be synchronized after connecting to the Internet. Since the current Internet (Web2) is the infrastructure of cryptocurrency, and cryptocurrency and Web2 jointly create the infrastructure of Web3, Crypto and Web3 can be discussed together in most cases.
Figure: Crypto and Web3, drawn by the author
After the Web3 wilderness gradually became lush and prosperous, the MEME phenomenon gradually became an old narrative, and in many cases, like rotten meat, it is not easy to attract the scramble of wild beasts. However, once an excellent narrative logic appears, it will still be eaten up by hyenas and vultures. In this regard, whether it is institutional capital, large investors or retail investors, they all have the same "fear of missing out" (FOMO) mentality.
On October 28, 2022, after Elon Musk personally led a group of funds to complete the acquisition of Twitter, the price of DOGE coins rose sharply and the trading volume surged. Since Elon Musk is the main promoter of the popularity of DOGE coins, investors expect that DOGE coins will be introduced into some payment scenarios of Twitter. This expectation has caused the trading volume of DOGE coins to surpass Ethereum (ETH) again. This shows that the MEME effect is still a casino with fierce bets, and the application prospects of technology are just a supporting role like the beautiful dealer (of course, this supporting role is also indispensable).
We are such animals. Most decisions come from the intuition or subconsciousness of the lizard brain, and intuition is the shortcut on the desktop of the brain. People are accustomed to directly clicking on shortcut programs with the mouse instead of calling up the command line window to execute logical judgment code. The lizard brain likes simple and familiar things (such as Dogecoin and Dogecoin) and hates unfamiliar and complex things (such as public chains and Layer 1/2/3). The rational brain has a long thinking loop and does not play a final role in most decisions. Even if there are a small number of rational decision makers, the mob will force rationality to follow the trend and pursue profits. Irrationality is the main source of noise in the Web3 industry.
2. Irrational behavior of higher animals
Exploring the irrational and wild jungle of Web3 is a great test of the humanity of digital nomads. They need to gradually eliminate greed, anger, ignorance, doubt, and arrogance in their nature in order to realize their nature and become Buddhas.
Greed. Greed is the primary evil, and it is mainly manifested in the desire to eat the last penny, trying to snatch the head and tail of the fish from the dealer, and not stopping profit and shipping in time. This is the mentality of a mercenary and unscrupulous businessman.
Anger. When the trend reverses and the price of the currency you hold falls, you refuse to admit defeat and continue to increase your position; when the price of the currency rises and you sell it, it continues to rise, and you cannot sit back and relax with your position empty, but instead regret selling it and buy it again at a high point to get stuck. This is the mentality of an impatient and reckless man.
Crazy. I fantasize about holding a coin for a few years, investing in value, forever, but this coin is not BTC and ETH. This is the mentality of a girl in love.
Doubt. After studying the market or basic information of a project, you are not confident enough to decisively participate in ecological interactions or transactions. This is the hesitant Yuan Shao mentality.
Slow. You cannot keep being a student every day and keep learning new projects and new knowledge. The arrogant attitude of veterans will ignore a lot of valuable information. This is the mentality of the Eight Banners Dandy.
To get rid of the inner demon, position risk control is the most important, because position changes directly affect the mentality of investors. Researching the news or fundamentals of the project, K-line technical analysis, etc. are just icing on the cake and a means of adding wings to the tiger. A good fighter has no great achievements. If you are nervous after participating in the transaction, it means that the position is too heavy, and there is a high probability that your mentality will be unbalanced due to the sharp rise and fall, which will lead to some wrong operations and cause losses.
Figure: Not happy with K, not sad with U, drawn by the author
Under the premise of keeping a calm mind, "not being happy with K or sad with U", we can keep improving and optimize the investment return rate from the perspective of industry information, technical research, etc. In the dense primitive jungle of Web3, everyone has his own way of hunting. No matter what kind of profit-making method, it is difficult for a pure egoist to become the biggest winner. Because under the influence of utilitarianism, all values are calculated by how much USD is arbitrage. However, chess is outside the game, and good poems are not polished in the house. The famous poets of ancient and modern times, rhetoric is really a foil. Li Bai really relies on real martial arts and swordsmanship and the chivalry it brings, and Su Shi really relies on sincerity and strong political literacy in the ups and downs of officials. Those who can really gain huge benefits and reputation in Web3 must be those who do not care about the encrypted narrative itself, but those who are experienced in the traditional world and are persistent in making more people win together.
3. From zero-sum game to positive externalities
Historian Machiavelli once said: "A thing can only be successful and lasting if it benefits everyone." This behavior is called principled altruism. By this standard, the model of benefiting everyone (including other industries outside the circle) is relatively rare in the Web3 industry.
We know that credit money has harmed the interests of almost everyone. The credit money issued by sovereign states, whether it is the US dollar, the euro, or the RMB, is essentially debt, and more than 90% of bank asset figures come from debts derived from credit activities. The banknotes initially issued by the Bank of England, established in 1694, were entirely the king's war debt. The popular universal tokens in Web3, such as BTC and ETH, are called "virtual currencies", but the underlying logic is physical currency (analogous to gold and silver), not debt-based credit currency. Physical currency does not require any substantial physical meaning, it is a carrier of value beliefs. The measure of value can even be a large stone whose location is known to members of primitive human tribes. Even now, the stones from the collapsed Berlin Wall can be sold for tens to hundreds of euros in German tourist souvenir shops (of course not every stone really comes from that wall).
Image: Stone memorial of the collapsed Berlin Wall, source: https://www.facebook.com/rainieis
BTC, which has many staunch believers in hoarding coins, high mining costs, deflationary output, and easy wallet loss, has gradually become something that many holders will not sell for a long time, thereby reducing the frequency of transactions and energy consumption. For non-high-frequency traders, the most important function of BTC has now become a store of value. Therefore, the value of BTC lies in the fact that people want to own it and keep it, rather than sell it or give it up. In the long game of buying and selling over the past decade, BTC has gradually concentrated in a few top wallets. As a result, the deflationary and centralized BTC is not suitable for the universal popular currency of Web3.
Deflation of currency in the early stage of popularity is fatal. In the early Ming Dynasty, copper coins were legal currency and silver was illegal currency, but everyone (including the emperor) was hoarding silver and generally recognized the value of silver. People cast silver into blocks and hid them underground, which indirectly caused the Ming government to be unable to obtain enough silver. It could only collect various agricultural and sideline products instead of collecting taxes, and its financial capacity was insufficient. During the Wanli period of the Ming Dynasty, Zhang Juzheng's reform officially made silver the official currency. After the Wanli Emperor, who was keen on making money and hiding silver, legalized illegal mining activities among the people, the silver mines were soon exhausted. In the late 16th century, Spanish colonists invaded Mexico and Peru and imported a large amount of silver from the Americas to China. Half of the silver produced in the Americas in the 16th and 17th centuries was imported into China. This directly led to the devaluation of silver in the Ming court treasury and a large-scale inflation of commodity prices denominated in silver. However, due to the corruption and private hoarding of a large amount of silver by the kings and nobles in the capital (similar to the behavior of centralized exchanges), the moral shackles of not imposing taxes imposed on the kings by Confucianists (both real and fake), and the tax resistance and tax evasion by landlords and tycoons (usually Confucian scholars), the treasury was still short of silver. Coupled with the drought disaster caused by the Little Ice Age and the southward migration of the Jurchen tribes, the Ming Empire eventually went bankrupt and collapsed.
Therefore, the ideal Web3 currency needs to be the opposite of the historically failed silver finance. First, orderly inflation ensures a large number of users and circulation, and then ensures that it will not depreciate. Deflation should be avoided as much as possible. Hoarding is sometimes not conducive to the widespread circulation of currency and the operation of a healthy economic ecosystem. Any currency based on a deflationary mechanism is not suitable as the most widely circulated currency. In addition, whether it is deflationary BTC, ETH or inflationary DOGE, SHIB, etc., the chips of several tokens are concentrated in the top one thousand wallets. The concentration and deflation of Bitcoin are mostly a game for the rich (hiding real coins), or just a false trading volume on exchanges (printing fake coins), while the real circulation among the poor is small.
Picture: The coin hoarders threw the wallet private keys of 7,500 bitcoins into the landfill, but this did not prevent the exchange from printing counterfeit coins to crash the market.
Source of the left picture: https://finance.sina.com.cn/stock/usstock/c/2020-03-08/doc-iimxxstf7256230.shtml.
Source of the right picture: https://zhuanlan.zhihu.com/p/435556626.
In addition to Bitcoin and public chain coins, almost all new coins issued on the public chain after public or private offerings have become short-term money-making activities. Institutions enter the market through private offerings and get low-priced chips in advance; project parties reserve some tokens for themselves and sell them after the tokens are launched, allowing team members to make a lot of money and retire early; while retail investors only receive airdrops for free or buy them at a rising price. It is rare for project parties and institutional capital to truly believe in the decentralized spirit of "co-construction, sharing, and co-ownership". In most cases, everyone involved in the project token ecosystem faces a "prisoner's dilemma", fearing that others will rush to sell or secretly sell them. As a result, most tokens will be dumped shortly after they are launched. Because some "coin scientists" who use program scripts grab a large number of airdrops or arbitrage, this game and dumping have become a zero-sum game.
Figure: Some tokens after ICO were dumped shortly after they went online
We have seen ICO fundraising campaigns from projects that promote a crypto narrative but have nothing to do with the principles of cryptocurrency, like colonists arriving in America with a Bible in one hand and a gun in the other. These fundraising activities are similar to traditional financial institutions, but they are not regulated like them.
The white deer skin coin that appeared in the Han Dynasty is just like the pricing token issued by the project party. Emperor Wu of the Han Dynasty ordered people to kill white deer around Chang'an, cut the deer skin into blocks, and monopolized the operation by the royal agency. The price was forced to be 400,000 copper coins (note the unit) for one white deer skin coin, and the tribute from the princes must include white deer skin coins. Thus, the central agency completed the harvest of local wealth. The French emperor used nickel white copper to cast inferior silver coins. After the credit went bankrupt, he could not issue treasury bonds for loans, so he often lost in the Anglo-French War. Tang Suzong cast a new copper coin "Qianyuan Chongbao", forcibly set the exchange rate with the old coin to 1:50, and plundered the old copper coins. A similar story happened in May 2022. The depreciating LUNA coins were continuously issued on the Terra chain, and finally renamed LUNC coins. The project party and the exchange reissued LUNA coins and airdropped them to holders in different periods according to different replacement ratios of new and old coins. The result of these abuses of power is the evaporation and transfer of private wealth.
Image: Issuing new coins in ancient and modern times is a powerful tool for harvesting wealth, source: https://kknews.cc/zh-sg/collect/98boroq.html
Cross-chain project tokens between public chains are often hacked due to technical loopholes. For example: On August 10, 2021, Poly Network was hacked on multiple public chains including ETH, BSC and Polygon, with losses exceeding $600 million; On October 7, 2022, the BNB Chain cross-chain bridge Token Hub was attacked, and hackers stole 2 million BNB; On November 4, 2022, GALA coins were attacked on the BSC chain, and hackers issued a large number of tokens and sold them. In these incidents, institutions, centralized exchanges and retail investors all suffered huge property losses.
As long as there is a project party for a token, there will be pre-sales or pre-mining, which will create unequal opportunities for participation, and ultimately lead to the concentration of tokens and the expansion of power of a few people. In October 2022, crypto fundamentalist programmer Jack Levin designed the XEN coin, which is a token that is not issued by a project party and everyone mines equally for the first time. XEN quickly attracted a large number of wallets to participate in mining on public chains such as Ethereum (ETH) and Binance Smart Chain (BSC), and once accounted for 50% of the sent blocks on the ETH chain. The XEN coin creatively solves the problem of "scientists" or "witches" who use scripts for batch mining, and uses their profit-seeking motivation to drive them to make profits for ordinary people who participate. The more wallets that "money-pulling party" mine in batches, the more tokens ordinary wallets will get after waiting for a period of time, so that everyone can benefit. At first, XEN was continuously mined and produced, with high inflation. Over time, the inflation rate gradually decreased, and finally became a token with negligible inflation.
Inflation is one of the reasons why shells could be used as currency in the early days of human civilization, that is, seashells are produced continuously for a long time, but they do not depreciate. Seashells are scarce and difficult to obtain in inland areas, and when coastal merchants sell sea salt and fishery products in inland areas, the journey is long and arduous, so they naturally spare no effort to shout high prices. One possible scenario is: as a psychological compensation for consumers, merchants give buyers (usually wealthy families) seashells with unique and magnificent patterns, beautiful and playable, hard and durable shells, and easy to carry. Therefore, seashells are naturally valuable as premium protection.
Similar inflationary but value-preserving currencies include spices such as pepper. Until the early Ming Dynasty, the pepper sold by Arabs from ocean shipping was very precious and durable, and could still be paid as part of the salary of civil servants. The first-rank officials also had to use pepper to buy some daily necessities. Pepper and seashells both consumed transportation fees and have certain value in themselves. Just like XEN's mining activities consumed more than 6,000 ETH within one month of its launch. Therefore, only after ETH becomes deflationary after switching to POS in September 2022, the inflationary but value-preserving mechanism of XEN issued on the ETH chain one month later has a slight possibility of success.
Since salt and iron were officially monopolized, in fact, early private merchants mainly dealt in luxury goods. Non-fungible tokens (NFTs) are like luxury goods such as pearls, rhino horns, hawksbill turtles (rare turtle shells), ivory, whale teeth, and woodpecker scalps. Treasures of good quality are hard to come by, and artistic aesthetics vary from person to person, and the circulation is not as good as seashells. Each NFT has its own characteristics, but the difference in aesthetics causes a large price difference. In the eyes of some people, these luxury goods may not be worth a penny, and are not as useful as cloth, silk, firewood and charcoal. The transfer of blue-chip NFTs is more like the transfer of interests and friendships between the upper class, and it is difficult to be used as a payment currency for ordinary people. As for NFT images that have no aesthetic value, are popular on the street, are low-priced, and have almost no trading volume, they are more like soft crab shells that can only be fed to chickens. The low liquidity characteristics will also make most NFTs unable to be sold in a bear market.
In summary, Bitcoin without a project owner is liberalism, while altcoins with project owners are elite politics. Historically, liberalism and elite politics have caused countless widening gaps between the rich and the poor and the centralization of wealth, which is not surprising. Because the development of productivity has chosen the path of elitism and liberalism, Satoshi Nakamoto cannot change it. When he invented Bitcoin, he should have thought of the final result of centralization. The process of wealth concentration eventually continued until the outbreak of the revolution, the land rights were equally divided, and then everything started over again, and wealth continued to be concentrated in the hands of a few people.
4. Defining value in a large and diverse ecosystem
Neither the "utopia" imagined by Western philosophers nor the "Great Harmony" society imagined by Eastern philosophers exists. The homogenization of the universe means the restart of creation, and the lack of differences in biological traits means extinction. The Web3 world should be big and different. The core is not "big" but "different", an ecosystem that can accommodate a variety of participation methods and experience types.
Web3 redefines two questions: What is value? What are the trade-offs of value? Surrounding these two questions, all current application scenarios are just the prologue. There are many kinds of wealth that people have, but only one kind is always decreasing, that is time. All applications serve people, that is, they serve people's time. Money is just a medium of exchange, and the ultimate exchange is to exchange time. For example, the seller of a house only exchanges the buyer's future working time, which can be used to experience the current leisure life. At present, the products provided by Web3 to users are more projects that consume the time of participants rather than saving the time of participants, such as "airdrops".
Whether the traditional Internet industry enters Web3, or the Web3 industry copies the App model and transforms it into a so-called dApp (decentralized application), rules and gameplay are more important than scenarios and products. The user experience of Web2 is generally smoother and easier to use than Web3. After all, half of the world's population owns a smartphone, and most of the billions of people are below the undergraduate level. Therefore, the graphical interface and revenue model of Web2 products need to be as simple as possible. Calculating the interest rate of pledged loans, buying land with a lot of money in the metaverse, spending a lot of time every day to grab airdrops, and weighing the game props and output-return ratio are not what ordinary people who need to work hard every day do. Most people who are hustling in the real world are still more inclined to open TikTok rather than continue to calculate the weight in the virtual world. Players who really love games will not think about making money while playing games, but spend hundreds of dollars to buy genuine game hard drives.
For a series of applications such as GameFi, SocialFi, and Metaverse, the most important issue to be solved now is not the gameplay problem, but the problem of user growth and the introduction of capital flow. The number of users and capital flow are the cornerstones of all financial ecosystems. Only with a foundation can you build a house structure on it arbitrarily; only with ingredients can you make a variety of dishes, and a good cook cannot cook without rice. Whether the user side uses a private key on-chain hot wallet, hardware wallet, or a private key-free exchange escrow account and multi-party computing wallet (MPC) wallet, the application side, whether it is App or dApp, DEX or CEX, is essentially a two-way trust choice, people-oriented, and there is no distinction between good and bad.
Whether it is decentralized or encrypted narrative is neither a sufficient nor a necessary condition for the success of the application scenario. The flying money exchange business in the Tang and Song dynasties and the deposit and withdrawal bills of money houses in the Ming and Qing dynasties were centralized exchanges. The bills had unique anti-counterfeiting marks, similar to the private keys of cryptocurrencies. Moreover, in ancient times, cross-regional exchange generally required the presence of the person, and encryption at the technical level was only used as an auxiliary. Wallets and currencies are just a carrier of trust and value, and human judgment is the standard for determining the value and degree of trust. There is also a deeper factor here: violence (usually face-to-face) is the eternal accompaniment in the long song of financial history, but technology is not.
5. How to escape the fate of becoming the garbage dump of history
The total output of world wealth (referring to the mining and manufacturing of physical entities) is growing every year, and there is no turning back for the printing press. The broad money supply (M2) is increasing at a rate that exceeds the output of physical entities every year (10-20%). More funds from Web2 and other traditional fields are considering or are entering the Web3 industry.
As mentioned earlier, traditional financial markets are a legacy of thousands of years of violent history. Currency, credit, and borrowing are the result of monarchs’ external wars of looting and internal plundering of the people’s wealth. What is despairing is that today’s financiers are also a blood alliance of violent machines. If traditional financial markets can completely break away from their violent origins and escape the fate of becoming the garbage dump of history, they must do the opposite and work with the cryptocurrency industry to transform into Web3, a digital network of innovation, honor, trust, and interconnection. Decentralized finance (DeFi) and traditional finance (TradFi) can prosper together, and each needs the other.
The cryptocurrency industry is experiencing the pain of a bear market, and some well-known crypto companies have gone bankrupt. But traditional finance is in even worse shape and has become a laughing stock, with Chinese fund managers generally facing their clients with losses of 20% to 40%.
If the crypto industry wants to continue to expand the number of users, it must learn from some traditional financial regulatory methods. In June 2022, a series of serial thunderstorms such as Celsius, a cryptocurrency lending platform, and Three Arrows Capital, an investment institution, have sounded the alarm for the crypto industry. On November 3, 2022, FTX, the world's second largest centralized exchange, was exposed to internal theft of user funds and participation in failed high-leverage speculation, which immediately triggered a run on user withdrawals. Within a week of the thunderstorm, FTX, the only exchange with an official US crypto license, filed for bankruptcy protection. The thunderstorm and bankruptcy of FTX Exchange severely hit the confidence of the crypto industry and investors outside the circle, and they sold their crypto assets or hesitated. The dark cloud of the notoriety of "fraud" hovers over the crypto industry and lingers.
Figure: FTX exchange token FTT plummeted 90% in just 3 days
The DeFi and TradFi sectors must agree on regulatory frameworks, standards, and rules. On November 3, 2022, Binance CEO Changpeng Zhao said in an interview with Bloomberg that Binance is considering acquiring a bank to bridge the gap between traditional finance and the cryptocurrency world. This is a process where both sides learn from each other.
Image: https://www.binance.com/zh-CN/news/flash/7260189
In fact, if the crypto industry, which is used to taking advantage of others, continues to be so "undignified", the government's sharp knife will be on the way to help it. On November 14, 2022, US Treasury Secretary Janet Yellen said that the FTX crash exposed the weaknesses of the crypto industry and that the US government has considered regulating the crypto industry. Fortunately, the current crypto industry is not closely connected with the traditional financial system, and the interests are not deeply tied. Otherwise, the impact of FTX's bankruptcy and reorganization would be like the bankruptcy of Lehman Brothers on the eve of the 2008 financial crisis, posing a threat to global financial stability.
The development of productivity is an instinctive need of human society. Any form of economic operation mechanism, as long as it is conducive to the development of social productivity, will inevitably absorb relevant application scenarios, and then provide multiple traffic entrances and user participation channels. As for the choice of entry channels, it is not important. As long as all possible conditions are met, factual results will be produced. If the flow or chips of tokens in DeFi are concentrated in a few institutions, and the management rights of crypto assets are controlled by a few people or even one person (such as SBF), it is centralized finance CeFi or TradFi; if TradFi adopts a decentralized operation mechanism, then TradFi, which runs both financial industry regulatory rules and blockchain transparency rules, is more trustworthy and efficient than DeFi. This point is the same whether it is the struggle between capitalism and socialism, the struggle between dictatorship and democracy, or the struggle between decentralization and centralization: if all causes are met, there will be deserved results.
Perhaps the original purpose of cryptocurrency was not to plant the "red flag of decentralization" all over the world (Satoshi and Marx are probably the two most misunderstood people), but to become the short-selling counterparty of the traditional financial world. The more corrupt the other side is, the more prosperous this side is. However, sooner or later, the Joker will be put in jail, just like the fund manager in "The Wolf of Wall Street" will sooner or later be disgraced. Batman will also retreat to the sidelines. The two-faced sheriff will definitely appear.
