Current state of crypto: Speculation vs. Market Segmentation

We are now in the mid-term of the fourth major market cycle (possibly nearing its end). The cryptocurrency market has grown significantly, with BTC ranking ninth among all assets ($1.26 trillion) and ETH ranking 25th ($409 billion).

Naturally, this raises a question: Has a market of this scale truly found Product-Market Fit (PMF)? Most would have said no in 2020-2021. However, given the market’s maturity and the emergence of various protocols, many might now say yes.

My answer is mixed. There are indeed protocols that generate significant revenue even after considering token incentive expenses, which leads me to lean towards yes. However, I must point out that PMF in most of these protocols heavily depends on speculation. In contrast, protocols unrelated to speculation often struggle to find widespread PMF and can only serve a minority of users.

Recently, many, including Vitalik Buterin, have expressed similar views on social media. Even for protocols that appear to have found PMF, they are primarily infrastructure protocols, and their PMF often still comes from speculation.

During the third bull market cycle, there were many blueprints using blockchain technology to solve real-world problems, such as metaverse, Play-to-Earn (P2E), and decentralized social networks, which attracted attention. However, despite market growth, it appears the blockchain vision is narrowing, with only a few enthusiasts remaining, and it has not addressed real-world issues.

1. Is it all about speculation?

Speculation is natural in emerging industries. While speculation can harm many, it also helps scale markets and industries. In other words, to rationalize speculation, the industry ultimately needs to find the right PMF.

Throughout the bull market cycle, efforts to find PMF seem to have regressed. Despite significant progress in terms of talent and capital influx leading to regulatory, technological, and infrastructural advancements, widespread PMF for blockchain products is still lacking. Even if Bitcoin and Ethereum ETFs are approved, since the 2021 bull market, discussions about decentralized and metaverse visions have diminished, and the market seems to be targeting increasingly niche markets.

Is market growth ultimately driven purely by speculation? To find an answer, I divide the market into three periods.

2. Answer: Mostly yes !

2.1 Internet currency

After the Bitcoin and blockchain concepts first appeared in 2008, Bitcoin primarily served as a means of online transactional payment due to its resistance to censorship and convenience for cross-border payments.

A notable example is Bitcoin being used to trade items in MMORPG games with active economies, such as World of Warcraft. Additionally, Bitcoin was used in illicit transactions on darknet markets like Silk Road involving drugs, weapons, and adult content.

Despite significant use in illegal transactions, Bitcoin also found PMF among specific groups, even in less widely known cases.

2.2 Speculation

At this stage, cryptocurrencies were primarily viewed as speculative assets. Despite projects like Steemit, Livepeer, Filecoin, and Brave Browser aiming to solve real-world problems, the market was still rife with speculative behavior.

At the end of 2013, Bitcoin prices surged from $100 to $1100, further solidifying its image as a speculative asset. This sparked Ponzi schemes like OneCoin, leading to many victims.

The first bull market in 2013 failed to attract widespread attention, but the second bull market in 2017 drew global focus. BTC and ETH reached significant market caps, especially in the South Korean market, where speculative trading was very active. During this period, projects like EOS, ADA, TRX, and BNB raised substantial funds through ICOs, although many ICO projects turned out to be scams.

The market built on speculation led to a prolonged crypto winter following the subsequent crash. However, projects established during this period and quantitative easing policies post-COVID-19 helped the market recover in 2021. DeFi protocols like Uniswap and Compound flourished on-chain and off-chain due to active speculation.

This period witnessed a high level of interest in blockchain technology itself, with many idealistic projects attempting to solve problems through decentralization. While grand visions like metaverse, P2E, and decentralized social networks attracted attention, they failed to materialize despite market growth, and the blockchain vision now seems to be narrowing, with only a few enthusiasts remaining and no solutions to real-world problems.

2.3 Speculative Infrastructure

Following the third bull market of 2021, the crypto industry garnered significant attention, driving efforts to integrate blockchain technology into traditional Web2 industries in search of PMF (Product-Market Fit). In the Web3 landscape, there was increased venture capital and more teams began building projects that solve real-world problems rather than solely focusing on speculation. These teams focused on improving scalability, interoperability, and user experience (UI/UX) to achieve mass adoption of blockchain technology.

These efforts addressed key issues. Noteworthy developments include bridges (such as Across, Wormhole, LayerZero) solving liquidity fragmentation issues, and layer 2 solutions (such as Optimism, Arbitrum, Polygon) effectively addressing scalability issues of the base layer.

Some protocols generated revenue that exceeded their spending on token incentives. A representative example is Base. Layer 2 business models rely on providing highly scalable block space, which depends on Ethereum’s security. They pay gas fees for storing data on the Ethereum network and charge transaction fees to users. Without governance token incentives, Base achieved $35 million in gross profit over the past 180 days.

Furthermore, numerous projects in the on-chain ecosystem provided practicality to users, with the following protocols achieving some degree of PMF:

• L1: Ethereum, Solana, Tron
• L2: Arbitrum, Base, Optimism
• Bridges: LayerZero, Wormhole
• Staking: Lido, Rocket Pool, Jito
• Re-staking, LRT: EigenLayer, etherfi, Symbiotic
• DeFi: Aave, Maker, Uniswap, Pendle, Ethena
• NFT: OpenSea, Zora
• Prediction markets: Polymarket, Azuro
• Social: Farcaster, ENS
• Infrastructure: Chainlink, The Graph
• Meme: Pump Fun, Moonshot

Here are my insights:

While the above protocols indeed provided significant practicality to users and achieved PMF, I believe that many of these PMFs are still primarily speculative. Conversely, services unrelated to speculation have also achieved PMF, but their audience is very limited.

• The core of smart contracts on L1 is to perform computations in a decentralized environment, offering benefits like censorship resistance and maintaining activity. However, there are few real use cases aligned with this core idea, as most users view L1 as a platform for speculation.
• The primary goal of L2 is to provide fast scalability while relying on the security of the base layer. While L2 has indeed achieved PMF, much of the demand comes from users looking to speculate on-chain faster and cheaper. If L1 is a high-risk, expensive casino, then L2 is a low-risk, more affordable casino.
• Bridges facilitate the flow of capital and information between different networks, making them critical infrastructure in today’s multi-network environment. Without bridges, many users and businesses would face significant inconvenience. However, similar to L2, bridges are often used by users to seek speculative opportunities across different networks, akin to transferring funds between different casinos.
• Staking and re-staking are crucial for the security of protocols and have seen immense success in Total Value Locked (TVL). While seeking incentives is normal and not wrong, many investors participate expecting unsustainable high returns (e.g., airdrops, yields, etc.).
• Decentralized finance (DeFi) enables anyone to engage in financial activities on-chain. Despite increasingly integrating with real-world assets (RWA), the market remains small, with many DeFi protocols linked to speculation. For example, Pendle and Ethena quickly grew by finding appropriate PMF, driven by users’ speculative behaviors. Both protocols attracted a large number of users and TVL by leveraging expected airdrops.
• The NFT market vividly demonstrates the impact of speculation. The NFT market is a neutral platform for trading NFTs, but examples like OpenSea and Blur indicate that transaction volumes sharply decline once the NFT speculative frenzy subsides or token incentive programs end.
• Web3 social aims to address issues with centralized social media. While users have some expectations of speculation, this area is one of the few where intentions to build and actual PMF align. However, it remains a niche market as there are still not many concerns about the centralization of Web2 social.
• On-chain infrastructure such as oracles and query services are crucial for the secure and efficient operation of the on-chain ecosystem, yet they are still primarily used for speculative services.
• Prediction markets and protocols related to memes essentially aim to promote speculation.

PMFs do not really exist

For example, imagine you buy YT-eETH on the Arbitrum network through Pendle. Arbitrum is a Layer 2 solution that reduces your costs and time. Pendle allows you to separate the income and principal of eETH, providing various strategies. Etherfi represents you in re-staking and minting liquidity ETH, while EigenLayer allows you to stake ETH in multiple protocols simultaneously. While these services are useful, their activities are driven by AVS rewards and potential airdrops of speculative behavior.

Note: There are indeed some blockchain-related services widely used in real life, but they typically follow the Web2 paradigm, with blockchain being just one feature. For example, Reddit’s avatar NFTs and Sweatcoin.

Do not misunderstand me.

In a free market, products do not necessarily need to be used as intended. Even if a product generates demand and revenue through speculation, it is still valuable. However, if PMF does not align with the core nature of blockchain, then blockchain may not be necessary. Traditional Web2 technologies are often sufficient.

Given the size of the market, why haven’t we seen widespread PMF of blockchain products? This is because modern society does not really need blockchain yet.

3. From Speculation to Trusted Neutrality

As Josh Stark explained in “Atoms, Institutions, Blockchains,” the value of blockchain in the digital domain lies in its trusted neutrality, similar to how physical laws and social norms function in the physical and social domains. Physical laws define space, time, and matter, while social norms (like governments and laws) define interactions in human society. Conversely, modern society does not yet need blockchain, as digital interactions still primarily rely on trust in centralized entities.

However, there are exceptions. In some countries where government corruption or inadequate infrastructure has led to the failure of social norms, Bitcoin and stablecoins play a crucial role in the economy. This is particularly evident in Latin America and Africa. Unlike people in developed countries who view cryptocurrencies as investments, residents in these regions use cryptocurrencies to sustain their livelihoods. Here, the trusted neutrality of blockchain endows Bitcoin and stablecoin assets with monetary and currency properties, enabling them to find real PMF beyond speculation.

To find broader PMF based on trusted neutrality, we can only wait for more failures of centralized systems. Although not directly related to blockchain, Truth Social by Trump emerged to avoid censorship by major tech companies. While these failures of centralized systems are disadvantageous to developed countries, they may ultimately drive people toward blockchain systems. Essentially, when the flaws of centralized systems become apparent, blockchain technology will provide true utility beyond speculation.

However, issues such as social media censorship, data breaches, and interruptions in cloud services are not yet sufficient catalysts. Although these issues do exist, the benefits of centralized services still outweigh these problems, leading most people to continue using existing systems. As I mentioned in a previous article, the biggest catalyst for blockchain finding PMF based on trusted neutrality will be 1) the failure of the dollar and 2) the rapid advancement of artificial intelligence. Recently, support for Bitcoin by figures like Trump, Larry Fink, and Jamie Dimon reflects similar trends.

4. Final Thoughts

Over the past three years, blockchain technology and the entire industry have experienced rapid growth driven primarily by speculative investor behavior. While speculation is often criticized, we should also recognize its role in industry development. However, it is unfortunate that the PMF of the blockchain market still primarily revolves around speculation, and we can hardly find fundamental PMF based on trusted neutrality.

Nevertheless, I remain optimistic about the blockchain industry. As highlighted by Balaji, the world is in a continuous cycle of bundling and unbundling. As our social systems become increasingly centralized, they are bound to encounter problems, increasing the demand for unbundling. I hope that in the future, blockchain will play a crucial role in protecting human sovereignty.