Before we begin..
Today’s article questions what we are doing with our lives. It also seeks to find answers for it. I map out the sources of revenue and categories in crypto that are rapidly growing. There are mental models that should help a founder within the industry understand where opportunities with little competition exist.
If you read it and enjoy it, please press the heart button at the bottom and spam your chats with the link. The algorithm gods require your precious click sacrifices to show mercy for distribution. Even better if you share it and tag us on social networks. I would love to hear about what you liked, hated, or found amusing in the article. But all that aside..
I’m taking a break from the normal content we post to have a monologue about the state of our industry and what we are doing with our lives. It’s the conversation I’d have with a friend atop a hill over a cup of coffee. But since I can’t host all of you guys together on a hill, we’ll have to make do with cosying up in your inboxes.
This email will probably break in your client, so use this link to read it in a browser. Also, join us on Telegram to chat about what’s written. Let’s go!
Hello!
A few days ago, I noticed an issue with the way we write. Most of the time, our articles cover technical topics for founders and investors. And that is great. We skip the drama, politics, and fraud to be nerds who spend weeks on topics that will be consumed in minutes. But we aren’t in academia. We work in a free market, investing and building alongside founders. So it is important that we stay on top of what is happening around us.
Here’s how I’d sum up the last six months in crypto if I were venting to a therapist:
A 13 year old launched a meme coin and dumped it. Scottie Pippen from Chicago Bulls somehow predicted Bitcoin’s price after a dream involving Satoshi. Speaking of which, Jack Dorsey might be Satoshi. A guy in France made $28 million betting on Trump’s presidency. Which reminds me, Trump launched a meme coin a few days before he took office. Two weeks ago, the president of Argentina tried something similar and wiped out $4 billion in value. His opposition is now trying to get him out of office. People are losing money on Su Zhu’s exchange. And by the way, Hawk Tuah girl launched a token and rugged. Dave Portnoy also launched a token and rugged. CZ spoke about his dog named Broccoli and it looks like that token is not rugged. Yet.
Meme coins now have the power to kick presidents out of office.
Talk about truly large-scale societal impact.
It’s not that good things don’t happen in our industry. In October, the UAE clarified it has no taxes for crypto. In the US, banks can now custody Bitcoins.. Someone made $25k tricking an agent into transferring him money. Oh, and, Marc Andreessen sent $50k to an agent and set the stage for a token that went to a billion. There are talks of the US government developing a strategic crypto reserve. OpenSea might finally issue a token and bail out NFT traders who lost big in 2022. FalconX acquired Arbelos. Coinbase clarified that the SEC has dropped all cases against it. And last week, Bybit survived the largest hack in human history.
Point is, we are a resilient bunch. But most of our collective psyche is wrapped up in all the bad news. The kind that is driven by price with a sprinkle of fraud and TONS of embarrassment. You can’t help but wonder, “Do I really associate myself with these clowns? Am I in a circus? Am I the monkey in this game?” It’s all so tiresome. Especially when you consider that the human brain processes information at ten bytes per second while thinking.
How am I supposed to do my life’s work with a 4k Ultra HD live stream of fraudulent frenzy going on?
If you are not consciously setting boundaries, working in crypto can feel like tossing your brain cells into a vortex of headlines and spinning it at the speed of light until the heat of the sun eviscerates the memories of all that you consider dear and holy. A gradual descent into madness marked by liquidations and the constant stream of never-ending news, that often means nothing. It’s like going in circles around Dante’s Inferno. Skipping from sin to sin.
And this is why we, as a newsletter, tend to be disconnected from the day-to-day drama. But in light of where the market is and what we hear upon speaking to founders, I figured it’s time to do a vibe check on the culture. To address the momentary vibecession we are in, so to speak.
The Age of Memesis
David Perell’s writing on Peter Thiel’s investment philosophy is one of those pieces that defined my career. Mimesis is one of the many things he talks about. Defined by René Gerard, the idea of mimesis rotates around the human tendency to mimic and compete with one another. Think of career choices you may have made at 17. You look at what your brightest peers are doing, or an adult who has the life you want, and you choose their career path. As humans, we are hardwired to mimic and compete with peers because of the high cognitive load involved in forging a new path. We like safety in numbers.
This applies to startups too. Put together enough smart people in a room, and you’ll see them emulate one another and compete with one another. Slap a sense of status on an accelerator or investment fund like Sequoia or Y Combinator, and we’ll likely see groups of smart people wanting to be a part of it. Not merely for the financial resources it unlocks, but also for the status it conveys.
YC understands this and therefore claims to have a lower acceptance rate than Harvard. The status is not what is explicitly sold. But it is definitely implied. And that is why young, driven, ambitious 20-somethings pack their bags and leave for SF to pay exorbitant amounts in rent with the hopes of going further up the status ladder.
When I was 15, I used to wonder why so many Indian VCs simply form their worldview on the basis of what a partner from A16z tweeted on Twitter. It took me a decade of working in venture-land to recognise that they were simply mimicking what ‘big money’ was doing. You don’t need to be original if you can simply copy trade the best. Is that edge? Not really. But it can make money. And this is why you see a slew of ‘me-too’ products in the market. Multiple people mimic and iterate on a concept.
Facebook was not the first social media platform. Instagram was not the first media sharing platform and Spotify was definitely not the first to allow users to stream.
Repetitive iteration helps consumers be better off. At first, the market gets crowded, but over time it decides what gets to survive. So you need multiple founders and multiple VCs chasing the same problem, often with the same solution.
A version of this has played out in liquid markets time and again. George Soros became famous for his trade that broke the Bank of England. Keith Gill—better known as Roaring Kitty—became infamous for sparking the GameStop rally. Both were brilliant at rallying large parts of the market into trades they were already in. Soros convinced traders that shorting the British Pound was a good bet, adding pressure on the Bank of England. GameStop investors squeezed the stock higher until Robinhood stepped in to limit shorting.
What we saw with Roaring Kitty was simply a modern version of Soros’ reflexivity—both were architects of self-reinforcing loops. A big trade attracts attention, people jump in, prices rise, even more people pile on, and suddenly, the asset is at new highs.
Back in Soros’ time, there was no Twitter to endlessly pontificate on the state of the world. In fact, he took a break from markets to study philosophy and write books. But today, you can just publish a meme coin Tier list and rally people into a trade. What Soros called reflexivity is what we now describe as meme coin mania.
People often argue about how financial nihilism is the reason why the average individual invests in meme coins. That somehow, a generation realises that it doesn’t have stable careers, potential partners or a house in the works by the time they are 30 and so they bet big on random tickers from Twitter with hopes of hacking through the very financial system that made them broke (and broke them). But I think that is a rather weak argument.
The real reason is mimesis. Yes, that same thing that dictates what career you choose, which startup YC backs and how Keith Gill made his money, is the reason why you just lost a ton of money on some random ticker named TrumpShibuInuWallDoesnotExistcoin.
Let me explain what happens when the internet breaks down the entry barriers for accessing financial markets and issuing new instruments on the information super highway.
Here’s how it typically plays out. You go through TikTok or Instagram and see a 17-year-old lecture you about the pathways to “wealth” while sharing tickers for the meme coins he traded the day before. The social media marketing manager from work has an NFT that costs a little over $150k on his LinkedIn profile. You see the bills rising and you see an alternative path. A friend shares a ticker in a WhatsApp group. An exchange lists a new shiny coin with a dog that seemingly has a hat on its head. You think this is it. You start with $100, and see it rise to $117. You think what if I had put $1k? Maybe $10k? Before you know it, the credit cards are maxed out and you are “in the trenches”.
Note: To be abundantly clear, Murad’s mention here is out of respect for the outsized influence he has on meme-coin markets. This is not a dig at him. He defines the category today, much like Keith Gill did with meme stocks a while back.
Pump It
In 2009, when Bitcoin came around, it upended how capital formation happens on the web. You could provide “labour” in the form of proof-of-work (the thing that keeps the network secure) and be rewarded with an asset that is Bitcoin. Since the value of the asset rose further in price in the future (due to demand and deflationary pressures), the future value of present labour was higher.
People were incentivised to provide compute to the network and hold on to their Bitcoins. All of this changed when ICOs came around as asset issuance and proof of labour were disconnected. You could mint coins, without labour.
Some $28 billion was raised between March 2017 and 2018. VCs claimed that this is the future of “finance” as it would allow individuals to coordinate capital and resources to bootstrap new networks. It made sense until you realised that too often, the VCs were investing into things at low valuations (say $10 million) and raising for a network at a much higher valuation (say $100 million) in a matter of months.
In conventional VC-land, such madness happened a mere 18 years ago during the dotcom boom. But crypto made it possible again.
Between 2018 and 2023, the market for such token releases matured. We no longer have ICO booms. But we still have a classic game of VCs investing at low valuations to try and list them at high valuations. Talk about an arbitrage.
While there is nothing inherently wrong in investing at a low valuation, there is a lot that is extractive about turning and selling it to retail consumers at a high markup without much progress to show for that spike. Chamath’s SPACs had a similar approach to things during the COVID markets of 2020. On average, the SPACs launched by him are currently down 42%.
Now extrapolate this to everybody getting to be their own Chamath or VC fund at the click of a button. That’s the tooling PumpFun enabled in the last six months. Depending on how you look at it, PumpFun is either the most innovative financial primitive of the last century or the most predatory platform. Reality probably lies somewhere in between. Meme coins are to markets what porn is to media. Much like with porn, it is unlikely that meme assets vanish. So long as greed and human desire to speculate exist, they are here to stay. And a lot of it will fuel meaningfully impactful innovations, much like porn did.
While it is beyond the scope of this newsletter to opine on the morality of it, I’d like to surface two interesting figures.
- A chart on the cumulative revenue of PumpFun. They made a total of $500 million last year in revenue.
- And another one, on the number of new assets issued on Pump over the last few months.
The second chart looks eerily similar to previous cycles of hype. I could overlay it with the number of ICOs launched or NFTs launched and it would look the exact same. There are two parallel realities I am dealing (or coping) with. One is that Pump is probably one of the most profitable startups of all time. The other is that it laid bare the “meta” of how crypto often works. Dave Portnoy intriguingly questioned the basics of what a rug is in one of his tweets.
When we say blockchains enable capital coordination, we do not clarify what the capital is being coordinated for. It could be for cancer research or for mapping out cities. But more often than not, the marginal person on the internet does not care about either. Everybody cares about profits and avoiding losses. We are adults with bills to pay and dreams to chase. So you have a market where everybody is betting on the most speculative investment while both capital and attention decline from things that truly matter. And that my friends, is the state of the market.
The true impact of PumpFun can be explained by the fact that it took crypto from a niche to tooling for the masses. When influencers, presidents and countries launch tokens and see their prices decline rapidly, we are not using crypto for wealth generation the way Bitcoin did back in 2009. We are mostly eviscerating it. But much like the outcomes of what individuals express on the internet cannot be defined by the creators of it, the outcomes of a market cannot be predicted by the tooling that enables it. The people who made TCP/IP, for instance, do not have a say in what I communicate in this newsletter today.
So this mania is the price one pays for releasing the genie out of the bottle.
You cannot have free speech without a willingness to hear a few offensive things. You cannot have tooling for free markets, without the probability that much of it aids greed and speculation. Especially when the consequences of launching an asset that rugs are little to none in an age where the regulator is sleeping at the wheel. Free speech works because there are consequences for saying things you should not be saying. How will a free market work without consequences? This is the great question crypto is trying to seek answers to. But as with most things, markets find their own solutions given enough time.
Meme markets actually rhyme a lot with blogging and personal expression on the web. In the early days, having a blog was a niche activity. You could launch one, but not everybody would read it. I love seeing old WordPress blogs on the internet because it is reminiscent of a time when people wrote to express, not to influence. Up until a few years back, meme assets were the same. Doge is special specifically because the founder did not launch it to make it a “meme”. As the tooling for meme assets evolved, everybody could launch a meme coin. Just like everybody could launch a Facebook page.
In the case of social networks, attention eventually funnelled down to a few creators. In the case of meme assets, capital will eventually concentrate on a few key names. The challenge is that people will lose money while they form maturity.
So where do we go from here? Are we “cooked” as the Zoomers would put it? Is there light at the end of dawn? Do I need to find a different sector to build a career in? WHAT DO WE DO!?
I’d be lying if I didn’t admit I’ve thought of these questions quite a few times in the last two quarters. That is not because I have lost my faith in what crypto can do or become. It is because of how attention has been distributed. And the only solution I find is to have my reality rooted in human interaction instead of what the influencers on Twitter seem to be talking about.
Every time I see my feeds get filled with the latest scam, I have a conversation with one of the founders in our portfolio and have my faith restored. It is, perhaps, the greatest privilege of working on Decentralised.co. We get perspectives from founders that are beyond what the feeds have to offer.
So if I had to zoom out and look at what is exciting, and what would define the next decade, this is how I’d play it. Think of it as a blueprint.
Respect The Pump
You just read me rant about fraud and the lack of essence in crypto for the last ten minutes. If you’re still here, strap in for a dose of optimism and the reasoning behind why all of this matters.
For starters, let’s consider the suite of applications that do make capital because directionally it will give us an idea of whether any of this is worth spending time on. TokenTerminal does not track all the applications we would have liked to see. They are slightly EVM-skewed but they do have the best data on price, revenue and earnings. So I started my enquiry by observing what the top ten categories in terms of revenue are doing.
The revenue figures you see below are by month for each year across the decade. It is granular because we want to play the skeptic. And we want to see it grow, because hey, what’s the point in being in a stagnant industry? WE WANT A HOCKEY STICK.
When considering revenue, you see three phases of growth for the industry.
- First, is what I would call the dark ages. The era before Ethereum smart contracts became a thing. Up until 2018, blockchain transaction fees were the primary source of economic output in the industry. Surely you could consider miner revenues and associated businesses (like Coindesk) but they are not applicable to the marginal person. Developers are not benefiting from it directly.
- Between 2018 and 2022, you see an explosion of applications and use cases. Revenue went beyond transaction fees to the chain itself. You can see the gradual decline of “Blockchain L1” fees making way for things like exchanges and lending. This is what I consider the era of enlightenment for crypto. A magical time when man questioned the limitations of what blockchains could do and went against the dictums of our lord and saviour Satoshi to create alternative business models.
It was during this Age of Enlightenment that we had models like Play-to-Earn (Axie Infinity) and yield farming take off. Surely, some of those chapters ended badly, much like political allegiances in medieval Europe. But it paved the environment for people to question what is possible and sent them down new paths.
- Post-2022, we see a new category taking off considerably faster. No brownie points for guessing what I call this. It is the Industrial Era of Crypto. Much like how humanity noticed the ease of using machines to manufacture and transport goods, those working within crypto noticed the possibility of revenue that scales without human intervention.
The alchemy of this age was stablecoins. Everyone wanted yield and the fast movement of money. Fintechs still relied on banks, who in turn relied on governments to dictate how money moves. Stablecoins abstracted the rules that historically existed for fintechs and enabled a new generation of businesses. Tether and Circle have collectively made over $5 billion in a single year.
According to the Economist, stablecoin value transfer hit $2.76 trillion last year, roughly 2/5ths of all value transacted via blockchains. This is up from 1/5th in 2020. The same story suggested that in March of 2024, stablecoin transactions accounted for 4% of GDP in Turkey. This piece is not about stablecoins either, so I will curb my excitement.
Now that we have established the sector makes revenue and that it has reached the scale of a few billion, it is worth exploring how sticky the revenue is. Revenue in crypto can be seasonal but at scale, it can change lives. Think of OpenSea, PumpFun or the P2E craze. Surely, one can argue there was a great “bubble” that ruined lives through NFTs or meme assets.
Questioning whether markets are zero-sum games is beyond the scope of this article (and the levels of existential crises I want to put you through). But one way to think of it is that the revenue during these cycles was so high that it made as much money as most firms do over a lifetime.
One mental model to be used with blockchain native applications is that there will be varying levels of product maturity. And depending on where we are in the cycle, the speculatory premium attached to the product will increase. Consider stablecoins, for instance. It has reached a point where large enterprises can use it for remittance. And that is why we saw a billion-dollar acquisition in that area from Stripe last year.
On-chain analytical tools selling to governments (like Chainalysis) and smart contract audit firms (like Quantstamp) have also reached both maturity and scale of revenue. These are businesses with meaningful cash flow and large enough margins to attract traditional pools of capital.
If you overlay these concerns, you get a matrix. One end of which is centralisation and decentralisation. The other end is seasonality. Extremely seasonal apps like FriendTech may be centralised but struggle to be value-additive to the ecosystem as they rarely pass on value to the marginal user. Uniswap, whilst being mostly decentralised, struggles to give value back to its shareholders. This is why last year they began adding a fee switch to their front end. Cumulatively, it has generated close to $103 million in fees for Uniswap labs since then.
It feels as though the commercial needs of an entity—revenue, margins and control of how the capital is allocated, often struggle with our desire to decentralise and pass on value to users.
A handful of companies have been able to find a middle ground. One that is equal parts innovative, decentralised, passing on value to users and with sufficient scope for growth.
My personal favourite among these is Layer3. If you are hearing of Layer3 for the first time, think of them as an ad network that has aggregated one of the largest user bases in all of crypto. They help new users find crypto-native products on a native basis and reward users with either dollars or crypto for trying them early on. So if you’re a new app or a newsletter like ours, instead of running an ad on Google for untargeted eyeballs, you go to Layer3 to get a curated subset of users that are crypto-native. Unlike Google, Layer3 passes on much of the value generated back to its users as incentives.
In the past, I’ve written about how they aggregate users. On average, they see about ~60k transacting users on the product each day. They have passed back ~$1.4 million to users this last quarter alone. Over the year that number is at $5.8 million.
In the world of ads, that may be nothing. Kanye West spent a bit more on his Super Bowl ad. But the point here is that the $5.8 million is interesting because it is the earliest instance of a product sending value back to its users. It is an open-ad network where the consumer (i.e., early adopter) is compensated in raw dollars through money pipelines that work at a global scale.
Anu from Working Theorys has a beautiful framing for zero-sum vs positive-sum products. She suggests that some products tend to reduce the usage of other products. For instance, you would either use Google Docs or Notion. A firm rarely switches between both due to the lock-ins that come with each product suite. You will need to manually port over the whole team. But some products tend to be positive-sum. That is, you could use Perplexity, Claude and ChatGPT on the same day for different use cases. These products do not eat into the market share of one another until a user’s taste is defined like we saw with Google vs Bing.
Extractive products tend to be zero-sum as they leave the (average) user worse off. Markets are not a zero-sum game if there is an underlying economic case to be made. Someone buying Tesla stocks in 2018 did not need someone else to lose money to make gains when it rallied in the years that followed. You can argue that the stock followed a pattern that was in correlation to the output of Tesla, the firm. But in meme markets, the game feels increasingly negative-sum.
The reason for that is fairly simple. A user needs someone else to put capital into a pool for the asset to price higher. Which in itself is fair game. That is how all capital markets work. But then the user also needs the vibe to stay the same way for prolonged periods. So from the get-go, you expect the mania to stick. Which is still fine because the greater fool theory would dictate people buy the asset. But as numbers go up, people rewire their own “net worth” on the basis of thin liquidity pools. A coin related to Congo, for instance, went to $1 billion in FDV with less than $5 million in its trading pool. People “reprice” their net worth based on this new imaginary capital and when the game inevitably ends, they are usually worse off.
Products like Layer3 are positive-sum in the sense that they do not extract value directly from their user. If you used their tooling and simply hung around long enough, you’d be up thousands of dollars simply by virtue of being an early adopter. As crypto crosses this initial chasm of users, we will increasingly see products optimising to be positive-sum as that is how you build a critical mass of users. The more users Layer3 has, the better possibility its team has to negotiate better deals for users.