One of the most bullish features of crypto in this wave has been the quality of people entering the space. Messari is the first high-quality research outfit that I have seen. They do institutional-grade research on all things blockchain. We, at Smile, are happy subscribers and if you are in anyways serious about investing in the space, suggest you do too. They have produced a guide to 2022, which, at 165 pages, is probably too long for most. I spent the weekend reading, summarising and adding my thoughts below.
Word of warning: In my previous posts, I have usually assumed no prior knowledge and explained themes/concepts or ideas that I was researching. This post will be different; I have assumed a basic understanding of crypto; otherwise, the post will be about 1,000 pages long. However, if you like a theme, comment or DM me, and I will see if I can write a post on just that.
Messari
Web 3 is “the internet owned by the builders and users, orchestrated with tokens.”
My take
Web3 is the single most significant change in tech since the move from desktop to mobile. We went from a world that was: read-only (web 1.0) to read-write (i.e. Facebook, Instagram = Web2) to read, write, execute, own (web3). I borrowed this from the fabulous Chris Dixon. Read his Web3 thesis here, and if you can’t be bothered to read the rest of this, listen to this podcast and then wait a week and listen to it again.
Messari
NFT Infrastructure is sorely lacking and will provide investment opportunities in 2022
My take
I couldn’t agree more. NFTs are more than just profile pics and JPEGs, they are the first experiment in digital ownership and IP sharing/protection, which is just the start. There are many things that need to be built to ensure you don’t need a computer science degree to create, distribute and edit them.
Messari
DAOs infrastructure also needs to be built
My take
Anyone that has followed me on Linkedin/Twitter and saw the excitement around bidding for the US Constitution had a first glimpse of the power of DAOs. DAOs are in use worldwide; some are groups of engineers who are acting as a work collective, some are buying profile pics, and others are investment vehicles. DAOs hold a lot of promise for organising people around a (mostly) temporary shared mission. However, I can already see issues with voter apathy, governance and control. I suspect they will become much more company/government like than true crypto nerds would like.
Messari
Ethereum won’t flip Bitcoin as the world’s biggest computer can’t be bigger than money.
My take
I am a huge ETH bull, so not sure I totally buy this. Ethereum 2.0 is coming, which will move us to proof of stake and lower gas fees. We are seeing Ethereum token burning reaching new highs, which means that Ethereum is starting to become deflationary. I can’t help but think that Ethereum outperforms Bitcoin. This is not to say that other Layer 1’s like Solana (especially) and Avax won’t do well. The simplest way is to look at where the developers are going. They are all going to Solana for good reasons (fast, cheap, and a well-funded, thriving ecosystem). This is why I am such a fan of Solana and its future potential.
Messari
DEFI is still only at 1% of global banks’ market cap. But competition, regulatory scrutiny, technical vulnerabilities, and high gas fees are hobbling the market.
My take
I am very excited about DEFI’s potential, but at the moment, the industry is not living up to its potential. I say that knowing that over $100bln is locked up in DEFI, but it needs to be $10trn. I love simple, robust protocols like Anchor. DEFI 2.0 has provided some innovative looping solutions and self repaying loans. But its kind of like having a lunch with Salad. I don’t feel entirely satisfied. Hacks/bugs will continue to make retail cautious. Insurance protocols like Nexus need to step up. Encourage more stakers, start paying out when hacks happen, and the DEFI DAPPs need to embrace or pay for insurance for their investors to give the community confidence. Until we have downside protection, we won’t see mass retail adoption.
Good chart - I am surprised that Polkadot is #1 but all power to Gavin!
Messari
Bitcoin will remain King
A few demand drivers for bitcoin:
1. BTC will be a reserve on other Layer 1s, whereas ETH will be a competitor to them
2. Cross-blockchain bridge protocols like Rune will unlock more peer-to-peer swaps
3. Fears over stablecoins’ independence, censorship resistance, or collateralisation could lead to more
interest in bitcoin-collateralised crypto dollars.
My take
I agree that one of the significant trends for 2022 and beyond will be inter-chain operability. Some exciting projects like Layer Zero are tackling this, but right now, it’s a mess. Trying to go from one protocol to another requires the patience of saint and MSc in Computer Science from MIT. It shouldn’t be this way. If we start to bridge across protocols seamlessly, I would assume that Bitcoin could take a more front and centre role. Don’t get me wrong, and I am not a Bitcoin bear; I just think that ETH outperforms in the next year or two.
Messari
Stablecoin regulations - we should get ahead of them before they get us.
My take
Fully agree; the most considerable tail risk in crypto for a long time has been a major stablecoin blow-up (I am looking at you USDT FUDers). I think it’s a small and manageable risk, but I am just calling it out. We need more transparency, self-regulation and surety. Otherwise, the regulators will come down with a baton so far it will make Dogecoin scream.
Messari
Payments innovation will see volumes go up this year
My take
We are a big bull on payments in crypto. Whether it’s paying for real-world goods, salaries, tipping or peer to peer. There is so much need in this space. Take wages, for example. We are looking at companies that will (eventually) stream payments for day labourers/freelancers by the second. Salaries can be used to invest in DEFI (20% boost in income) in real-time or taken into a wallet and spent immediately. It will help kill the horrible payday lending business and free millions of people from the enforced servitude of effectively lending your labour to a company to only have them pay you a month or more later. It’s disgusting, and crypto can solve it.
Messari
Profile Pics NFTs - you are either first or last; they are bullish on Punks, neutral on Apes and short penguins.
My take
I agree with the “only a few will win” sentiment, but I also see breakouts PFPs driven by communities first and product second. Take Bored Apes. They were a community that was challenging Punks, and IMHO are a more interesting, vibrant community than Apes. I would rather own an Ape than a punk (price aside). We see new PFPs start to really create their own communities. I own a Desperate Ape Wives, and it’s been fascinating to see these guys build such a powerful force. So choose your “people” wisely and stick in for the long term, not for flipping.
A good chart on how content platforms are evolving...who knows, soon you might be able to buy a Billy Newsletter token?
Messari
Play to Earn revolution is going to be BIG
My take
As Messari pointed out, Axie generated more than $500mln in revenue in the past three months. The scale of Play to Earn has such tremendous potential, which is why we are an investor in Animoca Brands and other P2E companies. We know that NFT games are better for the player. But so far, most of the games honestly suck. We are about to see some fantastic AAA games launch, and then let’s see how the market evolves (Watch Phantom Galaxies by Blowfish studios which Animoca owns). The other challenge that all game developers need to figure out in real-time is balancing supply and demand and making the entry price accessible to all. I have confidence they will, and this is why it’s a key focus area for us.
Opensea revenues - make every startup on the planet, ever, so jelly
I love Opensea, and it has had a good run, but the user experience is pretty underwhelming. I am sure the team is swamped, and I would back them to be one of the big winners. However, I will be interested to see what FTX and Coinbase can cook up.
Messari
Bullish on Crypto domain services
My take
I love ENS (Ethereum Naming Service) too. Verisign is a $26bln company, but ENS could be the registrar for people and businesses, so the TAM is multiple times bigger. If you want to see how big the business of verified identity can be, watch this and imagine.
Messari
Decentralised Social is inevitable, and the space is wide open
My take
This will be the first time the average normie will hear about crypto as not just something that people talk about on Twitter but in real life. Jack Dorsey leaving Twitter could throw open the door to a Twitter coin coming out of project Bluesky. How on earth will financial analysts add a crypto token valuation into their financial models? Not sure, but it will be fun to see. But if you are a company that wants to engage its community, it will be normal to have a token to do so. This will be one of the most exciting areas of social to watch in the coming year.
Messari
Decentralised file storage is a crucial layer that is needed.
My take
At the start of the NFT boom, I was pretty uneducated about where these NFTs are stored. It turns out they are pretty much links on a database. That is pretty scary. Sure it’s immutable etc., but still...the link is to centralised storage. Then came ARWeave and SIA that use their own blockchain for decentralised storage. This is another idea that is far better than the alternative. I wonder how many competitors will pop up and how they differentiate themselves.
Messari
Protocol owned liquidity is mind melting
My take
Hell yes they are. OlympusDao and the numerous forks they spawned offered insanely high APYs in exchange for staking their tokens. You can also sell our assets to them in exchange for discounted tokens. The premiums the coins traded at were mind-boggling and hard to explain in most cases. Unless you are early in these forks, they have mostly been terrible trades as your high APY is offset with an ever declining token price. Now it’s a race to get these DAO’s to invest these assets and earn a return. DEFI 2.0 has been a cool experiment, but I think we need to see DEFI 3.0 set up on the stage. This so called “liquidity solution” for the most part, they are replacing one problem (whales yield farming and dumping token) with the same problem (whales yield farming and dumping tokens). The only exception is Tokemak.
Messari
Worldcoin - they don’t know what to make of it
My take
Full disclosure, we are investors. But the experiment is a noble one. To give crypto to everyone on the planet is ambitious. I think of it less as basic universal income and more as opening a gateway of unshackling the global population and setting them on their crypto journey. I agree with Messari’s analysis on this whole privacy furore; it is much ado about nothing made up by people in front of their iMacs. For good reason, people in emerging markets are taking up crypto-like nowhere else in the world. Let us not deny them their right to choose.
Messari
Ethereum - bullish
My take
Whilst people are still discounting the flippening (Ethereum taking over the market cap of Bitcoin), the near term bullishness is so apparent. I am just going to quote Messari here as they say it wonderfully.
As Bankless summarised, “there’s more value locked [in Defi] than the market cap of most banks”, billions of dollars were burned in EIP-1559, interoperable Layer 2s have seen adoption explode, and “The Merge” to Ethereum’s proof-of-stake blockchain is in its final stages, which could further reward ETH holders with staking rewards and onboard new institutional investors who may have otherwise been hesitant to invest
given their ESG mandates / mining concerns. Not bad for a year’s work. There’s no obvious headwind in sight, though that can always change rapidly in a
risk-off environment (given crypto’s reflexivity) or if ETH2 delays or stalls in roll-up adoption continue to push capacity to competitors.