Navigating Crypto Chaos
Taking some distance to get perspective, avoid common cognitive traps and make sense of what is going on in the crypto industry.
TL; DR
· Check your assumptions: We are very bad at predicting the future of new tech.
· Unlearn your prejudices: Don’t fall for wild stories about crypto tainted by either utopian or dystopian biases.
· Remain rational: Utility, adoption and revenue is what really matters.
· Take risks: The only way to reduce uncertainty about the future is to build it.
1. Crypto: A tech paradigm shift
The first thing that we must understand when we talk about Crypto, Blockchain or the Web 3.0, is that we are talking about a new technology (by the way, maybe just a fad, or maybe the most relevant innovation in information technology since the advent of the smartphone and cloud computing, and something that in a hundred years time will be probably seen as integral to the very concept of the Internet).
The defining characteristic of new technologies is that they enable things that were just not possible before they existed. New technologies enable us to do things that we thought were impossible and, more importantly, they open the door also to things that were unthinkable.
Understanding the true potential of a technological innovation like ‘crypto’ requires us to predict the future of how something new is going to be used, and that is tremendously problematic.
Almost everyone is mostly wrong
Most of the things that are said about the future of Crypto, Blockchain or the Web 3.0 are false. Or, at least, entail a high level of falsehood or inaccuracy.
Why is that? Well, basically we are not that smart (as a species we may have not evolved that much from apes). The reality of the world is extremely complex, there is an infinite number of pieces interacting with each other, and human beings are not particularly good at predicting the future in such a messy environment.
2. Common traps when facing new technologies
Our brains are just not wired to understand the dynamic and convoluted puzzle social life is, and we are constantly haunted by systematic cognitive biases and traps.
New world, old eyes
The first cars were just horse carriages with a combustion engine. The first movies were just recorded theatre performances. Shockingly enough, some of the first companies that emerged when the telephone was invented in the XIX century were “telephone newspapers”, a business model that provided news and entertainment to subscribers over telephone lines.
The founders of “telephone newspapers” thought of the telephone just as a tool to improve newspaper distribution. That is to say, as a new broadcasting technology that could marginally improve the incumbent broadcast media. However, the key innovation of the telephone was that it enabled peer-to-peer voice-based information sharing in real time, a feature with the potential to radically transform the way humans communicate with each other. It only took some time for everyone to realize.
Every time a new technology gets into the spotlight, people tend to think about it in terms of what was possible with preceding technologies. Crypto enables peer-to-peer internet-based value exchange in real time, but our own prejudices may prevent us from seizing the opportunity.
This bias may explain a lot of what has been going on in crypto over the past decade. In too many cases we have been trying to integrate the new technology in our previous mental frameworks. Sometimes chasing non-existent problems with unfit solutions. Sometimes laughing at perfectly fit solutions to problems that we barely understand.
Just new or way better?
In the original sense, as coined by Clayton Christensen, a disruptive innovation is characterized by being worse at everything except for one dimension. But that dimension ends up mattering a lot, and then over time everything else gets better as the innovation is widely adopted.
The first airplanes were worse as a means of transport than every other existing transport facility. They were slower, less safe and had way smaller capacity. But they were better in one dimension: they could fly. And based on that single fact, a whole new industry that has entirely revolutionized travel was built.
The first personal computers were worse computers than every other existing machine. They had less memory, less storage and slower processing units. But they were better in one dimension: they were cheap. And for everyone who did not have a computer at all, that dimension mattered a lot and enabled the PC revolution.
A blockchain is a worse database. It is slower and requires way more storage and computing power. And yet there is one dimension along which it is radically different. No single entity or small group of entities controls it. And maybe (only maybe), that dimension can end up mattering a lot and a whole revolution can be built on top of it. And everything else that matters (energy consumption, transaction throughput, latency, time-to-finality, etc.) will keep getting better and better over time.
Memes, utopia and dystopia
Thanks to social media, everyone has a platform to talk about anything, including new technologies. Thus, memes and viral narratives around what a new technology is or will be, get out of control.
The number of narratives that can be created is virtually infinite and they are not necessarily linked to the material reality of the underlying technology. Narratives simplify facts and, in doing so, they obfuscate and bias information. A distance, if not an abyss, then emerges between reality and perception. And that abyss is fertile ground for wishful-thinking fantasists, snake oil salesmen and prophets of doom alike.
In general, commonplace narratives end up being biased towards either utopic or dystopic extremes. It is striking to see, for instance, XIX century newspapers warning about the dangers of riding bicycles for women’s mental health. Or the bizarre cigarette ads published from the 1930s into the 1950s in medical journals.
As Benjamin Graham pointed out, financial markets are manic-depressive, and crypto is not an exception. Frenzied highs dominated by greed are followed by gloomy lows dominated by fear. Although they say different things, people babble irrationally and make similarly outrageous predictions in both phases of the investment cycle.
Crypto is not a salvific religion that will bring perpetual prosperity, freedom, justice, self-sovereignty and eternal life to humankind. Crypto is not a worthless scam fuelled by diabolic masterminds to finance crime, rob the unwary, and plunge them into a system of delusional beliefs either.
Rumors get out of control easily, but things are rarely as good or bad as they seem. Remain calm, remain rational. And always keep in mind that the dominant narratives of the day are strongly correlated with the extremely volatile market sentiment.
3. Back to basics
Follow the money
Economic sustainability separates overhyped mirages from true value creation. Profit is the north star metric that helps us differentiate mere technical novelties from real market innovations.
And the crypto industry has been building, for quite some time, projects that are economically sustainable. Projects that generate demand, are productive, and return real yield.
Put both the hysteria and the euphoria aside, check your assumptions, unlearn your prejudices and focus on what really matters. Follow the breadcrumbs of utility, adoption, engagement and revenue:
- Users paying (with their money, trust, attention, energy or time) to use a blockchain, protocol or app.
- Users buying a token as economic collateral, medium of exchange, way to access a service or community, or to earn yield.
Build the future
Unfortunately, even user and revenue traction are lagging indicators. The world is full of uncertainty, and we will never be able to forecast the future course of a new technology with precision. Every project involves risk, and this risk cannot be eliminated.
“Life can only be understood backwards; but it must be lived forwards”. Søren Kierkegaard, Journalen JJ:167 (1843)
Yet there is a way to alleviate uncertainty about the future: human agency. Follow the breadcrumbs of entrepreneurship, bold visions, talented teams and ability to deliver:
- Ambitious projects with a defined path to deliver social value, achieve economic sustainability, build competitive advantages and turn them into defensible moats.
- Talented teams strongly committed to making it happen, over the timeframes of years, not weeks or months.
