I started this newsletter in May of 2021. Ethereum, Bitcoin, DOGE, and the rest of the market had already been running for over 6 months at that point. New narratives like TopShot and Beeple had already come and gone, and the biggest ones like Profile Pictures, Olympus, Axie Infinity, were underway or just starting.

And this newsletter didn’t start to gain steam for another few months, so odds are when you found this and subscribed, a good chunk of the opportunities were behind us.

This time it’s different. If you’re here now, then you’re well ahead of the mania. Crypto has only been “exciting” again for about two weeks. Bitcoin has broken to a new high, as has Solana, but not by massive percentages, and ETH hasn’t even broken its ATH yet.

The new narratives are just getting started, and there are sure to be many more over the next year or two as things heat up and get silly.

For comparison, if we overlaid this cycle with last one, Bored Apes were still six months away. Olympus hadn’t launched yet. No one knew what an Axie was. ETH was sitting around $500. You are EARLY.

I’m going to share a few things I’m looking at and excited about later this week. But in the meantime, I wanted to share a recommended reading list of pieces on this site that have held up from last time to help mentally prepare you to make the most of this period.

First: Read Crypto Confidential. This is obviously going to be the most helpful both from a strategic and psychological perspective, and if you haven’t picked it up yet, I highly recommend grabbing it.

Read Crypto Confidential

Second: Read these articles:

My Biggest Mistakes: This article covers some of the biggest mistakes I made during the mania that cost me the most money, and the lessons I learned from them.

My Best Decisions: The opposite of the previous article, these are the things I did that seemed to lead to the best outcomes.

Understanding and Profiting from Hype Cycles: An explanation of the hype cycle meta in crypto so you don’t get too caught up in one.

When to Sell: Creating Rules for Taking Profit: It’s easier to buy at the right time than to sell at the right time. So make sure you’re thinking about these rules now.

The Tokenomics Series: These articles explain how to evaluate new token launches:

• Tokenomics 101: The Basics

• Tokenomics 102: More on Supply

• Tokenomics 103: Utility

• Tokenomics 104: Launches

Where Yield Comes From: Most yield in crypto is inflationary and very risky to get too excited about. Make sure you know where it’s coming from!

Enjoy! And if there’s any topic you want me to cover, leave a comment and let me know.

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I even wrote as much in the last chapter:

“With the market down 80% from its highs and with many of the big players bankrupt, it was clear the game was over for a while…

In the meantime, the same things would happen that had happened in every crypto winter. Traditional media outlets would call the whole thing a farce and focus exclusively on the bad aspects of the industry. Journalists would write books about Crypto’s “fall” and “death” and how it was one big scam all along. And everyone who missed their chance at life-changing wealth along the way would get to say “I told you so.”

But the people who had been around a while would nod their heads and say, “We’ll see!”…

From its 2013 peak of $1,100, Bitcoin dropped to $171 in 2015, then it came back. From Ethereum’s 2018 high of $1,400 it dropped to $84. It came back too. Maybe this time is different, maybe this time crypto is done for good.

But I doubt it. I’ll see you in the next bull run.”

Well that next bull run is here. And if you want to make the most of this mania, BUY CRYPTO CONFIDENTIAL AND READ IT THIS WEEK.

Get Crypto Confidential

I promise I won’t keep hammering you with this call to action over the next few months, but if you have any interest in diving into this mania, you absolutely need the information in that book.

Even if you don’t think you want to speculate or invest, the book will help you understand what’s going on behind the scenes and help you make much better sense of all the news you’ll start seeing in the next few months.

Yes, the last mania was life-changing for me, and I discuss at length how that happened.

But more than anything, it will protect you from making the same stupid mistakes I made. There are so many pitfalls you can fall into, the worst being coming in too late and becoming someone’s exit liquidity, which the book will walk you through in an extremely entertaining fashion.

Either way, the book is the main resource you need before diving in. Grab a copy, you’ll fly through it in a few days, and you’ll be ready to make the most of the opportunity that’s looming.

See you in the maelstrom!

Get Crypto Confidential

I started this newsletter back in 2021 to share what I was learning as I dived head-first into the crypto mania going on at the time.

When the market crashed in 2022, I stepped away from the newsletter to focus on capturing the insane journey in a book.

My goals were to:

1. Write a book that was very fun to read

2. That could explain crypto to laypeople without being boring to insiders

3. And that could provide a roadmap of everything I did last cycle to benefit you in the next mania

That book is done and it comes out tomorrow!

Go here to order Crypto Confidential: Winning and Losing Millions in the New Frontier of Finance.

Order Crypto Confidential!

I can pretty much 100% guarantee that you will love this book.

It reads like a fast-paced thriller, set in the crazy world that we were all completely immersed in a couple years ago.

If you were as deep in it as I was, you’ll feel seen and it might bring back some pleasant and painful memories.

If you were watching from the outside, you’ll have a much better idea of what was really going on.

To give you a taste, here’s the prologue:

I was flying out of my bedroom before I even finished reading the message. This couldn’t be real. This guy was screwing with me. 

My wife, Cosette, called after me. “Honey…?”

“Uh, it’s fine. I gotta… fix something.” 

I could hardly form the words. My mouth wasn’t working. My heart hammered in my ears and pins and needles burned my hands and feet. I squeezed my fists as hard as I could to get them to stop hurting as I stumbled into my office and fumbled through my laptop password, pulling up the message that had thrown me out of bed: 

“Nat, someone found a way to hack us. It sounds bad. All of our funds might be at risk.”

This was the absolute worst-case scenario. The one I’d pushed to the back of my mind. The one I pretended was impossible so I could sleep at night. I’d always accepted the risk that I could lose all of my money. But if I lost a hundred million dollars of other people’s money … 

I couldn’t let myself think about that right now.

I started running through every possible scenario. Whoever was reaching out might be trying to scam us, trying to trick us into doing something enabling him to hack us. Maybe he had already hacked us and was holding our money ransom? Or, maybe, just maybe, he was actually a trustworthy person and wanted to help us out?

Doubtful. 

Just then, crying broke out in the next room. Cosette sighed and said, “I’ll get her.” I could hear the frustration in her steps to the nursery. Morse code that she wasn’t buying my “it’s fine.” Another thing I couldn’t think about now. I slipped on my headphones and hunkered down.

Checking the code, everything seemed fine. Everyone’s money was still there. Whatever the potential hack was, it hadn’t happened yet. Maybe there was still time. 

I looked at how much of my own money was at risk. Just over $10,000,000. I desperately wanted to sell whatever I could. But this was crypto. Everything was public, everyone could see what I was doing, and more than a few were already watching me. They’d notice if I pulled my money. They’d get scared and start asking questions. Or they’d assume I knew something was up and preemptively sell everything. A bank run would be almost as bad as a hack. 

The hammering in my ears continued. My hands burned.  

I joined a chat room with the hacker, Paul. He asked if I was the programmer in charge of the crypto code where he’d found the vulnerability. The truth was I’d hesitate to even call myself a programmer. I’d thrown that code together in two weeks. It was a freelance gig to get my feet wet, not something I thought people would put a hundred million dollars into. But what I told Paul was: 

“Yes, that’s me. How can I help you?” 

As Paul started typing his reply, I noticed a flurry of notifications coming from the public chat. Fuck. He’d sent a message to the entire community of thousands of people saying there was a security risk and asking if any team members were online. Now people were starting to freak out and demanding answers. What could I do? I tried to sound reassuring. I said everything was fine and we were on top of it. It’s not like I was going to tell everyone they might be about to lose all of their money. 

Meanwhile, on the private chat, Paul said he would need to do a couple things to verify that I was the owner. “Obviously, I can’t risk giving this information to anyone,” he said. “In the wrong hands it could lead to a massive financial loss.” 

“Yeah,” I thought, “like your hands, asshole.” 

I knew that whatever he was about to ask me to do could be part of a hack. The best way to get the gates of Troy open was to make us all think our money was about to be stolen. 

“If you could,” he continued. “Please send a small transaction from your account to the following account.” He pasted in his crypto address. Sending the transaction seemed safe enough, but I wasn’t an expert. I’d never dealt with a hacker, but there was no time to find and hire someone more experienced. 

If I played along and got us hacked, I’d be ruined. But if I didn’t play along and we got hacked, well, then I’d be screwed, too. A year ago, I never could have dreamed of making this kind of money. My entire life had changed. I’d secured my family’s financial future. I’d ensured the life for my daughter that I was so desperate to give her. And now it was all about to get taken away. Just like that. Back to start. Do not pass Go. Do not collect $200. 

I dug my elbows into my desk and fell forward into my hands, trying to rub the terror and fatigue out of my eyes. 

This might be the worst day of my life. 

What the hell am I supposed to do?

Ready to find out what happens next? Make sure to order Crypto Confidential!

I know you’re going to love it.

Order Crypto Confidential!

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The original promise of Bitcoin was a “Peer-to-Peer Electronic Cash System.” 

It was meant to enable sending online payments directly from one party to another without having to route through a trusted third party. 

In the physical world, we can pay each other without needing to trust some third party using cash. When we use Venmo, Paypal, or any other non-crypto online service, we trust that service to protect our money and reimburse us for it later. 

We haven’t been able to make peer-to-peer payments online since there’s no digital analog for giving someone cash. You could promise to mail them the cash, but it would be hard to build a business on that trust and delayed payment time. So instead, we use services like Stripe and VISA to handle the payments for us and pay them around 3% of every transaction for the service. 

In its infancy, Bitcoin functioned well as a form of digital cash. Payments were cheap, and settlement happened in around 10 minutes instead of the two days it takes a credit card transaction to settle. 

But as the network gained popularity, those transaction fees increased, and now it’s far too expensive to use the Bitcoin network for anything besides large transactions. Sending a BTC payment to someone today would cost $65, so unless you’re buying something in the thousands of dollars, the payment processing fees from VISA or Stripe, or other third-party services are much more reasonable. 

That doesn’t mean the promise of a Peer-to-Peer Electronic Cash system is dead, though. The network just needs to adapt. The main Bitcoin network may have failed to provide a low-cost payment infrastructure for small transactions. Still, it created the most robust, stable security system for a decentralized payments infrastructure. 

And now that the security and stability of Bitcoin’s base layer are well established, other layers can be built on top of it, similar to the Layer 2 networks being built on top of Ethereum.

The most promising and exciting of those on Bitcoin right now is Lightning: “a decentralized system for instant, high-volume micropayments,” which settles back to the Bitcoin network. Using Lightning, it’s possible to send fractions of a cent near instantaneously with negligible fees, providing the first glimpse of a true peer-to-peer electronic cash system. 

In this article, I’ll explain what it is and how it works, then cover some of the exciting applications using it today and what it might enable in the future. 

What is Lightning?

Instead of recording every single transaction on the main Bitcoin blockchain, Lightning allows two parties to set up a payments channel between them where they can record the payments back and forth and then settle the net of those transactions later. 

So if you wanted to pay me $0.10 per day for access to this blog, that would be cost prohibitive on the Bitcoin network. But on Lightning, we could open up that payment channel and have it send the $0.10 per day every day until you end your subscription, at which point the payments between us could be settled onto the main Bitcoin network. 

It gets better, though. While you need a payment channel link between anyone you want to exchange funds with, it does not need to be a direct link. If A and B have a payments channel, and B and C have a payments channel, then A and C can pay each other by routing through B. They don’t need to set up a separate channel between the two of them. 

Each of those payments on the Lightning network costs so little as to be hardly noticeable, and you can transfer as little as 0.00000001 bitcoin (currently about $0.0002). The network can also process millions of transactions per second, which is far and above VISA’s capacity for approximately 25,000 TPS. Solana, another competitor in the fast & cheap payments space, can only do 60,000 TPS. So Lightning has a significant advantage here. 

You might be tempted to say: “so what?” What’s exciting about fast, free payments that can scale down to fractions of a cent? Is it just for micropayments? International remittances? But I think the answer is that it could not only replace all of our existing payment infrastructures, but it could make it radically more efficient. 

On the one hand, it does open up international payments in a way that doesn’t exist easily today. You can buy things with credit cards overseas, but even with a well-established service like Wise, you’re still going to pay hefty fees for paying individuals. So it can further improve how well we pay and work with people in various countries.

Then there are the types of payments it enables. Very small payments do not make sense with our current credit and debit card systems, and especially not with ACH, so there’s no opportunity for micropayments or small streaming payments. It’s unclear whether this will ever be a popular form of payment, but we don’t know yet because we haven’t been able to test it out. If we can send people half a dollar for free for reading an article, will we do it? Maybe. 

But the biggest benefit is in removing the payments processing tax and lag that exists in the system today. You currently lose around 3% of every payment you process using the credit and debit card system and have to wait a day or two for it to settle. If it can settle instantly with zero fees, that’s a massive step up in payment efficiency for digital businesses. Considering many businesses operate with only 10-15% profit margins, this could be a 20-30% increase in their profitability. 

The potential gets a little more obvious when you look at how the technology is already being used. Several teams have started building products on Lightning, so let’s explore those next.

What’s Being Built on Lightning

By providing the infrastructure for free instantaneous peer-to-peer payments, quite a few applications have appeared around Lightning to leverage that technology in various ways. 

It’s a great example of how a core, deceptively simple innovation can spawn an incredible number of new applications. If a smart contract platform enables “perpetual decentralized applications,” then maybe the core of Lightning is “instant free payments.” 

So what are teams doing with that, and how can you play around with it?

Lightning Wallets

The first and simplest way to experience Lightning is to install a Lightning wallet and make a payment to someone else or send someone else an invoice for payment. 

I use the BlueWallet app on my phone (though there are quite a few you could play around with), and for anyone who has experience using crypto but hasn’t tried Lightning, I highly recommend giving this a go. Download the wallet app, set up a Lightning wallet, and send someone an invoice for payment, Ideally someone near you in person. Seeing how quickly it settles feels magical compared to anything on the main Bitcoin network or smart contract networks like Ethereum. It is insanely fast. It doesn’t even feel like crypto. 

Okay, that’s pretty basic, though, so what else.

Crypto Venmo

This is the natural next step because, as I explained above, you don’t necessarily want to open a direct payment channel with everyone. It’s more efficient to link them together so you can more easily pay and receive payment from anyone you want to transact with. 

Strike is a Lightning-native Cash App or Venmo competitor that lets you pay people directly in crypto using the lightning network and even receive your paychecks into their app to be partially converted into Bitcoin. They’ve also integrated with services like Twitter to allow Lightning network tipping and with Shopify to allow merchants to accept Bitcoin payments while receiving dollars. There was no way to do these kinds of smaller transactions using Bitcoin before, so it’s a great use case for how Lightning is improving the number of places the network can be used.

Crypto Social Media & Messaging

Sphinx has taken a really interesting approach to a crypto-native chat and monetization platform. 

First, it’s entirely Lightning native, including all the messaging, which is peer-to-peer encrypted so no one can access your messages. But then, on top of that, there’s a tiny transaction fee associated with each message to discourage spamming or botting from happening on the network. For normal human users, those costs get refunded. 

Finally, you can gate any content you want to share with an audience or with a customer and take payment in Bitcoin over the lightning network, so if you wanted to build a Patreon-type following, you’d be able to do it there as well. 

Micropayments Apps

Since Lightning allows you to charge very small amounts of money for single transactions, instead of needing to get someone on a subscription or recurring monthly bill to add it all up, it does enable some new types of applications to exist. 

One that is particularly fun is a DALLE-2 Lightning Bot. You send it a DALLE-2 image generation prompt, it sends you a Lightning invoice for about $0.20, and then once you pay the invoice, you get your image. 

It all happens automatically over Telegram too, and if you’re using a wallet like BlueWallet, it can automatically scan a QR code in your Clipboard so paying the invoices is extremely quick. It’s a neat way to access AI-generated art if you aren’t using DALLE-2 or Midjourney yet. 

More Advanced Financial Services

Lightning can’t support full DeFi applications, but it can provide the financial rails for anyone worldwide to quickly and cheaply access centralized financial services. That allows for somewhat hybrid approaches to exist of semi-custodial services that you can access and exit via Lightning and require some trust but which don’t require you to go through the normal lengthy documentation process you would with a TradFi institution. 

One of those services is Kollider, which lets you trade derivates on up to 20x margin using your Lightning wallet to fund and exit the positions. What’s particularly cool about their offering is you don’t need to prefund a trading account at all. You create whatever position you want to open, pay the invoice from your wallet, and the position is opened. Whenever you close it, the funds get sent back to your wallet. So they only need to custody your funds when you have a position open. You don’t need to deposit anything with them in the interim. 

Currently, you can only trade BTC and ETH, but they’re planning on adding significantly more derivatives in the future. 

If you want to find more applications to check out, the Stacker News Top Posts history is a great place to get started. There’s also a great roundup from DarthCoin, and they also have a good Getting Started Guide.

Instant Free Payments

Lighting is still in its infancy, but the number of applications that have already popped up to take advantage of what you can do with fast, free payments is quite exciting. 

It’s one of those efficiency improvements that seem small on the surface but could enable an entirely new world of digital commerce that we haven’t seen before, so I’ll be curious to see how it develops. 

As it stands, Lightning is far beyond any other crypto offering for fast, free, extremely small payments. If it can maintain that lead, it could dominate this new area of commerce and be the foundation for a new payment infrastructure for the Internet. 

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Yesterday was a historic event for crypto, particularly Ethereum. The Merge, the long-awaited switchover from Proof of Work to Proof of Stake, went off without a hitch, and Ethereum is now running on 99.5% less energy and with a 90% lower inflation rate. If you’re curious about why the merge was a big deal, check out the last newsletter. 

The Ethereum community has been looking forward to the Merge since Ethereum’s launch in 2017. So now that it’s completed, it’s not unfair to wonder, “now what?” This was a major milestone in Ethereum’s development. However, it’s not done, and there are still some significant upgrades to come to turn it into the extensive, optimal blockchain the community imagines it can be. 

Most of those upgrades relate in some way to my central thesis for why blockchains are useful: building perpetual, decentralized applications that are widely available and inexpensive to use. If The Merge was the first big step in that direction, the next four steps (though these are being pursued in parallel, not in sequence) are called:

1. The Surge

2. The Verge

3. The Purge

4. The Splurge

The Merge was a big deal because it was focused on reducing Ethereum’s energy consumption and changing its consensus mechanism. But most of these next focuses contribute to massively scaling what the blockchain can accomplish now that it’s energy efficient. The Ethereum blockchain can currently process 15-20 transactions per second, and after these upgrades are complete, that number should be around 100,000 per second, including all the transactions on rollups. 

So how is Ethereum going to 5000x its capacity? Let’s walk through the four areas of upgrades to find out. 

I’ll also note that as a non-super-technical wordcel I’ve done my best to explain these concepts, but I will certainly come short in some regard given their complex nature. I’ve included further reading on each topic at the end of each section if you want to geek out.

The Surge

The first of the upgrade categories also happens to be the most far along. The Surge refers to a surge in Ethereum’s computing capacity using Sharding technology.

Sharding is not a new idea. It’s commonly used to scale databases for resource-intensive webapps, or for the same infrastructure to be used across many different applications more efficiently. 

Say you have a database with 1,000,000 rows of information that needs to be processed. There are two ways you could speed the process up. You could increase the computing power available to process those 1,000,000 rows, a process called “scaling up.” Or you could split that database horizontally into five shards, each with 200,000 rows, so you can process the information using five separate machines. That’s called “scaling out.” 

The latter strategy of splitting the data into shards so multiple machines can process it at once is often easier technically than continuing to speed up a single machine. 

If Ethereum tried to scale up by increasing the processing power of the machines validating the network, then it would become harder and more expensive for members of the community to contribute to the security of the network. It would be a return to the same problem that arises with mining; you’d have to continually upgrade your machine to keep up with the demands of the network if you want to be a staker. 

By scaling out through sharding, Ethereum can increase its computing power without increasing the computational demands on stakers. Instead of quadrupling the processing power needed to validate the network, they can start by splitting the network into four shards. Then in the future, they could theoretically increase that shard count to any number, giving dedicated shards to major rollups like Optimism and Arbitrum. 

The challenge is how to do this while maintaining Ethereum’s security and composability. The best strategies for achieving that are still being debated, but you’ll likely see pieces of it come together in future EIPs like 4844 that are going to start moving the network in this direction.

Further Reading on Sharding and The Surge:

• EIP-4488 Spec

• Ethereum Organization on Sharding

• Post by Vitalik on the Eth Foundation about Sharding

• Why Sharding is Great from Vitalik

• What is EIP-4844

• Understanding Database Sharding

The Verge

As the steps in The Surge are completed, the size of the historical record for Ethereum will start to swell at an increasing rate. If the processing power is increased 100x through shards, then the rate at which data is recorded to the blockchain will also increase 100x without additional changes. 

To run a validator, you must maintain access to the full Ethereum “state,” the historical record of everything that’s happened on the chain. With a full sharding implementation, that state could start growing at 10s of Terabytes per year, which would soon make it prohibitively expensive to maintain a record of it on every validator. You’d need hundreds of terabytes of storage instead of being able to run your validator on a normal laptop easily. 

So the solution is to figure out how to move toward stateless network validation so that the processing power can increase and the size of the historical record can swell without bogging down every validator connected to the network. And by moving towards stateless validation, the hardware requirements to validate the network would drop even further, allowing you to run a validator on a simple Raspberry Pi device or a mobile phone. 

The core step for achieving this is to shift from the current Merkle-tree-based validation to a newer concept called “Verkle Trees.” Verkle trees dramatically compress the amount of data required to prove the validity of a block based on historical data, which makes them perfect for scaling up efficient validation as the size of the blockchain grows: 

The key property that Verkle trees provide, however, is that they are much more efficient in proof size. If a tree contains a billion pieces of data, making a proof in a traditional binary Merkle tree would require about 1 kilobyte, but in a Verkle tree the proof would be less than 150 bytes - a reduction sufficient to make stateless clients finally viable in practice. - Vitalik Buterin, Verkle Trees, emphasis mine

Once the Merkle tree proof system is replaced with Verkle trees, that should be a ~10x improvement in processing power for Ethereum. But that alone doesn’t fully solve the statelessness problem; it only lays the foundation for it. With the Verkle tree system introduced, there can be a new “root” or start for the Verkle trees established, and any state from before that point wouldn’t be necessary to maintain to prove the integrity of the network. 

With that done, the network can start to focus on “The Purge.” 

For more reading on Verkle Trees and The Verge:

• State Expiry EIP

• Ethereum Statelessness Roadmap

• Verkle Trie for ETH1 State

• Verkle Trees

• Why it’s Important to Go Stateless

• Verkle Trees MIT Presentation (with helpful pictures!)

• Verkle Tree Structure

• Verkle Trees Paper

The Purge

Once Ethereum has been upgraded to run stateless or near stateless, they can start purging the old state data and reduce the amount of information people need to store to run validators. 

The first version of this is to cut down the length of historical data that needs to be maintained by execution clients to one year instead of needing the full history. That has been outlined in EIP-4444 and seems to be a popular first step that’s likely to be implemented. 

From there, the current plan is to replace the single state tree with separate trees that each last for one year. So in the vast majority of cases, you never need to work through data older than a year, but it’s still available when needed. 

Then the network can implement further changes to prune the state and remove additional features that currently exist in the EVM but aren’t often used or aren’t used properly, like SELFDESTRUCT. The main goal of this portion of the future roadmap, though will depend on getting Ethereum to operate statelessly so this bloat can be removed, and other opportunities to trim the fat will likely arise once it’s started. 

Further Reading on The Purge

• EVM features to remove

• EIP-4444

• State Expiry Simple Summary

The Splurge

Finally, we have the splurge, which is just a grab bag of everything else the Ethereum community wants to build into the blockchain that doesn’t fit in one of the three other major buckets. Most of these are also very technical focused and will increase the performance of the chain but won’t likely be noticed by the users of the network. 

Some of the improvements in this category include:

Proposer / Builder Separation: Reduce MEV (Maximum Extractable Value) by separating the proposer and builder roles when constructing blocks. Learn more here.

Data Availability Sampling: A method for improving access to data across shards and improving the efficiency of validation proofs. Learn more here.

EIP-3074: An improvement to the EVM that would let externally owned accounts delegate control over the account to a smart contract. Learn more here.

EIP-4337: Another popular EIP, this one focused on account abstraction to remove the need for consensus-layer agreement on protocol changes. Learn more here.

There will likely be many more that end up in this category, and they might be completed ad-hoc as we wait on other major changes to the network from the first three categories. 

You probably noticed, though, that none of these changes are as exciting as the huge Merge change. The network is maturing, and with the major shift to Proof of Stake done, Ethereum can now focus on making incremental improvements to its processing power, enabling all of the user experience and application layer innovation to start happening on the Layer 2s that rely on it. 

If you’re looking for exciting new projects that are launching, they likely will be on Layer 2s moving forward. Ethereum is getting closer to fulfilling its goal of being the ideal settlement layer for those execution blockchains. As the current Optimistic Rollups and ZK-Rollups improve, we should see significantly more new and interesting tools and apps to try launching there. 

The Merge went off without a hitch. Hopefully, the rest of these improvements go just as smoothly. 

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If you’re remotely exposed to crypto, then you might have some idea of some big event coming up called The Merge. 

It is arguably the most significant event to happen in the crypto ecosystem in the last few years, maybe since the launch of Ethereum. 

Much of the hype is around what it might do to Ethereum’s price. And, yes, it might push it up over time. I’ll explain why later. But The Merge is more exciting from a technological standpoint, and less has been said about that to the non-crypto-native folks. 

If you’re already jazzed about the merge and need a good way to explain your enthusiasm to your friends, this is that post. If you’ve heard of the merge and aren’t sure why you should care beyond some potential Number Go Up effects, this is that post. If you’re already kinda excited about the merge and want to know more about why you should be excited, this is also that post. 

Let’s start with what the merge actually is. 

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What Is the Merge

When Ethereum was launched in 2015, the goal was for the network to be secured by a novel Proof of Stake consensus protocol, replacing the then-standard Proof of Work style security used by Bitcoin and its derivatives. But because Proof of Stake was a new concept, Ethereum opted to launch with Proof of Work and transition to Proof of Stake later, once they were confident they’d ironed out the kinks.

To ensure the Proof of Stake chain would operate smoothly before launching it to the public, they launched it as a separate Beacon chain. “The Merge” is when the Beacon chain merges with the current Proof of Work chain, completing the shift to Proof of Stake. The plan is to do this instantaneously with no network downtime, which has already been done successfully on all of the Ethereum testnets. 

Changing the consensus protocol in the middle of the day without interrupting any transactions is why it’s sometimes described as “changing the engines of a plane in mid-flight.” Nothing quite like it has ever been done before in crypto. It’s a significant technological challenge, with some risks I’ll discuss more later. 

Why Switch to Proof of Stake

The Ethereum Proof of Work chain is working fine right now, so why bother doing this at all?

Proof of Work is trusted and reliable, but it has its downsides. One is energy consumption. It secures the network by having the validators, also called “miners,” race to solve cryptographic equations to verify the next batch of transactions. If you win the race, you get paid a little bit of Ether or Bitcoin or whatever token the network uses. 

If you don’t have state-of-the-art hardware, you won’t win the computational race, and you’ll drive up your electric bill for nothing. Since hardware is so essential, you end up with some mining operations looking like this: 

Those operations consume an exorbitant amount of power. Granted, it’s much less power than is consumed to defend the US dollar or Gold as world currencies and monies, but it’s still a lot of power.

Basically, if you want to help secure a Proof of Work network, you must invest a lot of money into hardware and electricity. Anyone who can’t afford the hardware or who lives somewhere where energy is expensive is cut out. And I think we can reasonably agree that if we could have equally good security while using 1/1000th as much power, that would be a good thing. 

That is a big part of what The Merge is doing. When Ethereum switches from Proof of Work to Proof of Stake, energy usage will drop by an estimated 99.98%. There won’t be any need for massive mining operations, anyone with a decently powerful laptop could run a staking validator if they wanted to, and they aren’t racing to solve computationally intensive problems anymore so there’s no unusual amount of energy consumption. A computer running a validating node wouldn’t use much more energy than it would from normal use.

That’s reason number one: significantly less energy usage. 

If you don’t need crazy hardware or energy, what do you need? The main barrier to setting up a validating node on the Proof of Stake network is owning enough Ether. You need 32 ETH as the minimum staking amount on your own node. 

That is a lot of money, just over $50,000 at the time of writing. But by staking that amount, you’re saying you’ll be an honest processor of network transactions. Proof of stake operates by trusting the different members of the community running validator nodes to be honest and record transactions accurately, and if you try to lie and process false transactions, your staked amount can be slashed or taken away entirely. So while it is expensive to have to stake that much Ether, it’s also how the network ensures no one is submitting false transactions. 

The other big difference between having to stake 32 ETH, and having to buy tons of hardware and use a lot of electricity, is that you’re not losing the ETH when you stake it. You can always stop staking and withdraw it, albeit with a short delay, so you’re not really losing money the same way you are if you have to spend a ton on a mining setup. There are ways to do it with less, like setting up a Rocketpool Node for 16 ETH. 

All you need to become a network validator is 16 to 32 ETH, and some reasonable computer hardware. So the Proof of Stake network is more accessible for anyone who wants to help validate it, which should increase the number of network participants helping ensure its security and decentralization. Currently, there are 240,000 validators set up on the Beacon Network, and presumably, many more will join once the merge is complete. 

That’s reason number two: easier validator requirements should increase network participation, which helps increase security and decentralization.

Since you don’t have a monthly hardware and electricity bill to stay on top of, the Proof of Stake network doesn’t need to pay nearly as much to the validators securing it. 

Currently, the Ethereum Proof of Work network pays miners approximately 13,500 ETH daily. After the merge, that will drop by around 90%, significantly reducing the inflation rate of Ethereum. And since some ETH is burned with each transaction since the implementation of the EIP-1559 upgrade, there could be more ETH burned than is issued on particularly active days. Estimates suggest that if the gas fee on the network is at least 15 to 30 gwei, Ethereum is burning more ETH than it’s issuing. 

This is the other reason the merge is so exciting for Ethereum from a financial perspective. The inflation rate on the token supply is going to change from roughly 4.3% per year to somewhere between 0.4% and -2% depending on network activity. During periods of high transaction volume like last year, Ethereum can easily be burning one to two percent of its supply each year, creating deflationary pressure on the token price. 

Right now, 13,500 ETH are being given out to miners to help them pay for hardware and electricity, so most of it is probably being sold. Post merge, only 10% of that will be given out daily, and there aren’t the same daily expenses to stay on top of when you’re running a staking node, so you don’t have the same pressure to sell it. It’s hard to imagine such a dramatic supply shift not impacting the price. 

That’s reason number three: a 90% reduction in ETH given out per day.

So let’s put it all together:

In sum, The Merge will reduce Ethereum’s energy usage by 99.98%, increase security and decentralization through greater validator diversity, and reduce the inflation rate by 90% or more, possibly making it deflationary. On top of those quantitative benefits, it will also be a massive technological achievement for a decentralized network. That’s why The Merge is exciting.

If you’ve read my post on Crypto Use Cases, this transition makes Ethereum a significantly stronger home for the future development of Perpetual Decentralized Applications. 

What’s Not Happening

I should also highlight a few things that don’t come with Proof of Stake. 

First, gas fees for transactions will not get cheaper. They likely won’t change at all. They’ll increase during periods of high activity and drop during periods of low activity, and nothing about the switch from PoW to PoS will affect that. 

Ethereum’s goal is not to be a low-cost, high-speed chain. Its goal is to support very high-value transactions and to be the security and settlement layer for various Layer 2 chains like Arbitrum and Optimism. Gas fees are already 90% lower on those chains, and they’ll drop another 99% or more in the next few years as additional speed, and bundling improvements are rolled out on that layer. 

Second, transactions will not go through faster. This is also in line with Ethereum’s goals to be a security and settlement layer instead of a high-speed transaction chain. The switch to Proof of Stake won’t impact how fast transactions go through, it’s just a common misconception since the other chains that have launched with a Proof of Stake consensus protocol tend to adopt the high-speed, low-cost approach. 

Third, Ethereum will not necessarily be deflationary. There’s also a misconception that the merge guarantees the ETH supply will start decreasing. That’s not true. It all depends on how high the gas fees are, and if there isn’t much network activity, there won’t be any deflation. It is possible, for example, that the bulk of network activity moves on to L2s and ETH gas fees remain low for years until the gas spent by the L2s starts to drive up the fees on the main chain. For the past week, for example, gas has rarely broken above 15 gwei, so Ethereum would likely not be deflationary. 

Fourth, ETH does not become a governance token. Finally, there’s an odd myth that with Proof of Stake, the amount of ETH you have means you can vote on the direction of the network and what changes happen to it in the future as you might be able to do with the governance tokens of an on-chain application. This isn’t true. Chain upgrades will still be decided by consensus of validators and the implementation of Ethereum Improvement Proposals. 

Now let’s also go over some of the concerns since The Merge isn’t without risk. 

Concerns about The Merge and Proof of Stake

Centralized Power & 51% Attacks

The biggest concern to start with is how staking could centralize power. With staking as a service from companies like Lido and Coinbase, a huge amount of ETH is getting locked up by fewer and fewer validators. There are 240,000 validators on the Beacon Chain, but the vast majority of staked ETH is with only a handful of stakers. Lido alone has something like 30% of the staked supply. 

Is this a problem? It could be. 51% attacks still exist on Proof of Stake chains, so if someone managed to accumulate 51% of all the staked ETH, or if a few stakers colluded, they could conduct a hostile takeover of the rest of the chain. 

There isn’t a clear way to prevent this right now besides individuals choosing to diversify who they stake their ETH with or opting to run a validator node of their own. Lido was the only liquid staking option for a long time, but now with other options becoming available like Rocket Pool and Coinbase’s coming cbETH liquid staking token, there should be enough options to decrease Lido’s control of the market. 

This, to me, is probably the biggest concern and is one that the Ethereum community will need to figure out some solution for sooner rather than later. Lido hasn’t done anything to suggest it would be a malicious actor, but there’s no reason to let so much power accumulate to so few network operators. 

Potentially Less Censorship Resistance

One concern that’s come up especially strongly in the last few weeks is the potential that with fewer, large centralized staking providers like Coinbase and Lido, they could be forced by a government only to validate a censored version of the Ethereum blockchain, such as one that blocks certain applications or addresses from using the network. 

This could certainly happen, and it might not even be that surprising if it did. But there is already a reasonable way for the community to combat this, through what’s called a “User Activated Soft Fork.”

In short, if Coinbase decided to start censoring transactions, the Ethereum community could respond by switching to a slightly modified version of the blockchain where Coinbase loses some or all of the ETH they have staked. Naturally, that would destroy Coinbase’s business and be a rather large mess for everyone involved, so with the threat of that kind of reaction looming, most of these companies would likely opt to stop offering their staking services instead of complying with sanction requirements, since without the staking services, they wouldn’t be validators who need to comply with anything.

Staking Chain Reliability

This is a somewhat odd one, but it’s worth mentioning: the only two massively popular blockchains that have never had downtime are Bitcoin and Ethereum. Almost all other popular blockchains use a Proof of Stake style consensus mechanism, and almost all of them have had periods of downtime in the last couple of years. 

Does that mean that Proof of Stake is less reliable than Proof of Work? Not necessarily, and the Beacon Chain has never had any downtime since its launch in 2020, but some people have raised this question about the network’s reliability post-transition. 

Ultimately there’s nothing to indicate that there might be less network reliability post-merge though, so I’m not sure how seriously to take this concern. It might just be FUD. 

Rich Get Richer Effects

Under Proof of Stake, you earn passive yield by staking your ETH. The more ETH you have to stake, the more ETH you’ll get paid in return (though with the same APR for everyone). So the richer you are now, the richer you’ll be in the future. 

This argument honestly seems a little silly, though, since under Proof of Work, the more money you have to invest in mining equipment, the more money you can make there as well. I’m not sure why this is any different. 

There are No Decentralized Proof of Stake Networks

Ethereum will be the first fully decentralized proof of stake network, which does make the shift a little scary but also exciting. 

If they pull it off successfully, it will be a massive achievement for a decentralized autonomous team of contributors. Arguably more momentous than the original Bitcoin launch due to the added complexity of a Proof of Stake system like this. 

But it’s also never been done before! So pulling it off without a hitch is far from a sure thing. It wouldn’t be terribly surprising if something went wrong, but they’ve been test-running it so much for the last year and a half that it seems like they’ve done a good job covering all their bases. 

Ultimately there’s no way to know for sure, though. But The Merge should be happening around September 15th, and it will be an exciting day when it does.

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We’re at the fun part of the market where crypto has lost trillions of dollars in value and people are scrambling to make up reasons why it’s useful.

Many of these reasons are painfully cringe attempts to copy the new technology onto old paradigms in a masochistic sort of skeuomorphism that would only be envisioned by marketers and influencers who have never built the kind of technology they’re LARPing as innovators of. “Facebook could give everyone a META token and you earn more of it when you get Likes and you can cash that out for ETH and…”

Crypto is EARLY. Painfully early. If you’ve ever used any of the types of applications I talk about in this newsletter then you know the user experience is usually terrible. If you make a careless error you might lose all your money. If you pick a token at random it’s more likely a scam or shitcoin than anything legitimate. And we’re still five to ten years out from anything close to mass adoption of anything besides HODL and speculative gambling.

That doesn’t mean there’s nothing there, though. Crypto and the blockchain technology it’s built on do have the potential to create a new wave of the Internet, it’s just going to take some time. And to understand that potential, it’s helpful to look at some of the past major paradigm shifts in technology and see what we can learn from them.

Let’s start with mobile. The mobile revolution enabled:

• A new physical form of interacting with computers (small touch screens)

• New sensory forms of interacting with computers (audio, kinetic, visual w/ cameras)

• Mobility, you weren’t tethered to an office anymore

From those few things, we got an incredible amount of innovation. An amount that would have been hard to predict if you just had that list as your starting point. Uber needed mobile computers. Snapchat and Instagram wouldn’t exist without the cameras. Fitness apps needed kinetic sensors. Podcasts and Audiobooks needed computers with audio on the go. But none of those applications are obvious from the basic set of innovations.

The Internet is even simpler. What did it do, really? You could sum it up at the foundational level with: Computers can now talk to each other. You don’t need to be physically in front of some computer to utilize a process that’s living on it. And from that simple innovation, we got all of this. 

If you were hanging around when they first started wiring computers together and you said, “One day this simple innovation is going to let people make millions of dollars selling pictures of their feet to strangers,” Al Gore would say, “please put on some shoes and get out of my office.” But that’s what the Internet did! 

Okay, now let’s talk about crypto. We’ll start with what the blockchain, crypto, and web3 tech actually enable. 

Then once we understand that, we can look at what it might let us do in the future while recognizing that there will be many things on the order of feet pics and Postmates that we probably can’t predict.

What Crypto Technology Actually Does

Keeping with the ultimate simplicity theme from above, what does crypto technology enable?

Crypto and “Web3” are really all about blockchain tech. And what a blockchain lets you do is run perpetual decentralized applications.

They’re perpetual because they will always run forever if the blockchain is running. You don’t have to keep “hosting” the application like you do for a Web2 app. And they’re decentralized because they’re running everywhere all at once.

It's important to highlight that crypto is a backend innovation, akin to the first Internet innovation, and very different from mobile, which was a user experience innovation. Just as the first web pages looked a lot like newspaper or magazine pages translated onto a computer screen, we’re still in the early skeuomorphic phase of crypto applications. The front end has not caught up to the backend.  

There are other benefits from blockchain technology, like legibility of activity and potential for democratized access, but those aren’t the core new tech offering. They’re consequences and uses of it. The core new technology really reduces to perpetual decentralized applications. That’s the thing that we couldn’t do before. 

So, what can we do with that?

Current Uses of Perpetual Decentralized Applications (PDAs)

I try to keep a relatively level head about crypto, and at least 90% of it is nonsense right now. Maybe more like 95-99%. 

But there are some real use cases right now that are quite good and provide a legitimate case for the value of blockchain tech. 

I should emphasize, though, that if you live in the US, or another more developed country, some of these will seem silly to you. I’d encourage you to spend some time exploring what is like to live in a country without a robust banking system and with rampant inflation and/or corruption, and then look at these benefits through that lens.

Though, I guess the U.S. has decent inflation, and corrupt politicians getting rich off insider information too, so maybe you don’t have to think too hard.

Digital Gold

Bitcoin is the first innovative use of blockchain technology. Before blockchain, there was no way to have a global, digital, trustless, hard monetary asset. 

If you live in the US or many other countries you could buy Gold ETFs and that kinda gets you close. But you’re still trusting some other institution to redeem that ETF, and the government or bank could easily seize it or restrict your access to it.

With Bitcoin, anyone in the world can buy it. It’s completely digital, so you don’t need to store it. It’s trustless because the network is designed in such a way that you don’t have to trust a third party to honor your bitcoin the way you do in the ETF situation (the whitepaper is worth a read to understand this), and it’s a hard monetary asset based on the fixed supply cap.

It was technologically impossible to create something like Bitcoin before blockchain tech existed. But it’s also one of the most obvious and simplest versions of applying blockchain tech. It’s akin to the instant messaging layer of the Internet. And it’s kinda boring. Who gets excited about gold besides your grandparents and that one guy you went to college with who bought a 100-acre ranch in Texas to prepare for the total societal collapse that’s definitely coming next year just you wait. 

So, what else exists right now? 

Digital Currency

People don’t like spending their Bitcoin, and with the transaction fees, it’s unlikely to ever actually be a “peer-to-peer electronic cash system” like Satoshi originally suggested. 

Luckily, other blockchains are providing a digital cash system through stablecoins. Stablecoins like USDC and Tether as a way for anyone in the world to send US Dollars around are a massive improvement on the existing banking system in most of the world. And even in the US, sending $25,000 of USDC on a Saturday makes wiring money look like cave paintings. 

Yes, you can’t use your stablecoins to buy much in the real world (unless you use a Juno debit card). And yes, you still need to convert it into local money in most places, and that might be expensive.

It is still very early, but despite the earliness, the global digital currency innovation is quite impressive. 

Digital Ownership & “Property Rights”

Before perpetual decentralized applications, there was no way to make a thing online and guarantee someone could “own” it forever. 

Domain names can be taken away by ICANN. This blog could get taken down by Substack. Your Twitter account could be taken down. Your Instagram photos could get wiped out. 

You can only rent on the pre-blockchain Internet. But with code that can live everywhere forever, without needing a trusted third party to support it, you can own things in a way that’s arguably even better than Title rights in a developed nation. You do still rent your real estate from the government, after all.

Right now, digital ownership is focused on art, pictures of monkeys, and ENS domains. But if you looked at the Lightsaber and Beer-pouring apps on the 2009 iPhone and said, “see, apps are all silly!” then you would have been missing the point. We don’t really know what all will get done with digital property rights, but the fact that we have them for the first time is pretty exciting. 

Decentralized Lending & Borrowing

In the span of about 5 minutes, I could borrow USDC against my ETH, transfer it to my Juno bank account, and buy a car with it. 

I wouldn’t need to sign any loan docs or go through any kind of underwriting, no one needs to check my credit score, and my interest rate would be about 2 to 3%. 

That’s super fucking cool. Yes, it’s somewhat inefficient since you can’t use the item itself as collateral as you can in a car or home loan. And yes, you need quite a bit of crypto for this to make sense for big purchases. But the fact that I can take out a huge loan like that, send it to my bank account, and buy something, is incredible. I could literally do that on my phone in the bathroom at the dealership. 

And again, if you’re a wealthy person in the US, you might be thinking, “okay, I can get a portfolio line of credit with my bank too, so what?” but remember, most people are not in the US or living with a robust financial sector. And remember, the bank could take that money away, they could mess with your interest rate, they would care about your credit score, it’s much less convenient. 

Right now, you can only use other cryptos as collateral, but we’re still in the early days. Lightsabers and beer pouring. MakerDAO is already working on bringing real-world assets on-chain as collateral. Multiple projects are creating on-chain versions of public company stocks. As more assets get moved or mirrored on-chain, the number of things you’ll be able to leverage will expand significantly. 

Single Sign-On

Web2 companies like Facebook and Google have tried to make single-sign-on a thing for years. It started to get popular maybe five or six years ago, then everyone realized that if they shut down their Facebook or Google account, they would lose access to everything, and it started to wane.

But crypto applications are natively single-sign-on since you don’t typically create an account, you just connect your wallet. This is such a different experience that you’ll need to just try it to understand it, but it is a much nicer way of having an account on a website without having to give them a way to spam you.

Other Decentralized Financial Activities

There are also DEXes, Options trading, Perpetuals, and other financial tools and primitives being built as PDAs, but it’s kinda nerdy financial stuff and rather speculation heavy so I’m going to leave it out since it’s less attractive to the general interest in “why does crypto matter.” The other stuff above is more compelling. 

Anyway, it’s a short list, right? Well, this is why crypto critics aren’t wrong when they talk about how “useless” crypto is. It doesn’t do very much right now, but these few things do show some hints at what might be coming later. So, let’s explore that next. 

Future Uses and Benefits of PDAs

These all build on the aforementioned technology and benefits. I’m going to limit it to uses which either:

1. Could not be done without blockchain tech

2. Would be much shittier without blockchain tech (akin to Postmates on a phone vs. IBM mainframe)

Here’s a hodgepodge, feel free to toss any other ideas in the comments.

Cashing Out Value Locked in Various Silos

Video games are one form of this, and I’ve written about crypto gaming extensively (and critically). But any digital economy or ecosystem with a form of internal value could use crypto to make that value extractable to other currencies. This is one area where decentralized exchanges with permissionless token listings are particularly powerful. 

Other versions of this besides video games might be hotel, airline, and other loyalty points, gift cards, or even coupons.

Subverting the Credit Card / Stripe Tax

This is a subtle one that you might not be aware of unless you’ve started a business, but every company that accepts credit cards ends up paying a 2-4% tax to Stripe or their credit card processor. 

The payment processors can extract this tax because it’s the only way to accept digital payments in your store, online or offline.

With the digital currency innovation, companies can start taking digital payments without fees. Considering many businesses margins are less than 10%, getting back 2-4% of each purchase is massive. Solana Pay is already offering this and there will likely be many more tools for it in the future. 

Streaming Payments & Paychecks

Being able to move very small amounts of money continuously using code is starting to create some interesting use cases. The idea of a biweekly paycheck can quickly become a thing of the past, with people instead getting their salary or hourly payments streamed to them while they’re working. 

This introduces quite a few other potential work setups, like being able to charge continuously for consulting work vs. needing to deal with invoicing before and after work is done. It also opens the door to true micropayments for activities like reading a blog, but I’m extremely skeptical of that use case. I don’t think it’ll ever catch on.

Transferable Status & Reputation

If you build a reputation on Twitter, it’s very hard to migrate that reputation to YouTube or Instagram. Most social networks will reduce the spread of media from other social networks because they don’t want you taking your audience elsewhere.

Due to the single-sign-on mentioned earlier, social media in a Web3 world will likely center around following addresses instead of accounts siloed in one service. Since you’ll follow wallets, it won’t matter where they’re posting material. You’ll automatically be following them there.

And even if there is a siloed reputation system, you’ll likely be able to record your status in one area on your wallet and use it to establish a reputation in another domain. Basically, imagine if you could prove when signing up for StackOverflow that you had earned 10,000 Reddit Karma for your posts in /r/Javascript. That should give you some initial starting reputation, and that’s much easier with the wallet-based identities and single-sign-on that come with Web3.

The downside of a centralized account is that if you develop a bad reputation in one place, it will also be easy to punish you in other places. This could be good in general for weeding out bad actors, but you can imagine how it could be used maliciously too.

New Ways to Experience the Same Desires

The last type of innovation I’ll mention is a general assumption that as we use the technology more, we’ll find new ways to apply it to old desires and problems.

Mobile created new ways to make money, and blockchain will probably bring new ones with it as well. It’s already created a few, like selling digital art and democratizing access to owning shares of media like music.

Web and Mobile created new types of media, and I suspect there will be some new kind of media that develops that’s blockchain native. I can imagine, for example, a much more robust version of Wikipedia than we’re able to do on Web2 rails today.

Web and Mobile introduced new communication technology, so we’ll probably come up with some new form of that. It won’t necessarily be better, of course. Tinder is a much shittier version of talking to people at a bar.

Web and Mobile created new ways to accrue and struggle over power. That’ll happen again.

They created new kinds of games and entertainment. We already have some of that, and much more will be coming.  

They created new ways to signal status and flex. That’s already here and there will be more of it.

At root, humans are simple creatures. We like entertainment, mating, status, and desperately scrambling to find meaning before we die. Every new tool gets purposed towards seeking those ends in some new way that may or may not be better than the old ones. I see no reason to assume that won’t happen again, especially since there’s money to be made.

But we’re still very early. Many of the uses are silly, and many of the people evangelizing it are cringey.

It’s a very simple, core innovation: perpetual decentralized applications.

I’m excited to see what else we do with it.

There have so far been three:

1. One starting in late 2013

2. One starting in mid 2017

3. One starting in mid-late 2020

It’s easiest to see on the Bitcoin price chart: 

These tend to follow the bitcoin “halving” events, when the block reward issued to miners gets cut in half every four years or so. 

But this is just the top layer of the hype cycles. Within each of these “meta cycles,” there are many other hype cycles that occur, and they have so far been getting more diverse with each meta hype cycle. 

In the 2013 surge, Bitcoin’s growth was followed by other Bitcoin forks like Litecoin: 

In 2017, there were a new suite of cryptocurrencies that had their own hype cycle. Bitcoin and its forks went through their cycles again (you can see the Litecoin chart tracks the Bitcoin 2017 growth as well), but now there was Ethereum and the rivaling “smart contract” tokens which had their own cycles. 

Ethereum surged: 

And so did the “Ethereum killers” like EOS: 

But then within the Ethereum ecosystem, there were another set of hype cycles. The first ERC20 tokens took off, as the hype around ICOs intensified. 

MakerDAO launched and immediately shot to a rather high valuation: 

As did Brave’s “Basic Attention Token” 

So between 2013 and 2017, two things happened: 

1. The same hype cycles repeated themselves, with Bitcoin competitors following Bitcoin’s surge

2. New hype cycles emerged, as money flowed into new markets looking for the next new technology that could rival Bitcoin

If this was all we knew, then what would we have expected to happen in 2020 when the next surge started? 

Well, we’d expect:

1. Bitcoin and its competitors to surge 

2. The new players who lasted from the previous cycle to have another version of their hype cycle (Ethereum and the ETH killers, plus any remaining ERC20s from that period)

3. New hype cycles to emerge around new technologies

And that’s exactly what happened. Bitcoin started its run, and then the Bitcoin competitors, killers, or forks followed suit (DOGE oddly being the most notable here). 

Ethereum surged, and then it was followed by the “Ethereum killers” like Solana, Avalanche, Cardano (lol). 

ERC20s surged, starting with DeFi protocols then DeFi 2.0 and Gaming tokens.

And new technologies had their own cycles, the big one here being NFTs. 

Very similar patterns as 2017 played out, with the old participants who lasted replaying very similar cycles bringing in their new competitors (e.g Solana and Avalanche), and then new cycles formed around the new technologies (Beeple mania, Profile Picture mania, ENS domains, etc.) 

Now, obviously, history does not have to repeat itself. But it often rhymes. And since these manic periods reflect some deep human psychology around FOMO, and have played out in similar ways across most markets over time (though usually much slower), I don’t see any reason they would stop anytime soon. 

So assuming they do occur again, how can we prepare mentally for them to make sure we benefit from, instead of falling victim to, their occurrences? 

And how do we do it without trying to time the top and bottom, a generally impossible task? 

I have a few thoughts. As always, none of this is financial advice, I’m just a pixelated headshot with a blog. And if you aren’t subscribed, make sure you are for the next article!

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The Meta Cycle Will Likely Repeat

I don’t see any reason to suspect that was the end of crypto and it’s just going to go down forever now. 

The most important metric to me is developer energy. As long as the devs are doing something, capital will flow back in eventually. Especially once people don’t feel scared of inflation, recession, and all the other financial boogeymen on the news right now. 

If the meta cycle follows previous themes, then it would likely be kicked off by the Bitcoin halving, which will happen around April 3rd, 2024. 

Now that doesn’t mean it will start surging up on that date. There’s typically a lag. The last one happened on May 11th, 2020, and Bitcoin didn’t start to really take off in price until around September. There was a 5-6 month lag before the reduced supply entering the market significantly impacted the price. Though, granted, that could have been impacted by COVID recessionary fears. 

But either way, I wouldn’t expect it to be immediate, which means sometime late 2024 might be the next cycle. 

There are two big confounding variables here though. First, a potential recession. The entire lifespan of crypto has happened during a 13 year mega bull market, crypto has never lived through a recession or serious bear market, so if that’s what we’re going into then that could radically change things. 

Second, the Ethereum “triple halving.” When the Ethereum merge happens, likely in September 2022, the Ethereum daily issuance will drop by three halvings, about 90%. If that has a similar impact on Ethereum’s price as the halvings have on Bitcoin’s price, then we might see an earlier meta-cycle kicked off by Ethereum instead of Bitcoin. I have no idea if this will happen or not, it’s just a possibility. 

While I don’t believe much in Technical Analysis, it can be very helpful for seeing where you are, even if it doesn’t actually help tell you where you are going. The main things I like to check are the 200 week, 200 day, and 20 day moving averages. If we see the 20d exceeding the 200d and 200w, and staying ahead of them for a couple weeks at a time for Bitcoin or Ethereum, we might be back in the start of a new meta cycle. 

But again, the predictive power here is extremely limited. The important takeaway I think is that the meta cycle will be back, and it will probably rhyme with previous ones. 

Which also means…

Smart Contract Ecosystem Cycles will Likely Repeat

Within the smart contract blockchain ecosystems, we saw a few different hype cycles:

1. ETH killers 

2. Stablecoin platforms 

3. DeFi (1 & 2)

4. NFTs

5. Gaming

I see no reason these wouldn’t all go through their own hype cycles again, once the meta cycle is kicked off. And now that they’re all established, they’d probably start them earlier than they did these last two years since people won’t be as surprised by them. For example, it took a while in 2021 for people to realize profile pictures could be valuable. Now we know Punks and Apes could be worth half a million or more, so we’ll be quicker to move on those narratives. 

The particularly interesting one here is gaming. It felt like gaming was starting a much larger surge, akin to the Bored Ape surge following Beeple, as we went into the spring of 2022. STEPN kicked it off and there were some other games really starting to take off, but then the whole market puked and the fun was cut short. I’ll be interested to see what happens with gaming next time around, especially since teams will have a few years to build some seriously good games. 

One important thing to recognize with these cycles repeating though is that while the big blue chips from this cycle will likely come back in a big way, the laggards who came in later and were scraping the bottom of the barrel will probably never come back. 

There was a project in 2017 called “Bitcoin Diamond” that was trying to be a Bitcoin competitor. It rode the hype cycle hard, hit a $4 billion market cap, then after the meta cycle was over it crashed and is now basically worthless: 

So while tokens like Uniswap and AAVE, and NFTs like Punks and Apes, will likely reclaim and surpass their former glory, it’s very unlikely that all the second and third tier competitors will come back. 

People won’t buy the second tier stuff from the last cycle, they’ll buy the new competitors from the new cycle. The potential upside will feel much higher. 

There Will Be New Hype Cycles

Last, there will be new technology that comes out with tokens attached that people can speculate on, and speculate they will. 

It is almost impossible to predict what these next technologies will be, since they’re going to be new iterations on the existing tech we had this cycle. 

But there are ways we can get a few hints. For example, if we look at 2017, there were a couple hints of DeFi but barely any activity. Maker was the big example then. But then in 2020, there were tons of new DeFi protocols and it was a massive speculative area. So if you saw Makers success in 2017, you could ask: what other stuff like Maker might come out next time that I could buy into early? And that could have given you a clue to try things like Uniswap, AAVE, and Curve. 

Crypto Punks were also around during the last cycle, and they had a bit of interest. If you were particularly savvy you could have seen that and assumed that digital art would come back in a big way, and tried to buy into it early. 

Crypto Kitties was another canary. They had a brief period of serious popularity in the 2017 cycle, which foreshadowed all the crypto gaming insanity in this cycle. 

So while you can’t predict the future, there are always hints. 

Potential Hints for the Next Cycle

So then the question is: what might this cycle have hinted at as big areas of interest for the next cycle? 

Premium members can read my thoughts on that here. 

Preparing for the Next Cycle

The easiest way to prepare is to consolidate down to the blue chip, strong teamed projects from this cycle that you are confident will make it to the next one and come back in a big way. 

I wrote about what makes that list for me last week, but I’m definitely curious to hear any others. 

It could be a quiet couple of years before liquidity flows back into crypto, so you want to make sure you’re only holding on to things that will make it.

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Welcome to part three in the “boo the fun is over for now” series. Part one was “mistakes I made” and part two was “good decisions I made.” 

Maybe things are going to turn around and we aren’t actually entering a big recession, but who knows! Either way, I’m assuming we’re not going to have a significant amount of liquidity flowing back into the ecosystem until the money printer turns back on, the next halvening, or some other event justifies billions of dollars of new interest. And I don’t think the merge will do that. That’s a future article though. 

But assuming crypto price action is going to be quieter for the next couple years I spent the last few weeks asking myself what I’d be comfortable setting and forgetting, assuming I couldn’t touch anything for months at a time. 

So the list that I came up with are the projects which I:

1. Have good long term conviction on

2. Require zero or minimal maintenance

3. Accrue value without just printing tokens

Here’s where I landed. This is pretty much all I’m holding now. And obviously, this isn’t financial advice, I’m not a financial advisor, I’m an unemployed philosophy major who thinks blogging is a real job. Anywhooo…

ETH as stETH

The main thing I’m holding of course is ETH. I’m the most bullish on the ETH ecosystem of any that have popped up, especially now that we’re seeing some implosions and liquidity runs from the competing L1s of this cycle. All signs point to the merge going off well, it has the lion share of TVL, it’s where most of the new blockchain innovations are happening, it’s just pretty hard to argue it’s not the strongest smart contract platform that’s live right now. That doesn’t mean it won’t be IBM one day, but for now, it’s where I have the most conviction.

I’m holding it as stETH because it’s not only a free, extremely low-risk 4% yield, but there’s a huge discount on it right now where you basically get a year of yield for free by swapping into it. 

So if you have 100 ETH, you can swap it for 103 stETH or so, let it sit and earn interest for a year and a half till you can redeem it and it will be around 109 ETH. 

There has been some FUD recently around stETH because it’s not pegged 1:1 to normal ETH anymore. But it never really should have been trading 1:1, since you give up some liquidity to get the 4% APR. But this is very different from a stablecoin depegging. stETH isn’t a “stablecoin” pegged to ETH, it’s a receipt for an ETH deposit that you can redeem for ETH in the future post-merge. You’ll always be able to redeem it for ETH eventually, you just have to wait. So it’s not worth holding if you want to be able to trade in and out a lot, but if you’re going to hold ETH for multiple years anyway, I feel pretty good holding it in stETH and getting the free interest. 

SOL as stSOL

While I’m still most bullish on ETH, that doesn’t mean something couldn’t eat its lunch or seriously compete against it in the future. Tech platforms seem to tend towards duopolies or small oligopolies (Apple & Android for mobile, Apple & Microsoft for desktop, AWS Azure etc. for cloud, so on) so I don’t see why everything would live on ETH. Even with the L2s and side chains. 

So then the next natural question is: what would be the Android to ETH’s Apple? Or maybe ETH is Android, whatever. I think the clear answer is SOL. An EVM L1 like Avalanche has no chance long-term against L2s and ETH itself, especially with teams like Polygon building subnets directly on ETH for companies that want them. The same goes for BSC. 

The reason I like Solana is they’re building something very different from Ethereum. It’s more centralized, UX-focused, faster, and cheaper, and it will probably attract a lot of business. Most end users are not going to care about decentralization, they’re going to care about the experience. And Solana has a decent chance of delivering that. 

Which makes this the second biggest thing I’m holding. And like ETH, I figure I’d rather just stake it and get a free ~7% APR. The nice thing with staking on Solana too is that since it’s already Proof of Stake, you can convert your stSOL back to SOL any time, so there’s no liquidity premium. It’s always redeemable without a discount. 

MATIC as stMATIC

This one is a little weird since I think MATIC is going to have a hard time driving long-term value to their token, or at least it’s had a hard time so far, but their business development is so damn good, and they keep launching new tech that’s building directly on top of Ethereum. So while I’m very bullish on specific L2s like Arbitrum and Optimism, and competing L1s like Solana, there’s something kinda special about the Polygon team. Maybe I’m bag holding on this one, but they just seem to be a little bit more professional and sales oriented than most crypto teams, and their tech is solid. So MATIC makes the cut too, and again I’m just staking it with Lido to get free interest. 

One thing I’m realizing is I’m probably over-exposed to Lido… I kinda wish there were more good liquid staking alternatives. Oh well. 

IMX

My reasoning for IMX is similar to MATIC. They have a very strong business development team, constant tech updates, the existing tech is good, and the core offering of an NFT-focused L2 to Ethereum catered to games and media makes a lot of sense to me. Also, the Illuvium land sale on Immutable X was phenomenally smooth and inexpensive, it made me much more excited about the chain. 

I also love their staking setup, where staking earns you a share of minting and trading fees for NFTs instead of just gas fees. That means it could accumulate quite a bit more value than you’d expect from an L2 token where the gas is supposed to be cheap or free. Once I saw that was how they were doing staking, I got quite a bit more excited about the token. 

CVX as uCVX

Convex is the first crypto application that isn’t chain-layer that I think is worth holding. If you haven’t read my article on The Curve Wars I’d check that out to see why CVX is such a powerhouse, but the short version is that other teams are continuing to pay CVX holders to earn themselves more CRV emissions and thus more liquidity for their trading pairs. I love that by staking CVX you’re getting a surprisingly good dividend, around 30%, in other tokens besides CVX. And if you use the Llama Airforce Union, you can aggregate all your bribe earnings to one token and not have to sell tons of dust. 

So the Union is pretty good and if you want to maximize safety and earnings that would be a good choice, but I went ahead and put it into uCVX from Redacted (though you can also access it on the Union site) since they take all the bribes you earn and use them to buy more CVX, and your CVX isn’t locked up. Though I suspect the 1:1 peg won’t last forever on the liquid market, you can always redeem it 1:1 for CVX if you wait. 

Anyway, CVX seems to be one of the few apps accruing value that is likely to keep growing until the next run since everyone needs liquidity. So I’m happy holding this and letting it grow. 

My Cryptopunk

The reason I like Cryptopunks as a long-term bet is that since it’s the first NFT PFP project, and since it’s a historic artifact of the Ethereum ecosystem, it’s kind of a leveraged bet on the Ethereum ecosystem itself. I can’t imagine a world where Ethereum is the dominant blockchain worth trillions of dollars and Cryptopunks aren’t among the most valuable NFT assets. I think Apes are actually hurting themselves by constantly trying to build utility for the NFTs, but that’s debatable. Apes are definitely probably a decent hold too, but I feel less secure on those. The fact that Cryptopunks give you nothing besides the artifact itself gives them more long-term durability. 

Smaller Ones

Aside from those big primary holdings, I have a few others I’m holding on to since I think they’re doing interesting things and could turn into nice bets. 

RAIDER

I work with the Crypto Raiders team and designed their tokenomics and keep supporting them on the economy, so I’m biased. But they’ve completely switched gears to focusing on gameplay and downplaying the econ and crypto focus while we’re in a bear market, which I think is absolutely the right move. If they can build a great game over the next couple of years and then create a deeper crypto integration when things get exciting again it could be a good bet. So I’m happy to keep holding quite a few of these tokens.

ALCX as gALCX

The ALCX token has dropped something like 98% from the peak, but they’re getting closer to turning on profit sharing and they seem to be generating quite a lot of yield from their vault strategies. If people are using them to take safe leverage on their ETH and stable coins through the bear market, and they’re generating yield from that and using it to send value back to token holders, it could turn into a good cashflow token. But again, I might be bag holding here. I really like Alchemix. 

DPX as veDPX

Similar to ALCX, the Dopex ecosystem is starting to generate real cash flows, and now that they have their token locking mechanism for sharing revenue it could turn into an interesting hold, especially as they keep developing their options strategies. I talked about them at length here, but if they can win the competition for an on-chain options platform on layer 2, that could be a massive business that’s worth having a share of the profits from. 

Anyway, those are the main ones. I have a couple of other little things like GMX and Looksrare that I think are inexpensive, high upside bets, but these are the ones I feel strongest about. 

I’m curious to hear what anyone else thinks is worth just leaving and checking in on in a year or two. It’s a short list, but worth figuring out to keep the psychic load lower. And if nothing else it will be fun to reflect on this post in a year or two.

Plenty of things went well too, though, and it was definitely a successful time period. So aside from the things that went wrong, what went right? Or what were some decisions that ended up being prudent which I’m glad I made? 

Here’s what stands out. 

Not Trading

There’s a very easy trap to fall into when you first get exposed to crypto. You see these people on Twitter who at least seem like they have a huge amount of money and are crypto rich, and you see them posting charts with their predictions of where the price is going to go. 

Then you assume that means they’ve made their money trading, so you should try to trade too if you want to get as rich as them. 

This is almost never the case. Many times they don’t have much money at all, and for the ones who do, most did not make it from actively trading. More likely they bought a bunch of Bitcoin or Ethereum a few years ago, were crazy enough to hold it through the 90% drawdown, and then got rich through a combination of patience and stupidity depending on your interpretation. 

Or, they already had a bunch of money from something else. Or they made one really great lucky trade. 

However they got the money, just because they are now rich (or pretending to be rich) and posting trading charts does not mean they have any idea how to make money trading. It’s just as likely (more likely?) that trading is just a hobby now with all the money they made from other things. They might even be losing money trading! And you almost definitely will lose money trading. 

So yeah, don’t try to trade. Buy and hold. The only extent to which I’ll do something close to trading is trying to buy things when they’re cheap and avoiding buying the top. I made my biggest ETH purchase last year when it was between 1700 and 2000, which I’m still very happy with. 

Building

If trading isn’t the way to “make it” in crypto, what is? Working on stuff and waiting. I tried building a ton of different things in crypto starting in January 2021. I tried building an NFT platform for bloggers, tried building a LinkTree for crypto addresses, tried building an on-chain idle clicker game, plus a bunch of random ideas and other projects that never got off the ground. 

But the two most impactful things I worked on were this blog and helping the Crypto Raiders team with their tokens and economy. While probably 10+ other random projects failed to go anywhere, these two made up for everything else. 

If you want to try to build something in crypto or work with people who are building things, what I found the most helpful was to first get deeply ingrained in the crypto community (Twitter and Discord mostly), then figure out what kinds of skills were most useful. 

I had one huge advantage from writing articles like these for 10+ years now. There aren’t that many good explainooors in Crypto, so having some writing chops gave me a competitive advantage. 

Second to that though, I spent a solid 6-8 months last year doing almost nothing else but learning programming with a focus on Solidity and Web3JS. That got me good enough to work with a few different teams and start spinning up my own projects, which is what really let me contribute to building things in the space. 

I’d say that’s the easiest route to getting to work on things in crypto. Go hard on learning Web3 Javascript and maybe some Solidity, and you’ll be an incredibly valuable asset to any team. That’s probably the only skillset guaranteed to somewhat easily land you a job. Community management and design are good too, but they’re definitely second-tier in terms of demand. 

Starting Small

While I eventually ended up being pretty all-in on crypto, I started by moving a relatively small amount of my portfolio on-chain, and keeping the rest safer in Coinbase to start. 

The crypto community gets a little overzealous about the benefits of self-custody. It’s definitely better if you know what you’re doing. But if you don’t, it’s a big risk to take, since you’re probably more likely to lose your private key or get scammed than Coinbase is to go bankrupt and take your coins. 

I think anyone starting out should start very small and experiment on a low-cost L1 or L2, like Polygon, and get comfortable doing everything that way first. Once you feel like you really know what you’re doing, then you can take on full custody of your funds. 

This ended up being smart too since I did get exploited when I accidentally published my private key on a public GitHub repo. Stupid mistake, but I’m not the first to make it, and some bot was able to steal about $30k from me. Not fun! But I’m sure glad I hadn’t put everything in that wallet, it was a good (albeit expensive) lesson to learn. 

Strategic Information Consumption

The amount of information flying around in crypto is overwhelming, almost cripplingly so. It is extremely hard to stay on top of everything, and you should not expect to. If you try, you’ll spend all day on Twitter and Discord and never get anything done. 

That ends up being a big problem because the more time you’re trying to consume info, the less time you’re building, and you’re much more likely to Make It from building stuff than reading stuff. There’s very little alpha in public channels like Twitter, Telegram, and Discord, so don’t spend all day hoping someone will leak something that makes you rich. It’s more likely that anything they’re sharing is to get you to be their exit liquidity. 

But it is good to stay up on what’s going on, so trying to be very deliberate about creating a focused information funnel is extremely useful. I was constantly churning and replacing sources of info until I could arrive at what gave me the most bang for my buck, with a healthy dose of fun mixed in. 

If you want the 80:20, here it is:

• Bankless Podcast (weekly roundups mostly)

• The Daily (Ape / Bear) Telegram channel

• This Twitter list

You could probably just follow those sources and you’d know 80-90%+ of everything you need to know about what’s going on. There are plenty of other great sources, and I don’t want to seem like I’m criticizing anyone else. But this will get you quite far if you want to minimize the number of things to stay on top of. 

Again, you are very unlikely to get some crazy life-changing alpha from following tons of people on Twitter or joining tons of Telegrams or Discords. Follow a few big sources of highly focused news, and then join a couple of very tight-knit communities where you are sharing stuff with friends, and focus your energy on doing stuff. 

Planning for Taxes

Around September I realized my taxes might be getting kinda messy. So I signed up for TokenTax, started running some reports, and realized I was super fucked. 

So I started pulling money out of crypto to set aside for taxes to make sure it was covered. I knew there was a chance the market could tank and I’d have this huge tax bill that would require selling everything just to cover it.

Well, it turned out I was right to be worried about that. If I hadn’t prepped for taxes and had held everything, I would have gotten completely wrecked by the tax bill considering the market dropped so much between the end of 2021 and April 2022. 

This also helped me find opportunities to tax loss harvest some of my crypto to reduce my liability. And sure you could be aggressive and not pay for a lot of your DeFi gains, but I absolutely do not think that’s worth it. It’s a completely transparent ledger, your wallets are doxxed whether you like it or not, and the IRS will figure out what you owe. Just pay it. No matter how painful it is. 

Speaking of, now is probably a good time to tax loss harvest anything you bought in the last year. You’ll reset the long-term capital gains timer, but with the market down this much, I’m definitely going to do it to save on my taxes for this year. 

Creating Some Rules (Eventually)

One of the things I got wrong that I mentioned last week was not creating rules for rebalancing from the start, or at least not following the guidelines I already had. 

And while that’s true and it was a mistake, I did eventually come around and start following some. Thinking through this article on When to Sell is what really helped me, and made me realize how undisciplined I was being. 

So considering it was one of my big mistakes, and the thing that ended up saving my ass, it feels like this is the most important lesson. Set some rules for yourself and follow them. You will be stupid and emotional in the moment, so if you don’t have good guidelines to follow, you’ll just react emotionally to whatever is happening in the market. 

To quote from The Money Game again: 

“the identity of the investor and that of the investing action must be coldly separate… to know what you're doing, you do have to be able to step outside yourself and see yourself objectively.”

Without some rules that help you see yourself and your situation more objectively, you’ll make many more mistakes. So create some rules and stick to them. 

The last year and a half has been wild. It’s been lucrative, but also extremely trying at times. Aside from the financial losses (on paper anyway) I think the mental consequences of being fully engaged with a crypto bull cycle can’t be understated. 

I say fully engaged because this is the first time I went all-in on a crypto bull run. I had a passing interest in 2013 because of some exposure to Bitcoin via early DOTA 2 courier gray markets. 

In 2017 I got much more interested and published a couple of articles about crypto, and read all the seminal stuff at the time, but never really got into it. 

This was the first cycle where I really went all in, and what a ride it was. Stuff is still obviously going on, teams are still building, and crypto twitter is still shit posting, but we can’t deny the energy has probably dropped by ~90%. About the same as the prices! 

The best time to reflect on your strategies would be before you make mistakes, but it’s not very fun to do that is it? Plus you don’t really know what you’re doing wrong until it happens. There’s a common mistake people make by evaluating past decisions on present knowledge. No one could have known the Russia-Ukraine conflict would start, or that the Fed would announce rate hikes when it did or anything else that may have conspired to take away our magical Internet money. 

So I’ve been taking some time to reflect on what I did well, and where I made mistakes over the last year and a half. Since the mistakes are more catchy and useful, let’s start there. Maybe I’ll do a “things I did right” post later.

Here are some of the mistakes and lessons I’m thinking about. And if you haven’t subscribed, make sure you do for future posts!

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1: Not Taking Profits

There were so many stupid calls here. I’m a long-term investor in crypto so I don’t really believe in trying to time ETH and BTC, but for the alt-coins I was investing in I just got stupid. 

I bought a bunch of TOKE at $30, and held it up to nearly $80 then down to $2. 

I bought a bunch of ALCX at $200, held it up to $400, and then down to $20. 

I held my LUNA too long (lol), MATIC too long, JEWEL too long, OHM, TIME, there were a bunch. Obviously, it’s easy to look back and say “ah if I had sold at the perfect time I’d have made so much money!” but there were plenty of times where I was up 20-100% against ETH and I did absolutely nothing. 

This was just stupid. My goal was to increase my ETH stack, and I think most of my trades decreased it. 

One time when it didn’t was why I did what you’re supposed to do. I found something early, chose a price to try to get in, set a price where I would sell a certain amount of it, and I followed it almost perfectly. When I wrote the JONES article I bought a bunch at $5, then sold most of it at $13 because I knew the investor unlocks were coming up. 

On a more meta-level, I should have been willing to take profits out of crypto too when it started exceeding my target net worth allocations. In earlier 2021 I had overall financial goals including how much of my portfolio I wanted in Crypto, Real Estate, Indexes, etc., and then as crypto ran up I completely forgot about them. It wasn’t even a deliberate ignorance, I literally forgot. 

It wasn’t until I started to think about buying a house that I re-ran the numbers and realized how terribly out of whack things had gotten. So I started taking money out of crypto aggressively in early 2022 and that saved my ass. I still didn’t take enough out, and I should have started it earlier, but whatever. Doing that little exercise was a life saver. 

Going forward, the main thing I’m taking from this is to create periods to reflect on my target NW allocations and be more intentional about rebalancing and create rules for taking profits. 

2: Spreading Too Thin

There’s a great passage in The Money Game by the pseudonymous Adam Smith: 

“The greatest safety lies in putting all your eggs in one basket and watching the basket… If you are concentrated in only a few stocks, you are forced to measure each of them in terms of potential against each new idea that comes along, and this in turn makes you bump the bottom stocks off”

It’s tempting to think we should try to get a little bit of everything. And in some ways, our minds have been warped by index fund investing to think that’s the best strategy. But an index fund is a basket of everything. I think you want to do that for common stocks where you aren’t as involved and where most of the companies are real. In crypto, it seems to pay to pick a few high conviction bets and stick to them and judge everything else based on those. 

My highest conviction bets were ETH, MATIC, SOL, CVX, ALCX. If I had just started there and compared everything else against them, maybe only putting money into something else by removing one of those, I probably would have done better. ALCX still got nuked but the rest did great. 

Instead, I put money into basically everything remotely interesting. I ended up in dozens of Discords I couldn’t stay on top of and lost a bunch of money on projects that I wasn’t that committed to. I FOMO’d into stuff, held too long, didn’t cut losses, no bueno all around. 

Now I’ve consolidated almost everything considerably, but I wish I had done that earlier. It’s really hard to ignore all the shiny new objects, but I think that’s a better strategy than trying to get a piece of every action. 

3: Not Recognizing Farms vs. Investments

One unfortunate part of crypto, especially DeFi, is that even good projects with good tokenomics could be bad investments if their farms are too lucrative. 

I think TOKE was a good example of this. I believe in the product and liked what they were building, but they have pretty significant farming emissions and people were building up a huge farming operation on the platform, which then let people dump it aggressively when crypto started slowing down. People were holding it while TOKE was doing well and the TOKE/ETH pool was paying 150%, but when that stopped, it just got dumped. 

Even when a project is good, you have to recognize that most people in crypto are in it for short-term profits, and it’s probably a bad idea to try to be a value investor on anything besides the absolute top-tier network tokens (BTC, ETH, maybe a couple of others). 

Anything that can be farmed and dumped will be. Don’t try to be a hero and hold on just because you believe in it. And assume anything with emissions and liquidity rewards is going to be farmed heavily, so that’s most of why it has value. 

4: Misunderstanding Mini Hype Cycles

While the broader crypto market was moving through a hype cycle, there were also many mini hype cycles within it. 

The first one was DeFi summer, which started in summer 2020 and ran through the Fall, a bit into the Winter, and died in the Spring. The Yearn price chart captures it well. DeFi started dying when the May crash happened in 2021:

The next one was the Profile Picture Mania, which started around May & June and ran through the fall. Bored Apes kicked it off, but towards the end of it there were shitty new profile picture projects launching seemingly daily. I bought SO MUCH STUPID SHIT (these aren’t mine, but you get the idea, sorry to anyone still involved in these projects). 

Then there was Ohm fork mania, running from fall until the winter, which you can track nicely  from the Olympus market cap chart: 

There were other little ones too, like the GameFi mania you can see on the JEWEL price chart: 

The point is: everyone is looking for the next big win. And these hype cycles are happening all the time in different domains. They follow a somewhat predictable pattern:

1. Blue-chip, original-ish version of something starts to take off (Bitcoin, Punks, Axie, Olympus, etc.)

2. Close-ish derivative stuff starts to take off (Solana, Cool Cats, DeFi Kingdom, Wonderland, etc.)

3. Everything takes off as people scramble after missing step #2

Every time I kept playing during step 3, I lost money. But when I was smart and got out during step 2, I did well. 

The time I did this the best was with Bored Ape Yacht Club. I bought one at 4 ETH early in the PFP mania and then sold it at 61 ETH when my friends from outside crypto started asking me what NFTs to buy and Lazy Lions started taking off. I don’t know what it was about Lazy Lions, something about them just signaled the end times to me. That was when we started entering phase 3 though, and I sold most of my NFTs. 

But with Olympus, I made the mistake of not only missing where I was in the hype cycle but also missing the difference between farm and investment. I still really like the Olympus product, and it’s done fairly well compared to the rest of the market now that the mania is over, but it was so ridiculously overpriced because of the mania and APRs that I held way too long. 

I made the same mistake with RAIDER, thinking we were starting to take off when really it was just the JEWEL money from step 2 rotating into step 3 looking for a quick win. You can pretty much see it happen if you put the JEWEL chart over the RAIDER chart:

The two best ways to use this information seem to be to try to find things before they take off and invest early, or to wait for a new area to start to take off and then invest in the fast followers that have started growing. If you bought into TIME as OHM was starting to take off, then sold as OHM started dropping, you’d have done rather well. Or just invest in the thing that’s taking off leading the charge and skip the followers altogether. If you had just bought an Ape or a Punk when NFTs started taking off and skipped every other NFT you would have done significantly better than 99% of people who tried to find the hot new thing. 

Again, this won’t necessarily be how things play out next time, but something about this does feel like human nature. I’ve seen similar charts of hype cycles in other areas too, like the famous Gartner Hype Cycle chart: 

So I suspect this is a pretty typical trend. Don’t assume “this time it’s different.” 

5: Misunderstanding Cults

Crypto can be very culty. Bitcoin used to be more culty, and there are still Bitcoin Maxis who think everything else is a scam and the world is going to definancialize and replace all currencies with bitcoin and everyone will just eat steak and live on the Mediterranean and ship wives in from Eastern Europe, but that’s a (thankfully) shrinking population. Most people holding bitcoin just do it quietly and don’t feel the need to evangelize. 

My heuristic has always been that the more culty something is, the less likely it’s legitimate. Real products don’t need cults because they just work. Cultiness is usually a form of crony belief that helps gloss over a known, but uncomfortable, reality. 

Cardano is culty because their blockchain technology is a joke. They have not shipped a real product, and likely never will, which is why they keep talking about nonsense like their “scientists” making “research papers” and all the people in Africa they’re supposedly helping. Cardano investors know on some level they got scammed, so they act culty as a response. When reason fails, we return to faith. 

The biggest example of this cycle was of course LUNA and the Terra ecosystem. Something about it felt wrong from the start. The degree to which people would always shill me Anchor as a safe place for earning yield on stablecoins just felt off. And I even wrote as much in my article on stablecoin farming:

Alright, it's impossible to talk about stablecoin farming without some Lunatics showing up and yelling at me for not mentioning Anchor Protocol.

Here's the deal: Anchor is a stablecoin borrowing protocol on Terra, which pays a fixed APR of 19.45% for UST.

A fixed APR of almost 20% on a US pegged stablecoin is insane. It's phenomenal. It's the best thing on the market hands down. And it just feels a little too good to be true.

So yes, you can park your UST there and get 20%. And no it hasn't failed. And yes I'm bullish on Terra in general and hold some $LUNA. But I'm not putting my stablecoins here because it just doesn't make sense. No one is paying over 20% to borrow UST. It is supposedly mostly coming from the yield earned on Luna staked as collateral, with some support from its creators / investors, but something just feels off. Too much money appears to be getting minted out of thin air. 

But you know what, I didn’t follow my own advice. Despite having these nagging doubts about Luna, getting turned off the by cultiness, and not believing deep down that it had a future, I bought a bunch of LUNA and staked it in Astroport. I was so proud of that trade, too, since I saw it early, bought most of it at $30-40, and then rode it for a solid 3x which I of course took no profits on. 

Then it all got erased in the crash. I was right that something was wrong, and that Anchor was too good to be true. But instead of listening to my gut about cults, I bought in anyway from FOMO. 

Similar things played out in a variety of projects. A cult forms around a product, pumps it, and then it ends up falling apart. The mistake I made was thinking that the pump was a sign I was wrong about the cult. I was right. I just needed to wait longer.

Core Lesson: Impatience (Maybe)

The clear overarching lesson is that I should have been more patient and done less. If I had made fewer higher conviction bets, and rotated back into ETH regularly, I would have done much better. 

But then I also wouldn’t have ended up so deep in the industry. I wouldn’t have learned everything that I know now, I wouldn’t have gotten to work with Crypto Raiders and other teams, I wouldn’t have started this newsletter, I wouldn’t have made crypto friends on Twitter. 

Maybe some of the alpha is the friends you make along the way? I certainly lost a lot of gains by being so active, but I also got some of my best results from it. You definitely can’t expect to make perfect decisions, nor do I expect to in the future. And many of these lessons you can’t really learn by reading a blog post like this (sorry), you have to go make them yourself. 

So, I don’t really regret any of it. Now I know what to look for next time better, and I can take a more high-level approach to crypto here while things are quiet. 

I’m not leaving the industry any time soon. I still think it’s the next wave of the Internet, and I’m excited to see what continues to be built here. I hope you stick along with me. 

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For Consensus newcomers, welcome! I publish a crypto article almost every Friday, often focused on tokenomics, DeFi, or gaming.

Let’s start with the important caveat: there is very little “passive income” in DeFi. Passive income suggests you have built some product or business which can generate profit for you with minimal or zero continuing effort on your part. 

Unless you write a smart contract that charges fees that are paid to you, or sell an NFT with royalties that keep accruing to you, most returns in DeFi are not really passive income. They’re better understood as “yield.” Returns on your assets that you are putting to work in the DeFi ecosystem, either to help another platform function better or to simply take advantage of free tokens that are being kicked off. 

The core difference is that passive income is something you could accrue without an existing amount of capital. But if you want “passive income” in DeFi, you almost always need some amount of crypto assets you’re willing to put at risk. Those assets are what earn you your yield. 

As I explained in “How are DeFi Yields so High?” The sources of yield vary. Some are dividends of profitable crypto businesses. Some are the fees you’re earning for helping provide a service. Others are completely unsustainable free money faucets, the amped-up crypto equivalent of VC-subsidized Uber rides. 

But regardless of where they’re coming from, there is free money out there for those who want to claim it. You just have to know where to look, and how much risk you’re willing to take. 

Through the rest of this post, I’ll explain some of the safer easier ways you can earn passive yield on your crypto assets. At the end, I’ll go over assessing whether or not it’s worth it, and where some of the hidden risks are. 

How to Earn Passive Yield in DeFi

There are five broad sources of passive yield in DeFi:

• Lending

• Trading fees

• Staking

• Platform incentives 

• Aggregation

Each can allow you to earn some passive return on your capital at various APRs and risks, depending on your tolerance and how much time you want to spend managing it. 

Lending (low risk, low maintenance, low yield)

The simplest way to earn yield in DeFi is to supply assets to a borrowing platform like AAVE or Compound, and get paid a small amount of interest from the people borrowing that same currency from the platform. 

When you deposit assets into AAVE, Compound, Rari, or other lending protocols, you are then able to borrow other assets against them. Deposit somet ETH, and you can borrow USDC against it. 

When you borrow USDC, you have to pay interest on it. That interest rate varies based on the demand for borrowing USDC, is compounded by the second, and has to be paid whenever you pay off your debt. If you don’t pay it off or the debt gets too high, the platform can take your collateral to pay your debt. 

When you pay interest on the USDC you’re borrowing, some of that interest goes to the platform itself, but most of it goes to the other users who supplied the USDC that you’re able to borrow. So when you deposit some of your funds into these platforms, you’ll earn a bit of interest from the other people paying interest on borrowing those funds from the platform. 

If those people default on their debt, you’re protected, because the platform will seize their collateral and sell it to protect your assets. And despite the many catastrophic meltdowns in DeFi, the major lending platforms Compound and AAVE have never had any issues for depositors. 

So this is very safe, and requires no maintenance, but the yield is very low. You’ll typically only make 2-4% on stablecoins, and next to nothing on ETH or wBTC. You can also read more about this strategy here.

Trading Fees

Your next option for earning some passive yield on your assets is to supply your assets to decentralized exchanges, so other people can trade between them and pay you a small fee. 

Think of this like lending money to the currency booth at the airport. People want to trade between Dollars and Euros, so you give the booth 100 USD and 100 EUR. At the end of the day you come back, and they give you back 120 USD, 80 EUR, and an extra $4 in trading fees generated from people swapping between the two. 

You can do the same by depositing your crypto assets into decentralized exchanges like Uniswap, Sushiswap, and Curve. You supply the assets, people trade between them, and every time they trade, they pay a small fee. When you withdraw your assets, you get your share of the fees generated, based on what percentage of the total trading pool you contributed. 

While your funds are very secure using this strategy, you do open yourself up to impermanent loss. If you’re supplying tokens with prices that fluctuate a lot against each other, like ETH and USDC, you might lose money if their prices change significantly. Thankfully the yield on supplying volatile assets is also higher, so it can be worth it. It’s just a risk you have to decide if you want to take. 

This is reasonably safe, has minimal maintenance, and has a highly variable yield. Typically the riskier the pair is, the more your yield will be. You can read more about this strategy and how it works here. 

Staking

There are two kinds of staking. Real staking is when you contribute some of your crypto assets to help secure a crypto network, like staking your SOL to secure the Solana network, and soon staking your ETH to secure the Ethereum network. 

In return for doing this, you earn a share of the new tokens that are being emitted plus some share of the gas fees being charged on the network. So it’s kind of like earning a dividend for helping secure the network with additional collateral and processing power. 

Many projects will have “staking” but it’s just a way to get you to lock up your tokens and not sell them by giving you free tokens. You’re not securing a network or doing anything particularly useful besides not selling your tokens. This is a way to get free tokens, but you’re not really earning yield, you’re just protecting yourself from dilution. 

For real staking, you have two options. You can set up a validating node yourself depending on what network you want to stake tokens on, or you can just buy liquid staking tokens from a service like Lido. By going to Lido you can exchange your ETH for stETH, a token which earns about 4% APR in ETH while sitting in your wallet.

It’s among the safest options, has no maintenance, and has a low but very predictable yield. This doesn’t really require a blog post, you can just check out Lido, Rocket Pool, or look for other liquid staking solutions if you want to get started.

Platform Incentives

Platform incentives are where you can see the insane APRs start to appear, as protocols gives away their tokens to incentivize more people to use their products. 

I mentioned AAVE above, and if you use AAVE on Ethereum you are getting low predictable yield. But if you use AAVE on Avalanche, your yields are higher, because Avalanche has given AAVE free AVAX tokens to give away to incentivize people to migrate funds to the Avalanche chain.

These platform incentives can often be worth moving your funds around to different platforms to find the best yields, a process called “yield farming.” For example, let’s say you want to earn the highest yield on your USDC. You could pair it with DAI and deposit the two into the Uniswap DAI/USDC pool to earn trading fees. But Curve pays you extra CRV tokens to deposit your stablecoins there, so it might be worth it to deposit your funds on Curve instead. 

Then even within Curve, there are different pools that will pay you more or less CRV tokens for the same amount of USDC. So you could rotate your funds within different pools to maximize your yields. 

Platform incentives are where you can get into an insane amount of optimization, earn the highest yields, spend the most time micromanaging it, and also have the highest risk of blowup. If you want more, I have an in-depth guide to farming with stablecoins that covers finding these opportunities. And if you want the super degenerate yield farms that pay out 1,000%+ APR and will probably lose you all your money, you can go shopping on VFAT.

Aggregation

Finally, there’s aggregation, which is essentially a metalayer on top of these other methods. Yield aggregators tap into these other sources of yield and do the farming for you, so you can just deposit your investment and let the aggregator take care of the farming for you. 

There are two main types of aggreagors. Autocompounders will focus on a specific source of yield, harvest the rewards, sell those rewards for more of the underlying tokens, then reinvest those tokens for you. This is a process you would otherwise have to do yourself and could incur a significant amount of gas fees in the process, so they’re able to save you quite a bit of time and energy. 

Then the “true” aggregators collect yield from a variety of sources to give you a blended APR that should reduce your risk exposure while balancing out your earnings over time. Yearn’s token vaults like for USDC and ETH take a variety of strategies to earn yield on the assets, so you don’t have to keep hunting for the best returns. 

These aggregators are almost like democratized hedge funds that you can deposit and withdraw funds from any time, at any amount, and which anyone can access. They require no maintenance, are relatively low risk, and can sometimes have good yield. Though since they’re using the strategies already laid out and taking a fee off the top, they will typically pay slightly less than doing the strategies yourself. 

You can read more about how they work here, and definitely check out Yearn if you want to try using one. You can also look for good farms to autocompound on Beefy.

Getting Started

If you want to get started with these simpler, safer methods, here’s the easiest way. I’ll assume you have some ETH on Coinbase or another exchange already. 

1. Install MetaMask

2. Send in your ETH from Coinbase to your new Metamask wallet

3. Go to any of the sites linked above (you’ll have the easiest time with the AAVE or Yearn strategies)

4. Deposit your funds

5. Watch your portfolio on Zapper!

And that’s it! You’re earning passive yield. If you want to find more platforms to experiment with, the easiest way is to go to DefiLlama and scroll through the top projects on every chain sorted by Total Value Locked. TVL is a decent proxy for legitimacy, since the more money in a project the more battle-tested it is. It’s not perfect, though. Luna had billions in TVL. 

Speaking of, let’s talk about risks quickly.

Is Passive Yield in DeFi Worth It?

When you hear “passive income” or “passive yield” you assume it should be fairly, well, passive, right? 

Most stuff in crypto fails that test. It could blow up, you have to move things somewhat often, there are tons of risks that go unacknowledged, and you can’t really leave it for a few years without touching it. Except for maybe a couple of things. 

So you aren’t really getting passive yield the way you might from holding a bunch of dividend-paying stocks in your brokerage. It still requires more maintenance, and the downside is much higher. 

For example, if you put your life savings into Anchor Protocol to earn 20% APR, you might have lost 50% of it or more when Luna broke down. Was earning 20% worth the risk of losing everything? Definitely not. 

Despite writing about stablecoin farming in the past, I don’t do any of it now. Even if I can get 10% on my USDC, I’d rather have those dollars sitting in a fiat bank account because I think that risk-adjusted rate might be higher. This is a privilege I have by living in a country with a secure banking system though. That calculus might be different for someone in a developing nation. 

That said, I keep a lot of my ETH in Lido’s stETH. I consider it extremely low risk, and since I’m going to hold all that ETH anyway, I may as well earn 4% on it. The nice thing about stETH too is it’s extremely low maintenance. I don’t have to do anything, it just sits in my wallet. If you want more than 4% on your ETH, there are other ways to get it.

But, you should play around yourself and decide what makes sense for you. I’ve had plenty of fun on the more degenerate side of DeFi as well, though I think it’s mostly lost me money. If nothing else, experimenting and putting your money in a few different places is a great way to get your feet wet and see how everything works. I’d check out my Tokenomics series too if you want help evaluating projects, and you should also make sure they aren’t ponzis.

Has crypto built anything useful?

Or is it just a myriad of Ponzi schemes with sophisticated grifters stealing money from hopeful newcomers? 

Depending on who you ask, Crypto could be the financial coming-of-Jesus moment. Or it could be a “venereal disease… below contempt” in the words of Charlie Munger.

Part of the problem in assessing the crypto industry is we throw around certain terms without really understanding them, and without having a clear terminology around them. There are Ponzi schemes. But most projects aren’t Ponzi schemes. That doesn’t mean they’re necessarily good, but we need some more expressive ways to describe projects that are good and bad, living and dying, scams and not. 

So here’s one attempt at a framework for judging crypto projects. 

I’ve broken them out into two meta categories: living or dying. 

Then within those categories, there are four subclasses: Pyramid, Ponzi, Tulips, and Spenders. 

Put together, this gives us a useful framework for looking at new or existing projects and assessing if they have a future.

Living Projects

A living project is one where there are net spenders in the economy creating some amount of revenue for the business. People who are paying to use the service without getting paid to use it. 

One example of this is AAVE on Ethereum. When you deposit your funds and borrow against them on AAVE, you have to pay a certain amount of fees to AAVE for their service. AAVE isn’t paying you any bonus tokens to borrow assets, so you are a net spender in the AAVE economy once you take out some debt. 

If AAVE manages its costs, then it is a profitable business. It is living. 

Uniswap is another good example of a Living project. They earn some trading fees on every transaction, and they don’t need to pay out UNI tokens to get you to use their platform. People just use it. A third example of a living crypto project is Yearn. People will happily pay Yearn their 20% management fee to do the auto compounding or risk management for them, without getting paid in some other tokens for using the platform. That's real. 

Outside of crypto we have plenty of examples of living businesses. The taco food truck I get lunch from sometimes is a living business because I'm paying them for tacos, without getting paid some mysterious TACO coin (redeemable in the TACOVERSE??) for doing so. The taco truck has net spenders. It makes revenue. Maybe even profit. Weird concept, right? 

Unfortunately many projects in crypto are not living, even if they seem like it. They’re slowly dying. 

Dying Projects

If a project is spending more on incentives and emissions than it’s earning from users, it’s dying. 

Most projects that are doing this will say that token emissions are not “spend,” but they absolutely should be treated as such. No one would seriously argue that the TVL for a project would stay the same if the emissions were completely shut off. Crypto folks are always looking for free money machines, and unless you have a product they are actually using, they’ll rotate their funds elsewhere as soon as you turn the money printer off. 

Terra's Anchor Protocol is the most poignant recent example. There were real spenders, people who were willing to pay to borrow money on the platform. But the amount Anchor had to spend on inflating the yield to attract capital far exceeded the revenue they were generating. 

Unsustainable growth like this is not some special crypto thing. Uber is famous for this. The reason our Ubers are so expensive now is they stopped being subsidized by VC money. You could argue that the only reason Uber was able to displace cabs in some cities is because Uber was burning money to fuel their unsustainable growth. Now that the money has run out, cabs are getting more popular again. 

Before the popularity of venture capital, most businesses started out as real sustainable businesses and slowly grew into global behemoths. Now they don't have to wait. They can burn a few billion dollars to skip the boring slow period, then figure out how to become a real sustainable business later. Hopefully. Or they can get an Apple TV series made about them as a concession prize.

“Dying” is perhaps a strong term, but it’s suggestive of the direction the business is going in. Unless they can turn things around where people are paying more to use their product than they’re paying out in incentives, they will die. Many businesses and projects start off in a dying phase, and being in the dying phase doesn’t mean it will die, so it shouldn’t be interpreted too strongly.

These are the two most important categories: if a project hasn’t figured out how to switch from dying to living, then it’s not a “real” business yet, at least in my mind. Very few crypto projects have successfully done this. Then to get more specific, there are four categories we can further break down Living or Dying projects into: Pyramid Schemes, Ponzis, Tulips, and Spenders. 

Pyramid Schemes

A pyramid scheme is one in which the primary source of revenue is from people having to pay to enter the system. And where your primary source of revenue as a participant in the system is by getting other people to pay to enter, so you earn a share of their revenue. Thus the "pyramid" structure.

The people who are early and are able to recruit a ton of people make the most money. The later you join, the less money you're able to make as there are fewer people to recruit, and at some point the scheme tips over where the later people can't earn back their initial investments.

It's actually hard to find a good example of this in crypto. Many projects exist where early investors make more money than later investors, but that hardly makes something a pyramid scheme. The question is: where is there a product where you make money by convincing other people to buy into it? And where you make money directly from the people you convince to join?

Cardano might be a candidate. Their focus on convincing YouTube influencers to promote Cardano, and then get their followers to stake to their node so the influencer earns a share of all the yield generated on their stake definitely feels pyramidy.

Evan Armstrong argued that NFTs like Bored Apes are like an MLM, a less aggressive type of pyramid scheme, but they’re missing the crucial element of generating cash flows from later people you recruit. A Bored Ape holder doesn't get some share of the fees paid by people he convinces to buy an Ape. The only overlap is that early investors do better than later investors, which is true in pretty much everything. You wouldn't argue Facebook is a Ponzi just because their stock is down 80%, puting later investors in the red. 

Ponzis

Ponzi is the hardest to claim. A Ponzi scheme is one in which there is no real underlying business that's generating revenue, and the funds of later contributors are just paying off the earlier contributors. It also typically needs some element of deliberate fraud, since that fraud is what distinguishes it from a normal unsustainable business.

Bernie Madoff's Ponzi scheme is perhaps the best known and strongest example. He was committing fraud by faking trades to explain the source of profits when in reality he was recirculating money from later investors to earlier ones. He was running an investment business, but some of the returns were fabricated.

Bitconnect is probably the most famous Ponzi scheme we've seen in crypto yet. They were promising 1% compounded returns per day, which turned out to be coming from other people putting money into the system.

As far as we know now, Anchor protocol's 20% interest rate on UST was not a Ponzi. They don't seem to have been committing fraud by implying the yield was coming from anywhere special. They said it was marketing spending by the Luna Foundation to drive the adoption of UST. It's not that different in practice from VCs subsidizing Uber rides. I'm not saying it's right or good, what happened with Luna is pretty fucked, but it's not clear to me right now that Anchor was acting criminally.

Tulips

A Ponzi is a situation where some investment is paying out dividends that are funded by other investors. But a tulip is a situation where investment is getting more valuable because of the belief of other investors. And typically, a situation where the investment has very little utility besides being an investment or store of value. 

Many things are tulips, and we only judge them differently based on their durability. Gold is a tulip. Art is a tulip. Any status symbol can be a tulip. Most NFTs are tulips, even if they promise membership in some community. 

Calling something a tulip does not necessarily mean it’s inherently valueless. We can make gold into jewelry, sure, but the only reason we’re inclined to do that is because gold is valuable. The only reason we think it’s valuable is it’s sufficiently rare for other people to think it’s valuable. If we all stopped caring about gold, or if we figured out alchemy, no one would care about gold anymore. 

Tulip in this context just means the value is based primarily on some intersubjective myth about the assets importance. It only has value so long as other people think it has value. 

Spending

Finally, we have spending. This category is a little odd since you don’t have a “spending” the way you have a “pyramid scheme,” but it’s a sufficient umbrella to capture what distinguishes a real crypto project from the others. 

Ponzis and Pyramid Schemes are both ways of generating the appearance of spending without having real spending. And while a Tulip can be very valuable, there is often very little spending in the business so it’s hard to call it really an investment vs. speculation. 

Without real spending, a crypto project is either dying or pure speculation. Which makes this spending question one of the most important when evaluating the legitimacy of any project: 

1. Who’s spending money

2. How much

3. Is there a way for this spending to exceed the project’s expenses

And at least in the crypto realm, this typically means there needs to be some spending of tokens or assets that are not the native ones. This is a challenge many games can run into that I outlined in the One vs. Two Token article. If a game is making all of its money in their token, they then have to figure out how to dump their token on the market to actually collect that revenue. Spending something else like ETH or USDC is more legitimate. 

Alright, now that we have the various categories laid out, let’s look at how they apply to different projects and might test our intuitions about what’s legitimate or not.

Dying Projects Where Early Investors Make Money

What if you have an unsustainable business where some people make money, and then it declines dramatically in value?

WeWork is a decent example of this. Benchmark initially invested $17m in WeWork, and later sold some of that investment for $315m. If WeWork was an unsustainable business, where the early investors were getting paid off by later investors, was it a Ponzi scheme? 

While it feels close, it doesn't seem like it, since there was a real business being worked on that was trying to reach (and still is trying to reach) a point of sustainability. So an unsustainable business where early investors manage to make money isn't necessarily a Ponzi. There needs to be some element of a fabricated business or no attempt at a business.

This is true for many tech startups. They go out and raise money on some big goal they want to accomplish, and the early investors just need later investors to come in to buy them out. They don't actually need the business to succeed or become sustainable. So are all tech startups Ponzis? Or Tulips? They might be Tulips, but they definitely aren't Ponzis. Just Dying. 

Now, what about crypto projects? There are tons of crypto projects that launch, get bought into by early investors, go through a hype cycle, then drop 80-90% or more and never recover their all-time highs. The investors who sell at the top can end up making tons of money thanks to the people who bought in later as it was running up. 

Are those projects Ponzi schemes? Again I think we have to look at what the business is actually doing. Solana is down 85% from the all-time high, and some investors absolutely made a killing by buying it at $3 and selling it at the top. But that doesn’t mean it’s a Ponzi or pump and dump. Solana is building a real product with users who are spending SOL to use it, albeit currently much less SOL than is being emitted as staking rewards. 

Bitcoin vs. Ethereum

Where do Bitcoin and Ethereum fall? Critics will sometimes call them Ponzi schemes, but that doesn't make sense. There's clearly no false business being operated to sway investors. Nor are there any cash flows you get from investing in either of them (yet). 

Bitcoin is somewhere between a Tulip and an Dying Business. You can't do anything with Bitcoin besides trade it or hold it, but you do have some spending in the economy via transaction fees. The emissions from mining greatly outweigh the transaction fees though, so it's still heavily subsidized by the new bitcoins being printed. If the fees get high enough to justify continuing mining without the block rewards, then it would be a Living business, but we aren't there yet.

Ethereum is currently a Dying Business since you do have more things you can do with Ethereum by paying gas fees, but the emissions exceed the fees being paid. That said, it's possible that after the merge there will be more net spenders in the Ethereum ecosystem than new tokens being emitted, in which case the Ethereum network would become a Living, sustainable business. And it would be the first Proof of Stake chain to do so since all the competing L1s are massively unsustainable businesses.

But in both cases, there's no real Ponzi argument you can make. They're either Tulips or Dying.

Play 2 Earn Games

What about Play 2 Earn games with inflationary breeding loops like Axie Infinity or STEPN?

In my STEPN article, my biggest criticism was that their minting program would create runaway inflation eventually devaluing the sneakers and tokens. I also argued that their GMT token was massively overpriced and had no cash flows or revenue associated with it to justify the price.

So the game itself is definitely a dying business, but is it also a Ponzi? This one is weird since there's not really a business outside of the game itself, yet there is clearly some value to in-game work as we see from all the Web2 games that develop grey market economies. So saying "all of the value is imaginary in a game" isn't the same as saying it's not real. Sure there's something very different about a digital sneaker vs. a set of silverware, but the digital sneaker is still a thing people value to play the game.

But the game isn't exactly dying in the way I described it above, since they aren’t paying out a ton of extra free bonuses to incentivize activity. People bid up the prices because they wanted to play more. So it's kinda closer to the Tulip model, where the prices were driven up primarily by speculation on what you'd be able to do with your digital sneakers, more than any true underlying value. So maybe "Dying Tulip" is the best designation here.

Why isn't it a pyramid scheme? You don't benefit from recruiting people into the game, aside from the benefits that come from more people being in the ecosystem in general.

If by giving someone your activation code you earned 10% of their GST then it would definitely be a pyramid scheme, but no such mechanism exists. I’m sure some future game will add it though as a “growth hack.”

What’s the Point?

We could go through this exercise for any number of crypto projects, and it might seem a little pedantic, but I find it helpful as a way to analyze new and existing projects to see what their future might hold. 

The first question has to be whether the project has real spending or not. Is there some way it’s generating cash flows from being used? 

If not, where is the money coming from? Is it just a Tulip people are speculating on? Or is it some sort of Ponzi or Pyramid scheme? 

And if there is real spending, is the project living or dying? Is it having to emit a huge amount of tokens to incentivize people to do that amount of spending? Or is that spending happening without incentives? 

For me, this is how I’m looking at what projects might survive the bear market. Yearn’s token has had a brutal drawdown against ETH, but their business seems extremely solid. MakerDAO is another good example. Terrible token price, but the business itself is very healthy. 

One big question will be which of the competing L1s can transition from dying to living. If the Ethereum Merge goes on as planned, and gas fees stay consistent, then it should become deflationary and be a business with solid cash flows. Can other L1s pull off something similar? It’s easy to pick on Solana’s seemingly impossible task of getting enough on-chain action to become sustainable at their current gas prices, but I think those criticisms underestimate the effects of a product like Solana Pay getting integrated into Shopify. Small fees are fine if you have enough of them. 

In a bull market, everything looks amazing. But now that we’ve sobered up a bit, looking at projects through these lenses can help separate the wheat from the chaff. 

Thank you Wikipedia for the photo of Charles Ponzi

Whether to use a one or two token model is among the most common questions I get from teams designing their crypto game’s economy. 

My default response until recently was always to use two tokens, but now I’ve been rethinking that advice. I think you can make a compelling case for either choice, and I’m going to try to explain some of that nuance here. There also may be a way to get the best of both worlds, as I walk through at the end.

This article will primarily focus on gaming, though you could apply similar thoughts to other crypto projects. Gaming is a nice sandbox to think this through in though since it allows for so much more token utility than other projects. 

Anyway, let’s dive in. 

What’s a Token For?

The primary use of a token in a crypto game should be to improve the game economy in some way that is not possible without a token. 

Tokens are used for many other things like speculation, but as I explained in my “crypto gaming is broken” article, those other uses can end up hurting the quality or future of the game.

So how can a token improve the game economy in some new way? I believe this primarily occurs through closing the loop on microtransactions. Instead of a one-way street where players make microtransactions to unlock some additional utility in the game, crypto tokens enable a two-way street where players can also pull some of the value of their work out of the game. They allow those who have invested significant time into the game to trade that time for capital, and they allow people with capital a new way to trade some of that capital for saved time. 

These transactions can take two forms:

Application Transactions: Where players are paying the game itself for access to something like a battle pass, cosmetic, loot box key, or progression in the game. 

Peer-to-Peer Transactions: Where players are paying each other for resources within the game. These could be NFTs, currencies, or anything else. 

Those transactions have existed in games for a long time. We’re all familiar with in-game transactions and auction houses. The one crucial difference a token enables is the ability to create a liquid market between the game and “real money.” A way for the player to redeem their Runescape gold for dollars (with a couple of extra steps). 

Any other utilities, in my mind, are secondary. Not that the other utilities don’t exist, but this should always be the primary value of introducing a crypto token to a game. 

So what are those other utilities? Fundraising is a big one. Speculation another. Governance can be one as well. You could also include cash flows or ownership too, as a more serious version of speculation. But we need to recognize that tokens are often introduced not to make the game better, but as a way to help fund the game. And then the question is if this can be done in a way that also benefits the game and community, or if it always ends up being at odds with creating a good game. 

Since the two token model is more common right now, let’s start there. 

The Two Token Model

The two token model was pioneered by Axie Infinity with their AXS “governance” token and their SLP “in-game” token. 

AXS is the fixed supply token that’s meant to accrue value over time, and SLP is an infinite supply token they can mint and burn as needed to balance out the game. 

In this model, AXS is essentially a security. It’s akin to holding stock in the Axie game. Teams can’t really say this, of course, but that’s what it’s doing. Governance is often just a way to feign utility to get around the security concerns. SLP is the real “game” token, since it’s what most of the game economy runs on. 

Benefits to the Two Token Model

What’s great with this model is you can split out the speculation and the game economy. When you launch anything in crypto, people will speculate on it to try to get a nice fast return. Having one token where people can speculate and one token where people can play the game lets these two uses play out separately so that a surge in speculation doesn’t cause a surge in the in-game prices. You don’t want a surge in speculation to suddenly drive up the price of everything in the game. 

It also makes fundraising easier. Investors want a fixed supply token they can invest in that has some reason to go up in value over time. A variable supply in-game currency isn’t a great investment asset since the game creators can adjust the emissions, burns, and utility of the token at any time. And they might need to try to push its value in one direction or another to balance out the game. 

The two token model of this type is also familiar. People are used to seeing two tokens from Axie and other games that have followed its model, so they intuitively “get” that there’s one token for speculating and one token for playing. It’s also similar to how we think about normal money, like how Gold or Bitcoin is the asset you hold, and Dollars are the asset you spend. 

Downsides to the Two Token Model

While a game is surging in popularity and the market is hot, a two token model looks perfect. One token is staying fairly steady for people to play the game with, and the other one is steadily going up to give people that NGU speculation euphoria. 

But when the music stops or slows, people will start to wonder: what’s the point of this governance token exactly? It’s unlikely people will sit on millions of dollars of game tokens just to vote on governance measures. There needs to be more. 

This question of “what is the point of the Fixed Supply Token?” is the big downside of the Two Token Model. So there are a few ways to solve it:

What is the Fixed Supply Token For?

Have a purely speculative Fixed Supply Token (FST) eventually leads to the “hey why are we holding this?” question. Speculation can’t keep the price up forever, so there has to be some point to the token.

Some teams will take the approach of adding cashflows, typically via staking. This can go two routes: 

Dilution Protection: You stake your token for more of the same token. This isn’t really cash flow, it’s just dilution protection as more tokens get unlocked. But it still looks like “free money” at least. 

Dividends: Stakers receive some other token representing the spending in the game. This is tough to get right though, because if you redistribute funds collected via Application Transactions, then the transactions that should be acting as sinks to pull the currency out of the economy stop acting as sinks. They turn ponzinomic instead. So you really only want to redistribute fees from Peer to Peer transactions. 

Dividends from Peer to Peer transactions could be quite significant, too. STEPN was making 2-3m a day in transaction fees for much of the past month. There were 600m GMT tokens circulating, so let’s assume 1/2 of those would get staked if they had staking. If they split their transaction fees with GMT holders 50/50, then there would be $1m a day going to 300m GMT staked or about .3 cents per token per day. Given the average GMT price of $1.50 over the last month, that’s a 0.2% per day dividend, or 73% non-dilutive APR. That’s incredible! They didn’t do this, but it does show that dividends on peer-to-peer transactions can be significant. 

If a team doesn’t want to add cash flows, or if they want to add something in addition to cash flows, they will add in-game utility for the fixed supply token. 

This is what Axie ended up doing, by introducing AXS costs for breeding. In that case, the FST becomes an additional in-game currency, with the difference being that it is a fixed supply vs. the other token’s infinite supply. Game designers can choose whether they want these used tokens to be burned or recirculated, and use that as an additional check on the game economy. 

Utility for the FST gets tricky though. What do you use the FST for vs the VST (Variable Supply Token)? 

You could draw the line anywhere, but it typically ends up being somewhat arbitrary. There are good arguments for using either as the marketplace token, and for either as the app transaction token. 

I think if teams are going to add utility for the FST, then that utility should have some impact on the token’s supply. The point of adding utility is to drive value to the FST, but if it’s just being used as a currency like the VST, then there’s no utility to holding it. You can just buy it as you need it, and sell it when you don’t. But if the FST gets burned when it’s used on special upgrades in the game, for example, then both the FST token and the assets that have those upgrades should get more valuable over time as the game gets more popular. 

Teams taking the two-token route will eventually run into this problem though. Unless they find a way to add value or utility to the FST, it will get dumped, and a lot of speculators will be left holding the bag. 

So what if they try a one token model?

The One Token Model

Using just one token has been tried much less. But it offers some promise as a way to resolve the issues of the two-token model. 

One thing worth keeping in mind is that a one token model doesn’t necessarily mean there’s only one currency in the game. The game could have many currencies, but only have one that acts as the bridge between the game and crypto. 

There are a few ways this could be done.

A VST One Token Model

One option is to create a one token model with just a variable supply token. I haven’t seen a good example of this yet, but it makes sense as a token model for a game trying to strictly follow some of the ideas I had in the “crypto gaming is broken piece.”

It goes back to my point at the start of this article. The purpose of a crypto asset in a game is for people to be able to trade their in-game work for out-of-game money. 

If a game studio wanted to do this without messing with complicated tokenomics, here’s an extremely simple method. 

1. Build an awesome game with an in-game marketplace (e.g. Runescape, WoW, etc.) 

2. Create a bridge between the core currency and the blockchain

3. Add liquidity for that currency with another token (ETH, USDC, etc)

There, you’re done. You made a crypto game. This is deceptively simple but it’s all we need in many cases. Imagine Runescape with a highly liquid Gold <> USDC market. That would be pretty awesome, right? 

You don’t even need to make the items NFTs, because let’s be honest, the game items are worthless without the game. Just keep the normal Auction House where players can trade everything for gold, add a gold bridge, and boom, awesome crypto game. 

Why haven’t we seen this? Well, because making fun games is extremely hard. There are games that are taking this approach, most of them just aren’t out yet. And when they come out it’s going to be much harder for them to gain traction because they won’t have an exciting ponzinomic loop on top of them. And if we’re being honest, those breeding ponzi loops are an excellent go-to-market strategy for drumming up initial hype. 

The other downside of this model is that there’s no token for people to speculate on. And at least for now, succeeding in crypto does seem to require having some opportunity for speculation. It’s also hard to raise money from investors without some fixed supply asset they can hold on to for the long term with some hopes of its value going up. 

So let’s consider a Fixed Supply One Token Model next.

A Fixed Supply One Token Model

Could you build a crypto game where there’s just a fixed supply token? This is the route some of the older crypto gaming platforms that launched took, like Sandbox and Decentraland. And I think we might see it become popular again as an improvement on the two token model. 

Here’s one way you might do it. This is somewhat speculative and I’m still workshopping it, so please don’t just copy & paste it and assume it will work.

In this model, you have your fixed supply token which serves as the investable asset as well as the bridge for all in-game money.

But you still need a more variable supply currency in the game so you can balance the economy better. So you still have the VST, it’s just locked in the game without a bridge.

Then you create an in-game DEX between the VST and FST, as well as among any other in-game assets. This is actually a much better technology for trading something like wood for gold, since it creates a SushiSwap or Uniswap style liquid market for being able to immediately trade anything without needing a buyer on the other side. 

So players could exchange Gold for the FST at any time and bridge out the FST. Or they could bridge in the FST to buy Gold and Wood and whatever else they want. 

Since the FST has a fixed supply, and all the items in the game would be inflationary, the purchasing power of the FST should increase over time without being extractive. Early players would be rewarded with the fruits of their labor being more valuable in FST terms, but later players will still be able to Play and Earn. 

Then separate from the resource marketplace, you could have an item marketplace. These items could be extractable as NFTs, or they could be locked in the game. I don’t think it makes a big difference. You could price everything in the marketplace in the FST, and then take a transaction fee either into the treasury or as a burn. If you burn it, then you create some deflation over time, which would also help drive more value to the FST. 

Another option is to price the item marketplace in a major crypto asset like ETH. The huge benefit here is that then the transaction fees are in an asset that is not tied to the game performance. If you charge a transaction fee on your own token, you still have to sell that token into the market to have revenue. If you charge a transaction fee on ETH or SOL or USDC, then you have that revenue immediately. 

This also requires players to bridge another asset like ETH, SOL, or USDC into the game, which would be stored by the treasury. The treasury could earn yield on these assets while custodying them, creating an additional income stream for the game. 

The question then is, how does the FST derive value? Here you could reintroduce the dividend model, but where the dividend is paid in the asset being used in the marketplace. So by staking my FST, I’m earning some ETH or USDC in the game, without having to bother with some complicated on-chain staking system. This would be extremely cool and is not something I’ve seen any game try. Though I suppose it would be complicated legally. 

Then you could also have it accrue some dividends from the trading fees on all the other swaps. So by locking up your tokens in the game, you’re earning some ETH, some of the in-game VST, and some more of the FST, all from the different trades happening in the game. That would make it a phenomenal investment asset, and you’d be increasing the value of the FST over time by having its purchasing power for the inflationary assets increase. If you threw some high-value burns on top of it, you’d have an extremely strong investment thesis for the token. 

As I think through this model, I think it’s much stronger than the current popular two token models. It adds a lot of flexibility and ensures there’s one core asset that’s accruing value in the ecosystem. The VST one-token model is ideal if you just want to build a game that has some crypto tie-in. But this FST model lets you retain some of the more speculative side of crypto, as well as the investability over time. 

This is purely a thought exercise and definitely needs some refining. But I hope it’s helpful for any team trying to think through how to structure their tokenomics. I’ll keep referring to this and expanding on it as I explore more games, and work with more teams. 

And as always, if you’re working on a game and want to collaborate on figuring this out, hit me up on Twitter.

It takes years of work, often millions of dollars, and at the end has no guarantee of success. Even the games that do become hits often lose their popularity after a couple years. 

Think about how few games have stayed popular for a decade. World of Warcraft, Runescape, FIFA, it’s a short list. If every video game that launched had a dedicated governance token with a five-year unlock schedule, 99% of those tokens would be completely worthless by the time they were done releasing. 

So one of my strong theses with Crypto Gaming has been that the games which will succeed will be the ones where a base set of IP and crypto assets can be used in a variety of games. Instead of trying to manufacture a hit on the first try, create a strong set of NFTs and tokens and then use them in a collection of games so you get more attempts to build a hit using those assets. 

Crypto Unicorns is a newly launched game taking exactly this strategy. They have two sets of NFTs: Unicorns and Land, with which they’re building a variety of games over the next year. And they have two fungible tokens to go with them: RBW (Crypto Unicorns Rainbow) the fixed-supply governance token, and UNIM (Unicorn Milk) the infinite-supply in-game currency. 

Their roadmap is aggressive. The first game, an economic management sim, is already live and I’ve really been enjoying it the last couple weeks. And in the coming months they intend to launch more games like Jousting, Racing, and even a Unicorn 5v5 Action RPG. 

Crypto Unicorns is already doing a lot of things right that I think the crypto gaming space desperately needs. But they also have a couple question marks I’m still unsure about. I’m particularly concerned / curious about their RBW token. So this was a particularly fun deep dive and should give you a lot to think about whether you intend to play the game or not. 

I’m going to cover:

1. The Current Game

2. The Future Games

3. The Economic Loops

4. Their Tokenomics

5. How to Start Playing

6. My Current Strategy

7. Closing Thoughts

The Current Crypto Unicorns Game

The first game mode you can play right now is an economic simulator focused on a few core game loops:

1. Breeding unicorns

2. Farming berries

3. Crafting items

4. Gathering materials

5. Buying and selling resources

Each of the game loops relies on the others, so it’s hard to completely specialize in just one. Breeding requires farming berries as well as gathering UNIM. Crafting requires berries, UNIM, and other materials. Buying and selling requires creating things to sell, or finding things to sell on gathering missions. 

The end state of the loops is either earning RBW / UNIM which you can sell for other crypto assets, or breeding more unicorns which you could sell on an NFT marketplace. So there are already multiple ways you can Play & Earn. 

Part of the metagame on top of these loops is your land and unicorn management. Every loop requires land with buildings on it to complete the different activities. Every loop also requires a unicorn with energy to complete the task, except for farming. Unicorns only earn 1 energy every 24 hours, so even though some loops like crafting planks look like you could do them very often, you’re pretty heavily handicapped by the energy requirement. 

You can also spend 10 berries to replenish a Unicorn’s energy before the 24 hours are up, but you have to do the math on whether that’s ROI positive or not. An activity like crafting planks is ROI negative right now, whereas sending your unicorn off in the gathering cart might be worth the 10 berries. 

The last important piece of the unicorn management puzzle is that each unicorn has a class, and each land has a class. If you put a unicorn to work on a piece of land that its class matches, it will get some bonus. For Gathering, it will get more and better materials. For farming, more berries. For crafting, it’ll double the output. So matching your unicorn to the land is pretty important. 

Most of the gameplay right now is based on finding the highest ROI activity for your unicorns, and setting lots of timers to remind yourself of when they’re done farming, gathering, breeding, and traveling to the market. If you’ve ever played Sim City Mobile or an Idle Miner game, it feels similar to that. You check in on it every few hours and do a few things, then wait for the timers to be done. And you can always spend money to speed things up. 

The difference of course is that there’s actual crypto money involved here, so there’s a little extra pressure to figure out the most valuable things to do. Some parts of the market are also slightly inefficient since the game had some pre-seeded marketplace liquidity, so while farming is highly profitable for now, that will have to go away soon. 

As an economic sim game though, it’s quite fun! It feels similar to mobile econ sim games while also bringing in the crypto breeding elements. And while the loops are somewhat similar to Sunflower Land, it’s more robust and offers much more active gameplay. The potential earnings are also higher, although still quite a bit lower than STEPN. 

To give you a sense of the earnings, you could have 9 plots of land with 5-6 farms each, for a total of 50 farms. On those 50 farms you could plant 50 seeds every ~8 hours, and get an average of ~6 berries from each of them (300 total) assuming you upgraded your farms a few times.

50 seeds costs ~100 RBW and you can sell 100 berries for ~40 RBW. So you spend 100 RBW to make 120 RBW in 8 hours. 1 RBW is about $0.70 right now, so you make $14 every 8 hours, or $52 a day from farming. 

Breeding is more profitable, and you can do it at the same time as farming. Your first round of breeding costs ~30 RBW (between RBW and Berries) + 600 UNIM, so about $57. The baby unicorn you hatch from it is selling for ~$500 right now, so that’s an insanely good ROI. Though it is pretty tempting to keep all your babies to put them to work on the farms and later evolve them into adults. 

Also given that huge ROI, we have to assume the costs of unicorns is going to come down dramatically in the next few months (or the tokens will appreciate significantly) so take that into consideration when buying into the game. Though the breeding cost does increase dramatically with successive breedings, following the chart below. So you can see a second round of breeding would cost the 30 RBW and 1400 UNIM, so $105. Then the next one is $201, and so on. 

Given the current costs, it seems like if Unicorns are currently around 1 ETH they should drop to at least 0.5 if not lower, unless people diamond hand them and use them to accelerate their farming gameplay. To be honest that’s probably what I’m gonna do. It is very satisfying to be able to farm more. 

The Future Games

The current economic sim is just the start and lays the foundation for all the other games. You’ll need unicorns for the different game modes launching in the future, and I presume you’ll need some of the other resources as well. 

Jousting

Jousting is the first game they’re planning on launching, which from the looks of it will be a mostly RNG based competition between unicorns influenced by their stats. Each unicorn has various stats which you can influence during the breeding and evolution process, so if there are good prized for winning Jousting tournaments you can imagine there being some value to having particularly high-stat unicorns. 

Racing

​​

The next game their planning on releasing will be racing. It’s not clear if this will be an automated horse race like ZED RUN, or more of a controlled race like Mario Kart. I assume automated, since they’re planning on releasing it this year, but maybe there will be some control elements as well. 

Once again, the Unicorn stats come into play for who wins the race, so there could be some selective breeding for the best racing stats. 

Battle Game

Finally they’re planning on releasing a Battle Game which sounds a lot like an Action RPG or MOBA like League of Legends. 

The details are the most sparse on this one, but it looks like you’ll have a full range of 5v5 classes like you would expect from other MOBAs. And I honestly love the idea of breeding a competitive MOBA Unicorn team, it’s ridiculous and awesome. 

Other Games

They haven’t announced any others, but I have to assume that with three games planned there will be others they experiment with as well. 

I alluded to this in the intro but this is one of the things that sets Crypto Unicorns apart from other games in my mind. Your assets will be usable in a variety of game modes, so if you just want to farm and do automated jousting, you can do that. If you want to buy a team to win Battle Games, you can do that too. 

They get to experiment with building many different crypto games, and you don’t have to love a specific type of game to want to invest in and join the ecosystem. 

Let’s talk a bit more about how you can make money playing the game right now though. 

The Current Economic Loops

I typically only cover games that have a live Play & Earn component to them, so let’s go through some of the economic loops that exist in Crypto Unicorns right now, their strengths and weaknesses, and different ways you could play them.

The main economic loops are:

1. Farming

2. Gathering

3. Crafting

4. Breeding

Farming

Farming is special since it’s the only one you can do without a unicorn. A farm is one of the buildings you can construct on your land, and you can have up to 8 farms on one piece of land. 

As you level your farms up, they get bonuses to their Berry Output and Farming Speed. The default time for farming is about 7.5 hours, but depending on your adjacency bonuses and farming speed bonuses you could reduce that by as much as 30%. 

You need a Seed to plant, and then when the farming is complete you can harvest however many berries your farm produces. You can see on this one I’ll get 6-8 berries. So as long as berries are selling for more than ⅙ the price of a seed, it’s worth using a seed on this farm. 

You can also enhance your farming yield by assigning a unicorn to it. The unicorn bonus is only 3-10 berries, and it does cost an energy, so it’s never worth doing unless you’re using a baby unicorn since this is really the only thing baby unicorns can do: 

So the farming loop is quite simple: 

1. What’s the price of berries and seeds

2. Does this farm produce berries at a ROI positive ratio

3. Sweet let’s start farming then

Gathering

The simplest economic loop that requires a Unicorn is gathering. This happens in the Gathering Cart, where you send a Unicorn off on an up to 24 hour adventure to hopefully find you some good loot. 

If you match the Unicorn you send to the Land the Cart is on, you get a bonus to your gathering rewards. If you also give them 10 berries that matches their class, you get the BEST rewards. It’s not 100% clear what those differences mean, but it does seem to be worth always trying to go for the “best” rewards. 

The rewards are also determined by the level of your cart, similar to the farming bonuses from leveling your farms. Most Gathering quests bring back a large amount of UNIM (I’ve gotten anywhere from 50 to 700), as well as some seeds, crafting materials, and even boosters. 

This is currently the only way to get UNIM in the game, so if you don’t want to buy any on the open market you’ll have to do some amount of gathering to pay for breeding and crafting. 

Crafting

Next we have crafting, which is how you create the rarer materials needed for leveling up your buildings, and perhaps for some other uses in the future. 

Crafting is kind of a strange beast right now because it’s not really worth doing. For example the simplest thing you can craft, Raw Wood Plank, takes 1 unicorn energy and 25 minutes. 

But you can buy Raw Wood Planks from the marketplace for about 0.14 RBW per piece. Since we have to value 1 Unicorn Energy as 10 berries, and 10 berries costs about 40 RBW, you’re spending 4 RBW to make 0.14 RBW. Not good! 

What about the harder recipes? Let’s look at these two, Pollen Powder and Sugar Sprinkles: 

Pollen Powder costs 10 berries (1 energy) + 3 berries + 15 UNIM + 6 Milled Wood Planks. If we convert those costs to RBW, they’re 4 + 1.2 + 1.5 + 8.6 = 15.3. And you can buy 10 Pollen Powders for 101 RBW. So it seems like this is ROI negative, but if you assign a unicorn who matches the land to do the crafting, you get double the output, so you’re actually getting 1 Pollen Powder for 7.65 RBW which you can sell for 10 RBW. That’s pretty good! 

The math on Sugar Sprinkles is about the same, but you can only sell them for 9 RBW. Still a good ROI though. So Crafting does have some ROI positive activities right now, you just have to get to the higher level crafting stations to access them. 

Breeding

The final thing you can do on your land is breed your unicorns. This takes 24 hours, two unicorns, and 1 energy from each unicorn, plus the breeding costs. So it’s fairly expensive, but given the current prices of RBW, UNIM, and what the unicorns are selling for on OpenSea, it’s still insanely profitable. 

There’s less to say on this one since the math is basically: 

1. Is it ROI positive based on how many breedings you’ve done?

2. Sweet, make a baby

3. If not, go back to farming & gathering

The one thing worth mentioning is that there are three “secret” classes: Star, Rainbow, and OmNom, which weren’t available at launch but you can create through breeding. These special classes are cool since they can get the matching land bonuses from both of the lands their parents match with, so they’re a little more versatile than normal unicorns. Plus they’re just so darn cute. 

Trading

The last part of the economic cycle that’s worth highlighting is the marketplace. You can buy anything on the marketplace instantly for RBW, but if you want to sell anything, you have to “send” a unicorn to the market to sell that one item. 

A sale takes 8 hours and 1 unicorn energy, so selling is expensive and slow. You have to bake that extra cost into any ROI calculations, since you can’t immediately sell stuff as you get it. And it means you want to consolidate your efforts a little bit, since you have minimum quantities you can sell the different assets in. I’m not sure how I feel about this added friction to the market, but it does make things more interesting.

Crypto Unicorn Tokenomics

Crypto Unicorns is using a two token model:

• RBW is the fixed supply governance token

• UNIM is the variable supply in-game token 

There are quite a few caveats though, and their model is a little confusing. Let’s go through them individually then talk about the overarching structure. 

RBW: Crypto Unicorns Rainbow Token

Their fixed supply governance token is called RBW. It has a total supply of 1,000,000,000, with a circulating supply of only 6% of that. If you’ve read my Tokenomics article on Supply, that might send off a few little alarm bells.

But what should really alarm you is the 24 hour trading volume. How the hell is there only $47,604 in volume? I almost feel like the tracking must be broken or something, and it turns out it is broken. If we go look at Balancer where most of their liquidity is, you can see the actual volume is about $8m. Phew. 

We do still have to worry about the coming 1,667% inflation though, and given that inflation you probably don’t want to hold this token. Just earn, spend, and trade. Though I said the same thing about STEPN’s “GMT” token a month ago and it went up 3x within two weeks of my article so what do I know. 

How quickly is all of that inflation going to happen? Well they actually give you a handy chart for it: 

This should probably concern you a little bit as an RBW holder. At launch, 5% of tokens were in circulation, and by squinting at the chart it looks like around 20% of tokens will be in circulation after 1 year. 

So the supply is going to 4x in one year, which means the value of the game has to 4x for it to sustain the current token price. So while staking RBW on their site seems like a great deal because you’re getting up to a 170% APR, you would really need a 400% APR just to make up for how much you’re getting diluted: 

So I definitely won’t be staking or holding it. But what good is the RBW token then? You get governance, but I don’t think people are going to hold thousands of dollars of rapidly inflating tokens to vote on aspects of a game. Especially since a game can’t really give token holders true governance or it will die. Governance is mostly a meme to avoid calling tokens securities. 

The one thing you can use RBW for that’s a legitimately good use is for certain in-game activities. Specifically breeding new unicorn babies, evolving babies into adults, and buying materials in the marketplace. So you do need some for these activities, but not a ton. 

One topic I touched on in my “Crypto Gaming is Broken” article is how if a game is going to have a fixed supply token, that token should be burnable for certain in-game activities in order to give those activities long term value. E.g. if the tokens that are spent on breeding and evolving get burned, then the supply trends down over time and unicorns get more and more valuable as the game gets more valuable, even though there isn’t a cap on breeding. 

While Crypto Unicorns is charging RBW for breeding and evolving, they’ve said they’re going to recirculate this RBW into the market:

So while it’s a fixed supply token, they’re going to be constantly re-selling it into the market as people use it in the game. So not only do you have to deal with 200-400% inflation per year, you also have to deal with the treasury dumping spent tokens. So it’s kinda like an infinite supply token, especially since there’s almost no reason to hold the token long term. They’re not accruing any value to it since they don’t burn it, it’s inflating at a very high rate which staking doesn’t make up for, and it doesn’t provide any cash flows or other value.

I could be missing something, but it seems like the RBW token needs to be reworked for it to have value over time. Unless you’re one of the investors who starts unlocking in a year, then this model is great for you.

Anyway, on to UNIM!

Crypto Unicorn Milk (yum?)

UNIM is the variable supply token that is used more commonly in the game. You need it for breeding, evolving, and for crafting the more advanced recipes. 

Unlike RBW, the UNIM that’s spent in the game gets burned, but it’s an infinite supply token they can mint more of anytime so burning doesn’t really mean anything in this context. 

There’s not much reason to hold UNIM either. You can buy it if you need it, or just earn it and use it, but since the price will probably be quite variable it’s not necessarily something you want to sit on. I’m actually cashing mine out and adding it to the USDC pool on Uniswap to earn some trading fees from it. 

What I’d Change

I really don’t love the RBW token right now. There are very good reasons not to hold it, and not many good reasons to hold it. I think they could improve that if they added some burns for it into the game, or found a way to slow down the inflation rate, but right now the risk / reward is just too high. 

If it were me, I’d make all the breeding and evolving burn the token so it can’t recirculate. And I’d add some high-level building upgrades that burn the token as well so the best land upgrades get rarer over time. Then people would have a reason to buy the tokens and spend them as early as possible. 

But maybe I’m missing something, I’m open to any disagreement on Twitter.

How to Start Playing

The absolute bare minimum you need to play is one piece of land. But then all you can do is farm, and you can’t even sell the berries you’re farming, so you really do need a unicorn as well. And this is where we get into some of the cost concerns. 

The cheapest pieces of land cost 0.1 ETH: 

And the cheapest unicorns (that you can actually buy, some are bugged) cost 0.4 ETH:

Granted, those ones have already had their ROI positive breedings used up. If you want one with all 8 breeding points, you’re looking around a 1 ETH minimum: 

Since you might want at least a couple unicorns for breeding, and you might want a couple pieces of land for farming, you get into the 2-3 ETH cost range pretty quickly to start playing. If you wanna go crazy and get a full set of 9 pieces of land and 6-8 unicorns to keep the land busy, you’re easily getting past 10 ETH. It’s a very expensive game to start playing right now. 

Like I mentioned before though, these prices will have to come down. The Unicorn supply has already almost doubled in the last two weeks, and with how high the breeding ROI is, I don’t see any reason that expansion in supply would slow down. If you wait a few weeks the floor will probably drop another 25-50% and you can get in for much cheaper. 

You will miss out on some of the lucrative farming opportunities that are currently in the game, but the ETH savings would probably make up for it. The game also doesn’t really reward time that much right now, since you can just pay to upgrade your land buildings as fast as you want. The only thing you’d be missing out on by waiting for a lower entry price is the current ROI on breeding. 

But once you have some amount of unicorns and land, you can visit the game site and place your land. This has some important strategic considerations, since matching land gets a speed boost to all activities, earning a 5% boost for each piece of matching adjacent land.

Then with the land placed, you can start building on it. There are five types of buildings: 

1. Farms for farming

2. Carts for gathering

3. Workshops for crafting

4. Nurseries for breeding

5. Stables for increasing how many unicorns you can have working

Since farms are your main economic tool to start, and you might not need to do some of the other things right away, you could start with just farms and a gathering cart. Then add one or two of the other buildings as you need them. If you have multiple lands you can spread things out too, e.g. I have my Stables on one of my pieces of land with the least speed bonus, since the Stables don’t have anything that needs to be sped up. 

From there, you just start running the different economic loops from above! And the main thing you’d push profits into is upgrading your buildings so you can get better rewards from them. Or, you could keep cashing out your RBW as you go, it’s up to you how much you want to keep or reinvest. 

My Current Strategy

If you’d like to know my current strategy for investing in and playing the game, you can read that in the paid subscriber addendum to this post. 

Closing Thoughts

I like almost everything about Crypto Unicorns. The one big question mark for me is how they’re going to make the RBW token valuable over time. I do think some changes could happen there to make it a more attractive investment. 

It’s also worth highlighting what I’ve mentioned a few times: unicorn costs will have to come down. They don’t have strong limits on breeding, and since it’s ROI positive right now to breed 3-4 times, we could see the supply 10x quite quickly. Do not buy a unicorn thinking it will go up in value. These are gameplay assets, not buy and hold assets, and they will certainly get less valuable over time as the market gets flooded from breeding. 

What I love about Crypto Unicorns is the depth of the economic sim. Is it still fairly simple? Yes, but it’s farm above the economic complexity of many other crypto games we have right now. Adn it’s fun! I love games I can spreadsheet out to find the highest ROI activity, and CU is perfect for that. 

So I’m going to keep farming, breeding, crafting, and building my little unicorn empire. The next big question will be how fun can they make the other games they’re releasing to go along with it. For that we’ll have to wait and see.

I’ve spent the last year deep in the world of crypto gaming. It’s my strongest interest in the space, and the area I feel the most qualified to have opinions on. 

I’m fortunate to have seen crypto gaming from more angles than most people. I was a heavy player of games like Runescape, World of Warcraft, Diablo 3, and DOTA 2, which all demonstrated early experiments at what we’d now call crypto gaming. These experiments ranged from gray markets for in-game currency in World of Warcraft, to “NFTs” of rare items in Runescape and DOTA 2, and the brief attempt at a real-money auction house in Diablo 3. 

I’ve experimented with the past, current, and upcoming crypto games fairly extensively, having spent at least $100k on imaginary land, sneakers, characters, and tokens. I’ve started writing about those analyses more on this site in the last couple of months. 

I’ve also helped build a crypto game economy. I’m an advisor for Crypto Raiders, where I assist on the game economy and tokenomics. Through hands-on building a crypto game economy and seeing it function in the wild, I’ve gotten to test a number of different theses. I’m also getting more exposure to these ideas in practice through additional games that I’ve started working with on their economies in the last few months. 

Crypto gaming is brand new. Hardly anyone has more than a year or two of experience in it. So while I still feel very green at all of this, I also feel fairly qualified to lay out some of the issues I see in the space right now, and some ways we might improve on them moving forward. 

I’m extremely bullish on crypto gaming. It’s something I’ve wanted for well over a decade, though I didn’t know the words for it until recently. I’m confident gaming will eventually grow to be a trillion-dollar industry within crypto. So while this article is very critical of the space currently, don’t assume that means I don’t believe in it. Quite the opposite. I believe in it deeply, and want to help make it the best it can be.

As such, this is also not an explicit prescription for all games. It’s rather a list of problems, and a list of possible solutions or experiments to run. I only have so much time and so many projects I can work with, so I’m sharing it in the hopes that many teams will run with these ideas, iterate on them, and hopefully make the space stronger together.

With that, let’s dive into the analysis. If you have any thoughts after reading this, I’d love to hear them on Twitter.

Current Problems in Crypto Gaming

There are a few common issues in crypto gaming currently, which I’ll go through in no particular order:

1. NFTs set a bad precedent for games

2. DeFi set a bad precedent for games 

3. Most earnings are unsustainable

4. The costs are too high for game lifecycles

5. Much of the work is bullshit

6. Too much power for people with capital vs. time

7. “Play to Earn” sets the wrong expectations for players

NFTs Set a Bad Precedent for Games

The NFT wave kicked off at the beginning of 2021. It started with art, then moved into profile pictures, and started to creep into gaming along the way. 

It’s important to highlight that NFT popularity started with art and collectibles with rarity and fixed supplies. The strategy for investing in these collectibles was to simply buy and hold them. If you picked right, the number went up, and you made money once you sold them to the next buyer. 

This standard for NFT investing set a bad precedent for gaming. Making characters NFTs that people could speculate on opened up gaming to the same expectations for Number Go Up. But the idea that you could buy a basic account for a game, hold on to it, and expect it to get more valuable is absurd. 

Nonetheless, there is a heavy focus in NFT games on the “floor price,” the cheapest price of entry for the NFTs. A game with a decreasing floor price is seen as dying even if it means the game is getting more accessible for new players.

It is extremely hard to build an economically sound game and a happy community when you start with 10,000 NFTs worth thousands of dollars. You’ll need to bring the price of NFTs down considerably to make the game attractive to the number of players you need to onboard. And by starting with high-value assets, you’ll attract more speculators than players, exactly the opposite of who you want to populate your early game community. 

DeFi Set a Bad Precedent for Games

The first wave of crypto games are essentially a marriage of NFTs and DeFi. We took the ponzi loops that exist in DeFi (buy our token, stake it for more of the token, sell the tokens you earn, and hope you make an ROI before it all collapses!) and just added extra steps. The breeding loops that exist in many NFT games are the same as yield farming, there are just colorful characters attached to them. 

Further, DeFi yield and staking set expectations for what a token should do. People expect that they can buy a game’s token and earn passive yield from it without playing the game. But introducing that passive yield ends up breaking the in-game economy. 

Crypto gaming needs to break away from the expectations of NFTs, and the expectations of DeFi. Copying those paradigms helped get it started, but they’re now actively hurting it. 

Most Earnings are Unsustainable

If all the sinks in a game increase the earnings of participants in the game, the economy has to collapse eventually. You cannot keep increasing everyone’s earning potential without having some massive inflation on the reward currency which will eventually cause its value to collapse. 

A simple way to test this for a game is to ask what the primary token sinks are, and what they do to the economy when they’re utilized. If all of the main sinks increase people’s ability to earn, then the game is unsustainable. If the main sinks do not increase earnings, the game might have a sustainable economy. It is necessary but not sufficient. 

This was my main criticism of STEPN. While the game is fun and has a better economic design than most games right now, most of the sinks increase earnings in the game right now, so it has to collapse in some way eventually unless they’re able to mitigate this. 

The Costs are Way Too High for Game Lifecycles

How long does a good game last? Two years? Five? Very few games last 10+ years. So we have to consider the short lifespans of most games when assessing the values of game assets. 

There are essentially three ways to value something:

• Intrinsic non-monetary value (status, happiness, etc)

• Cash flow (it makes you money)

• Appreciation (speculation that you can sell it for more)

There are 100,000 pieces of land for Otherside, the Bored Ape Yacht Club metaverse. These pieces of land have a floor price right now of $6,000 and get more expensive from there. 

Let’s say the price averages out to $10,000 per land across all 100,000 pieces of land. That’s about $1b of Otherside land. If we generously assume the BAYC metaverse will be popular for 10 years, you have to ask if you can at least break even on your land in that time period, assuming you aren’t happy to spend $10,000 just to play with no promise of return. 

The only way you get a return is if you can sell your land to someone else for more, or if you can generate a good cash flow off of it. But selling it to someone else for more is the normal ponzinomics we’re used to and want to move away from. 

But you can see the problem here pretty quickly. Assuming you want at least a 10% annual cashflow on your BAYC land, the whole ecosystem would need to pay out $100,000,000 a year to land owners. Say BAYC can match Fortnite’s popularity, which generates about $5b a year in revenue. Could BAYC give away 2% of its revenue to land owners? 

That’s not too unreasonable, but we then have to weigh it against the odds that BAYC can build a game as popular as Fortnite and then sustain that popularity for a decade. 

Possible? Yes, but it’s not a bet I’d be willing to take. I think we have to acknowledge that most of the value in these assets is speculation on the appreciation. People expect the number to go up and are going to be very sad when the music stops. And yes it does have to stop eventually.  No game lasts forever.

Much of the “Play” to Earn is Bullshit Work

In an ideal version of Play and Earn, you would be able to cash out some of the value you accrue from playing a fun game. Or, you would get paid by making some meaningful economic contribution to the game, like designing a popular skin that other players buy. 

That is not how most “Earning” works right now. Most of it comes from doing some form of bullshit work, usually slightly obfuscated button clicking. And to be fair that’s not an unusual thing, especially in MMOs: mining for copper in Runescape isn’t exactly thrilling. But if you’re earning from logging in every few hours to click a few buttons, to do something the game could just remove from the necessary activities to focus on more fun stuff, you’ve kinda just created a weird job. 

Farming-style loops and land management games are a common example of this. And to be clear, I’m not saying this is necessarily bad, but if the bulk of the earnings comes from logging in every few hours and clicking something you haven’t really built a fun game that people make money from. Unless you can make the land management complex to the level of Sim City or competitive in some way. I do think it would be interesting to create a Web3 Sim City games where you create trade deals to share resources between different cities… but I digress.

People with Capital have Instant Power

Right now much of the power in P&E games is instantly accessible to those with large amounts of capital. They can buy tons of resources, run the economic loops faster, and quickly gain significant control of the market. 

This is demotivating for the true players who likely have more time than capital. The highest earning potential should accrue to the people putting the most time and energy into the game, and there should be limits on how close to that you can get by deploying large amounts of capital. 

Assume that people with lots of money to deploy into your game are there to milk it for yield, not to play it. Plan the game accordingly. If it can be farmed, it will be farmed, and the losers will be the people who are there for fun.

“Play to Earn” Sets the Wrong Expectations

For a game to be sustainable, players can’t be able to jump in and immediately start making a good ROI on their investment. And the easier it is to do the math on how you get to ROI positive, the more the game will be farmed by people with large amounts of capital. 

This is where the Play and Earn terminology is quite a bit better. Most gameplay should not be disguised bullshit work, it should be actual gameplay. And the earnings should be difficult to calculate, especially for newer players. 

Finally, earnings should be irregular, with large jackpots instead of steady income. The harder it is to predict a steady income from the game, the more you’ll be able to build it around actual gameplay instead of DeFi loops. 

Okay, those are most of the high-level issues. Now let’s go through some of the ways I think we can combat them. 

How Can We Fix It?

As I said in the intro, this is not a blanket prescription, but rather a list of ideas and things I think crypto games should try. The space is still very new, and we’re all experimenting and figuring things out.

1. Significantly reduce the cost to entry

2. Create limitations on the power of new capital

3. Prioritize rewarding play not clicking

4. Get rid of staking

5. Build a fun game first 

6. Separate the external & internal economy as much as possible 

7. Obscure the ROI 

8. Reframe expectations around P&E

9. Not limiting play

Significantly Reduce the Cost to Entry

Having to spend $10,000 to play a game is stupid. You know it, I know it, everyone knows it. The only reason this feels somewhat normal right now is that we’re all high off NFT season and have copied those paradigms over. 

But the idea that you have a $10,000 starter account for a game is absurd and turns off the very many players who would probably love to try your game but can’t afford to invest a decent used car into it. 

It also adds significant stress to the economy because the gameplay earnings now have to justify this huge startup cost. If you want to try to get to ROI in 3 months, you need to be making $3,333 a month from your starter account. So either other people need to be putting in $3,333 per month into the ecosystem for you to earn, or you have to benefit from ponzinomics. It’s almost always the latter. 

Joining a crypto game should be free, or comparable to the cost of a normal game (under $60). I’m partial to the Free-to-Play model, and some teams are doing interesting experiments in this direction (e.g. Genopets and Sunflower Land). 

This will significantly reduce what people can earn from playing in the beginning but that’s good, there’s less pressure on you to try to keep the token prices high so people can earn a crazy amount from the game. And it means people’s expectations are much lower. They’re not sweating over the $10k investment. They can actually enjoy the game. 

If you already launched a 10k collection with a high price though, what do you do? We tried to deliberately bring the price of characters down at Crypto Raiders but it didn’t get taken very well. The problem with the NFT biases is people are laser-focused on the floor price. So while we made progress on our goal to reduce the cost of entry for the game, many people were extremely upset that they couldn’t sit on their characters to flip them for more later. 

But I stand by doing some kind of model like that. The way I was thinking about it, if you can over time turn your 1 $10,000 character into 10 $1,000 characters, or even 100 $100 characters, then you’ve significantly reduced the barrier to entry without destroying any value for the original buyers. That might be your best bet. 

Some will say that renting and scholarships are a solution here, but I don’t love them. The point of crypto gaming is to get to own your gaming assets, it’s kinda lame to have to borrow them from someone else or apply for a scholarship. 

The economies of Runescape and WoW worked fine with people creating new Level 1 accounts all the time. Access should be free or extremely cheap, and the earnings should come later through sufficient work. 

Create Limitations on the Power of Capital

Someone with a bunch of money shouldn’t be able to swoop in and dominate the game or the game economy. 

One way this happens right now is breeding. A person or guild with a ton of capital can buy up many of the assets, start running a breeding operation and have a huge influence on the market without really having to play the game. 

Another area we will likely see this is with game item marketplaces. If someone can come in and buy the rarest items in the game, they can immediately start winning tournaments or farming the best rewards without having to put much effort in. 

On the breeding and economic loops side, there should be some limits to how quickly someone can deploy capital. STEPN has an interesting barrier for this built into sneaker leveling. Since a sneaker has to be level 5 to mint with it, and since you can only level one sneaker at a time, and since breeding has a 48-hour cooldown, no matter how much money you have you can’t realistically mint more than once every 36 hours or so. It’s very different from breeding in other games where you could theoretically buy 100 characters and breed 100 more from them. There’s no way to have that kind of multiplicative growth in your sneaker collection. 

Another way you can build in controls for this is through soulbound items. The best gear in a game should be Bind On Pickup so it cannot be sold. It can be used to win tournaments and farm lower-level, sellable gear, but it cannot be sold itself. This ensures the highest-earning and competitive potential is held by people actively playing the game, and can’t be bought by newcomers. Let people buy up to 80-90% of the best gear, but never the best. 

Finally, you could make certain ROI-increasing activities non-transferrable, such as investments into land upgrades that have timers associated with them. 

One small criticism I have of Crypto Unicorns is that land upgrades transfer on sale, and they take no time to purchase. So you could buy a piece of land on OpenSea, sink some money into it, and immediately be economically competitive with people who have been playing the game for a month. I don’t think that’s ideal. There should be some additional benefits from playing the game for a while.

Prioritize Rewarding Playing, Not Clicking

This is more of a spectrum than a fine line, but for games to be primarily fun with a side of earning, the earnings should come from activities closer to “play” than repetitive clicking. 

That doesn’t mean farming games are bad, just that they should have a decent strategy and tactical layer attached to them. There should be tradeoffs. It should be hard to whip up a spreadsheet and calculate the optimal way to play. And buying resources to click “breed” and sell the new NFTs definitely shouldn’t be the primary earning mechanism. 

If breeding is the primary earnings mechanism, that means people aren’t paying to play the game, they’re paying to play the breeding ponzi. A game has succeeded when people are paying for high-level gear, or additional dungeon runs, or cosmetics. Things that let them play the game more, or that let them flex in whatever the game’s social context is. 

Limiting the best rewards to PvP, end-game content, challenges, leaderboards, and other more competitive activities helps ensure this is the case. 

The analogy I often come back to is that someone signing up for a brand new Runescape account couldn’t expect to immediately make an impact on the Grand Exchange. Someone who buys a character NFT or signs up for your game shouldn’t be able to immediately reap the economic rewards either. 

Get Rid of Staking

Staking tends to be implemented in one of two ways, neither of which makes sense.

Either, you stake the governance token to get more of the governance token. This is dumb since now you’re rewarding DeFi people with deep pockets instead of your actual players. And staking isn’t doing anything besides slowing them down from selling, which is nice, but it doesn’t improve the game. 

Or, you stake the governance token to get a share of in-game revenue. This is kinda dumb too since now you have to make the in-game economy much lossier, preventing most players from actually earning anything while playing because you’re paying out rewards to stakers instead of actual players. You could just give a share of fees from something like the in-game marketplace, but then you’ve impacted your own ability to generate revenue. 

I think it makes much more sense to treat the governance token as the most valuable finite resource in the game and use it for the most impactful upgrades to characters or accounts. This allows characters to accrue value over time since these upgrades will necessarily become finite, and gives the token a reason for existing and being held. Instead of locking up supply by having people put it in a staking contract, lock up supply by having people put it in the game. 

Build a Fun Game First

This might seem like a revolutionary thought, but I think for a crypto game to work it needs to be an actually fun game first. 

If no one wants to play your game when they aren’t making money from it, they’ll run for the exits and dump everything at the first sign of market trouble. And if the internal economy of the game doesn’t work without external token activity influencing it, then the game is starting off on an unstable footing that will be hard to build out of. 

This seems so stupidly obvious, but it’s so rarely done. Probably because launching a token is such an incredible way to raise money, and games are very expensive to make. So you do have some challenges here. How do you wait to incorporate your token until you’ve built a fun game, and how do you build a fun game without a token as a fundraising mechanism? 

Well, you can of course raise money the normal way. But I also think community members can be more patient than we assume. Illuvium is doing a good job of this right now. They have a token that’s been launched for a while, and they’re now introducing people into the beta of their game, but there’s no way to earn within the game yet. That’s coming later. They’re focused on building a really fun game first, then introducing the earning elements once it’s more established. 

Separate the Internal and External Economies

It’s tempting to try to balance your in-game costs around the external value of the tokens, but this becomes a distraction and results in a frustrating in-game experience for your players. 

The two economies should operate independently. The game should function the same whether 1 gold in the game is worth $0.001, or $1. There will be periods of surging interest in the game where people will flock to it and push up the price of the tokens, and there will be lulls where the token prices drop. Throughout those times, the experience of playing the game should stay consistent. Otherwise, you’re constantly going to be changing the economy of the game to chase the token price, and it’s going to make the whole thing rather confusing for everyone. 

One example of not doing this well, in my opinion at least, is STEPN’s recent decision to base minting costs on the relative prices of their tokens. 

This makes one of the game's core loops extremely hard to predict on a day-to-day basis, and makes minting annoying to try to do the math on. Maybe that’s the point, but it makes minting less fun and more transactional of an experience. And the main benefit is that it helps pump up their governance token price, while maybe making the game more affordable in the short term by pulling down the price of GST.

Either way, people shouldn’t have to check Coingecko to decide or know what to do in your game. 

Obscure the ROI

Assuming again that any easily mapped economic cycle will get taken advantage of, we should make it very hard to calculate the ROI from playing a game. 

Measuring ROI is important for many games right now because they have such high startup costs. You don’t want to spend $10,000 on a character or piece of land if you’re not sure how you’re going to earn that back. But if games are inexpensive to start, as I think they should be, then this becomes much less of a concern. 

It’s still worth thinking about how you can obscure the cost-benefit analysis of in-game activities though. One way is through having rewards that have a high variance. 

Perhaps running a dungeon in a game has an expected value of $0.20. But 90% of the time, you’re only earning $0.10 and 10% of the time you’re earning $1.10. That’s a very simplified version but you get the idea. You can know that a player should have some rough ROI over a few months or years of playing, without them being able to easily calculate it in the game due to the variance of outcomes. 

This is already a common design standard in games with loot boxes, rare drops, and other mechanics, but we oddly haven’t seen as much of it yet with Play & Earn, probably because so much of the earning is based on “work” rather than “play.” 

Reframe Expectations Around P&E

This will be the hardest, but the most important. As an industry, we need to shift the expectations away from P&E games being something you can quickly mine for a profit, to games that are actually fun to play where you happen to be able to cash out some of your work. 

A good model for this being done currently might be DOTA 2. You wouldn’t think of it as a P&E game, since there’s no crypto involved and there are no “work” like activities for you to earn anything of value. But the assets in the game do have value on their in-game marketplace, so if you get something you didn’t want from a loot box, you can sell it to someone else. 

The vast majority of players end up spending more than they earn. I’m actually not sure anyone is net positive in this marketplace unless you have some of the very early very rare items. But it’s a good example of how a game can have a marketplace without having the fun destroyed by it. 

If a game requires a decent amount of playtime before earning becomes possible, and if once that earning is possible it’s hard to calculate the ROI on it and it’s secondary to the actual gameplay, you’ll likely have a much more sustainable game economy on your hands. 

Not Limiting Play

The last change I hope we move toward is to create P&E games that don’t need to limit the ability for players to enjoy the game. 

Energy, recharging, and other time-based limitations are a good way to limit the inflation in the game. But they do limit how much someone can enjoy your game, and if you’ve built a good game, you’ll end up disappointing people who want to play it. 

Instead we should aim to have a lot of the game be freely playable an unlimited amount, and only have the capital-generating activities have limitations. Other games with robust economies in the past had very minor limitations on the economic activity in the game. You could essentially mine all the copper you wanted in Runescape or WoW, and they turned out fine. But we could still limit the extremely valuable activities, like end-game dungeons or harvesting the rarest resources. 

This may also tie into the concept of building a fun game first. If the game is broadly fun and has earning added in later, there will be plenty of things to do that aren’t tied to earning. And that might end up solving some of this problem on its own. 

Moving Forward

This was a bit of a brain dump, but I hope it’s useful to any team trying to build a Play and Earn game. 

We all have an incredible opportunity to be among the first to figure this out. To build this generation’s World of Warcraft or Runescape scale game, but with a real-world economy attached to it.

I’m extremely bullish on this space. It’s the sector of crypto I’m most excited about. So if you ever want to share what you’re working on or other thoughts on topics like this, definitely reach out to me on Twitter.

But games for “gamers” are often not the most popular or most successful. Starting with Facebook games and continuing through Mobile, the most popular games are casual ones. Relaxing, less competitive, quick games you can play on the toilet or while on a Zoom call. 

If you were online in 2010, you remember Farmville. The casual farming game that consumed everyone’s lives on Facebook for a year. At its peak, there were 32 million daily active players. 

World of Warcraft, widely regarded as one of the most successful games of all time, had a peak of 10 million monthly subscribers. Farmville was attracting 3x that many people per day. Casual gaming is massive, much larger than the “serious” gaming industry. 

So naturally, we should see some extremely popular casual crypto games. And they should perhaps be the most successful crypto games, bringing the most people on-chain and developing into the largest crypto game economies. 

Two weeks ago I wrote about STEPN, one of the first extremely successful casual crypto games to hit the market. 

This week, I want to introduce you to Sunflower Land. The farmville-esque game that’s created a fun, chill take on play to earn gaming. 

What is Sunflower Land

Sunflower Land is a passive farming-themed economic development game based on Polygon (tk). If you’ve played Farmville, SimCity, or idle mobile games like Idle Miner, the gameplay will be very familiar to you. 

You start out with an empty farm, where all you can plant are Sunflowers. When you harvest a sunflower, you can sell it to the shop for 0.002 SFL. Then you can buy Sunflower seeds for 0.001 SFL, and plant some more. 

Sunflowers take 1 minute to grow, so you can double your SFL every minute. Granted, it’s a rather small amount you’re doubling. So once you save up enough you can start buying Potato seeds for 0.01 to grow potatoes, which you can sell 0.014. Potatoes take 5 minutes to grow instead of 1, so your earnings per minute are slightly lower, but you gain the benefit of not having to repeat the cycle every minute.

Crops get progressively more expensive and higher earning, but less efficient per hour, till you hit the peak at Radishes: 

But farming to multiply your SFL is only one part of the game. You can also spend your SFL to buy an axe, to chop down trees for wood: 

Then you can use that wood to craft a pickaxe, which you can use to mine stone. And as you mine stone, you can make better pickaxes, to mine iron and gold. 

You can also use your farmed resources to unlock additional resources, by crafting food to give to the little goblins around the farm: 

And you need to do that to eventually unlock wheat, so you can buy chickens and start farming eggs:

So you get an idea of how the game progresses. The more willing you are to keep playing and managing your farm, the faster you can earn SFL. The faster you earn SFL, the faster you can progress through the various levels of farming in the game, steadily increasing your SFL earnings. 

The more you play, the more you can earn. The more you earn, the more you can reinvest into earning more. Or the more you can cash out to sell on the market. 

One thing that’s nice about Sunflower Land though is you can make it as fast-paced or laid back as you want. You could optimize your earnings by farming sunflowers every minute. Or you could take a calmer approach and harvest Parsnips every 12 hours. You’ll earn slower, but you only have to check on the game twice a day instead of 1,440 times a day. 

And of course, since this is a crypto game, you can also buy the assets if you don’t want to take the time to farm all of them. The Sunflower Land collection on OpenSea already has 245 ETH of volume traded on it, for everything from pieces of wood to chicken coops. 

This currently is the only way you can earn from playing. Once you make one of these rare items, you can pull it out of the game to sell the NFT on OpenSea. And some are quite valuable, the rarest item right now, Kuebiko, is selling for just over $10,000: 

What you can’t do yet is pull out your SFL to trade it. They’ve restricted that until May 9th, to give the game economy some time to develop. I love this strategy, it helps limit the initial speculation on the token price of the game, and it ensures there will be plenty of SLF in the market when they do activate trading. 

So you have one way to play and earn right now: Level up your farm to produce rarer goods, then withdraw them as NFTs to sell on OpenSea. Soon, you’ll have a second way to earn, by directly pulling out your earned SFL to trade in a liquidity pool like any other token. 

If your goal is to add a worthwhile P&E game to your roster though, does Sunflower Land make the cut? Let’s look at their tokenomics. 

Sunflower Land Tokenomics

One of the biggest problems in Play & Earn games is runaway inflation from player growth. 

As more players enter the game, they create more and more tokens through their in-game activities. As the player base is growing the new demand can support the inflating supply, but as soon as the growth stalls, the token value can collapse. This was one of my primary concerns outlined in the STEPN piece, and it’s a recurring challenge in balancing P&E games. 

Sunflower Land has come up with a novel way to combat this by halving the SFL emissions every time new SFL supply milestones are reached.

Right now when you play, you get 0.02 SFL per Sunflower harvested. But once 100,000 SFL has been harvested, you’ll only earn 0.01 SFL per Sunflower. Then after 500,000 have been harvested, it drops to 0.004. This continues in perpetuity until it keeps halving every 10,000,000 SFL: 

The tools will also drop in costs, so you’ll be able to buy 0.001 axe to farm 0.001 wood. But what won’t drop in cost are the rare items and upgrades. So Woody the Beaver is always going to cost 200 Wood and 50 SFL, regardless of what halving the game has reached: 

This does a great job of balancing out the supply of SFL in the market as the number of players increases since everyone’s earnings will drop pretty dramatically. But it might be a little too aggressive. 

After four halvings, the earnings rate will be 1/10th of what it is today. At that rate, you’d only be earning 0.55 SFL per day from Radish farming, compared to the 5.50 you can earn today. So if you want to save up for the Radish Pie so you can unlock wheat and chicken farming, you’d need to farm for a month just to get the necessary SFL: 

Even if you farmed Sunflowers every minute perfect, you’d only earn 3 SFL per day. It’d take 5 days straight of non-stop clicking to earn the 15 SFL you need for a Radish Pie. That seems a little… ridiculous. Maybe they’re expecting that people will buy SFL on the market to speed things up, but there still needs to be someone farming SFL to sell on the market, and the halvings affect everyone equally. So everyone’s output is going to drop off dramatically. 

Based on that, if you think the game is going to be popular long term, it might kinda make sense to just stockpile SFL and wait for the halving events. It’s going to get harder and harder to come by, and more people will need it for playing, so the price could increase dramatically over time. That, of course, is only true if people want to play the game though. 

It could also make sense to stockpile some of the harder to craft NFTs. The Foreman Beaver costs 5,000 Wood plus the Apprentive Beaver (500 wood + 100 SFL) and Woody (200 wood + 50 SFL) so he’s 5700 Wood + 150 SFL total. After a few halvings he’s going to be ridiculously hard to make. 

With this halving strategy, Sunflower Land does introduce something I haven’t seen other games do well: accruing value to the in-game currency over time. And it presents a potential solution to the runaway inflation issue we’ve discussed a number of times now. I’m not convinced this method will work, since I think the degree to which it will slow down progress risks making the game un-fun. But it will be interesting to observe, and they can always adjust things as they go.

So could Sunflower Land turn into a major crypto game? And could it provide sufficiently interesting earning potential for the people who want to play it? Let’s look at the bull case for the game. 

The Sunflower Land Bull Case

Remember the stat I tossed out in the intro: FarmVille had 32m DAUs at its peak. That is an *insane* number of players. There are supposedly fewer than 1m people who have ever owned an NFT (check tk). So if Sunflower Land can successfully recreate a satisfying farming simulator on crypto rails, that has the potential to become a massive game. 

I do think that casual games will attract many more players than more intense ones. And if STEPN is any indication, casual games can also attract massive amounts of capital. So what would bring tons of players, and tons of capital, into Sunflower Land? 

First, the halving is actually a rather good motivation to play the game now. If you’re remotely interested in trying it out, you’re getting closer to the next halving every day. So the sooner you start, the sooner you can get a headstart on everyone else by building up your beaver army. 

But what about after, when the halvings start to kick in? What will make people want to stick around and keep progressing? P&E games can only be sustainable long-term if they’re a net sink for players: if the amount being spent and put into the game exceeds the amount being awarded. And that can really only happen if the game is sufficiently fun for people to play regardless of earnings, and if there are ways to invest in-game resources that do not increase your ability to earn more in-game resources. 

On the fun side, the casualness of Sunflower Land helps it a lot. It’s easy to fit it into your schedule as something you do casually between (or during) Zoom meetings, since it doesn’t require the heavy focus of a game like Axie or the time running around outside from STEPN. During the farm mints, you can also get into the game for as little as 1 MATIC which is an insanely low startup cost compared to other games.

And on the cosmetic, non-multiplicative in-game sinks, they have the potential to build in social elements similar to the original FarmVille or more modern Animal Crossing. People enjoy showing off what they’ve built and are willing to put time and resources into building something neat they can show off to their friends. If Sunflower Land does a good job on the social elements as well as the game elements, it could turn into a popular casual game where you build something you’re proud to show off. 

So what about the Bear case? 

The Sunflower Land Bear Case

I’m really not sure about the halvings thing. It just doesn’t sound fun to chop down 0.001 Wood. We like getting whole numbers of things, and if I see the cheapest Wood item costs 50 Wood, and I’m harvesting it 0.001 at a time, I’m gong to go play something else. I think they’ll need to adjust this system over time (unless I’m missing something significant) to keep players motivated to play as the game scales. 

Otherwise, you can essentially win the game by just playing a bunch now, quitting for a month or two, then coming back and selling your resources. That would probably be the most time-efficient strategy, since as the halvenings happen it will eventually take you 10 days to do what you can currently do in 1. While that solves the inflation problem on a macro scale, it is demotivating to current players. You don’t expect to get worse at a game the longer you play it, but someday when you log in you’re going to be earning half as much as you were the day before. 

One way around this might be to do it on a per-farm basis. So early farms get the max earnings, then reduce it for later and later farms. Then there’s a benefit to having one of the early farms, and early players don’t feel like their work is getting slowly eroded. Playing right now does feel like a bit of a race against the clock to gather as many resources before the first halving, and it’s gonna suck to see all the projected timelines for accomplishing certain milestones get doubled. 

So I’ll be curious to see how they resolve this if they do at all. Maybe it’s not going to be an issue and I’m overly concerned for no reason. 

The last little annoying thing is that making the resources like Wood into ERC-1155 tokens you have to buy on OpenSea, instead of ERC-20s you could easily buy in a liquidity pool on SushiSwap, is extremely inconvenient. It does help them earn more trading fees though. But they’ve said they’re changing this soon so it’s temporary. 

How to Start Playing

To play you need a farm. You can only have one farm per wallet, and you’re only supposed to have one wallet per person. How they verify this I have no idea, but they say they’re banning people for violating it. 

To get a farm, you can either mint one during the public minting events (they announce these in their Discord), or you can buy one on OpenSea. I picked one up on OpenSea since that seemed easier. You can go to their Farms collection and filter by “Active” then pick one. 

It might be worth taking a look at the farm before you buy it to see how far along in the crop progression they’ve gotten. If they’re still planting sunflowers then they’re basically at the beginning. But if they have radishes or chickens you know they’ve gotten decently far. 

Then you start farming! The gameplay right now isn’t extremely complex. The more often you’re willing to tend to your crops, the more you can earn. And then you want to save up certain crops and SFL for whatever step is next in your progression. For me, there’s a Goblin promising to unlock Wheat if I give him a Radish pie, which needs 60 Radishes and 15 SFL. So that’s what I’m focused on. 

As your farm develops, you can choose between continuing to reinvest in the farm and trying to create things you can cash out to your wallet. Like with most P&E games, any amount you cash out will slow down your ability to compound and increase your earnings, so you have to decide where it makes sense to draw that line. 

I definitely appreciate that the farms are so cheap to start out with. You don’t feel like you have this huge 4-5 figure expense you need to pay off before enjoying the game. Of all the games I’ve tried out or written about, this one definitely has the lowest barrier to entry. So if you’ve been looking for a P&E game to dip your toes in, this might be the one.