What will happen next in the crypto market amid the bear market?

You have realized that you are in a bear market.

You have probably lost more money in the last few weeks/months than you have in a long time. It turns out that not only are the numbers going up, but if it sounds like a Ponzi scheme and you tweet about it like an arrogant asshole, it probably is.

When a bear market happens, everyone wants something to talk about, and the crypto crash day sent everyone into a panic and out of the game. The most important thing is to understand that this is part of the game when you get into this space early, and make sure you have tangible lessons learned. Last but not least, make sure you stay in a good frame of mind personally. Investing is hard, and it's hard to cut out external (superficial) factors, but you can always work, and there are more important things in life than having or not having money in your bank account.

One of the biggest things I expect as we emerge from the bear market/downturn is a maturation of the industry as a whole. So what does that mean?

Here are some quick thoughts on what’s coming next:

Focus on transferring tokens to reflect the value captured by the network

It’s likely that with the LUNA bust (and now Celsius), we’ll get more crypto regulation (or at least scrutiny) sooner than we expect. While I don’t like this on the surface, perhaps it will free up various builders in the industry to be more constructive with their tokens. The next cycle should be about improving token economics to enable tokens to serve as a more direct form of value-added for a given protocol. We went from utility tokens in the first cycle, to valueless governance tokens, to an understanding of the speed and price of token issuance in this cycle, and hope to evaluate tokens (and therefore regulations) in sync with clear revenue models in the next cycle.

Crypto continues to accelerate many dynamics, but one thing it has so far refused to accelerate is business model innovation. This needs to happen, and it will depend on how participants and users and developers think about choosing from core protocols and copy/paste protocols, and how they think about open source moving forward. Coming out of the bear market sometime in 2023 (see how optimistic I am that the bear market will only last a year), hopefully we will see founders and DAOs willing to experiment with entirely new forms of Token + NFT structures (thoughts about this structure for another day).

More loyal to the Ethereum ecosystem

For better or worse, the narrative of competitive L1s is dead. There will be new L1s, but I think EVM-compatible games that are primarily focused on accumulating TVL through Ponzi schemes will be dead soon. The biggest opportunities may still be in gaming-type games that will create high transaction volume (thus generating fee income for the network) in addition to protocol value (percentage of transactions on the platform perhaps or more standard NFT type economics). That said, there are currently very few teams in the space that have a clear understanding of how to build games, so I am very bearish.

Right now, FLOW, AVAX, and MATIC (and a little SOL) are best positioned to capture these markets. Time will tell if others do the same, or if the action converges on one chain (I hope to god we don’t have more chain shards for specific applications). We are certainly bullish on Arbitrum and expect L2 to continue to capture more volume for non-gaming businesses over time, though there may be volatility as gas costs drop on L1.

The second (obvious) prediction is that the new L1 will seek to replace Solana in a meaningful way. While I think the biggest attack vector is still the generality of the programming language, there may be other attack points I haven’t considered, assuming Solana fixes its uptime issues. I remain bullish on Solana at these prices.

Talent moat seen as real/return to brand as a differentiator

I’ve always thought that Yearn’s core moat has been the talent level of contributors (besides the early economies of scale associated with the Curve release/convex bribe). People have poured billions into Yearn because they know it is managed by a sophisticated, risk-mitigating, tech-savvy team of strategists and engineering. In the open source world, few seem to understand how getting out of a bear market talent moat can increase market share through better product velocity, creativity, and risk management. I wouldn’t be shocked if the “baby boomer” protocols, which have shown the ability to safely manage billions of dollars, have stronger moats than we once thought. The question is whether the teams of these protocols can be properly incentivized to stick around instead of starting something new with a completely clean token supply.

New Narrative

“It seems clear in crypto that narratives are exhausted and emerging narratives like ZK are not enough to drive the next wave of inflows. Small narratives like the CRV war or L1 rotation drive washouts but not net new inflows. DeFi regulation is also an issue.”

While this bear market was theoretically started by some combination of macro conditions and a crypto-centric crash, that doesn’t mean crypto will go up once the world “adventures” back in crypto, just as it has downside. While I do think there are a lot of people who started trading stocks and thought they knew what they were doing over the past two years, these same people will realize they have no alpha and may turn to crypto as a way to trade in a less efficient market, crypto bear markets are generally about inactivity and lack of narrative.

Because of this, we have to consider what narrative will emerge if/when we decouple from stocks to kick-start the cycle. Outside of The Merge, there are a number of new stories that could accelerate over the next 6-18 months. My gut tells me that the ones that can best pull us out of the bear market will be those that focus on sustainable revenue for the protocol and those that tout the various new users that have never interacted on-chain before.

The latter will fill in the domain shift of other web2 primitive ideas in distributed productivity/computing on the consumer side (e-commerce, gaming, super apps), enterprise or B2 B2 C side (think Livepeer, Helium, Render, etc.), and institutional entry on the DeFi side. All will focus on abstracting today’s crypto user experience in security and transaction processes.

While investors today are all falling back in love with infrastructure type investments, the other thing I will say is that after the above narrative emerges, I think we will see B2B software enter crypto/web3 en masse as a second wave that helps kill the bear market. The next wave will be joined by a bunch of brands, companies and institutions that want to contextualize on-chain data for a variety of use cases. I think this space is ripe for Web2 founders as it will require an understanding of enterprise SaaS GTM actions and familiarity with on-chain to execute at a high level.

These are just some thoughts, this isn’t really a definitive post, but a quick peek at other things I should probably be working on today.

Two more random thoughts

Nouns and Crypto Fatigue

So I'm actually pretty bullish on Nouns, but I do wonder about this.

You’ve exceeded the value dilution (i.e. token release) in value creation… you should rage quit, which will give you a floor price.

In effect, you are betting on the DAO's ability to grow your investments.

Nouns often rely on people’s ability to spread their brand and narrative in order to add more value to the DAO (and thus more than the inflation that occurs every day). While an rage exit creates a nice “floor price” similar to the RFV dynamic, this ignores a fundamental problem in a bear market, which is… people are going to get really tired of crypto brands for a while.

Maybe only for a year or so, but I don't think Nouns will be immune to crypto fatigue, so as a DAO I might consider how best to move Nouns away from crypto and more towards a short-term community/movement. The low hanging fruit would be through some kind of entertainment brand, the next would be a studio focused on supporting some kind of creators, and the last would probably be philanthropy. Or, of course, leverage the subDAO structure and build out LilNouns for each of these use cases, with capable leaders and a percentage of funding for the core Noun DAO. Again, I'm just giving a half-baked idea here.

Cryptocurrency and the bear market dictatorship

At some point in every founder relationship I’ve had (crypto or not), I discuss the important dynamic of understanding when you’re effectively becoming a dictator within an organization. Doing so in a tight labor market can be scary because for many people the line between being overruled (but heard) and being ignored is very thin (and the skills to make employees/contributors/communities feel heard are rare). However, as the walls start to close around you and the market feels bleak, it’s often indecision and/or apathy that kills a team.

It may sound sacrilegious to say, but I think full democracy is a negative for most crypto projects today. The vast majority of projects will see widespread apathy/failure in their communities and governance participation will die in a bear market. Use this time to work on projects with the best leaders and get them closer to dictators to weather a down market. No activity will kill the protocol. I wrote in our recent investor update:

As the bear market continues to progress, the core thing we will be watching is whether the protocols that have created material wealth continue to build, just as they did in 2018. If we see a slowdown in development, we may assess network value and sell projects that we have lost confidence in, just as we did last year.

Regardless, the best protocols recognize that leaders sometimes need to have leeway to make tough but unilateral decisions while maintaining checks and balances on the wallets of those who will (somewhat inevitably) exit and try to take all the money with them.

Original title: 《 Notes From a Bear Market (Crypto Edition) 》

Original author: Michael Dempsey