Cryptographic Narrative Alpha: It is the end, but also the prologue

Written by: Kerman Kohli

Compiled by: TechFlow intern

Some thoughts after the UST collapse and what it means for all of us.

Last week, one of the most impactful events in our industry occurred, as a company valued at over $40 billion rapidly went to zero in just one week.

In my crypto career, I have seen many charts, but none compare to what we experienced last week.

Reflecting on the entire event, many thoughts have flashed through my mind, and I believe the most intriguing is that the truths obscured over the past few years are gradually coming to light.

Truth and Motivation

During the era of LTC and other altcoins, they were forks of BTC, and their promise of being simpler and faster than BTC was a fundamental lie, as the technological foundations were the same, only the adoption rates differed. Throughout the decade-long cycle of cryptocurrency, various issues have been obscured, hidden by those underlying motivations, leading to a lack of awareness for newcomers.

In every bull and bear cycle, different issues have been obscured, but the basic human nature remains similar. If we look back at each period, we can see the following points:

1. BTC is a tool used by criminals. (Traditional institutions vs. Cyberpunk)

2. LTC/XRP/IOTA are better versions than BTC, with a greater chance of becoming currency. (Speculation vs. Retail)

3. People are sharing some tokens on video platforms. (Paid messages become the reason for retail to buy cryptocurrencies)

4. ICOs that change the world. (Good/bad project teams vs. Long-term investors)

5. Various L1s that are cheaper, faster, and better than Ethereum. (People who missed ETH vs. ETH ecosystem)

These are all undeniable truths in the industry; the past isn't particularly good, but not everyone is a bad actor. However, what people fail to understand are the hidden motivations that determine why people say and do what they do in this industry. So far, we have been somewhat satisfied with the occurrence of this cycle because these truths and motivations share a common theme:

Greedy Speculation

Greed is the main theme of this game, permeating the entire cycle. The ultimate winners are the smartest among the greedy, who make money and leave the market, taking speculative assets with them, which is what we typically refer to as a "bull market."

Whenever friends ask me, "What coin should I buy?" to participate in cryptocurrency, I always tell them the same thing:

Do not buy anything other than Ethereum or Bitcoin, because cryptocurrency is a massive casino, and once you step in, you have already lost.

Rational people usually listen and do just that, but those whose brains are controlled by greed do not care about this. After losing most of their money and growing tired of losing, they will exit with complaints.

Safe Assets

This time, what is leaving is not an investment asset; it is a high-yield savings account, marketed to ordinary people and the treasury to safely store their money and build a continuously growing ecosystem. They tell savers that this is a sustainable future. Matt Levine's excerpt elegantly summarizes this:

Safe assets are much riskier than risky assets. This is a profound lesson I believe we learned from the 2008 financial crisis, and cryptocurrencies seem to enjoy relearning the lessons of traditional finance. Systemic risk exists in safe assets; equity assets—tech stocks, Luna, BTC—are risky, and everyone knows they are risky; everyone accepts the risk. If your stock or Bitcoin drops by 20%, you will be sad, but you are not that surprised. Therefore, most people arrange their lives in such a way that if their stocks or Bitcoin drop by 20%, they will not be ruined.

On the other hand, safe assets—AAA-rated mortgages (high credit mortgages), bank deposits, stablecoins—should not have risk. People rely on their value, and when people lose even a little confidence in them, they can completely collapse. Bitcoin is worth something at $50,000, worth less at $40,000, while a stablecoin is worth something at $1 and worthless at $0.98. If it can reach $0.98, it could also go to zero.

As an industry, what we see is a group of participants who lure another group of participants under the guise of safety, while in reality, they are creating wealth without generating any real value—or rather, under the pretense of creating value:

1. You create a token.

2. You create a so-called "stablecoin."

3. You tell people you can burn speculative coins for stablecoins.

4. The more stablecoins exist, the higher the value of speculative coins.

5. To keep people in your stablecoin (preserving the value of your speculative coins), you promise them a fixed return of 20%.

So your question is, where do you get the money to pay that 20% return? It turns out you can call your wealthy "friends," promising them tokens, and they help you maintain it longer.

This is one of the truths obscured by countless motivations:

1. Founding members benefit from LUNA's multi-billion dollar valuation and speak on Twitter to defend this model.

2. Early investors bought LUNA for less than $1 and have made 100 times their capital, often reaping hundreds of millions or billions in profits, endorsing their credibility.

3. KOLs buy LUNA at low prices and then promote this "high-yield savings account" to their followers. They may not know where the yield comes from, and they don't care; their subscriber numbers increase, and so do their profits.

4. The Terra ecosystem convinces investors, businesses, and retail that this is a safe "20% yield" without emphasizing the risks. They do not genuinely bother to communicate the risks because when you are selling people on very high yields, who cares?

Another classic crypto game, repeated over and over, but the target has shifted from greedy speculators to greedy yield seekers, who suffer heavy losses. They are not looking to get rich overnight but believe that cryptocurrency is the future of banking and finance, and that these yields are stable, just like their bank accounts.

This is Just the Beginning

Within the industry, there are still many truths to uncover, and only when we collectively see the truth will we reach the bottom. At that time, everyone will wake up, everyone will become clear-headed and reflect on themselves. I predict that one or several of the following will happen in the coming months:

• Many DeFi 2.0 or new DeFi are merely abstract financial schemes that fundamentally create no real value, but attract people with exaggerated terms like "liquidity," "depth," and "algorithm," merely creating an internal circular economy.

• Many projects do not know what their unit economics are and will realize they have given away billions of dollars in value, with massive oversupply contributing to the destruction of their own ecosystems.

• Many investors who believe that buying newly launched tokens early will guarantee their returns will realize this is impossible; you need to create real value.

• Tokens with low circulation but hoping for huge FDV are like smoke and mirrors, obscuring the truth and reflecting the situation. They will be ridiculed until they face reality and go bankrupt.

• Currently, NFTs are merely sheltered under the eaves of art collectibles. Only when they experience collective disillusionment will we see true innovation in digital assets, different from what we have seen so far.

• A pre-released game already has billions in FDV; it feels like pricing oneself as if you have already succeeded. No pain, no gain; no one can succeed right from the start. It takes years of refinement and iteration; those who have not experienced hardship cannot build anything.

• Those public chain tokens that obscure the scalability trilemma will be exposed.

• Algo-stables are largely useless because they are not accepted as valid mediums of exchange and are merely designed as clever financial games. They may still have their uses, but in their current form, they are of no use outside the money game. Pay attention to "Curve Wars" to understand the extent to which people still believe this lie.

• Those that truly create value and feel "boring" will continue to thrive and stand the test of time—just as they always have. As the truth becomes clearer, they may be repriced.

• Most investors are fence-sitters; they have no real beliefs, theories, or understanding of where they put their money. Many will wake up as the market shows them the reality of their investments.

I am not being overly pessimistic or harsh; I just feel it is important for me to voice these thoughts to people. Unless we acknowledge the problems, we must strive to create solutions. That is why I wrote this article—not to scare you, but to accept the ugly truths so that we can work together to address these challenges.

I began my crypto journey during the bear market of 2018, and I see many similarities in the attitudes of market participants from then to now. We are still far from the bottom because there are more truths to be fundamentally uncovered. We only discovered one of many truths last week, and the rest have yet to drop their curtain.