Viewpoint: The fit of cryptocurrency products mainly comes from speculation; otherwise, they can only serve a small number of users

Author: 100y

Compiled by: Deep Tide TechFlow

Current Situation: It's either speculation or niche markets.

We have entered the mid-term of the fourth major market cycle (perhaps nearing its end). The crypto market has grown significantly, with BTC ranking ninth among all assets ($1.26 trillion) and ETH ranking 25th ($409 billion).

This naturally raises a question: has such a large market truly found product-market fit (PMF)? In 2020-2021, most would say no. However, given the maturity of the market and the emergence of various protocols, many might now say yes.

My answer is mixed. There are indeed some protocols that can generate significant revenue even after considering token incentive expenditures, which leads me to lean towards a yes. However, I must point out that the PMF of most of these protocols largely relies on speculation. In contrast, protocols unrelated to speculation often struggle to find broad PMF and can only serve a limited number of users.

(Source: Vitalik Buterin)

Recently, many people, including Vitalik Buterin, have expressed similar views on social media. Even those protocols that seem to have found PMF, primarily infrastructure protocols, often derive their PMF from speculation. During the third bull market cycle, many blueprints utilizing blockchain technology to solve real-world problems, such as the metaverse, P2E, and decentralized social networks, attracted attention. However, despite market growth, it now seems that the vision for blockchain is narrowing, with only a few enthusiasts remaining and no real-world problems being solved.

1. Is it all about speculation?

It is natural for speculation to arise in emerging industries. While speculation can lead to many victims, it also helps the market and industry achieve scale. In other words, to rationalize speculation, the industry must ultimately find the right PMF.

Throughout the bull market cycle, the industry's efforts to find PMF seem to have regressed. Despite the influx of talent and capital bringing significant advancements in regulation, technology, and infrastructure, there are still no broadly PMF blockchain products. Even if Bitcoin and Ethereum ETFs are approved, discussions about visions like decentralization and the metaverse have decreased since the 2021 bull market, and the market seems to be targeting increasingly niche segments.

Is the growth of the market ultimately driven solely by speculation? To find the answer, I will divide the market into three periods.

2. The answer: Mostly

2.1 Internet Currency

(Source: siliconANGLE)

After the concepts of Bitcoin and blockchain emerged in 2008, Bitcoin primarily served as a payment method for online transactions due to its censorship resistance and convenience for cross-border payments.

A notable example is Bitcoin's use for trading items in MMORPGs (such as World of Warcraft) with active economies. Additionally, Bitcoin was used in illegal transactions on dark web markets like Silk Road, involving drugs, weapons, and pornography.

Despite significant use of Bitcoin in illegal transactions, it found PMF among specific groups even in less well-known contexts.

2.2 Speculation

At this stage, cryptocurrencies were primarily viewed as speculative assets. Although projects like Steemit, Livepeer, Filecoin, and Brave Browser aimed to solve real-world problems, the market remained rife with speculation.

At the end of 2013, Bitcoin's price soared from $100 to $1,100, further reinforcing its image as a speculative asset. This led to Ponzi schemes like OneCoin, resulting in many victims.

The first bull market in 2013 failed to garner widespread attention, but the second bull market in 2017 attracted global focus. BTC and ETH reached significant market capitalizations, particularly in the South Korean market, where speculative trading was very active. During this period, projects like EOS, ADA, TRX, and BNB raised substantial funds through ICOs, although many ICO projects were essentially scams.

As the market was built on speculation, the subsequent crash led to a prolonged crypto winter. However, projects established during this period and the quantitative easing policies post-COVID-19 helped the market recover in 2021. DeFi protocols like Uniswap and Compound thrived on-chain, with speculative activities being active both on-chain and off-chain.

This period witnessed a high interest in blockchain technology itself, with many idealistic projects attempting to solve problems through decentralization. Although grand visions like the metaverse, P2E, and decentralized social networks largely failed to materialize, they inspired many.

2.3 Speculative Infrastructure

After the third bull market in 2021, the crypto industry attracted significant attention, driving efforts to integrate blockchain technology into traditional Web2 industries in search of PMF. In the Web3 landscape, venture capital increased, and more teams began building projects to solve real-world problems, not just speculation. These teams focused on improving scalability, interoperability, and user experience (UI/UX) for the mass adoption of blockchain technology.

These efforts addressed key issues. Notable advancements include bridges (like Across, Wormhole, LayerZero) solving liquidity fragmentation issues, and Layer 2 solutions (like Optimism, Arbitrum, Polygon) effectively addressing scalability issues at the base layer.

Some protocols generated fee revenues exceeding their expenditures on token incentives. A representative example is Base. The Layer 2 business model relies on providing highly scalable block space, which depends on Ethereum's security. They pay gas fees for storing data on the Ethereum network and charge users transaction fees. Without governance token incentives, Base achieved a gross profit of 35 million dollars in the past 180 days.

Moreover, numerous projects in the on-chain ecosystem provide utility to users, with the following protocols achieving some degree of PMF:

• L1: Ethereum, Solana, Tron

• L2: Arbitrum, Base, Optimism

• Bridges: LayerZero, Wormhole

• Staking: Lido, Rocket Pool, Jito

• Re-staking, LRT: EigenLayer, etherfi, Symbiotic

• DeFi: Aave, Maker, Uniswap, Pendle, Ethena

• NFT: OpenSea, Zora

• Prediction Markets: Polymarket, Azuro

• Social: Farcaster, ENS

• Infrastructure: Chainlink, The Graph

• Meme: Pump Fun, Moonshot

Here are my thoughts

While the above protocols do provide significant utility to users and have achieved product-market fit (PMF), I believe that many of these PMFs still primarily revolve around speculation. In contrast, services unrelated to speculation, while also achieving PMF, have a very limited audience.

• The core of smart contract L1s lies in performing computations in a decentralized environment, providing benefits like censorship resistance and maintaining activity. However, there are few real use cases that align with this core idea, and most users view L1s as platforms for speculation.

• The primary purpose of L2s is to provide fast scalability while relying on the security of the base layer. Although L2s have indeed achieved PMF, most demand comes from users wanting to speculate on-chain more quickly and cheaply. If L1 is a high-risk, expensive casino, then L2 is a low-risk, more affordable casino.

• Bridges facilitate the flow of capital and information between different networks, making them key infrastructure in the current multi-network environment. Without bridges, many users and businesses would face significant inconveniences. However, similar to L2s, bridges are often used by users to seek speculative opportunities across different networks, akin to transferring funds between different casinos.

• Staking and re-staking are crucial for the security of protocols and have achieved tremendous success in terms of total value locked (TVL). While seeking incentives is normal and not wrong, many investors participate with the expectation of unsustainable high returns (such as airdrops, yields, etc.).

• Decentralized finance (DeFi) enables anyone to engage in financial activities on-chain. Although increasingly integrated with real-world assets (RWA), the market remains small, and many DeFi protocols are related to speculation. For example, Pendle and Ethena grew rapidly by finding appropriate PMF, but this growth was driven by users' speculative behavior. Both protocols attracted a large number of users and TVL by leveraging airdrop expectations.

• The NFT market vividly demonstrates the impact of speculation. The NFT market is a neutral platform for trading NFTs, but examples like OpenSea and Blur show that once the NFT speculation frenzy subsides or token incentive programs end, trading volumes plummet.

• Web3 social aims to address the issues of centralized social media. While users have some expectations of speculation, this field is one of the few areas where the intent of building aligns with actual PMF. However, it remains a niche market, as not many people currently worry about the centralization issues of Web2 social.

• On-chain infrastructure like oracles and query services is crucial for the secure and efficient operation of on-chain ecosystems, but they are still primarily used for speculation-related services.

• Prediction markets and meme-related protocols are essentially designed to facilitate speculation.

PMFs do not truly exist

For example, imagine you purchase YT-eETH on the Arbitrum network through Pendle. Arbitrum is a Layer 2 solution that can reduce your costs and time. Pendle allows you to separate the yield and principal of eETH, offering various strategies. Etherfi represents you for re-staking and minting liquid ETH, while EigenLayer allows you to stake ETH across multiple protocols simultaneously. While these services are useful, their activities are driven by speculation around AVS rewards and potential airdrops.

Note: There are indeed some blockchain-related services widely used in real life, but they typically follow the Web2 paradigm, with blockchain being just one feature. For example, Reddit's avatar NFTs and Sweatcoin.

Don't misunderstand me.

In a free market, products do not necessarily have to be used as intended. Even if a product generates demand and revenue through speculation, it is still valuable. However, if the PMF is inconsistent with the core essence of blockchain, then blockchain may not be necessary. Traditional Web2 technologies are often sufficient.

Given the scale of the market, why have we not seen widespread PMF for blockchain products? This is because modern society does not truly need blockchain yet.

3. From speculation to trusted neutrality

As Josh Stark explains in Atoms, Institutions, Blockchains, the value of blockchain in the digital realm lies in its trusted neutrality, akin to the role of physical laws and social norms in the physical and social realms. Physical laws define space, time, and matter, while social norms (like government and law) define interactions in human society. In contrast, modern society does not yet need blockchain because digital interactions still primarily rely on trust in centralized entities.

However, there are exceptions. In some countries where social norms have broken down due to government corruption or inadequate infrastructure, Bitcoin and stablecoins play a crucial role in the economy. This is particularly evident in Latin America and Africa. Unlike people in developed countries who view cryptocurrencies as investments, residents in these regions use cryptocurrencies to make a living. Here, the trusted neutrality of blockchain endows Bitcoin and stablecoins with the characteristics of assets and currencies, allowing them to find a real PMF beyond speculation.

To find a broader PMF based on trusted neutrality, we can only wait for more centralized systems to fail. Although not directly related to blockchain, Trump's Truth Social emerged to avoid censorship by big tech companies. While the failure of such centralized systems may be detrimental to developed countries, they could ultimately drive people towards blockchain systems. Essentially, when the flaws of centralized systems become apparent, blockchain technology will provide genuine utility beyond speculation.

However, issues like social media censorship, data breaches, and cloud service outages are not yet sufficient catalysts. While these problems do exist, the benefits of centralized services still outweigh these issues, leading most people to continue using existing systems. As I mentioned in a previous article, the greatest catalysts for blockchain to find PMF based on trusted neutrality will be 1) the failure of the dollar and 2) the rapid development of artificial intelligence. Recently, the support for Bitcoin from notable figures like Trump, Larry Fink, and Jamie Dimon reflects a similar trend.

4. Final Thoughts

In the past three years, blockchain technology and the entire industry have developed rapidly. This growth has been primarily driven by speculative behavior from investors. While speculation is often criticized, we should also recognize its role in driving industry development. However, it is regrettable that the current PMF of the blockchain market still revolves around speculation, and we can hardly find a fundamental PMF based on trusted neutrality.

Nonetheless, I remain very optimistic about the blockchain industry. As Balaji pointed out, the world is in a continuous cycle of bundling and unbundling. As our social systems become increasingly centralized, they will inevitably encounter problems, and the demand for unbundling will increase. I hope that in the future, blockchain will play a key role in protecting human sovereignty.