Current situation: either speculation or segmenting the market.
We have entered the middle (and perhaps near the end) of our fourth major market cycle. The crypto market has grown significantly, with Bitcoin ranking ninth among overall assets ($1.26 trillion) and Ethereum ranking 25th ($409 billion).
This naturally raises the question: has a market of this size actually found product market fit (PMF)? In 2020-2021, most people would say no. However, given the maturity of the market and the emergence of various protocols, many may now say yes.
My answer is mixed. There are indeed some protocols that generate significant revenue even after accounting for token incentive payouts, which makes me inclined to say yes. However, I must point out that the PMF of most of these protocols relies heavily on speculation. In contrast, protocols unrelated to speculation often struggle to find widespread PMFs and can only serve a small number of users.
Source: Vitalik Buterin
Recently, many people, including Vitalik Buterin, have made similar points on social media. Even for those protocols that appear to have found a PMF, primarily infrastructure protocols, their PMF often comes from speculation. In the third bull market cycle, there are many blueprints for using blockchain technology to solve real-world problems, and buzzwords such as the Metaverse, P2E, and decentralized social networks have attracted people's attention. However, despite market growth, it now appears that the blockchain vision is shrinking, leaving only a handful of enthusiasts and not solving real-world problems.
1. Is this all about speculation?
Speculation is natural in emerging industries. While speculation can lead to many victims, it also helps markets and industries achieve scale. In other words, to rationalize speculation, industry must eventually find a suitable PMF.
Throughout the bull market cycle, industry efforts to find PMF appear to have regressed. While the influx of talent and capital has led to significant regulatory, technical, and infrastructure advancements, there is still no widespread PMF blockchain offering. Even if Bitcoin and Ethereum ETFs are approved, talk of decentralization and visions like the Metaverse has diminished since the 2021 bull run, with the market appearing to target increasingly niche market segments.
Is the market's growth ultimately driven solely by speculation? To find out, I divided the market into three periods.
2. Answer: Most of them
Image source: 100y
2.1 Internet currency
Image source: siliconANGLE
After the concept of Bitcoin and blockchain first emerged in 2008, Bitcoin was primarily used as a payment method for online transactions due to its anti-censorship properties and ease of cross-border payments.
A notable example is the use of Bitcoin to trade items in MMORPG games with active economies, such as World of Warcraft. In addition, Bitcoin is used for illegal transactions on darknet markets such as Silk Road, involving drugs, weapons, and pornography.
Despite its prominent use in illicit transactions, Bitcoin has found PMFs among specific groups even without being widely known.
2.2 Speculation
At this stage, cryptocurrencies are primarily viewed as speculative assets. While projects like Steemit, Livepeer, Filecoin, and Brave Browser aim to solve real-world problems, the market is still rife with speculation.
In late 2013, Bitcoin's price surged from $100 to $1,100, further reinforcing its image as a speculative asset. This gave rise to Ponzi schemes such as OneCoin, which resulted in many victims.
The first bull market in 2013 failed to attract widespread attention, but the second bull market in 2017 attracted global attention. Bitcoin and Ethereum have reached significant market capitalizations, especially in the Korean market, where speculative trading is very active. During this period, projects such as $EOS, $ADA, $TRX, and $BNB raised significant amounts of money through ICOs, even though many ICO projects were actually scams.
Since the market was built on speculation, the subsequent crash led to a prolonged crypto winter. However, programs built during this period and post-COVID-19 quantitative easing helped the market recover in 2021. DeFi protocols like Uniswap and Compound thrive on-chain, and speculation is active both on-chain and off-chain.
This period witnessed a high level of interest in blockchain technology itself, with many idealistic projects attempting to solve problems through decentralization. While grand visions like the Metaverse, P2E, and decentralized socialization mostly failed to materialize, they inspired many.
2.3 Speculation infrastructure
After the third bull run in 2021, the crypto industry attracted a lot of attention, driving efforts to integrate blockchain technology into the traditional Web2 industry in the search for PMF. In the Web3 scenario, venture capital increases and more teams start building projects that solve real-world problems rather than just speculation. These teams focus on improving scalable functionality, interoperability, and user experience (UI/UX) to enable large-scale application of blockchain technology.
These efforts address key issues. Notable developments include bridges (e.g., Across, Wormhole, LayerZero) that address liquidity dispersion issues, and layer 2 solutions (e.g., Optimism, Arbitrum, Polygon) that effectively address the scalable functionality of the base layer.
Some protocols generate more fee revenue than they spend on token incentives. A representative example is Base. Layer 2 business models rely on blockspaces that provide highly scalable functionality, which relies on the security of Ethereum. They pay gas fees for storing data on the Ethereum network and charge transaction fees to users. Without governance token incentives, Base achieved $35 million in gross profits over the past 180 days.
In addition, many projects in the on-chain ecosystem provide utility to users, and the following protocols achieve some level of PMF:
Layer 1: Ethereum, Solana, Tron
Layer2：Decision、Base、Optimism
Cross-chain bridge: LayerZero, Wormhole
Staking: Lido, Rocket Pool, Jito
Re-staking, LRT: EigenLayer, etherfi, Symbiotic
DeFi：Aave、Maker、Uniswap、Pendle、Ethena
NFT：OpenSea、Zora
Prediction market: Polymarket, Azuro
Social: Farcaster, ENS
Infrastructure: Chainlink, The Graph
迷因：Pump Fun、Moonshot
Here are my thoughts
While the above protocols do provide significant utility to users and achieve Product Market Fit (PMF), I believe that many of these PMFs currently revolve primarily around speculation. On the contrary, although those services that have nothing to do with speculation also achieve PMF, their audience is very limited.
The core of smart contract Layer 1 is to perform calculations in a decentralized environment, providing benefits such as anti-censorship and staying active. However, there are few real applications that are consistent with this core concept, and most users use Layer1 as a platform for speculation.
The primary purpose of Layer 2 is to provide rapidly scalable functionality while relying on the security of the base layer. While Layer2 does achieve PMF, most of the demand comes from users wanting faster and cheaper on-chain speculation. If Layer1 is a high-risk, expensive casino, then Layer2 is a low-risk, more affordable casino.
Cross-chain (Bridges) promotes the flow of capital and information between different networks, making it a key infrastructure in the current multi-network environment. Without cross-chain, many users and businesses will face major inconveniences. However, similar to Layer 2, cross-chain is often used by users to find speculative opportunities on different networks, such as transferring funds between different casinos.
Staking and re-staking are critical to the security of the protocol and have been a huge success in terms of Total Volume Locked (TVL). Although it is normal and not wrong to seek incentives, many investors participate expecting unsustainably high rates of return (such as airdrops, income, etc.).
Decentralized Finance (DeFi) enables anyone to conduct financial activities on-chain. Despite increasing integration with real-world assets (RWA), the market remains small and many DeFi protocols are associated with speculation. For example, Pendle and Ethena grew rapidly by finding the appropriate PMF, but this growth was driven by the speculative behavior of users. Both protocols have attracted large numbers of users and TVL by leveraging airdrop expectations.
The NFT market vividly demonstrates the impact of speculation. NFT marketplaces are neutral platforms for trading NFTs, but examples like OpenSea and Blur show that once the NFT speculative frenzy subsides or token incentive programs end, trading volumes can plummet.
Web3 Social aims to solve the problems of centralized social media. Although users have some expectations for speculation, this industry is one of the few where construction intentions and actual PMF are consistent. However, it's still a niche market because not many people are worried about the centralization issues of Web2 social yet.
On-chain infrastructure such as oracles and query services are critical to the safe and efficient operation of the on-chain ecosystem, but they are still mainly used for speculation-related services.
Prediction markets and memecoin-related protocols are inherently designed to promote speculation.
Image source: 100yPMFs is not real
For example, imagine you purchase YT-eETH on the Arbitrum network via Pendle. Arbitrum is a Layer 2 solution that reduces your costs and time. Pendle allows you to separate your eETH returns and principal, offering a variety of strategies. Etherfi restakes and mints liquid ether on your behalf, while EigenLayer lets you stake ether across multiple protocols simultaneously. While these services are useful, their activity is driven by speculation in AVS rewards and potential airdrops.
Side note: There are indeed some blockchain-related services that are widely used in real life, but they usually follow the Web2 paradigm, of which blockchain is just one feature. Examples include Reddit’s avatar NFT and Sweatcoin.
Don't get me wrong.
In a free market, products do not have to be used as intended. Even if a product generates demand and revenue through speculation, etc., it still has value. However, if PMF is inconsistent with the core essence of blockchain, then blockchain may not be necessary. Traditional Web2 technologies are usually sufficient.
Given the size of the market, why haven’t we seen widespread PMF for blockchain products? This is because modern society doesn’t really need blockchain yet.
3. From speculation to trustworthy neutrality
As Josh Stark explains in "Atoms, Institutions, Blockchains", the value of blockchain in the digital industry lies in its trustworthy neutrality, which is similar to the role of physical laws and social norms in physical and social industries. Physical laws define space, time, and matter, and social norms (such as government and law) define interactions in human society. In contrast, modern society does not yet need blockchain because digital interactions still rely primarily on trust in centralized entities.
However, there are exceptions. In countries where social norms have failed due to government corruption or poor infrastructure, Bitcoin and stablecoins play a key 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 ends meet. Here, the trusted neutrality of blockchain gives Bitcoin and stablecoins the properties of assets and currencies, allowing them to find real product market fit (PMF) that transcends speculation.
To find a broader PMF based on trusted neutrality, we can only wait for the failure of more centralized systems. Although not directly related to blockchain, Trump’s Truth Social emerged as a way to avoid censorship from Big Tech. While the failure of such centralized systems is detrimental to developed countries, they could ultimately drive a shift toward blockchain systems. Essentially, when the flaws of centralized systems become apparent, blockchain technology will provide real utility beyond speculation.
However, issues such as social media censorship, data breaches and cloud service outages are not enough to act as catalysts. While these issues do exist, the benefits of centralized services still outweigh these issues, causing most people to continue using existing systems. As I mentioned in a previous article, the biggest catalysts for blockchain to find PMF based on trusted neutrality will be 1) the failure of the US dollar and 2) the rapid development of artificial intelligence. Recent support for Bitcoin from high-profile figures such as 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 achieved rapid development. This growth was primarily driven by investor speculation. Although speculation is often criticized, we should also see its role in promoting industrial development. However, it is regrettable that the current PMF in the blockchain market is still mainly speculative, and it is almost impossible to find a basic PMF based on trusted neutrality.
Despite this, I am still very optimistic about the blockchain industry. As Balaji points out, the world is in a constant cycle of bundling and unbundling. As our social systems become more centralized, they are bound to encounter problems and the need for unbundling will increase. I hope that, in the future, blockchain will play a key role in protecting human sovereignty.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: "Deep Wave TechFlow"
Original author: 100y
