Original author: 100y
Original translation: TechFlow
Current situation: Either speculate or focus on the niche market.
We have entered the middle (and perhaps near the end) of our fourth major market cycle. The crypto market has grown significantly, with BTC ranking ninth among overall assets ($1.26 trillion) and ETH ranking 25th ($409 billion).
This naturally raises the question: Has a market of this size really 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 people 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 seem to have found PMF, mainly infrastructure protocols, their PMF usually comes from speculation. In the third bull market cycle, there were many blueprints for using blockchain technology to solve real-world problems, with buzzwords such as metaverse, P2E, and decentralized social networks attracting attention. However, despite market growth, it now seems that the vision of blockchain is shrinking, with only a few enthusiasts left and no real-world problems solved.
1. Is this all about speculation?
It is natural to generate speculation in an emerging industry. While speculation can lead to many victims, it also helps the market and the industry achieve scale. In other words, to rationalize speculation, the industry must eventually find the right PMF.
Throughout the bull market cycle, the industry's 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 divide the market into three periods.
2. Answer: Mostly
2.1 Internet Currency
(Source: siliconANGLE)
After the concepts of Bitcoin and blockchain first emerged in 2008, Bitcoin was mainly used as a payment method for online transactions due to its censorship resistance and convenience for 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. Additionally, 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. Although projects such as Steemit, Livepeer, Filecoin, and Brave Browser aim to solve real-world problems, the market remains rife with speculation.
The surge in the price of Bitcoin from $100 to $1,100 in late 2013 further reinforced 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. BTC and ETH have reached significant market caps, especially in the Korean market, where speculative trading is very active. During this period, projects such as EOS, ADA, TRX, and BNB raised large amounts of money through ICOs, even though many ICO projects were actually scams.
The subsequent crash led to a prolonged crypto winter as the market was built on speculation. However, projects built during this period and post-COVID-19 quantitative easing helped the market recover in 2021. DeFi protocols like Uniswap and Compound flourished on-chain, and speculation was active both on-chain and off-chain.
This period saw a high level of interest in blockchain technology itself, with many idealistic projects attempting to solve problems through decentralization. While grand visions such as the metaverse, P2E, and decentralized social mostly failed to materialize, they inspired many.
2.3 Speculative Infrastructure
After the third bull run in 2021, the crypto industry has attracted a lot of attention, driving efforts to integrate blockchain technology into traditional Web2 industries in search of PMF. In the Web3 scenario, venture capital has increased, and more teams have begun to build projects that solve real problems rather than just speculate. These teams focus on improving scalability, interoperability, and user experience (UI/UX) to achieve large-scale application of blockchain technology.
These efforts address key issues. Notable developments include bridges (e.g. Across, Wormhole, LayerZero) addressing the fragmented liquidity problem, and layer 2 solutions (e.g. Optimism, Arbitrum, Polygon) effectively addressing the scalability problem at 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 providing highly scalable block space, 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 has achieved $35 million in gross profit in the past 180 days.
In addition, numerous projects in the on-chain ecosystem provide utility to users, and the following protocols have achieved some degree of PMF:
L1: Ethereum, Solana, Tron
L2：Decision、Base、Optimism
桥：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 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 L1 is to perform computation in a decentralized environment, providing benefits such as censorship resistance and activeness. However, there are few real use cases that are consistent with this core concept, and most users use L1 as a platform for speculation.
The main purpose of L2 is to provide fast scalability while relying on the security of the base layer. Although L2 does achieve PMF, most of the demand comes from users who want to speculate on the chain faster and cheaper. 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 a critical infrastructure in the current multi-network environment. Without bridges, many users and businesses would face significant inconveniences. However, similar to L2, bridges are often used by users to find speculative opportunities on different networks, just like 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 value locked (TVL). While it is normal and nothing wrong to seek incentives, many investors participate in it expecting unsustainably high returns (such as airdrops, yields, etc.).
Decentralized Finance (DeFi) enables anyone to conduct financial activities on-chain. Despite increasing integration with real-world assets (RWA), the market is still small and many DeFi protocols are related to speculation. For example, Pendle and Ethena grew rapidly by finding appropriate PMFs, but this growth was driven by users' speculative behavior. Both protocols attracted a large number of users and TVL by leveraging the expectation of airdrops.
NFT markets vividly demonstrate the impact of speculation. NFT markets are neutral platforms for trading NFTs, but examples like OpenSea and Blur show that once the NFT speculation frenzy subsides or token incentive programs end, trading volumes drop sharply.
Web3 social aims to solve the problems of centralized social media. While there is some speculation among users, this space is one of the few where the intention to build and the actual PMF are aligned. However, it is still a niche market because not many people are concerned about the centralization issues of Web2 social yet.
On-chain infrastructure such as oracles and query services are critical to the secure and efficient operation of the on-chain ecosystem, but they are still mainly used for speculation-related services.
Prediction markets and meme-related protocols are inherently designed to facilitate speculation.
PMFs are not real
For example, imagine you buy YT-eETH on the Arbitrum network through Pendle. Arbitrum is a Layer 2 solution that reduces your costs and time. Pendle allows you to separate the yield and principal of eETH, offering a variety of strategies. Etherfi re-stakes and mints liquid ETH on your behalf, while EigenLayer allows you to stake ETH in multiple protocols at the same time. While these services are useful, their activity is driven by speculation on AVS rewards and potential airdrops.
P.S.: There are indeed some blockchain-related services that are widely used in real life, but they usually follow the Web2 paradigm, and blockchain is just one of the functions. For example, Reddit's avatar NFT and Sweatcoin.
Don't get me wrong.
In a free market, products do not necessarily have to be used for their intended purpose. Even if a product generates demand and revenue through speculation, etc., it is still valuable. However, if the PMF is inconsistent with the core nature of the blockchain, then the blockchain may not be necessary. Traditional Web2 technologies are often sufficient.
Given the size of the market, why haven’t we seen widespread PMF for blockchain products yet? It’s because modern society doesn’t really need blockchain yet.
3. From speculation to credible neutrality
As Josh Stark explains in Atoms, Institutions, Blockchains, the value of blockchain in the digital realm lies in its trusted neutrality, similar to the role of physical laws and social norms in the physical and social realms. While physical laws define space, time, and matter, 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 some countries where social norms have failed due to corrupt governments 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 a living. Here, the blockchain's credible neutrality gives Bitcoin and stablecoins the characteristics of assets and currencies, allowing them to find real product-market fit (PMF) beyond speculation.
To find a broader PMF based on credible neutrality, we can only wait for more centralized systems to fail. Although not directly related to blockchain, Trump's Truth Social emerged as a way to avoid censorship by big tech companies. While such failures of centralized systems are not good for developed countries, they may eventually drive people to blockchain systems. In essence, when the flaws of centralized systems become apparent, blockchain technology will provide real practicality beyond speculation.
However, issues such as social media censorship, data breaches, and cloud service outages are not enough of a catalyst. While these issues do exist, the benefits of centralized services still outweigh them, causing most people to continue using the existing system. 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 prominent 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 is mainly driven by investors' speculation. Although speculation is often criticized, we should also see its role in promoting the development of the industry. However, it is regrettable that the current PMF in the blockchain market is still dominated by speculation, and we can hardly find basic PMF based on credible neutrality.
Despite this, I remain very optimistic about the blockchain industry. As Balaji points out, the world is in a continuous cycle of bundling and unbundling. As our social systems become more centralized, they are bound to run into problems and the need for unbundling will increase. I hope that, in the future, blockchain will play a key role in protecting human sovereignty.
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