One of my favorite things to do is take a messy, contentious, confusing topic in crypto and propose a framework to make sense of it. Here are eight from this year.

Users: who will use crypto? Why?

1. Benefits vs inefficiencies of using crypto

Blockchain adoption by inefficiency tolerance threshold

Today, things built on public blockchains are highly inefficient to use. For largely imperceptible and niche benefits, users must incur highly visible costs like transaction fees and poor performance.

This chart maps benefit to each user on the y-axis, the number of users that perceive that benefit on the x-axis, and on the inefficiency the user is willing to tolerate on the second y-axis. It says, for example, that the small population of silk roaders and speculators are willing to tolerate a high degree of inefficiency, but “mainstream users” will not.

A reader recently pointed out that the Fogg Behavior Model has a similar message: the way to get more users is to deliver more benefits and/ or reduce the inefficiencies.

2. Ethos users vs ethos-agnostic users

Because the ineffiencies of public-blockchain based apps1 turn away most users, the remaining users perceive unusually high benefits. Part of this is due to the nature of the use-case (e.g. speculation, silk road). The remaining benefits are from true belief in the ethos of blockchains: ethos users are willing to incur additional costs because they believe in the emergent benefits that most do not see.

The properties of a use-case can be described by the following 2x2. Most users do not detect global and emergent properties (Q2). Ethos users do.

wilcox 2x2

  • Q1. Global and direct: transaction fees
  • Q2. Global and emergent: privacy, censorship resistance
  • Q3. Local and emergent: a local tax or local incentive
  • Q4. Local and direct: “local subnetwork effects” like it being easier to get crypto by mining in Venezuela than to get cash dollars

It’s unlikely we see “mainstream adoption” of crypto until we have use-cases that do not rely on global and emergent properties.

Price: where does it come from? What is it good for?

3. The Narrative Bubble Loop

Because of poor cost-benefit, crypto does not appeal to mainstream users so speculators make up the majority of people in the space. And cryptomarkets are the perfect environment for speculative bubbles to form.

The Narrative Bubble Loop

The Narrative Bubble Loop

This is how I imagine it.

  • A speculative bubble forms in an environment described by the paper: (1) lack of reliable historical data, (2) conditions that attract retail investors, and (3) relative strength of narratives
  • Narratives formed by early believers of some form of mass movement spread. The most compelling narratives start to be assumed as true
  • The winning narratives fuel a speculative bubble around the assets supported by the narratives
  • The bubble crests as asset prices rise to a point where there are fewer marginal buyers than sellers
  • Mass movements compete for adherents, along the way experimenting with new narratives and strengthening old ones
  • A new speculative bubble forms

This is a great thread on the history of boom-bust cycles in crypto2.

4. Price flywheels

Each time a bubble forms, some fraction of speculators convert to users. And each time it pops, some churn out. Projects benefit from speculation if they can convert speculators into users and keep them.

Coin Price Flywheel up

Here’s the flywheel in action as the price increases:

  • The price of a cryptocurrency rises
  • Attracting speculators
  • Some of whom convert into actual users
  • Increasing belief in the cryptocurrency
  • Driving up the price of the cryptocurrency

There’s also a flywheel down. Read the linked post to see it.

Strategy: what should you make? How do you win?

5. Competitive moats

For a few months last year, everybody was talking about the defensibility of successful crypto projects. If you build something good, won’t somebody just copy it or fork it? Since then, that has happened in some cases but not as frequently as many would have guessed.

crypto moat sources

The figure above compares importance of moat sources for crypto projects with an average non-project. A point at the origin means that that particular moat source does not apply. A point closer to the origin compared to the “Non-crypto project” means that moat source is less applicable than the average project and vice versa.

For crypto projects, network effects are more important, switching costs are equally important, intangible assets and efficient scale are less important, and cost advantage is not important. Overall, there are fewer ways to build a moat, but it’s not true to say crypto projects cannot have economic moats.

Overall, crypto projects are less well positioned to defend against competitors, but not defenseless. It’s still too early to see how this will play out.

6. Incumbents

For every potentially disruptive technology, there is a phase where expectations far exceed reality. One of the ways these future disappointments manifest are with people assuming that the incumbent powers will adopt the technology. Most times, they have no incentive to.

Games are one of the best categories to illustrate this point. It’s fun to imagine Nintendo, Blizzard, or Epic swapping out all the game assets for cryptogoods, but basic economics makes that hard to imagine.

supply demand for fortnite skins 3

In this case, Epic can increase revenues by increasing price or supply. They elect to increase supply. Using cryptogoods would limit their ability to increase revenues in this way.

In sum, there’s no reason for Epic or any other incumbent game company to replace their game items with cryptogoods or their game currency with cryptocurrencies. If the “next Fortnite” has similar business incentives, they will not want to use cryptogoods or cryptocurrencies either. So if games bring crypto to the masses, they will have different business models.

Personal performance: how does an individual or group do better?

7. Ability vs signaling

ability signaling 2x2

  • “The Rockstar” (high, high): An expert in their area and compensated commensurately. These are the distinguished engineers, career CEOs, creative icons.
  • “The Lemon” (high, low)[^3]: Companies overrate this individual. Their offices are filled with employees of this archetype that rise to their level of incompetence and stick around as long as they can.
  • “The WIP” (low, low): Needs to put in the work. The question here is which direction? Along the x-axis or along the y-axis?
  • “The Entrepreneur” (low, high): Unusually high actual abilities, but for whatever reason their signals underrepresent them. As a result, starting something of their own is a better expected value than accepting less than they’re worth from a company.

By and large, it’s best to prioritize improving actual ability rather than signaling ability. One of my favorite things about the crypto industry is the people. It feels like there’s an unusually high proportion of people going out there and just doing stuff, rather than trying to climb through an established hierarchy.

8. Decision-making framework

decision making framework

If the decision is both ambiguous and high-stakes, we use Armstrong’s framework. If the decision is only ambiguous, the decision-maker can collaborate with a few people and make the call. And if the decision is neither ambiguous or high-stakes, the decision-maker should simply move forward. In all cases, communication to the team completes the decision.

Companies, products, teams, even individuals are the sum of their decisions. A framework can help reduce time wasted on unimportant decisions and increase the quality of important decisions. A nice side-effect is that a public process turns implicit knowledge explicit, and makes it clearer to everybody how to participate in directing the organization.

Looking forward

I expect to make a lot more in the coming year. Readers seem to enjoy them and I love making them. Tweet at me with topics you’d like for me to cover. And if you have any frameworks that have really helped you understand crypto better, let me know.

  1. Has anybody tried renaming DApps to TApps? Token apps? Relies less on “decentralization” as a descriptor. And even if the app only uses Bitcoin or Ethereum (no native tokens), we can probably agree that we can use tokens as shorthand for cryptocurrencies. Plus TApps sounds fun. 

  2. h/t Zooko for reminding me of it here 

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