The events of 2022 question the survival (or necessity) of cryptocurrency. Before FTX collapsed in November, there were explosions involving stablecoin Terra and its coin LUNA, as well as crypto lender Celsius, crypto broker Voyager Digital and hedge fund Three Arrows Capital, to name a few. . Bankruptcy At the end of the year, questions arose about former FTX competitor Binance, which faced mass customer layoffs and a criminal investigation over compliance. Just 12 months ago, many of these companies were hailed as examples of how vision, bold thinking and grit can create multi-billion dollar empires overnight. They now offer many different courses.
After every high-profile cryptocurrency crash, there are new calls for more control over the space. The idea is that if we regulate cryptocurrency players like traditional financial institutions, they will start to behave like one. But a regulatory framework specifically designed for this technology will solve only part of the problem. This will certainly improve consumer protection and market integrity. However, this will not change the incentives underlying the space, nor will it stop the reckless and fraudulent behavior it still attracts. For the cryptocurrency industry to have a positive impact on society, we must first reform the way we measure progress and success.
Since its inception, cryptocurrency participants have been obsessed with the price, market capitalization, and trading volume of competing coins. These measures distorted the incentives of wealthy cryptocurrency entrepreneurs and made it easier for bad actors to merge, raise capital, and make noise about their scams. For cryptocurrencies to become truly mainstream, the industry needs to stop blindly trusting these utility metrics and focus more on metrics that closely track progress against the real needs of consumers and businesses.
The problem of cryptographic value and related indicators
It all started in the early 2010s with the introduction of the first altcoins (or "altcoins") to compete with Bitcoin and a set of objective market benchmarks. Since cryptocurrencies are based on public ledgers, a large number of indicators, including price and market capitalization, have been available since the beginning. The resulting sense of transparency and deceptive similarity between cryptocurrencies and public stocks has legitimized these instruments beyond their usefulness. Also, because the cryptocurrency market lacks the safeguards that traditional finance has built up over decades of trial and error, it's very easy for bad actors to play games and scams. use these funds.
The result is an environment in which a new crypto-token can be launched and emerge quickly, at least on paper, to create a network worth billions of dollars. Indeed, these wild valuations are created by limiting the supply of tradable coins and quickly crumble when the hype machine behind them slows down. But faced with the alternative, it's hard for entrepreneurs and investors to resist the temptation to use these now-standard metrics as evidence of positive momentum. It is human nature to believe that the price of your token, however inflated it may be, accurately reflects the potential you have created.
By giving nascent cryptocurrencies an aura of scale and a competitive moat, these funds make it easier to attract developers, secure partners and raise more capital, creating a vicious cycle where founders don't care. it". . It's as if the founders of today's tech giants have been selling their stock in real time since they announced a beta version of the product instead of an IPO. Amidst the investment frenzy, uncertainty and noise, it's easy to get distracted by the numbers, even though they may be detached from reality. .
This premature monetization of the cryptocurrency innovation process has a disastrous effect. The incentives this creates determine the types of problems founders prioritize, how the market rewards their actions, and the long-term sustainability of what they create. The attention of entrepreneurs is diverted from the more complex and uncertain levels of technological progress and crypto-tokens, and their prices essentially become "commodities". As a result, real progress has stalled.
We have seen where this way of doing business and innovation is leading. Pump and dump schemes, exit scams, and good old fashioned scams are well hidden and thrive in legitimate projects as the project's market cap and "number" grow - a meme that has become a bit of a religious issue in some parts of cryptocurrency. - That's all.
Skip the bad cryptometers
Ironically, in an environment where everything is easy to measure, there is a desperate need for better measurements. After all, measurement is a means of determining value; it reflects the philosophy that governs organizations, markets, and systems. To avoid getting lost, crypto entrepreneurs and investors need to rethink how they measure progress.
Consider the profound ways metrics impact innovation.
Every business needs to identify key metrics to align teams, quantify progress and ultimately be competitive. Examples of Moore's predictions range from the density of Intel transistors, the megapixel speed of digital cameras, progression-free survival in oncology, the net estimate of progress in customer retention, and more. By focusing on a small number of metrics, metrics encourage organizations to ruthlessly prioritize resources and move in a specific direction.
This is particularly useful when dealing with unstructured problems that have high uncertainty about the best way forward; exactly the type of problem that many emerging industries like cryptocurrencies have.
Once installed, however, the measurements may have outlived their practical usefulness; when James Watt developed horse power at a time when it was important to compare horse drawn carriages with steam locomotives, boats and the automobile. Centuries later, while not providing information on alternative means of electric vehicles, it is still the undisputed industry standard.
The inertia of such metrics stifles cryptocurrencies and causes significant damage as attention, talent and dollars chase a few practical but flawed metrics. While the price and value of coins circulating on the network can be reliable indicators of quality as the cryptocurrency market matures, today, whether intentionally or not, they are much easier to game. Outstanding examples of this are Terra Stablecoin and FTT token FTX, both of which created the illusion of value through aggressive marketing and subsidized growth, only to spiral into a death spiral when their failing economics stalled. In surprisingly transparent versions of Ponzi schemes, investors blindly trust market capitalization figures as tangible evidence of real value.
Unfortunately, honest entrepreneurs cannot completely escape the tyranny of these funds, because their venture capitalists (VCs) pushed them to include the token and increase its value with incentive programs that help VCs demonstrate progress to their investors, or to believe the only thing: The way to compete with others is to promise developers and early adopters the same unrealistic financial returns.
A good approach
It doesn't have to end like this. Cryptography is transformative because it allows two parties to transact directly without handing over control to an intermediary; Alice can send value to Bob, sign a financial contract with him, or transfer ownership of a digital asset or device. a work of art with a bit of confusion. and cost. It is important to note that although they can still use intermediaries to simplify these tasks, Alice and Bob have more control and bargaining power. Like the Internet, cryptocurrencies are open networks, and this openness enables greater choice, lower prices, and innovative products and services for consumers and businesses.
So, how can cryptocurrencies provide these benefits? Entrepreneurs and investors should abandon the current measures and develop new ones. These new measures should be exactly in line with the impact that the crypto-app hopes to have on the world. Ironically, inventors and founders have always created value; identify a problem worth solving for your customers and support your startup's existence to solve it. Entrepreneurs who are obsessed with solving problems rather than the initial prices and volatility of cryptocurrencies can take a step back by defining metrics that track the progress of decisions.
For example, founders who want their crypto networks to replace traditional payment binaries should compare their growth to the same metrics that payment companies have been using for decades. They must also directly measure the savings they bring to consumers and businesses by redefining mainstream financial services with cryptocurrencies. Similarly, Web3 entrepreneurs interested in creating more choice and competition in the maker economy should measure the economic value they provide to creators and compare it to incumbents. If it turns out that encryption does remove friction and empower creators, these new tools will quickly demonstrate the technology's benefits to society.
Going back to basics makes sense. Measurements can transform the complex problems that cryptocurrencies hope to solve into complex problems that entrepreneurs, managers, and engineers can optimize, giving investors, consumers, and even regulators a better appreciation of the new space. Cryptocurrencies will only matter if they bridge the gap between digital records on the blockchain and their real-world impact, and creating better cryptometrics is a prerequisite to unlocking that potential.