I would imagine that most people were shocked with the ferocity of the collapse of the cryptocurrency industry last week - I certainly was. I had erroneously believed that the smaller magnitude of bubbles that had been occurring since the 2019 bubble indicated that cryptocurrencies were finally developing into something that was moving toward becoming widely used by everyday people. Instead, the dramatic trend reversal that occurred last week shows that not much has changed.
In this post, I'll provide a general overview of many of the negative trends that lead me to believe that we are still moving backwards, instead of toward wider adoption, and why these trends need to flush out.
UST, USDD, and algorithmic stablecoins
The big news last week was the collapse of the Terra stablecoin, which wiped out $18 billion of wealth. Those lucky enough to have sent their coins to exchanges before the Terra blockchain was halted can still participate in paper trading, however - at Binance, for an unknown reason, people are currently putting up buy orders for Terra at 12 cents.
There has been much written about UST, but none of the articles seem to grasp at the core of the problem - that algorithmic stablecoins don't work. On the contrary, some try to divert attention from the failure of UST by claiming that it succumbed to a "coordinated attack," although nobody has proven such an attack. Even if an action like a large withdrawal had been coordinated, it's not clear how converting UST to dollars would be doing anything other than doing what the coin was supposed to facilitate.
TRON leader Justin Sun claims that his new USDD stablecoin will succeed where Terra failed because Terra simply "grew too fast," and USDD will somehow avoid the same fate by growing slowly. USDD, however, provides no significant improvements beyond those of UST. The list of failed algorithmic stablecoins is long and will grow longer for the simple reason that there is a key technological innovation that is both required and yet to be discovered that is needed to keep a coin's value stable using an algorithm. Until that insight is discovered - and especially at the moment the insight is discovered and what has solved the problem becomes obvious in a new coin - every one of these current algorithmic stablecoins is going to fail.
These coins are draining time, talent, and money away from projects that actually can succeed, and that drain is contributing to the perpetuation of the bubble cycles. All of the coins need to flush out to allow a recovery.
"Play to earn" games
Axie Infinity is an app where the point is essentially to earn tokens by playing the game. The tokens can be sold at exchanges for other coins, or they can be expended to purchase in-game items that make it possible to earn more tokens. The tokens are powered by an Ethereum sidechain.
BBC World News aired a documentary on May 16, 2022 about Axie Infinity and its players. One of the most interesting moments in the show featured a player who realized that he could hire a team of other players, and earn more than he could by taking another job in his country, like harvesting crops.
When someone is earning money for doing something, the key question one should be asking is "what value does this work provide?" It's easy to see how a contractor who gets paid to build a house makes value; someone can then live in it. It's also easy to see how this player could provide value by working in agriculture, because there are always people who need to eat. In both of these cases, the value is long-term - there is a house that many people can live in for decades, or a person who is alive to perform other tasks. In the case of Axie Infinity, however, what value is playing the game providing that would make someone pay someone else to play it?
The answer I came up with is that the value is simply the enjoyment of playing the game. If more players are in the game, it's more fun for everyone. The major issue with that answer is that, unlike a house that will continue to serve a purpose as long as it is standing, players can lose interest in the game very quickly for whatever reason, and therefore this value is not long term like a house is. Axie Infinity and similar games provide jobs to people only because they have somehow broken through the noise of everything else that people can do.
Judging by our experience trying (unsuccessfully) to break through the noise and get the attention of big-name cryptocurrency miners on PROHASHING, writing code is trivial compared to getting people to find out about about and use your product. Because marketing and advertising is so difficult, every popular product is always on a knife's edge, waiting to be overtaken by whatever else is the next thing to get attention. Eventually, something else will cause players to gain less enjoyment from playing Axie Infinity, and "working" by playing will produce less value because there are fewer people around who would gain enjoyment from having on additional player.
I agree with Bloomberg that the next stage in this crisis will be the collapse of these games where the value being generated by "work" is created by providing something ephemeral like players' happiness from playing the game. Video games are the highest-grossing form of entertainment because people will pay developers to create games for them, but it simply doesn't make sense that there can be so much value in paying people to play games with them. I fully expect in the coming weeks to see a crisis of confidence where several "play-to-earn" games collapse and fold. That needs to happen because too much time, talent, and money is being wasted in these games.
NFTs
NFTs are, for the most part, worthless, because they are currently implemented incorrectly. A large number, if not most, NFTs represent images at URLs on the Internet. The statement they make is exactly, and nothing more than, "I am associated with this image, and most other people are not."
They do not actually "own" the image, as almost all NFTs don't actually confer copyright. In March 2021, someone paid $66m for Beeple's Everydays, but the purchase didn't actually include the copyright to the image collection. Beeple can, at any time, republish that collection, sell the copyright to someone else, or even create other completely identical NFTs based on the collection. These identical NFTs would undoubtedly devalue the original to some extent. If there were identical NFTs, the only difference between them and the first created would be a belief that they are not the first; otherwise, these identical NFT owners would see the exact same artwork on their computers.
Contrast this sale to that of an original artwork, where if the artist decided to paint a second "copy" or scan images of it, it would be similar, but not identical, to the original. In this traditional auction, even if the artist wanted to paint it again or retained the copyright, he could not physically create a second copy. Scanned images would not devalue the original painting, and people who look at the scans are not seeing the same image as the person looking at the painting, because no monitor exists that can display a resolution and color depth high enough to be indistinguishable from the original.
The idea that some people push online that there really isn't any difference between a rare JPEG and a rare painting, is false. This version of "image URL" NFTs has some value, because vain people do derive value from flashing wealth to others, but that value is nowhere close to current market values.
It's also popular in the media to hold the contrary position that all NFTs are worthless, but that also is false. An NFT needs to simply be actually nonfungible to have value. "Nonfungible" doesn't just refer to being unique on the blockchain; it needs to be unique in the real world too to be valuable in the long run. Some examples that I would actually buy are tokens that represent copyright in images, songs, or software where the owner can commercialize them; or tokens that represent corporate earnings, like the ones we had considered awarding that would give tokenholders a share of PROHASHING's profits.
Everything else in the NFT space is wasting time, talent, and money, and will flush out before the trend reversal occurs.
Conclusion
Every crash has a story with it. The story of the first bubble of 2013 was whether the system could survive Mt. Gox's constant downtime and the news of the 2012 theft. The story of the second 2013 bubble was whether China would ban bitcoin trading. The bubble of 2017 largely turned on whether people would ever actually use cryptocurrencies.
The current crash's story is that ridiculous applications are sucking energy away from projects that have actual value. Being a construction worker isn't as glamorous as being a social media influencer, but only one of them provides real value, which is why there are so many more construction workers in the world.
In cryptocurrencies, the only way to right the ship is for enough "algorithmic stablecoins" to collapse so that people stop buying them, for people to realize that playing games is a hobby and not a job unless you are one of the few hundred people in the world who is extremely talented at League of Legends, and for NFT buyers to finally recognize that there are only a very small number of NFTs that actually represent something that is nonfungible. In short: stablecoins, gaming, and NFTs each currently have a small number of applications that provide real value, and a large number that do not.
There is limited money in the world, and when some of it is being spent on projects that provide no value, there is less to go around for projects that actually do have a future. Bitcoin provides a way to store large amounts of money in a paper wallet without the involvement of banks. Although some make fun of dogecoins and litecoins, these chains are the fastest way to send money between two people with fees near zero. Monero provides privacy and has even cheaper fees than litecoins. The Bitcoin Core developers insisted on a multi-chain world in 2016, and Chainlink is working on tools to make that possible. ETH has an insatiable demand for blockchain space and gas fees continue to rise; if there were more engineers working on the problem, ETH 2 might be released sooner. There are also games and NFT projects that actually already do provide value, but which, like PROHASHING, are unable to break through the noise.
Unfortunately, when worthless projects fail, the money doesn't just go somewhere else; it simply vanishes, just as would money invested in the stock of a company that goes bankrupt. The need for people to earn more money elsewhere and reinvest it in the projects that do have a future is why it takes a long time for the industry to recover after each crash.
I'll talk about ways that we can prevent the cycle of investments into bad projects from recurring over and over, but for right now, this crash is far from over because there's a lot more pain ahead until the deck is fully cleared.
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