Issue #67: Stair Steps
I’ve never been a “working for the weekend” guy but after a week like this Saturday couldn’t come soon enough. Crashing crypto markets combined with a horrendous cold knocking me on my ass (that I was convinced was Covid but tests said otherwise) had me wishing time travel was a thing so I could just skip forward a few days.
Not all bull markets officially end with the collapse of a major institution or project, but two of the last 3 crypto bull markets have. Eight years ago, Mt. Gox announced it was insolvent after the theft of 744k bitcoins went undetected for years, sending crypto into a three year bear market.
While market corrections are often sudden, I think the far more interesting thing to explore is what causes them to boom in the first place. If you zoom out of a particular cycle and look at the last 10 years, growth isn’t consistent and gradual. Instead it’s marked by periods of seeming stagnation, and sudden, steep jumps in adoption and attention that resemble stair steps.
I think it’s a great mental model and visual for how to think about our market cycles and why things happen when they do. It’s also a good reminder to stay on your toes during bear markets.
Let’s zoom out…
I’ve been through three full cycles of crypto and Web 3 adoption now. I understand why people use bull and bear markets to denote shifting dynamics, but it’s a misleading metric that prioritizes asset prices.
Periods of extreme growth are short lived, but - importantly - they establish a new innovation baseline, higher and more robust than the previous baseline. There are more components, more tools, more ideas and more users to experiment with, and that serves as the foundation for the next cycle of innovation.
My framework for visualizing this dynamic are stairs. Up, then flat, up, then flat.
Stair Flats are defined by:
periods of obscure and rapid compounding innovation
funded by influx of venture capital during previous cycle
resulting in net-new utility
with minimal user growth/adoption
often corresponding with bear market
Stair Steps are defined by:
moments where new utility reaches a “tipping point” and pokes through the fog
rapid user growth/adoption
Massive influx of venture capital
often corresponding with bull market
These periods aren’t independent of each other. Each is a result of the period before it, and will usher in the period after it.
Let’s walk through a few examples…
Stair Flat: 2014 - 2017
Mt. Gox blew up in February 2014. At the time, it was the world’s largest exchange and its collapse took the crypto industry into its first multi-year bear market (aka a stair flat). During this period:
Increase in access. Exchanges like Coinbase, Kraken, and Gemini emerged as the “second generation” of exchanges, replacing former market leaders Mt. Gox and Btc.e. Their existence was significant because they increased access to cryptocurrency. Before this, you had to wire money to a foreign bank account specified by the exchange and pray the money would eventually show up in your trading account. Sometimes it did, sometimes it didn’t. In exchange for taking that risk, you got to buy bitcoin at $75 a pop. So in other worlds…worth it.
Developer opportunities. Second-generation blockchains, namely Ethereum, were developed and launched, providing a more robust blockchain platform for developers to build on.
Standards. The ERC20 token standard was widely adopted, lowering the barrier of new asset creation.
Stair Step: 2017 - June 2018
All of the innovation during the stair flat (Ethereum, smart contracts, token standards) combined with an increase in retail access to cryptocurrencies via platforms like Coinbase, Poloniex and Binance hit a tipping point, jolting the industry into the next phase of hyper growth.
During this period:
The number of unique Ethereum wallet addresses increased from 950,000 on January 1, 2017 to 30M by March 2018.
The crypto market cap increased from $18B in January 2017 to over $800B in January 2018.
Over $2.3B in venture funding was raised by blockchain and crypto companies between January 2017 and June 2018.
Stair Flat: 2018 - 2020
While new user growth and total market cap fell flat, the second “crypto winter” had a higher innovation baseline, and incubated three pockets of innovation that have come to define the industry today: DeFi, NFTs and proof-of-stake blockchains.
The first generation of DeFi projects (MakerDAO, Uniswap, Aave, Instadapp, Synthetix) were developed, launched and found initial product-market fit amongst a few thousand daily active users.
The first generation of NFT platforms - Opensea and Rare Bits - emerged, but struggled to stay afloat. Rare Bits shut down in March 2020.
“Third generation” blockchains - proof of stake chains like Solana, Avalanche and Near - were developed to provide faster, cheaper alternatives to Ethereum.
Stair Step: 2020 - 2022
All the compounding innovation over the previous three years hits a tipping point and…boom.
DeFi gets there first…in Summer 2020. DeFi utility, fueled by liquidity mining rewards, draws in tens of thousands of new DAUs, pushing TVL in DeFi protocols from a few billion to over $100B over the subsequent year.
NFTs follow suit. Finding product market fit as PFPs, NFTs attract millions of new users into the market. Opensea and half a dozen other marketplaces that kept their head down and managed burn rates through the bear are there to provide access.
Third generation proof-of-stake chains launch and provide much needed competition at the Layer 1 level.
We’re going into the next stair flat, and the baseline for innovation is A LOT higher than it was in 2020.
The dominate narratives of the next cycle are forming/will form in small corners of the market, funded by the $45B in venture capital injected into the ecosystem over the last 18 months. Keep your eyes open. Research. Experiment with everything.
If you’ve been waiting to jump into Web 3, now is the time. If you’re already in, get refocused and double down.
Thanks for reading,
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