Crypto α

Crypto α

- 16 mins
crypto ethereum bitcoin

“Believe me, my sole purpose is to make as much money as possible; for after good health it is the best thing to have.”

– Wolfgang Amadeus Mozart

I want to preface this article with a small note on prices.

<rant>

Asset prices are driven by narratives and macro environmental factors. In crypto, you might have heard of people referring to projects as “sleeping giants”, “undervalued”, “gold mines”, “opportunity of a lifetime”, “come out stronger than ever” etc. These are meaningless labels, especially in a highly correlated market like crypto, where during a bull market even dead projects can catch a bid (only relative to their USD valuation, not their BTC or ETH valuation).

IMHO the most important “equation” in markets is:

Good narrative + good macro = number go up

That’s it. No need to over-complicate it by overanalyzing historical data like stock to flow, rainbow charts, halving cycles or sinusoids (yes that’s mine 🙃). It’s fun mental masturbation when you have a few spare minutes, but you’ll be left holding a heavy bag if you actually believe it.

</rant>

I wanted to write a small note listing out some of the projects I personally find interesting. I had initially planned to also add a high level overview, but there ended up being so many projects that I just added a one line summary instead. The list is not exhaustive, and I’ve only picked areas that I like and understand.

Exceptions: Crypto gaming and individual NFTs

The major exceptions in this list are crypto gaming and individual NFT projects. I have found absolutely zero value for blockchain in gaming, with perhaps the exception of very basic games (card trading etc.). The main issues I have with crypto gaming are:

If someone can convince me that is a viable solution to these issues, I would be happy to change my mind.

For individual PFP NFT projects, it’s hard to make sweeping judgments, but by and large, I only see value in the surrounding (potentially gated) communities. Outside of that, they are just shitcoins with jpegs (which is so stupid it may even be bullish).

Ethereum L2s

The Ethereum L2 space is fascinating, with multiple different architectures and approaches to scaling being experimented with. Modularity is the key point here, i.e. breaking the blockchain up into individual modules (from top to bottom – execution, settlement, consensus, and data availability). The individual modules can then be made more efficient by moving them off-chain or onto a separate blockchain, while still maintaining the security guarantees of the base chain.

The primary L2 options are:

As of now, rollups on ethereum are the most actively developed space. Polynya 1 has an excellent set of articles on rollups that I would recommend reading (he really is the go-to person for questions about rollups).

Top rollups ordered by decreasing order of how cool I find them (to maintain brevity I have made several over-simplifications in this list):

Optimistic rollups

“A state transition is valid unless proven otherwise”

Coupled with the rollout of Proto-danksharding aka EIP-4844 on ETH L1, we could see a lot of usage on optimistic rollups. I think optimistic rollups will reach maturity around 2023-24. I’m using maturity in a rather non-technical sense to mean that the rollup is both reasonably decentralized and can be used by the average crypto user.

Zero-knowledge rollups

“A state transition is valid iff proven so”

For a quick primer on ZK, I recommend checking out this Medium post from Amber group. As exciting as the tech (and math) behind zk rollups is, I think a lot of people are getting ahead of themselves. ZK tech will take longer to mature. I think most zk rollups will reach maturity around 2024-25.

DeFi

The narrative for permissionless finance is as strong as ever, particularly with the collapse of large centralized players. The market focus is primarily on options and perpetuals, with the basic building blocks being CFMMs, CLOBs and price/volume oracles. After the yield farming degen phase of 2020-21, the focus has shifted to “real yield” generation, with strategies such as covered calls, hedging LP positions and delta neutrality becoming popular. Some protocols are also experimenting with long gamma strategies on LP positions. Funding rate and option mispricing arbitrage are also gaining popularity.

Some of the more interesting projects that caught my eye, again ordered by decreasing order of how cool I find them:

On Arbitrum

On Solana

On Starknet

On zkSync 2.0

On Polygon PoS

DeSo

Decentralized social (DeSo) is still very early, but one of the most interesting. The “decentralized” aspect needs to be understood quite carefully here, as decentralizing the entire social media backend would be an incredibly wasteful use of valuable blockchain resources. Instead, the focus is on decentralizing the social graph. The ability to “own” your social graph and carry it with you between different applications is fascinating.

However, in its current state, most DeSo applications require a separate wallet application. This is somewhat logical, as the social graph and sign-in are distinct from the application itself. However, this UX is not familiar to most users, and IMHO is a significant barrier to adoption. In its current state, I do not believe that DeSo will be able to attract a large user base outside of crypto.

The potential here lies in abstracting away the blockchain elements, and exposing the end user to only the downstream application. Arguably this is also true for all of DeFi. In its end state, this could potentially look like some kind of “super-app” (eg. WeChat in China). A rather interesting use case is under-collateralized loans, where a user’s collateralization factor is a function of the “strength” of their social graph.

On Polygon PoS

There are also several applications building on top of Lens:

On Starknet

NFTs

The general public’s viewpoint on NFTs often ranges from skeptical to outright hatred. Entire communities (such as r/antiNFT) have even spawned around the dislike surrounding NFTs, memes such as “right click save” became quite popular on Twitter and YouTubers published videos reaching nearly 10M people.

In the same span of time, Reddit launched its “Collectible avatar” NFTs, which was initially met with a lot of skepticism. On some subreddits, you could get banned just for having an NFT as your profile picture. However, the launch of these NFTs was among the most successful NFT launches to date, if not the most. This article does a good job of breaking down why this was the case.

Looking back at it today, several months into the launch of Reddit’s NFTs, people are starting to warm up to the idea of NFTs. This r/OutOfTheLoop thread is a perfect example of this. Note that a lot of the comments denouncing NFTs several months ago, are now using a Reddit collectible avatar as their profile picture.

The mania seen in 2021 surrounding PFP NFTs seems unlikely to occur again (at least, one can hope). However, the utility of NFTs far exceeds basic PFPs. In DeFi NFTs are used to represent liquidity positions (eg. Uni v3) and LP derivatives. In DeSo we see NFTs being used to for name services, social graphs and on-chain reputation.

Personally, I see the NFT space as being split into three distinct categories:

  1. PFPs - Expensive status symbols with a limited supply, primarily traded on “auction style” marketplaces like OpenSea and Rarible
  2. NTTs - Non-transferrable tokens (also called soulbound). Used to represent social graphs, on chain reputation and digital identity
  3. Reward/Loyalty tokens - Cheap and semi-fungible utility based tokens which require deep and instant liquidity

The last use case is particularly interesting, and as any “sell shovels in a gold rush” person will tell you, the infrastructure for this would be likely to accrue the most value.

On ETH L1

On Starknet

Alt L1s

Despite maximalists belief that the chain they like should be the only blockchain; from a technological point of view, this makes no sense. Every chain makes tradeoffs, and the “best” chain is the one that best fits your use case. Some controversial thoughts coming up.

(ducks) Bitcoin as a base layer for L2 applications is stupid. Bitcoin could potentially be a short on the current financial system, where in the event that something goes horribly wrong, the simplicity of Bitcoin could become the life raft that people are looking for, assuming it is able to handle the transaction volume. Another potential scenario is the “digital gold” narrative coming true, where Bitcoin is used as a reserve currency for sovereigns.

The Bitcoin maxis reading this will probably be seething, so let me piss of the Ethereum maxis too. Note that I am assuming a Type 1 EVM goal (fully Ethereum-equivalent) for all L2 rollups (as is more or less, currently the case) 8.

(ducks again) Assuming that EVM will be the only VM is also stupid. EVM has some very well publicized limitations, and while it can be upgraded to address some of these issues, foundational changes would require breaking a lot of pre-existing smart contracts. This would be an undertaking greater than anything on the ETH roadmap, and Ethereum likely won’t (and shouldn’t) do this. This leaves the door open for other VMs to come in and offer a better value proposition.

I will caveat this by noting that if EigenLayer (see below) succeeds in its vision of commodotizing Ethereum’s trust layer, this may not necessarily be an issue. Another (more minor) caveat is that Ethereum L2s do not necessarily need to be fully EVM-compatible (eg. Starknet’s Cairo zkEVM).

This leaves the space open to alternate L1s, but only those that can offer a sufficient delta value proposition over ETH L2s. The delta could be in the standard throughput/fees/latency improvements, or with a unique set of features making it easier for people to build something they cannot build right now.

My top alt L1s:

On a side note, I am very happy to see Rust (crab people unite!) being used in so many of the projects. It really is a great language, and I’ve barely even scratched the surface in my own Rust projects.

Others - Espresso, Eclipse, Partisia, Nitro SVM

Disclosure

The author may hold cryptocurrencies mentioned in this article. This article is for informational purposes only and should not be relied upon. This article is neither financial nor investment advice. You should conduct your own research, and consult an independent financial, tax, or legal advisor before making any investment decisions. See full disclosure here.

References

  1. Polynya on mirror ↩

  2. Optimistic Rollups - Ethereum Foundation ↩

  3. Introduction to zk-SNARKs with Examples - Christian Lundkvist ↩ ↩2

  4. KZG10, IPA, FRI, and DARKS: Analysis Of Polynomial Commitment Schemes - Hackernoon ↩ ↩2 ↩3 ↩4

  5. warp on GitHub ↩

  6. An approximate introduction to how zk-SNARKs are possible - Vitalik Buterin ↩ ↩2 ↩3 ↩4

  7. A. Belling and A. Soleimanian. Vortex. Building A Lattice-based SNARK scheme with Transparent Setup ↩

  8. The different types of ZK-EVMs - Vitalik Buterin ↩

  9. G. Danezis et al. Narwhal and Tusk: A DAG-based Mempool and Efficient BFT Consensus (2022) ↩

  10. A. Spiegelman et al. Bullshark: The Partially Synchronous Version (2022) ↩