Words: Ignas
Compilation: Deep Tide TechFlow
How do you choose which coins to invest in in a bull market?How do you do your research?Is it just looking for potential targets on Twitter?
Given that there are so many tokens and narratives in the crypto world right now, how should you assess which tokens have the potential to outperform BTC?
In my opinion, the success of any crypto ecosystem is driven by three key elements: technological innovation, token minting opportunities, and the narrative level of the project.
These key criteria help assess the potential of a crypto project and its ability to attract and sustain a dedicated community.
In this post, I’m going to take some of the methods I’ve mentioned in previous blog posts and tweets and expand on them.
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In addition, I will use some examples to help prove my point.
Note: You can track the performance of the crypto narrative and related ecosystem tokens on this Dune dashboard created by CryptoKoryo.
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1.Technological innovation: the key to project development
Technological innovation is the driving force behind new projects or upgrades in crypto. The more innovative the technology, the more narrative power a project has.
BTC started it all with its distributed ledger. Then ETH Fang was launched, making complex transactions possible through smart contracts. The 2017 bull market started in part due to the invention of ERC20.
"However, the most important impact of ETH and ERC20 is not technical; Prior to ERC20, coins were primarily considered as a currency for payment or storing value. But with ERC20, everything is tokenized. As crypto prices rise, so do the use cases for cryptocurrencies. - my reflections on the blog post “The Past in Echoes”.
The last bull run was marked by the emergence of DeFi, which included several technological innovations: AMMs, lending protocols, algorithmic stablecoins, and more.
With each bull market, there are new technological innovations in the crypto industry. Without it, the industry would have stagnated and eventually disappeared.
Many innovative solutions are built during bear markets, so staying and researching during tough times does pay off.
Since the last bull run, new and exciting technologies have emerged:
Optimistic Rollups and ZK Rollups are used to reduce transaction fees and increase speed at the execution layer;
innovation in the data availability layer;
account abstraction and intent to improve user experience;
Soulbound tokens, non-transferable tokens used to represent personal identity on-chain;
real-world assets or on-chain tokenization;
a new generation of on-chain derivatives and DEXs;
DeFi on inscriptions and BTC;
Re-staking
AI is another technological innovation that has had a significant impact on crypto, despite its origins outside the crypto ecosystem. But time will tell what crypto projects can really do to decentralize AI.
However, not all technological innovations are created equal and can bring wealth benefits.
They differ in their token economic models/token minting aspects, and the differences in these aspects will attract the attention of investors and thus become the dominant narrative.
2. Token Minting Opportunities: Monetary Aspects
Token minting, or what I like to call “money printing,” is akin to a central bank injecting new fiat money into the economy. In the crypto space, this is seen through the issuance of new tokens within an ecosystem.
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When ETH Square launched, the first thing we did was launch more tokens thanks to the invention of ERC20. However, the rapid collapse of the 2017-18 token revealed the limits of mere narrative due to the lack of substantial technological innovation.
What’s more, they fail to incorporate a comprehensive flywheel effect that will incentivize users to hold tokens through project revenue, staking, and other mechanisms. Learn the lessons of the 2017-18 bull market!
In 2020, the invention of AMMs and staking contracts was a powerful money-printing machine. Staking a liquidity pool token (50% “altcoin”, 50% ETH) to earn more altcoins is a powerful but unsustainable Ponzi scheme that can make early participants rich, but the pattern is not sustainable.
Curve then invented veTokenomics to provide higher rewards and voting power for long-term staking. But this model is gradually losing its popularity.
Token minting is not limited to the token level.
2021 was a bull market for NFTs, with limited series of NFTs trending in the market. Even though ERC721 innovatively launched Cryptokitties in 2017, the 1+1=3 cryptokitties minting model caused the token to be super inflated and the price crashed suddenly.
NFTs have also experienced booms and declines, as hundreds of NFT collections have been launched, distracting users and the amount of money invested on each NFT. Bored Apes, led by Yuga Labs, creates a flywheel effect by rewarding BAYC holders with new NFTs, tokens, and ongoing narratives to prevent community sales
Due to airdrops and high yields, DeFi has allowed a lot of people to make big profits.
A person can earn thousands of dollars just by trying to use a DeFi protocol. But at the moment airdrops have become less generous, harder to obtain, and more dependent on the depth of your interactive airdrops (trading volume, staking volume, etc.).
While new tokens should be backed by the aforementioned technological innovations, not all innovations offer the same wealth opportunities.
It’s very difficult to monetize a narrative like “account abstraction”, but it’s even more difficult to monetize a narrative about Soulbound Tokens (SBT) (considering SBT is address-bound and non-tradable).
RWA is also a powerful narrative, but the inherent low volatility of RWA may not allow for huge gains in the project’s currency.
So, where are the wealth opportunities now?
Ordinals, BRC20 & BTC DeFi
There are many new BTC NFTs and BRC20 tokens launched every day, which can often be minted freely and fairly.
But Ordinals and BRC20 lack a flywheel Ponzi tokenomics. I’m worried that BTC NFTs will suffer the same fate as ETH Fang NFTs, as the amount of money invested in each collection and the attention of the market are diluted by other NFTs. BRC20 also lacks smart contract features that make ERC20 more Ponzi and friendly.
However, I believe that the situation is changing. For example, Bitmap Ordinal holders received an airdrop of BMP tokens, and this trend is likely to continue, so holding early Ordinals inscriptions and Brc20 tokens may result in higher returns. However, the market still needs more technological innovation to realize the Flywheel token economy.
I think Stacks might be able to capture this grand narrative and join the BTC DeFi ecosystem.
L1 Ecosystem
Seven months ago, I tweeted about the zkSync era ecosystem.
I believe that ZK Tech’s technological innovation is strong enough to attract developers and new funds into the ecosystem to drive the growth of the token. However, this did not happen.
The ZK Tech narrative proved to be unappealing. There is also a lack of innovative dApps and flywheel token minting opportunities. Since then, the airdrop narrative has weakened and is not enough to keep the hype alive in the market.
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Now, there are some promising L1s:
Injective provides wealth opportunities for INJ token stakers. The ecosystem is brand new, so currently user funds and attention are focused on a handful of protocols and NFTs.
Kuji is similar to Injective, but it emphasizes the flywheel effect in ecosystem project airdrops and the true yield potential of no more new KUJI token offerings.
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The Solana ecosystem has been destroyed, but is being rebuilt. It is launching new tokens and airdropping them to loyal ecosystem users. Solana is also dominating the modular blockchain narrative.
Avalanche is becoming an RWA and Forex chain, which is a more sustainable growth model.
Polygon’s POL is being transformed into a chain of chains, and new partners are choosing Polygon to expand ETH.
Fantom, like Solana, lost most of its DeFi ecosystem in the bear market. But with Sonic’s upgrades, it’s aiming for a modular blockchain.
Celestia dominates in terms of data availability, but needs to launch more chains and reward $TIA token holders.
SEI is a low-cap competitor to SUI and APTOS, but as a new ecosystem, I hope that as the ecosystem expands, they reward SEI token holders.
Re-staking with Liquidity Restaking Tokens
I talked about this in a previous blog post. I think it’s going to be one of the most exciting narratives when Eigenlayer fully launches mainnet.
So what do you think about L1 and L2? In terms of tokenomics, I’m more bullish on L1. L1 tokens have native staking yields and ecosystem airdrops to stakers. As a result, L2 tokens may be more attractive if they are used for gas fees, staking, and ecosystem token airdrops to L2 token holders/stakers.
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A recent vote involving fake “staking” conducted by the Arbitrum DAO shows the uselessness of L2 tokenomics.
3.The Power of Storytelling
The power of narrative in crypto is insane! Narrative plays a huge role in explaining what caused the token to rise.
Technological innovations are important, but their success often depends on how they are communicated and understood by the community. Complex narratives can lead to a loss of interest, no matter how successful an innovation is.
The narrative gives life to the technical aspects and tokenomics models, turning them into something that investors can relate to, believe in, and be a part of. It captures people’s imagination and beliefs to create a strong, positive community.
The narrative is crucial in maintaining the value and demand for the new token. Without a compelling narrative and belief in the potential of these tokens, new users have little incentive to join and invest in the ecosystem.
Mere narrative can drive tokens, but with substantial technological innovation and token minting opportunities, tokens can stay high for longer. Without the other two elements, the token can rise quickly and then fall sharply.
DeFi, for example, has all three key pillars. It relies on technological innovations in smart contracts and self-custody that allow for innovative token value creation, but also has a powerful narrative for creating a new type of financial system.
Terra’s UST is a notorious example, but it also perfectly fulfills all three pillars with the story of algorithmic stablecoin technology “innovation”, the money flywheel effect (Ponzi), and 20% APY passive income.
So, which narratives fit into the three pillars of a thriving ecosystem?
One of them is Restaking + LRTs, which pass on the story of “protected by ETH Fang”, and are one of them. DeFi on BTC is another narrative.
Modularity vs. Monolithic L1 is a huge story of this bull run, with Solana, SEI V2, and Fantom challenging the modular vision of ETH, Avalanche, and Polygon. Which approach will succeed is not easy to answer, but both approaches may have a place in the crypto space.
AI is a powerful narrative, but there is currently very little technological innovation in AI and low opportunities for token minting. However, as I mentioned, AI tokens are emerging, but without real technological innovation and the flywheel effect, they can rise as fast as they fall.
Here’s a question for you: What other ecosystems meet these three criteria?
Difference Between “Thriving” and “Sustainable” Ecosystems
I originally titled this article “Three Key Factors Driving a Sustainable Crypto Ecosystem,” but that’s not accurate.
These three key factors help the ecosystem thrive, but the pace of innovation slows as new competitors emerge, with newly minted funds in the ecosystem outpacing the attention and amount of money coming into the ecosystem to maintain the price, and narratives being replaced by more popular ways to play in the market.
Axie Infinity is a great example of a “thriving” ecosystem. Games on the blockchain are a novelty, and Axie perfectly demonstrates the Play-to-Earn vision to the world.
Thousands of Filipinos believe they can earn money by playing games. However, its growth depends on how quickly new projects enter the ecosystem, as more and more NFTs and Smooth Love Potion tokens are minted.
In the crypto space, we are constantly playing this similar chain game. New innovations and narratives are monetized through the issuance of new tokens. Unless the ecosystem manages to continue innovating and reinventing itself, as well as managing the token’s inflation, the once-thriving ecosystem will shrink and the token will fall.
DeFi is “thriving” through liquidity mining, but we need to continue to reinvent it. DeFi 1.0 projects have passed the initial hype phase and are now entering the stage of sustainable growth.
But the narrative I mentioned in this article has not yet flourished. Their ecosystem is young, with new exciting tokens on the horizon. Our mission is to find the ecosystems that build the most sustainable and thriving ecosystems.
It’s a delicate balance, with each element reinforcing the others, creating an environment of growth and sustainability. As we continue to see the development of this bull run, I believe these three keys will help you find a sustainable crypto ecosystem from decline.
Source: TechFlow
