Mainnet Main Thoughts

My non-consensus views from the Messari Mainnet Conference.

I attended the Messari Mainnet Conference September 21-23 in New York City. Over 4,000 participants attended, from 200 different projects. There were 250 speakers. Keynote speakers included Vitalik Buterin, Anatoly Yakovenko, Balaji Srinivasan and Changpeng Zhao. 

These are my Top 10 thoughts from the conference. Really, they’re thoughts that I’ve been stewing on for a while. My interactions at the conference and side events cemented them. 

Most are non-consensus. 

1. Subdued vibe 

2. Price recovery ain’t coming anytime soon

3. Most likely area for innovation is…

4. Institutions are NOT coming into crypto 

5. Regulation is NOT going to drive user adoption

6. NFTs are a bust 

7. A multichain world will consolidate into a handful of chains

8. Crypto will NOT bank the unbanked 

9. Private blockchains are done

10. DeFi did two interesting things 

1. Subdued vibe 

The vibe was more subdued than the Consensus Conference in Austin in early June (read Consensus Cliff Notes). Crypto market cap has dropped ~30% since then. Sentiment is more bearish. CeFi platforms collapsed (read CeFi Casualties). Sanctions were imposed (read Can a Tornado topple Ethereum?). Macro backdrop has deteriorated. 

Although Mainnet doubled its attendance from 2021, energy was lackluster. Dozens of side events were hosted throughout the week. I went to several of them. The attendance was moderate. Perhaps it’s because there were so many events people were spread thin. More likely, it’s a reflection of waning interest in crypto winter. 

Two types of excitement persists. 

1. Unbridled enthusiasm - This is the most fervent kind. I don’t have much patience for it. It’s the “Crypto will change the world. Have fun staying poor.” mantra. These are the cheerleaders powered by baseless optimism. Whenever something doesn’t work out the “It’s still soooooo early.” defense is used. That trope is counterproductive. It undermines the actual progress the industry has made. Stop using it.  

2. Grounded enthusiasm - Those that are excited about the specific project they are working on. They realize it’s a long shot. It will probably fail. But they’re willing to risk it anyway. It reminded me of this tweet. 

Elon Musk @elonmusk

@westcoastbill I was at a lunch with Munger in 2009 where he told the whole table all the ways Tesla would fail. Made me quite sad, but I told him I agreed with all those reasons & that we would probably die, but it was worth trying anyway.

2. Price recovery ain’t coming anytime soon

This crypto winter will test the industry’s mettle more than any other. Conference participants kept asking when the bull market would come. Don’t hold your breath for it.  

The first mainstream crypto bull market occurred from summer 2017 to January 2018. Crypto market cap went from $100 billion to nearly $800 billion (8x). It was fueled by Initial Coin Offerings (“ICO”). ICOs were, potentially illegal ways, for “projects” (otherwise known as companies) to skirt securities laws and raise capital quickly and cheaply. It crashed when projects turned out to be scams or had questionable business models. 

The second mainstream crypto bull market occurred from summer 2020 to November 2021. Crypto market cap grew from $250 billion to $2.8 trillion (11x). The rally was fueled by:

1. Easing fiscal and monetary policy: Governments around the world, led by the US, flooded financial markets and consumers with money. The simplest way to view all the methods by which the US government flooded Main Street and Wall Street with capital is the M2 money supply. M2 calculates the money in circulation in the US. It grew an unprecedented 35% from $16 trillion spring 2020 to $21 trillion in November 2021. 

2. DeFi: DeFi projects launched in the summer of 2020 allowed degens to trade crypto assets with ease. It ballooned the market by creating derivative crypto products. In some cases users could trade with 100x leverage. TVL grew from $1 billion in June 2020 to $180 billion by November 2021. 

ICOs, accomodating fiscal and monetary policies and DeFi are not going to spur the next crypto spring. The two biggest rallies were spurred by financialization. Both were unsustainable. 

The winter will test the industry’s mettle more than those of the past. Financialization will not spring the tulips. Spring will rise from useful innovation that will bring either: 

1. Consumer use cases

2. Economic value creation

Both have largely evaded the crypto industry so far. 

3. Most likely area for innovation is

Tangible consumer use cases and economic value creation that could spur the crypto spring will likely come from:

1. Gaming - Games that are as or more fun than traditional games and allow players to monetize in-game economies.   

2. Crypto phone - We live on our phones. Crypto requires a native easy to use mobile experience for users to interact with a blockchain without even knowing they’re doing it. 

3. Crypto bank - Crypto loans don’t create economic value. They are only used for trading more crypto. That needs to change. Financial systems are being used as political tools. Cancel culture has extended to groups being financially canceled. Financial mobility provides leverage against the state.  

4. Incentives - Tokens, and their potential economic benefit, incentivize people to do things they otherwise may not do. For example, Helium is building a wireless network. Investors can buy and connect a Helium hotspot to the network. Users connect to the network by buying Helium tokens. Tokens are paid to investors that bought hotspots. It’s a novel way to build infrastructure. 

4. Institutions are NOT coming

At each conference prognosticators claim large financial institutions (meaning pension funds, endowments and sovereign wealth funds) are soon going to invest in crypto. Pundits claim regulation is barring large capital inflows into the market. Once regulation is clearer, these large funds will allocate to crypto. They are not. 

Clearer regulation is not going to open the floodgates. Two issues persist:

1. The crypto market is not big enough - Crypto has a $1 trillion market cap. 55% of the market cap is in two assets: Bitcoin and Eth. Stripping out stablecoins, leaves $282 million of other assets to invest in. The global asset management industry manages over $100 trillion of assets; about half is in the US. A $530 million two asset crypto market and a smattering of random tokens that collectively are valued at $282 million is simply not big enough for a $100 trillion industry to pay much attention to. Crypto is not going to move the needle for them. They’ll pay attention to it at the fringes, but large crypto investments are not happening soon.  

   

2. No one knows how to value crypto assets - Nearly all of the $50 trillion of US based asset managers invest in stable predictable businesses. Venture made up $330 billion of the $50 trillion. The managers managing $50 trillion of assets don’t invest based on “it’s gonna moon.” Until some semblance of valuation can be ascribed to tokens, large managers will not invest a material amount in crypto. 

   There is some experimentation happening. Larger managers are investing in crypto through crypto focused venture and hedge funds. I believe institutions will invest larger sums in crypto via staking products. However, staking yields are becoming less attractive relative to safer government bond yields.  

5. Regulation is NOT going to drive user adoption

Regulation will drive adoption was a common refrain at the conference. That’s categorically wrong. Regulation will not drive user adoption. 

There are not millions of people sitting on the sidelines thinking to themselves “Gee I would really like to use crypto, but I won’t until the regulation is clear. Once it’s clear, I’m going to dive right in!” 

Users didn’t ask themselves if Uber was compliant with local regulations when they got in their first Uber. They got in Uber and kept using it because it was a demonstrably better experience. In fact, Uber was often thwarting regulation. The product was so good consumers demanded that their politicians make it legal. 

The decriminalization and legalization of cannabis didn’t drive a huge increase in demand. People who wanted it, already used it regardless of the legality. 

Crypto will not be different. 

6. NFTs are a bust 

JPEGs sold for thousands of dollars were mostly scams. Insightful data from Coinfeeds shows that many NFT projects fueled the growth of their “communities” using Twitter bots and purchased fake accounts to retweet, comment and like projects. Like the 2016 US election Facebook debacle, the semblance of a community forming and engaging in an NFT project was fabricated. 43% and 27% of the Twitter accounts that engaged with Solana and Ethereum NFT projects respectively were promotional Twitter accounts. Their only purpose is to participate in promotions to make it look like a lot of people are engaged. On some Solana projects, nearly 70% of engagement was from promotional accounts. 

OpenSea volumes have declined +90% in USD terms. 

The concept of storing data on a blockchain as an NFT that can be revealed to those I want to is innovative. That will continue. Trading ape JPEGs like that of Q4’21 is over. 

7. A multichain world will consolidate into a handful of chains

The conference trade floor was littered with booths of new blockchains. They gave out cool swag. They explained what they did, what problem they addressed and why they are necessary. It was mostly a jumble of nonsensical jargon. 

There are about 1,000 different blockchains today. I don’t see a world where there are more than a handful of scaled blockchains. It’s like languages. There are over 7,000 of them. But we only use a handful to communicate. Any more gets too complicated, cumbersome and defeats the purpose. 

8. Crypto will NOT bank the unbanked 

The unbridled enthusiasts perpetuate that crypto can bank the unbanked. It won’t anytime soon. They are not unbanked because technology is lacking. They are unbanked because they don’t have money. They live off of a few dollars a day. They spend what they earn. For banking services to be useful, you need to earn more than you spend. 

Blockchains can facilitate low cost instantaneous transactions. That should help commerce in impoverished areas. Increasing commerce should create additional savings. At that point, the unbanked could become banked.  

9. Private blockchains are done

E&Y publicly stated their private blockchain attempts and those of clients haven’t worked. One of the largest US banks said the same. It seemed inevitable. Open source > closed. 

10. DeFi did two interesting things  

DeFi has not created any economic benefit. But it did create two interesting things:

1. Self-funded: It’s the first time in history an industry has self-funded itself. All other industries rely on financial markets to fund them. DeFi projects invented their own currency. Its own lending practices. Overnight it grew to $180 billion. It created a giant casino to trade the tokens it created. 

2. Automated market makers: The main technological innovation from DeFi. They create liquidity for otherwise illiquid assets and execute transactions at low cost.

Stay curious.

Follow me on Twiter @samuelmandrew for my latest thoughts.