I was recently listening to Chris Dixon on the Bankless podcast from November 2021. In a moment of prescience, he mentioned that 2022 might be a big down year, or in the very least, act as if:
His overall point above was one that caught my attention in the roughly two-hour podcast. There is a distinction in any market of prices vs the underlying business. Price discovery is the market’s attempt to price in business aspects with imperfect knowledge. While virtually every financial asset is being dragged down, that gravity takes with it good companies and projects. We’re well into the stage of the drawdown where there’s no place to hide.
In the crypto space, this occurred in 2018-2019 known as the “crypto winter”. Most everything fell out of bed and stayed down for the better past of 18-24 months, some of which never returned. Chris is comparing this time to the current “winter” that we may be in today. The key difference is the constructive developments underneath the turbulence, that weren’t there for the most past in 2018-2019.
He describes his concerns during that period were primality due to the lack of meaningful development happening. Now, the opposite seems to be the case (at least from November 2021, but I think it still applies today), and this is coming from a guy who is on the ground more often than most speaking with entrepreneurs and developers. I’m seeing and hearing the same things myself, as recently as Monday.
I agree with his overall optimism for several reasons, especially now that his prediction came true. A few overlapping reasons that I’m optimistic includes the following foundational aspects that are more sound than prices would indicate:
Intellectual capital is flowing into the space
Competent teams are well capitalized beyond their underlying tokens
Prices are generally uncorrelated with development for established teams
Intellectual capital Inbound
I’ve heard it over and over that some of the brightest minds are either already in the Web 3 space, or they are making their way there. This isn’t true for all projects, and I’m certain we’ll all slowly learn who really can’t sail in these waters, but a sentiment like that doesn’t develop without some merit.
Below is taken from LinkedIn of Chainlink Labs:
Additionally, they have advisory positions of the former heads of applied cryptography at Stanford, Dan Boneh, the founder of MIT’s Cryptoecomics lab; Co-creator of Diem, Christian Catalini; with more recently Dahlia Malkhi, former CTO of the Diem Association and now Chief Research Officer. A quick reminder that Diem was Facebook’s attempt at creating a cryptocurrency which was ahead of its time, and ultimately introduced too much regulatory scrutiny for the company, of which the assets were sold off to Silvergate in January for around $200,000,000.
I’ve noticed over the past several months that most new hires are coming from Google and Meta, two of the notoriously difficult companies to get hired into (reportedly Google only accepts 25% of Harvard graduate applicants), and which most hired are coming from positions at the companies from tenured positions (3-10 years generally).
So although there will be exceptions of (soon to be) failed companies that couldn’t attract good talent, through this “winter” process, talent frees up and becomes available. The end result is great talent attracts great talent, and the Mathew Principle makes an appearance ( Mathew 25:29, “For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them”).
Well capitalized teams will thrive
Blockchain technology has its perks, and being able to see account balances for public chains helps sometimes. Understandably, a company like Chainlink Labs certainly has cash amounts well beyond our purview. Yet what is clear that in a high-stress market event, it appears that they have some levers to pull:
Napkin math shows that as of today’s prices, they have a few billion of reserves in an emergency, and this is outside of the company’s balance sheet that we can’t see. Knowingly using (effectively) stock in a company to fund emergency situations can spiral things out of control, but I suspect they could find quick financing off this collateral.
The downside to above, as some skeptics like to point out, is that the company owns a significant share of the supply. Fair enough, they created it after all. But thinking through the risks, I feel more comfortable with the incentive structures seemingly aligned with everyone else who owns a piece of the project.
To take another example, I was on the weekly call with Horizen earlier Monday, and Rob Viglione (co-founder and CEo) made a similar point to the one above. They are in a fortunate situation to be well capitalized that allows them to continue working, developing and moving business forward while we will find out who is out of reserves. To be fair, I’m having to go off his word that the reserves are there, but knowing the history of the project and previously announced liquidity investments into the project, I’m sure there’s little to no embellishment (previously apart of a $100,000,000 fund).
That said, that call could have been placed at anytime within the past year, and the development activity, team enthusiasm etc. were the exact same. It’s clear that when you’re well funded, focus can be applied evenly.
The sentiment is in the air, because the co-founder of Polygon weighed in effectively reiterating the same:
The overall point here, is that great teams can (and do) continue developing, building and growing while not having to worry about reserves.
Development continues and is generally uncorrelated with price
Of anything I want to get across, and what Chris alludes to, is that development is occurring regardless of the turbulence in the space. I’ve noticed this trend over the past 12 months or so as I’ve closely followed it, but it highlights Chris’s point very well. Regardless of what prices show today, they are not a great indication of underlying development at some of these projects in this macro environment. In some sense, what is going on in the market has decoupled from fundamentals and is clearly all tied to reactionary capital markets, inflation and most importantly the Fed. So the main point here is important, especially relative to historical standards.
Santiment1 provides a good service in it tracks multiple factors of a project, from its development activity, how many people are actively working on a project, among other variables. To illustrate the point, below is a chart of Chainlink’s price overlayed with its development activity and development activity contributors within the past few months:
You may say: Ah ha! see! it’s clearly going down as the market rolled over. But let’s zoom out a little to include going back to February 2021:
The trend is a slow and steady increase in development activity, regardless of token price. This is true for most major projects like Ethereum, Polygon, etc. This is the fundamental point Chris is making, that regardless of whatever prices are doing in the market, there isn’t a “product winter” like previous years. That’s overall encouraging to me, and its what I see as well. The recent call with Horizen was a plethora of development and on-schedule deliveries. Chainlink announced its staking roadmap a few days ago, not to mention its release of CCIP (Cross-Chain Interoperability Protocol) later this year.
It is this perspective that provides a good framework in which to view market volatility. The 24/7 nature of crypto allows for pure price discovery, through which volatility is allowed to play out in real time. In today’s environment, everything is taking a hit. Fair enough, but I believe the market is mispricing many things (while at the same time repricing things that didn’t deserve it) and good projects/companies get caught in the storm. It’s important to view prices as an imperfect signal at times to the underlying developments due to imperfect information.
We may be entering a financial winter, but it’s certainly one that well-capitalized teams continue to build during the season.
Will
https://app.santiment.net/