Status Quo: Either Speculation or Niche Market.

We are already in the midst of the fourth major market cycle (perhaps nearing its end). The crypto market has grown significantly, with BTC ranking 9th ($1.26T) and ETH 25th ($409B) in overall asset rankings.

This naturally raises the question: Has a market of this size truly found Product-Market Fit (PMF)? Back in 2020-2021, most would have said no. However, given the market's maturity and the emergence of various protocols, many might now say yes.

My answer is mixed. There are indeed protocols that generate significant revenue even when accounting for token incentive spending, which makes me inclined to say yes. However, I must point out that the PMF of most of these protocols heavily relies on speculation. In contrast, protocols with little connection to speculation often fail to find widespread PMF, serving only a niche group of users.

Recently, many, including Vitalik Buterin, have raised similar points on social media. Even protocols that seem to have found PMF, mainly infrastructure ones, often their PMFs come from speculation. During the third bull cycle, there were many blueprints for using blockchain technology to solve real-world problems, with buzzwords like metaverse, P2E, and decentralized social networks capturing people's attention. However, despite the market's growth, it now appears that the vision of blockchain is shrinking, with only a few remaining degens and no real-world problems being addressed.

It is natural for speculation to arise in an emerging industry. While speculation can lead to many victims, it also helps the market and industry achieve scale. In other words, for speculation to be justified, the industry must ultimately find a suitable PMF.

Throughout this bull cycle, it seems the industry's efforts to find PMF have regressed. Despite the influx of talent and capital leading to significant advancements in regulation, technology, and infrastructure, there are still no blockchain products with widespread PMF. Even with the approval of Bitcoin and Ethereum ETFs, discussions around visionary concepts like decentralization and metaverse have dwindled since the 2021 bull ycle, and the market appears to be targeting increasingly niche segments.

Was the market's growth ultimately driven solely by speculation? To find the answer, I divided the market into three periods.

After the concepts of Bitcoin and blockchain first emerged in 2008, Bitcoin was primarily used as a payment method for online transactions due to its censorship resistance and ease of cross-border payments.

A notable example is the use of Bitcoin in MMORPG games with active economies, like World of Warcraft, for trading items. Additionally, Bitcoin was used for illegal transactions on dark web marketplaces such as Silk Road, involving drugs, weapons, and pornography.

Despite its significant use in illegal transactions, Bitcoin found its PMF with specific groups even when it was not widely known.

During this period, cryptocurrencies were largely viewed as speculative assets. Although projects like Steemit, Livepeer, Filecoin, and Brave Browser aimed to solve real-world problems, the market was heavily speculative.

At the end of 2013, Bitcoin's price surged from $100 to $1100, reinforcing its perception as a speculative asset. This led to numerous Ponzi schemes like OneCoin and many victims.

The first bull cycle in 2013 failed to attract widespread attention, but the second bull cycle in 2017 captured global interest. BTC and ETH achieved significant market capitalizations, with speculative trading especially prevalent in the South Korean market. During this period, projects like EOS, ADA, TRX, and BNB raised substantial funds through ICOs, though many ICO scams emerged from projects with no real substance.

Since the market was built on speculation, the subsequent crash led to a prolonged crypto winter. However, projects built during this time and quantitative easing post-COVID-19 helped the market recover in 2021. DeFi protocols like Uniswap and Compound boomed on-chain, with speculation active both off-chain and on-chain.

This period saw heightened interest in blockchain technology itself, with many idealistic projects aiming to solve problems through decentralization. While grand visions like the metaverse, P2E, and decentralized social mostly remained unrealized, they inspired many people.

Following the 2021 third bull cycle, the crypto industry attracted massive interest, leading to increased efforts to incorporate blockchain into traditional Web2 industries to find PMF. Within the Web3 scene, venture capital investments grew, and more teams started building projects that addressed real-world problems beyond speculation. These teams focused on improving scalability, interoperability, and UI/UX to achieve mass adoption of blockchain technology.

These efforts tackled crucial issues. Notable advancements include bridges (e.g., Across, Wormhole, LayerZero) addressing fragmented liquidity, and layer 2 solutions (e.g., Optimism, Arbitrum, Polygon) effectively solving base layer scalability problems.

Some of these protocols generate more fee revenue than they spend on token incentives. A representative example is Base. Layer 2 business models rely on providing highly scalable blockspace that depends on Ethereum's security. They pay gas fees for storing data on the Ethereum network and charge users transaction fees. Without governance token incentives, Base achieved an impressive gross profit of $35M over the past 180 days.

Additionally, numerous projects within the on-chain ecosystem provide utility to users, with the following protocols achieving a degree of PMF:

• L1: Ethereum, Solana, Tron

• L2: Arbitrum, Base, Optimism

• Bridge: LayerZero, Wormhole

• Staking: Lido, Rocket Pool, Jito

• Restaking, LRT: EigenLayer, etherfi, Symbiotic

• DeFi: Aave, Maker, Uniswap, Pendle, Ethena

• NFT: OpenSea, Zora

• Prediction Market: Polymarket, Azuro

• Social: Farcaster, ENS

• Infrastructure: Chainlink, The Graph

• Meme: Pump Fun, Moonshot

Here’s my hot take

While the protocols mentioned above do provide significant utility to users and have achieved PMF, I believe that, at this point, much of this PMF ultimately revolves around speculation. Alternatively, services that have achieved PMF with little connection to speculation tend to have a very limited audience.

• The essence of smart contract L1 is to conduct computations in a decentralized environment, providing benefits like censorship resistance and liveness. However, genuine use cases aligning with this essence are rare, with most users utilizing L1 as platforms for speculation.

• The core purpose of L2 is to offer fast scalability while relying on the security of the base layer. Although L2 has certainly achieved PMF, much of the demand stems from users wanting to speculate on-chain more quickly and cheaply. If L1s are high-stakes, expensive casinos, L2s are their lower-stakes, more affordable counterparts.

• Bridges facilitate the movement of capital and messaging between various networks, making them essential infrastructure in the current landscape of numerous networks. Without bridges, many users and businesses would face significant inconvenience. However, like L2s, bridges are often used by users seeking speculative opportunities on different networks, like services that transfer funds between casinos.

• Staking and restaking are critical for the security of protocols and have been highly successful in terms of TVL. While seeking incentives is natural and not inherently wrong, many investors participate with expectations of unsustainably high rewards (airdrops, yield, etc.).

• DeFi enables anyone to engage in financial activities on-chain. Although there are increasing cases of integrating RWA, the market remains small, and many DeFi protocols are linked to speculation. For instance, Pendle and Ethena have grown rapidly by finding appropriate PMF, but this growth has been driven by user speculation. Both protocols attracted significant user and TVL by leveraging expectations of airdrops.

• The NFT marketplace sector vividly illustrates the impact of speculation. NFT marketplaces are neutral platforms for trading NFTs, but examples like OpenSea and Blur show a sharp decline in trading volume once the NFT speculation frenzy wanes or token incentive programs end.

• Web3 social aims to address the issues of centralized social media. While there is some user expectation of speculation, this sector is one of the few where the building intent and actual PMF align. However, it remains a niche market as not many people yet share the concerns about centralization of Web2 social.

• On-chain infrastructure like oracles and query services are essential for the safe and efficient operation of the on-chain ecosystem, but they are still largely used in services related to speculation.

For example, imagine you buy YT-eETH through Pendle on the Arbitrum network. Arbitrum, a Layer 2 solution, reduces your costs and time. Pendle allows you to separate the yield and principal of eETH, offering various strategies. Etherfi restakes and mints liquid ETH on your behalf, and EigenLayer lets you stake ETH across multiple protocols simultaneously. While these services are useful, their activities are driven by the speculation surrounding AVS rewards and potential airdrops.

p.s. There are blockchain-related services widely used in real life, but they typically follow Web2 paradigms, with blockchain as just one feature among many. Examples include Reddit's avatar NFTs and Sweatcoin.

Don’t get me wrong

In a free market, products don’t necessarily have to be used as intended. Even if a product generates demand and revenue through avenues like speculation, it is still valuable. However, if the PMF doesn’t align with the core essence of blockchain, then blockchain might not be necessary. Traditional Web2 technology can often suffice.

Given the market's size, why haven't we seen widespread PMF in blockchain products? It's because modern society doesn't truly need blockchain yet.

As Josh Stark explains in Atoms, Institutions, Blockchains, the value blockchain brings to the world is credible neutrality in the digital realm, akin to the roles of physical laws and social norms. Physical laws are essential as they define space, time, and matter. Similarly, social norms, such as governments and laws, are necessary as they define interactions within human society. Conversely, modern society doesn't yet need blockchain as digital interactions are still relatively well-coordinated based on trust in centralized entities.

There are exceptions, though. In countries where social norms fail due to government corruption or outdated infrastructure, Bitcoin and stablecoins can play crucial roles in the economy. This is evident in Latin America and Africa. Unlike people in developed countries who view crypto as an investment, residents in these regions use crypto to sustain their livelihoods. Here, blockchain's credible neutrality gives Bitcoin and stablecoins the characteristics of assets and money, finding real PMF beyond speculation.

To find broader PMF based on credible neutrality, we can only wait for more failures of centralized systems. Although not directly related to blockchain, Trump’s Truth Social emerged from a desire to avoid Big Tech censorship. While such centralized system failures are unfavorable for developed nations, they could eventually drive people toward blockchain systems. Essentially, blockchain technology will provide true utility beyond speculation when the flaws of centralized systems become evident.

However, issues like social media censorship, data breaches, and cloud service outages are insufficient catalysts. While these problems occur, the benefits of centralized services still outweigh them, leading most people to continue using existing systems. As I mentioned in a previous article, the biggest catalysts for blockchain finding PMF based on credible neutrality will be 1) the failure of the dollar and 2) rapid advancements in AI. Recent endorsements of Bitcoin by prominent figures like Trump, Larry Fink, and Jamie Dimon reflect a similar trend.

Over the past three years, blockchain technology and the industry have grown rapidly. This growth has been primarily driven by investor speculation. While speculation often gets a bad rap, we should recognize its contributions to the industry’s development. However, it's disappointing that the current PMF in the blockchain market remains heavily focused on speculation. There’s little we can do to find fundamental PMF based on credible neutrality.

Despite this, I remain very optimistic about the blockchain industry. As Balaji pointed out, the world is in a continuous cycle of bundling and unbundling. As our social systems become increasingly centralized, they are bound to encounter issues, and the demand for unbundling will grow. I hope that, in the future, blockchain will play a crucial role in protecting human sovereignty.

Status Quo: Either Speculation or Niche Market.

We are already in the midst of the fourth major market cycle (perhaps nearing its end). The crypto market has grown significantly, with BTC ranking 9th ($1.26T) and ETH 25th ($409B) in overall asset rankings.

This naturally raises the question: Has a market of this size truly found Product-Market Fit (PMF)? Back in 2020-2021, most would have said no. However, given the market's maturity and the emergence of various protocols, many might now say yes.

My answer is mixed. There are indeed protocols that generate significant revenue even when accounting for token incentive spending, which makes me inclined to say yes. However, I must point out that the PMF of most of these protocols heavily relies on speculation. In contrast, protocols with little connection to speculation often fail to find widespread PMF, serving only a niche group of users.

Recently, many, including Vitalik Buterin, have raised similar points on social media. Even protocols that seem to have found PMF, mainly infrastructure ones, often their PMFs come from speculation. During the third bull cycle, there were many blueprints for using blockchain technology to solve real-world problems, with buzzwords like metaverse, P2E, and decentralized social networks capturing people's attention. However, despite the market's growth, it now appears that the vision of blockchain is shrinking, with only a few remaining degens and no real-world problems being addressed.

It is natural for speculation to arise in an emerging industry. While speculation can lead to many victims, it also helps the market and industry achieve scale. In other words, for speculation to be justified, the industry must ultimately find a suitable PMF.

Throughout this bull cycle, it seems the industry's efforts to find PMF have regressed. Despite the influx of talent and capital leading to significant advancements in regulation, technology, and infrastructure, there are still no blockchain products with widespread PMF. Even with the approval of Bitcoin and Ethereum ETFs, discussions around visionary concepts like decentralization and metaverse have dwindled since the 2021 bull ycle, and the market appears to be targeting increasingly niche segments.

Was the market's growth ultimately driven solely by speculation? To find the answer, I divided the market into three periods.

After the concepts of Bitcoin and blockchain first emerged in 2008, Bitcoin was primarily used as a payment method for online transactions due to its censorship resistance and ease of cross-border payments.

A notable example is the use of Bitcoin in MMORPG games with active economies, like World of Warcraft, for trading items. Additionally, Bitcoin was used for illegal transactions on dark web marketplaces such as Silk Road, involving drugs, weapons, and pornography.

Despite its significant use in illegal transactions, Bitcoin found its PMF with specific groups even when it was not widely known.

During this period, cryptocurrencies were largely viewed as speculative assets. Although projects like Steemit, Livepeer, Filecoin, and Brave Browser aimed to solve real-world problems, the market was heavily speculative.

At the end of 2013, Bitcoin's price surged from $100 to $1100, reinforcing its perception as a speculative asset. This led to numerous Ponzi schemes like OneCoin and many victims.

The first bull cycle in 2013 failed to attract widespread attention, but the second bull cycle in 2017 captured global interest. BTC and ETH achieved significant market capitalizations, with speculative trading especially prevalent in the South Korean market. During this period, projects like EOS, ADA, TRX, and BNB raised substantial funds through ICOs, though many ICO scams emerged from projects with no real substance.

Since the market was built on speculation, the subsequent crash led to a prolonged crypto winter. However, projects built during this time and quantitative easing post-COVID-19 helped the market recover in 2021. DeFi protocols like Uniswap and Compound boomed on-chain, with speculation active both off-chain and on-chain.

This period saw heightened interest in blockchain technology itself, with many idealistic projects aiming to solve problems through decentralization. While grand visions like the metaverse, P2E, and decentralized social mostly remained unrealized, they inspired many people.

Following the 2021 third bull cycle, the crypto industry attracted massive interest, leading to increased efforts to incorporate blockchain into traditional Web2 industries to find PMF. Within the Web3 scene, venture capital investments grew, and more teams started building projects that addressed real-world problems beyond speculation. These teams focused on improving scalability, interoperability, and UI/UX to achieve mass adoption of blockchain technology.

These efforts tackled crucial issues. Notable advancements include bridges (e.g., Across, Wormhole, LayerZero) addressing fragmented liquidity, and layer 2 solutions (e.g., Optimism, Arbitrum, Polygon) effectively solving base layer scalability problems.

Some of these protocols generate more fee revenue than they spend on token incentives. A representative example is Base. Layer 2 business models rely on providing highly scalable blockspace that depends on Ethereum's security. They pay gas fees for storing data on the Ethereum network and charge users transaction fees. Without governance token incentives, Base achieved an impressive gross profit of $35M over the past 180 days.

Additionally, numerous projects within the on-chain ecosystem provide utility to users, with the following protocols achieving a degree of PMF:

• L1: Ethereum, Solana, Tron

• L2: Arbitrum, Base, Optimism

• Bridge: LayerZero, Wormhole

• Staking: Lido, Rocket Pool, Jito

• Restaking, LRT: EigenLayer, etherfi, Symbiotic

• DeFi: Aave, Maker, Uniswap, Pendle, Ethena

• NFT: OpenSea, Zora

• Prediction Market: Polymarket, Azuro

• Social: Farcaster, ENS

• Infrastructure: Chainlink, The Graph

• Meme: Pump Fun, Moonshot

Here’s my hot take

While the protocols mentioned above do provide significant utility to users and have achieved PMF, I believe that, at this point, much of this PMF ultimately revolves around speculation. Alternatively, services that have achieved PMF with little connection to speculation tend to have a very limited audience.

• The essence of smart contract L1 is to conduct computations in a decentralized environment, providing benefits like censorship resistance and liveness. However, genuine use cases aligning with this essence are rare, with most users utilizing L1 as platforms for speculation.

• The core purpose of L2 is to offer fast scalability while relying on the security of the base layer. Although L2 has certainly achieved PMF, much of the demand stems from users wanting to speculate on-chain more quickly and cheaply. If L1s are high-stakes, expensive casinos, L2s are their lower-stakes, more affordable counterparts.

• Bridges facilitate the movement of capital and messaging between various networks, making them essential infrastructure in the current landscape of numerous networks. Without bridges, many users and businesses would face significant inconvenience. However, like L2s, bridges are often used by users seeking speculative opportunities on different networks, like services that transfer funds between casinos.

• Staking and restaking are critical for the security of protocols and have been highly successful in terms of TVL. While seeking incentives is natural and not inherently wrong, many investors participate with expectations of unsustainably high rewards (airdrops, yield, etc.).

• DeFi enables anyone to engage in financial activities on-chain. Although there are increasing cases of integrating RWA, the market remains small, and many DeFi protocols are linked to speculation. For instance, Pendle and Ethena have grown rapidly by finding appropriate PMF, but this growth has been driven by user speculation. Both protocols attracted significant user and TVL by leveraging expectations of airdrops.

• The NFT marketplace sector vividly illustrates the impact of speculation. NFT marketplaces are neutral platforms for trading NFTs, but examples like OpenSea and Blur show a sharp decline in trading volume once the NFT speculation frenzy wanes or token incentive programs end.

• Web3 social aims to address the issues of centralized social media. While there is some user expectation of speculation, this sector is one of the few where the building intent and actual PMF align. However, it remains a niche market as not many people yet share the concerns about centralization of Web2 social.

• On-chain infrastructure like oracles and query services are essential for the safe and efficient operation of the on-chain ecosystem, but they are still largely used in services related to speculation.

For example, imagine you buy YT-eETH through Pendle on the Arbitrum network. Arbitrum, a Layer 2 solution, reduces your costs and time. Pendle allows you to separate the yield and principal of eETH, offering various strategies. Etherfi restakes and mints liquid ETH on your behalf, and EigenLayer lets you stake ETH across multiple protocols simultaneously. While these services are useful, their activities are driven by the speculation surrounding AVS rewards and potential airdrops.

p.s. There are blockchain-related services widely used in real life, but they typically follow Web2 paradigms, with blockchain as just one feature among many. Examples include Reddit's avatar NFTs and Sweatcoin.

Don’t get me wrong

In a free market, products don’t necessarily have to be used as intended. Even if a product generates demand and revenue through avenues like speculation, it is still valuable. However, if the PMF doesn’t align with the core essence of blockchain, then blockchain might not be necessary. Traditional Web2 technology can often suffice.

Given the market's size, why haven't we seen widespread PMF in blockchain products? It's because modern society doesn't truly need blockchain yet.

As Josh Stark explains in Atoms, Institutions, Blockchains, the value blockchain brings to the world is credible neutrality in the digital realm, akin to the roles of physical laws and social norms. Physical laws are essential as they define space, time, and matter. Similarly, social norms, such as governments and laws, are necessary as they define interactions within human society. Conversely, modern society doesn't yet need blockchain as digital interactions are still relatively well-coordinated based on trust in centralized entities.

There are exceptions, though. In countries where social norms fail due to government corruption or outdated infrastructure, Bitcoin and stablecoins can play crucial roles in the economy. This is evident in Latin America and Africa. Unlike people in developed countries who view crypto as an investment, residents in these regions use crypto to sustain their livelihoods. Here, blockchain's credible neutrality gives Bitcoin and stablecoins the characteristics of assets and money, finding real PMF beyond speculation.

To find broader PMF based on credible neutrality, we can only wait for more failures of centralized systems. Although not directly related to blockchain, Trump’s Truth Social emerged from a desire to avoid Big Tech censorship. While such centralized system failures are unfavorable for developed nations, they could eventually drive people toward blockchain systems. Essentially, blockchain technology will provide true utility beyond speculation when the flaws of centralized systems become evident.

However, issues like social media censorship, data breaches, and cloud service outages are insufficient catalysts. While these problems occur, the benefits of centralized services still outweigh them, leading most people to continue using existing systems. As I mentioned in a previous article, the biggest catalysts for blockchain finding PMF based on credible neutrality will be 1) the failure of the dollar and 2) rapid advancements in AI. Recent endorsements of Bitcoin by prominent figures like Trump, Larry Fink, and Jamie Dimon reflect a similar trend.

Over the past three years, blockchain technology and the industry have grown rapidly. This growth has been primarily driven by investor speculation. While speculation often gets a bad rap, we should recognize its contributions to the industry’s development. However, it's disappointing that the current PMF in the blockchain market remains heavily focused on speculation. There’s little we can do to find fundamental PMF based on credible neutrality.

Despite this, I remain very optimistic about the blockchain industry. As Balaji pointed out, the world is in a continuous cycle of bundling and unbundling. As our social systems become increasingly centralized, they are bound to encounter issues, and the demand for unbundling will grow. I hope that, in the future, blockchain will play a crucial role in protecting human sovereignty.