disconoah.eth
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Happy (as happy as one can be when crypto prices plummet) Friday.
I just got back home following a week out West for ETHDenver. It was a heck of a week - amazing events, star-studded speaker panels, and a whole lot of forward thinking and innovation going on. The most interesting part about ETHDenver taking place in the midst of a broad crypto selloff is that, while asset prices are an important indicator, selloffs don’t scare away the real OGs who are building meaningful web3 applications. These developers, designers and entrepreneurs are heads down, undeterred by market sentiment and extremely bullish on the long term potential of blockchain technology.
More on ETHDenver next week, where I’ll do a full recap of the week and capture my thoughts and takeaways. This week, though, I want to dive into the great balancing act in crypto. While the staunchest believers in web3’s potential may be undeterred by volatile asset prices and regulatory uncertainty, the two must always be taken into consideration when exploring the long term impacts on various stakeholders: 1) crypto builders and operators, 2) investors, 3) end users, and 4) the entire web3 sub-culture which falls under the technology ecosystem.
Such a discussion is extremely relevant this week for two reasons. One, asset prices have fallen off of a cliff in the last few weeks. MTD, Bitcoin is down -20%, Ethereum -30%, Solana -35%, Dogecoin -38%, and memecoins even more. Generally, this isn’t great, but there is positive news as well. Two, we are getting more clarity into the Trump administrations’ and SEC’s approach to crypto regulation, Gary Gensler be damned. In just a week’s time, the SEC retreated on cases against Coinbase and OpenSea, provided guidance on memecoins, and paved the way for advancements in the stablecoin space (more on these later). Bad news begets good news. Today, I’ll explore the relationship between developer activity - a proxy for the fundamental health of the crypto industry - and both asset prices and regulation.
Asset prices vs developer activity
Bag holders are certainly feeling the pain. In recent weeks, the cryptocurrency market has experienced a significant downturn, with Bitcoin's value dropping below $80,000 for the first time in months. This decline can mainly be attributed to Trump's announcement of new tariffs on imports from Mexico, Canada, and China. These tariffs have heightened economic uncertainty, leading to risk-off positioning among investors in risky assets such as cryptocurrencies and equities. The initial optimism surrounding a pro-crypto agenda under the Trump administration has been overshadowed by these trade tensions, resulting in a market selloff.
We all know that crypto markets are volatile, and that’s never going to change. The key question, however, is how the relationship between asset prices and developer activity will change, and whether there will be a mean reversion in the correlation between the two. Right now, the silver lining in this bear market is that developer activity remains robust. According to a16z’s 2024 State of Crypto Report, the number of unique active addresses interacting with blockchain technology reached an all-time high of 220 million in September 2024, tripling the figures from late 2023. This surge indicates a growing interest and engagement in blockchain development, suggesting that the foundational aspects of the crypto industry continue to strengthen, even as asset prices fluctuate.
The venture behemoth’s widely recognized State of Crypto Index, which tracks the development of the crypto industry, reflects the aforementioned positive trend in developer activity. The index aggregates various parameters, including active developers, the proliferation of blockchain projects, verified smart contracts, job search interest, academic publications, active addresses, transactions and DEX volume. Said index posted a modest MTD gain of +0.8%, providing a counter narrative to the declines in crypto prices. TL;DR, the crypto ecosystem’s builder community is resilient despite market volatility. Continuous increases in active addresses and project development suggests that the community is more focused on long-term technological advancements than short-term market sentiment.
One parameter of the index that I think is worth diving deeper into is job search interest. a16z uses Google Trends to aggregate interest in the industry by compiling worldwide searches for “web3 jobs”, “crypto jobs” and “blockchain jobs”. After hitting a ATH in January 2022, the measurement fell steadily before climbing back up in January 2024 and has been on a steady rise since. What this means - smart people want to work in web3. As an interesting tidbit, I had the chance to catch up with my entrepreneurship professor from college while in Denver this week. I asked him about the level of interest in web3 and blockchain technology among undergraduates, and he claimed that there has been a dramatic increase in interest. In response to the rise in interest, the chancellor of my university recently introduced blockchain-related classes in both the college of business and college of computer science. An argument can be made that this dynamic could be both a leading indicator and a lagging indicator.
Either way, heightened interest among undergraduates and the young workforce is a net positive. There's no doubt that interest spikes during crypto bull markets, but the true test of an industry’s resilience is whether that enthusiasm translates into sustained developer activity once prices cool off. Historically, crypto prices and developer engagement have had a complex relationship—market booms attract new builders, but it’s the bear markets that filter out speculation and leave behind those genuinely committed to the technology. Speculative trading activity may fluctuate wildly, but the number of developers contributing to open-source crypto projects tends to decline far less during downturns.
Let me go out on a limb and draw a comparison between this dynamic and the concept of the Sharpe ratio, which is widely used metric to assess the performance of investment portfolios and individual assets. Basically, it helps investors understand whether they’re being properly compensated for risk - a higher Sharpe ratio means an asset is delivering better returns for the risk taken. Crypto markets, driven by speculation, often have a lower Sharpe ratio because of extreme volatility. While returns can be astronomical, the variance in price swings makes for a risky investment. Developer activity, on the other hand, behaves more like an asset with a higher Sharpe ratio - it’s steadier, less sensitive to short-term noise, and represents a more reliable long-term "return" on investment in the industry. If we apply this to crypto’s long-term viability, developer activity may be a better signal of value creation than asset price fluctuations.
Even during market crashes, committed developers continue building, much like how a well-diversified investment portfolio with a high Sharpe ratio weathers volatility better than a single speculative asset. If we view crypto’s long-term success as a function of developer effort rather than just price appreciation, then measuring developer activity might be a better indicator of sustainable value creation than short-term price spikes. Furthermore, if builders and investors think in terms of Sharpe ratios and drawdowns, they should care more about developer activity than price volatility. A market crash may scare off speculators, but as long as developer retention remains strong, the fundamental value of the ecosystem remains intact. In the long run, developer resilience could act as a stabilizing force that reduces overall crypto market beta, increasing its ability to deliver strong, risk-adjusted returns for all stakeholders over time.
Regulatory clarity vs developer activity
Whether or not Trump himself actually believes in blockchain technology, he thoughtfully observed the crypto industry’s dissatisfaction with the SEC’s “regulation by enforcement” approach under Biden-appointed Gary Gensler, and saw an opportunity to court both their money and their votes. The 45th and now 47th President positioned himself as an ally to the industry, and his calls to fire Gensler became a rallying cry. In aggregate, the crypto industry donated over $100 million to Donald Trump’s 2024 presidential campaign and related political action committees. The bulk of that capital came from a few large companies and individuals, such as a16z, Ripple, Coinbase, and the Winklevoss twins. TL;DR - the investment is paying off, as the SEC under new Trump-appointed Chair Mark Uyeda is ushering in a new regulatory scheme for digital assets. A couple stories to touch on…
(1) Last Thursday, the SEC agreed to drop its lawsuit against bluechip crypto exchange Coinbase. The politically-motivated nature of this case had the crypto industry heated, especially since the SEC had previously approved Coinbase’s business model before going public in 2021 and then subsequently sued them in 2023 without any fundamental changes to its operations. This was a marquee example of the old SEC’s anti-crypto agenda, masked under the false accusations of Coinbase operating as an unregistered national securities exchange, commingling various functions without proper registration, and depriving investors of critical protections. This was a massive win for the publicly traded Coinbase and the industry as a whole, and triggered another great outcome just hours later…
(2) On Friday, the agency closed an investigation into NFT marketplace OpenSea, during which Gensler was looking to put downward pressure on the company by classifying NFTs as securities. The OpenSea exec team praised this decision, noting that by attempting to classify NFTs as securities would have been a massive step backward - “one that misinterprets the test and slows innovation.”
(3) In similar fashion, yesterday the SEC issued long sought-after guidance on memecoins, claiming that they are not classified as securities under U.S. Federal law and are more akin to collectibles. The statement provided further clarity that the digital asset space had been demanding for years.
(4) Finally, the SEC approved the first interest-bearing stablecoin native to a public blockchain, developed by a company called Figure Markets. Stablecoin technology presents a massive opportunity, but historically, they have not been interest bearing. This approval by the SEC aligns stablecoins more closely with the benefits of holding traditional currencies in bank accounts, and allow holders to earn passive income while maintaining stability. I expect this to be a powerful tailwind for the stablecoin space.
In the previous section, we explored the relationship between asset prices and developer activity. As mentioned, there’s a positive correlation, but it’s not perfect. On the other hand, there’s a near perfect correlation between regulatory clarity and developer activity - clear guidelines, expectations and rules = more interest to build new applications. Developers and entrepreneurs aren’t incentivized to take risks and push the frontier of blockchain technology when threats of being de-banked, top-down lawsuits and compliance issues persist like the did under the previous SEC regime. They want clear guidelines and regulations, and certainty that their businesses would not become targets of agency overreach and vague interpretations of securities laws. The news re: lawsuits against Coinbase and OpenSea, new memecoin guidance, and stablecoin approval signals that the days of politically motivated regulation and vagueness are over.
This new SEC approach is a function of a pro-crypto president, but also of a major legal shift which took place last year. In June, the Supreme Court voted to overturn the Chevron doctrine, which established the precedent that courts and the U.S. Congress should defer to a federal agency’s (i.e. the SEC) interpretations of ambiguous law (i.e. digital assets as securities), as long as the agency’s interpretation is reasonable. Before the decision, there was nothing stopping the Gensler-led SEC from deciding how to interpret securities laws, thus giving them the leeway and legal standing to target crypto companies. This is a huge win for crypto, since it limit’s the SEC’s power to classify digital assets as unregistered securities based on the Howey test, forces Congress to provide clear crypto laws, and reduces regulation by enforcement.
The stars are aligning for the crypto industry from a regulatory perspective, which should translate to robust developer activity. Let’s return to the Sharpe ratio concept. If laws are clear and consistent, developer activity grows with lower risk, meaning a higher regulatory Sharpe ratio. If rules are ambiguous or change suddenly, developers face more risk and have a lower regulatory Sharpe ratio, since there is less return potential per unit of risk.
While the crypto market may be enduring a rough patch in terms of asset prices, the underlying strength of the industry lies in the continued resilience of its builders. As regulatory clarity improves and legal obstacles fade, developers are more empowered to innovate without the cloud of uncertainty hanging over them. If we focus on the long-term fundamentals - developer activity, regulatory clarity, and technological advancements - it becomes clear that crypto’s true value isn’t solely driven by short-term price movements. Instead, it’s the strength and consistency of its ecosystem’s builders that will ultimately define its success in the years to come.
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