In practice this worldview resulted in me being focused on investing in tokens that are “real”. The way I separated between real tokens and non-real was by viewing tokens through the lens of traditional businesses. If a protocol could have a business model, with a product being served and revenue being generated, and a PnL that you could analyze, the corresponding token was real. If there was no such thing, and no prospect of having such things in the future, I would deem a token as being not real, and therefore not something I was interested in exploring or investing in.

That mental model works for understanding some things in crypto, such as defi tokens, starts to collapse when you apply it to most infrastructure tokens, and implodes the second that it is applied to meme coins. And what I’ve realized is that it is a bad mental model for understanding tokens, not only because it doesn’t generalize beyond niche token categories like defi, but because it fundamentally misreads what crypto is. Unless tokens have use cases with PMF in the real world, and unless the PMF for crypto protocols grows beyond servicing crypto’s internal circular PvP economy, tokens are memes. Because of that, 99.9% of tokens in existence are memes. Even your favorite infra and defi ones.

The industry desperately needs people to want to do things that are more than memes. We need to want to invest in them. The alternative is that crypto continues to degenerate and that we will all have spent our best years on building next gen internet casinos. Good enough to make money, but also psychological hell.

The opposite view says that token prices are entirely sentiment and narrative-driven. This is the old and battle tested way of looking at crypto assets. The bigger the idea, the more mind share an idea has, the more money it will attract. If you adopt this worldview, you inevitably end up with the realization that infrastructure is the most interesting category of crypto assets to invest in. The bigger the infrastructure, the more surface it can touch, the more valuable it should be.

Fundamentally driven investors often accuse sentiment driven investors of being gamblers, while sentiment driven investors often accuse fundamentals driven investors of being midcurved (ie unintelligent) and broke. Strangely, both are true. Investing in things that do not have and will never have a business model, is gambling. But the reality is also that the only truly large outcomes crypto has generated have all been in infrastructure and completely unrelated to fundamentals.

While the philosophy underpinning each of these groups and the discourse around it is very interesting, I believe most of us should be asking ourselves a far more meta question. Namely, who is going to buy your tokens? Whether you think fundamentals matter or not, in order for you to make money, a lot of people are going to have to come in and buy the names that you have in your portfolio. There is no other way to make money.

There are a handful of things in crypto where we can point to a sustained, structural demand source. BTC has the ETFs. Solana has crypto natives. Memes and AI tokens have gamblers. These are buyers. There are also a handful of things that we know have sustained supply. High FDV tokens have VCs and teams. Highly incentivized networks and apps have operators. L1s have miners. A lot of projects have huge grant programs. These are sellers.

Coming back to the question of fundamentals vs sentiment/narrative, it’s becoming obvious that the extremes of both of these views are equally midcurved. Yes the fundamentals of some defi protocols are great, but what does it matter when in the whole world there is only a handful of crypto native hedge funds buying? And what does it matter that infrastructure projects like Celestia and Eigenlayer are huge, unique, incredible pieces of technology, when everyone ever involved with them is selling, with billions to go?

The far more interesting question for any given liquid token is what are the flows, and what will they be in the future.

Fast forward two years and we find ourselves in a market where new protocols are regularly launching their tokens at $5B+ valuations. New infrastructure projects like Monad and Eigenlayer are expected to trade at $20B+ valuations. While these projects are not pre-traction, they are certainly pre-revenue. Celestia is perhaps the best example of this, commanding at $15B valuation while also generating less than $100k in annual protocol income. For sake of reference, that’s roughly the same as what Snapchat is valued at, a company that does over $1B in cash revenue per year and is used by hundreds of millions of people every day.

To me as an investor, having been forged in the fiery fires of the post 2021 bear market, this signifies the end of the era of protocol businesses. I made my first learnings and investments with Heartcore at a time when it felt like the entire crypto universe believed that what mattered was the fundamentals. Focus on the fundamentals, focus on revenues, focus on building a protocol that could prove a post-SBF world wrong. Hell, even Ethereum has adopted a sound business model. But in 2024, none of that matters anymore. The industry has shifted back to emphasizing the visionary aspects of crypto. The long view on blockchains, the infinite theoretical potential they could bring, the infinite scalability, the promise of running the global economy on a decentralized technology, the promise of web3. We are back to valuing crypto on its ultra long term future promise vs what crypto is today or tomorrow.

There is a complex conversation to be had around why this shift occured and what the implications are. But I’m not looking do that with this article. Me writing this is more so a personal acknowledgement, perhaps acceptance, that the crypto that I had come of age in as a professional investor is gone. We no longer care about protocols being sound businesses. What we care about now is being so back. We care about creating lots of hype, attention, launching and riding our bags at absurd multiples. We care about the big picture. Let me also be very clear in saying that this is not a moral judgement on the industry, any investor, team or project. My job as an investor is not to judge, but to observe, react to the market and deliver exceptional returns to our LPs. I intend to continue doing that to the fullest extent. What this is, is me coming to terms with the fact that the industry has once again completely shifted, has turned into a different beast, and that the era of protocol businesses, that I had grown accustomed to, is for all intents and purposes over.

At least for this cycle.

With software products outside of web3, you only deal with this problem to a much lesser degree. You are unlikely to open source any core business logic that you’ve built, and even if you do, you are going to bet the farm on being the best at selling the hell out of premium services and support on top of it.

This is not how we typically operate defi products. With defi, everything you’ve built is out in the open. You can not rely on keeping your business logic proprietary, and you most likely can not rely on selling services on top of it to make money. Protocols are not purpose-fit to sell human services (though DAOs potentially could be).

This has led to a lively discussion of how and when a defi protocol makes for a defensible product / investment. My view is that protocols, especially in defi, can have okay-ish defensibility, and here is why:

Liquidity has network effects. Assuming that a competitive open-source environment leads to all protocols being equally efficient at processing financial requests, the protocol with the most liquidity is always going to be more efficient. The most efficient protocol is the cheapest to use, and will therefore attract the most users. Having the most users generates the most fees, which in turn attracts the most liquidity. The more users and LPs a protocol has, the more valuable it becomes. Liquidity has network effects.

Market dynamics therefore create a situation in which the only defensibility you have as a defi protocol, is your liquidity. Becoming #2 in the TVL race is more or less equal to losing in the long run, because you will become less and less competitive with #1 over time. Obtaining liquidity, and preventing churn, therefore has to have second highest priority, right after building a novel product.

There are also a few other factors to consider. You can also have weak / short term defensibility through factors like your brand, liquidity incentives and IP-gating your code. These are weak because they either only provide an incentive to use your protocol over the short term (brand, liquidity), or do not create a lasting moat around your protocol (IP-gating). These factors should be viewed as levers or acquisition tactics that enable you to rapidly create liquidity over the short-mid term, but not as something that can create lasting defensibility. Use them wisely.

The next question therefore becomes how you defend your liquidity after running out of short-term tactics. Realistically, there are only a handful of protocols in the market that have achieved this. I will focus on the example of Uniswap. With them, the road to strong network effects was both simple and complex: Be first to market, continuously evolve the product, match competing liquidity incentives when necessary, IP-gate for as long as you need to develop the next version of the product, be first to market with a new and novel product, repeat. This is akin to a flywheel for liquidity. As long as the flywheel is active and Uniswap maintains their pace, the protocol will remain defensible.

Obviously not all defi protocols will be able to implement the same type of flywheel. Uniswap’s flywheel was also certainly amplified by them being first to market. Your best bet might be to be first to market with a novel new mechanism. Yet some protocols were not first and still managed to become the dominant player in their niche. These are tough problems to think about, and something that I want to spend time on in a future piece. But over the long run, all roads lead to the same conclusion. The only way to build a lasting defi protocol is to amass, maintain and defend the most liquidity. In defi, your liquidity is your moat.