First and foremost, I want to make it clear that this article does not endorse or promote the usage of Friend.tech or key trading. I have personally tried the app, but I no longer use it, and I do not hold any keys. In fact, I believe it to be nothing more than a typical crypto Ponzi-like cult, as I have previously discussed in 👉 my post on X.

These are some other interesting researches about how pozi is Friend.tech:

👉 @macrocephalopod 👉 @KyleReidhead

Friend.tech operates on a simple ponzinomic: users can acquire keys (previously known as shares) of specific Twitter accounts to unlock access to their exclusive chat. It's important to note that these keys are not ERC20 tokens or NFTs, and they cannot be transferred. They are exclusively purchasable through the Friend.tech smart contract. Furthermore, the value of these keys is not fixed; instead, it fluctuates in accordance with a bonding curve formula 👇

$$K^2/16000 * 1 ETH$$

(K = Total keys in existence for the Twitter Account selected)

The formula dictates that the ETH buying price for keys is automatically determined as K (Key Total Supply)^2 divided by 16000, while the selling price is calculated as (K-1)^2 divided by 16000.

While the Friend.tech app on top of the bonding curve is a classic ponzinomic, the technology behind it introduces a clear-cut use case for the bonding curve that has the potential to revolutionize the DeFi and NFT landscape!

The Bonding Curve is the interesting part of the story

Before Friend.tech in the Ethereum ecosystem, we only experimented with the bonding curve in some ICOs, for years, a few projects experimented with it with low levels of adoption and success, and most of them are not even alive today.

Friend.tech is the first post-ICO success case of the bonding curve usage, and behind the application itself, it demonstrates that a bonding curve for mint/burn can be a highly successful strategy for a lot of business cases.

In DeFi, various trading mechanisms have emerged for NFTs and ERC20s. However, they all grapple with significant liquidity and loss issues, making it challenging for projects to grow and maintain adequate on-chain liquidity. As a result, users often end up holding assets that lack market liquidity, Let deep into it:

Automatic Market Makers (AMM):

An ecosystem that has risen with Uniswap V1, AMMs are pools of two assets equilibrated by a formula:

$$X*Y=K$$

(X = Token A amount | Y = Token B amount | K = Constant)

Based on the AMM formula after every trade K must never change to achieve equilibrium. Example: A liquidity pool has 1,000 ETH and 1,000,000 USDC (K = 1,000,000,000), giving a price of 1 ETH = $1000. If a trader buys 5 ETH from the pool, they'd leave 995 ETH in it. To keep the pool's balance, they'd need to add about $5,025.13 in USDC. After the trade, the new price of 1 ETH would be roughly $1,005.03.

👉 Here is a simple video to explain this process from @gabrielhaines on X

In AMMs, users add liquidity to a pool and earn trading fees from transactions. However, a limitation arises: liquidity providers can experience Impermanent loss (IL). This loss occurs when there's a significant shift in the pool balance between assets X and Y due to a price surge or drop, leading to a potential value loss compared to simply holding the two assets. In fact in a study from REKT, in Uniswap V3 more than 50% of liquidity providers are in a loss.

Over the years, AMMs have evolved in attempts to address the IL issue. Innovations include multi-asset pools like Balancer, NFT-powered pools such as Sudo, and custom range curves like Uniswap V3. However, the problem persists. In fact, many projects depend on team-provided liquidity or incentivize users to add liquidity through farming.

Conversely, AMMs excel in stable trading like Curve, which involves trading between assets that maintain similar values 99% of the time due to minimal price fluctuations.

Another challenge with AMMs is liquidity itself. The more liquid a pool is, the cheaper the swaps. In contrast, pools with low liquidity cause traders to incur an additional cost known as Price Impact. This cost increases based on the amount swapped and the available liquidity from LPs. This leads to further complications when a token operates across multiple sidechains and L2s. Additionally, projects with more than one token face challenges due to fragmented liquidity.

Order Books:

Traditional order books, commonly used in NFT trading, don't face the same liquidity challenges as AMMs. However, they have a more severe problem: liquidity is solely based on orders. This results in a pronounced liquidity shortage for projects, slowing down trading.

Many have likely encountered the frustration of holding NFTs they can't sell due to a lack of orders. Furthermore, orders offer limited liquidity power. Most are stored off-chain, and on-chain orders are cost-prohibitive. This makes it very difficult to develop decentralized applications, such as DAOs, Farming, or Collateralization, atop this type of liquidity.

Is Bonding Curves the new big thing?

The bonding curve LP approach, unveiled by Friend.tech, presents a groundbreaking design suitable for numerous assets in the crypto realm. It's particularly beneficial for multi-asset projects, shielding them from the challenges of liquidity erosion.

Contrary to conventional methods, Bonding Curves eliminate the need for external liquidity or order books, offering projects a streamlined strategy to ensure liquidity for their assets.

Using Friend.tech as a case study, a Bonding Curve has the ability to mint and burn keys. The value of these keys varies depending on the total number of keys currently in circulation. When a user acquires a key, the Ethereum used isn't funneled to a liquidity provider or another participant. Instead, it's retained within the Bunding Curve, ready to reimburse users who opt to sell their keys later on.

This mechanism guarantees authentic liquidity without any intricacies. Furthermore, it assures holders of the ability always to liquidate their assets via the Bonding Curve.

What's more, Bonding Curves offer a high degree of adaptability. They can be tweaked to modify the rate of price changes, either accelerating or decelerating them. By adjusting Bonding Curves, developers can also establish a supply cap and implement a royalty system. Notably, this royalty is HARD-CODED, ensuring it's applied every time an asset is minted or burned, rejuvenating the NFT sector.

To provide a clearer picture, let's delve into a hypothetical scenario separate from Friend.tech:

Imagine an NFT collection employing a Bonding Curve for its minting process. The developers configure a maximum supply of 10,000, a 5% royalty, and a pricing formula that starts at 0.001 $ETH and escalates to 50 $ETH.

In this context, the Bonding Curve's mint/burn mechanism promotes more active trading of the NFTs. This setup grants arbitrageurs the opportunity to reconcile market values with mint/burn values, provides users with a safety net against significant losses by allowing them to burn, and ensures the collection's creator continues to earn royalties, even when platforms like Open Sea or Blur bypass them.

This concept can be added to ERC20s and can be powerful for multi-tokens projects, the projects that suffer the most from the AMM/Order design of DeFi.

Delving deeper, Bonding Curves can be seamlessly integrated with DAOs or community-operated systems to adeptly manage an asset's supply. This can be done by either expanding or contracting the supply, adjusting the price for minting and burning, or even introducing a novel automatic earning mechanism.

In essence, by embracing the Bonding Curve, the DeFi industry can address:

✅ Fragmented Liquidity

✅ Liquidity Erosion

✅ Rogue Pull Issues (when teams withdraw liquidity from AMMs)

✅ Royalty Challenges

Is the bonding curve the next piece in DeFi to reach capital efficiency as never before? Bonding Curves will be a significant topic of discussion in 2024. Eagerly anticipating its evolution!

The Other Thing…

Another intriguing feature of Friend.tech is the non-transferability of Keys. While some might view this as a limitation, a deeper understanding of the crypto ecosystem reveals it to be a strategic decision.

A significant reason behind the surge in NFT popularity and the substantial funds raised through NFT drops is the absence of clear legal precedents in the NFT domain. Essentially, NFT drops function similarly to ICOs (Initial Coin Offerings). However, until 2022, regulators remained largely silent on this matter, allowing numerous entrepreneurs and anonymous entities to capitalize on drops without legal constraints. This dynamic is emblematic of the perennial "cat and mouse" game in the crypto world: as long as regulators lag behind, innovative fundraising methods will flourish and often achieve cult status.

Friend.tech's like approach of minting non-transferable assets combined with the implementation of a bonding curve could very well become the next major trend in the crypto world. Given the absence of legal precedents for non-transferable assets, this strategy opens the door for a plethora of new applications, both legitimate and questionable, to adopt this framework.

Consider the concept of a Bonding Curve DEX, which aligns with the core functionality of Friend.tech Contracts. Such a decentralized exchange can cater to a myriad of innovative use cases. It can facilitate the minting and trading of tokenized assets, NFTs, and ERC20 tokens. Furthermore, it can serve the gaming industry by handling in-game items, a sector that's vast yet plagued by fragmented liquidity. The potential applications are vast and varied, underscoring the versatility of this approach.

Friend.tech is a terrible application and a terrible ponzinomic, however, it has inadvertently (or intentionally) stumbled upon the next significant innovation in the crypto space.

Is this prediction accurate?

Time will be the ultimate judge. But it's certainly worth keeping a close eye on the development and trajectory of such decentralized applications!

👉 Follow me on X

The crypto industry is teetering on the brink of a covert seismic shift. During the last bull run, 'Decentralized' was merely a buzzword. Everyone in the space was busy pumping and building cult-like followings out of thin air. It was the era of complicit silence.

However, the Tornado Cash case has just set a precedent, a precedent that finally brings a touch of regulatory clarity. It introduces a new mantra for builders in the space - RESPONSIBILITY.

Let’s dig into it!

The Big Precedent

Aug 2023, the United States Department of Justice published this indictment from the Tornado Cash‘s developers Roman Storm and Roman Semenov trial. And successfully, the U.S. Attorney's Office, Southern District of New York published this Press Release. The legal resolution from the Tornado Cash dilemma can drastically change the space as we know it.

Tornado cash developers, for the first time in the dapp ecosystem history, are charged for Helping Hackers Launder $1B, Including Infamous North Korean Attacks, not primarily because they built Tornado Cash Privacy Tools, but because Tornado was un upgradable contract and even if “Ruled by a DAO” developers had the keys to update it and comply to the requests of the OFAC. But they didn’t update it to block terrorists by using the app and on the contrary they publicly said they could not actually control it.

👇 Quoting the indictment:

The defendants and Pertsev, the Netherlands third dev, recognized that they did not incorporate KYC or AML programs as required by law, and so they made misleading public statements to minimize their ownership and control of the Tornado Cash service, and their operation of the Tornado Cash service as a business from which they expected to generate substantial profits,"

This recognition included a message that Storm sent Semenov saying they "should never ... talk as if we own tornado,".

👉 Full Story in my article “How Crypto Privacy Battles Will Redefine Your Tomorrow”

Why is it important?

The Tornado Cash precedent highlights the future of US law in Decentralized Application cases, taking advantage of teams who have upgradable control over the applications without recognizing DAOs as a thing.

With this precedent, U.S. lawmakers can exploit the weak point of most DAOs and projects in the space - the team. They can pressure teams to make updates (if they're able) without the consent of the DAO, undermining the authority of most DAOs. This is particularly true for DAOs that are essentially off-chain forums with snapshot voting, where teams promise to relinquish control to holders. This situation reveals that real control has always resided with the teams.

In this article, I’m going to explain why upgradability in smart contracts makes dapps apps and speculate about the implications for lawmakers in the near future.

Contracts Upgradability Debate

Since the invention of Ethereum, Smart Contract development has evolved, experimenting with different structures and standards.

In the early days developers got smart contracts as not mutable executable code on Ethereum, like persistent script. But in 2018 applications started to idea to explore upgradability in Smart Contract. Most applications and teams reacted positively to the upgradable idea, giving good actors the possibility to solve bugs and sometimes save people money.

Protocol upgradability at first glance is a way to also update existing applications without the need to ask users to move their money and spend on gas fees.

From a developer perspective, it is a strong win-win, but we’re in crypto. This is not a regulated Web2 environment, we’re in the unregulated Wild West of Web3, with 90% of Off-Shore companies and anons behind our money flow. In this wild west “Protocol Neutrality” is fundamental and power to teams is a huge point of failure, EVEN if they’re trying as much as possible to act in goodwill. There is no shared goodwill here!

Protocol Neutrality

Protocol Neutrality is the fundamental structure that a Smart Contract should respect to be called a Decentralized Application and live in the Ethereum Network resilient from off-chain attackers and securing its utility from bad actors, politics, rogpulls and censorship.

To explain as easily as possible the points of failure of the concept of Upgradable Contracts, I take as an example the most decentralized applications in the space, Uniswap V1

🦄 Uniswap V1 has 0 upgradable features and is the simplest AMM existing in the space:

• All Liquidity Pools (LP) are simple ERC20 - ETH

• No need for complex routings between LP, the maximum routing possible is ERC20 A > ETH > ERC20 B

• A simple forkable interface is needed with minimum off-chain computation to route tokens.

• It doesn’t depend on any other protocols to work, and it does not rely to oracles or any external source of data to work.

👉 Github Repo

👉 Etherscan

By this contract What you see is what you get:

• Users can predict 100% what happen by using it or storing their money on it

• Nobody can change the rules

• Nobody can steal LP money

• Nobody can stop it from working

• Nobody can stop anyone from using it

• Nobody is responsible for what happened in the contract

The only point of failure and censorship attack can be done by the entity that hosts the interface to help users interact with the Uniswap V1 contract, but in this specific case:

• Anyone can fork the code and host it locally without the need for complex computational resources.

• Even if states are able to censor public RPCs users can set up an Ethereum Node for ~$100 and use the app locally.

Uniswap V1 is the best example in the space of Protocol Neutrality, it’s smart contracts are free from countries, policies, or bad actor control.

This setup let Uniswap Labs act as a good player in the space, both legally and technology, and also this setup let Uniswap, especially the V2, the protocol with more applications built on top.

👉 I wrote an interesting Paper back in 2020 about the “Responsible DeFi Manifesto,” underlining the risks of building on top of upgradable applications. At the time, the buzz “DeFi Lego” was very popular, and naive people and builders lost billions on it.

In fact, Uniswap Labs always acted super smart in this direction, understanding the implications of Protocol Neutrality since the beginning and approaching every innovation via deploying new versions and letting users decide what version to use instead of updating the rules on top of them.

Points Of Failure

When a team decides not to respect “Protocol Neutrality” by leaving points of failure like Oracles or Upgradability, the team obtains an amount of power on the money of its users.

Until now the space never had a legal precedent to say “Power = Responsibility.”

With the Tornado Cash precedent, from now on, IF a team has the keys to make upgrades, they MUST follow what regulators want and have full responsibility for what happens in their application.

Upgradable contracts give countries a fundamental point of attack, the team members, and the companies who host the privilege of the applications. It is safe to say to any reader to DYOR and pay attention to using any upgradable contract from now on.

DAO Cults

The DAO’s “Decentralized Autonomous Organizations” concept, by definition, means an organization that is Decentralized (On-chain) and Autonomous (Must work independently from external actors).

In the crypto space, this concept has largely failed, turning the idea of DAOs into a mere lure to attract investors and create tokens. Teams often market DAOs as a method of outsourcing decision-making, but in reality, they retain control over app updates, treasury, and assets.

While DAOs began as an innovative concept, they have now devolved into a cult-like phenomenon centered around community decision-making, which in reality, is virtually non-existent. The stark truth is that no existing DAOs are genuinely decentralized or autonomous.

Here are the common DAO models:

Snapshot Model: Trust-based Governance

A commonly adopted governance model for DAOs in Ethereum is the "snapshot" model, where a small group of entrepreneurs host a multisig wallet and promise to adhere to the results of off-chain voting. This form of governance places full trust in the team to follow the community's decisions. However, it introduces a significant risk of failure as it relies heavily on human decision-making and has no legal enforcement mechanisms to ensure that the team acts in the community's best interest.

Moreover, the snapshot model of governance is akin to an app being controlled by a proprietary off-shore server of a company, promising to act as users decide on the platform.

Castle Model: Upgradeable Features Governance

Another governance model is the "castle" model, which includes upgradeable features in the protocol that only activate if a certain voting threshold is met in a proposal.

At first glance, this approach seems to foster flexibility and adaptability within the protocol. However, permitting upgradable features, regardless of who possesses the upgradeability rights (team, delegators, or holders), introduces a significant point of failure and potential vulnerability for the entire protocol.

This is contrary to one of the fundamental principles of blockchain, which is that using a protocol or contract should only involve interacting with the contract as it currently stands. Allowing functionality upgrades in this approach enables the modification of usage terms after interaction, leading to a total loss of trust in the contract as written.

Risks of Current Governance Systems

Besides being expensive to maintain, these systems often fail to generate added value for investors and the team outside of an excuse to create a token. Particularly with upgradable systems, they risk undermining the protocol's credibility, potentially leading to its downfall.

The DAO idea currently is just an expensive failure, from a way to explore how to get people involved to an excuse to have a token and hoping to have fewer legal consequences in upgradable contracts, but this is not how the law works.

DAO Failure

Most founders who have experience with DAOs agree that the best governance approach is to minimize governance or to have no governance at all for the future of the decentralized applications they've built.

👇 An example of this claim is from Brently.eth, former ENS:

“When it comes to protocol governance, DAOs should not be a way to "get people involved," with low value activity done inefficiently with a DAO to show it's "active" or "engaging the community," but the opposite: they should do the minimum required for the protocol and no more, with the goal of eliminating themselves eventually if possible. I call this "DAO minimalism".

Web3 protocol governance should be the exception rather than the norm. The whole point of web3 is to get rid of arbitrary gatekeepers. Web3 is about protocols that just work exactly as expected. Thus, the best web3 protocol governance DAO is the one that doesn't exist because the protocol is self-running and has nothing to govern….

…The worst protocol governance DAO is constantly asking its token holders to vote on things that didn't require a DAO to accomplish.

The least bad protocol governance DAO is active only occasionally for important things that require the DAO.

The best protocol governance DAO is one that doesn't exist.

the end

👉 Entire Post on 𝕏

Furthermore, all of the governance models place the team in a vulnerable position as they become legally responsible for managing funds and determining the protocol's future direction.

This increased responsibility makes them an easy target for regulators in various jurisdictions to exert control over. The Tornado Cash dilemma sets a legal precedent for regulators to sue DAO actors and managers.

Unlike token holders, regulators understand that no real power is vested in these DAO tokens.

Ecosystems Cults

The real issue in the crypto space is that during every bull market, people become blinded by excitement and the pressure to maximize gains before the cycle dumps. They often overlook the importance of decentralization, intrinsic value, and legal considerations. Instead, they create, share, and pump cult-like investments for short-term gains.

• In 2016-17, with White Papers and ICOs

• In 2020 happened with NFT-Art

To read the full story of the rise and fall of the NFT Art bubble, I wrote about this in one of my early articles:

https://mirror.xyz/basedtoschi.eth/iU9LjtkJ1nJvSZ6SUegMnb-CmJvgBjL_UUghIXbNORA

• In 2021 happened with Airdrops, DAOs and Memes

I recall the discussions in the space around 2019-2020, which were largely centered on the existing technology and the projects associated with developing new tech. However, as the bull run began attracting a broader audience, NFTs and meme projects with no technological foundation or plans started to garner most of the attention. Investors realized that due to the pump-and-dump nature of Bitcoin that fuels price volatility, along with regulatory uncertainty, it's not lucrative to invest in long-term projects. Instead, short-term cult-like investments became more profitable.

I discussed deeply this concept in this article:

https://mirror.xyz/basedtoschi.eth/uSkk1grZ_d_Bm1H0IzVYYKjXTu7dHkyKqm2ssD4Gtxs

More than ever before even now, the crypto market is full of new ways to sell to people always the same ponzinomic, but with different names, as an example the friend.tech trend at the moment is the same pasta over and over again as I explained in this tweet:

👉 𝐀𝐟𝐭𝐞𝐫 𝐚 𝐦𝐨𝐧𝐭𝐡 𝐰𝐢𝐭𝐡 𝐟𝐫𝐢𝐞𝐧𝐝.𝐭𝐞𝐜𝐡, 𝐈 𝐩𝐫𝐞𝐝𝐢𝐜𝐭 𝐚 𝐫𝐨𝐜𝐤𝐲 𝐩𝐚𝐭𝐡 𝐚𝐡𝐞𝐚𝐝.

Why have we reached this innovation black hole?

Regulatory uncertainty is one of the key factors. This is largely due to countries' inability to assign real responsibility to teams who maintain control of an application that purports to be decentralized, or to those who promote DAOs as decentralized entities, or even to those who launch unbacked tokens/NFTs with the sole intention of attracting investments from friends and family, only to dump them later.

Web2 or Web3?

Long story short of this huge article:

Since I've been in the space, I've advocated for the idea that if smart contracts are upgradable, regardless of whether it's via a DAO (which is even worse in this case), such applications should not be considered web3 but rather web2.

This is because if a small group of people can exert power over others transacting within an application on Ethereum, they must adhere to their country's laws and bear full responsibility for what happens in their app.

From my perspective, a situation like Tornado Cash was bound to occur sooner or later, which is why I've always promoted the idea of DAOs managing ONLY Application Earnings, with fixed executable via vote choices that can operate even without voting, or better yet, NO DAO at all, but for sure NO UPGRADABILITY!

Following the Tornado Cash dilemma, countries now have the opportunity to clarify, through regulations, the responsibilities of crypto apps based on the special powers that teams or small groups of individuals possess.

The clear lawmakers position is: “If you can update the app to comply YOU MUST and you’re responsible for what happen in your contracts if you don’t”

This will drive technological advancement by encouraging builders to create truly Decentralized Applications like Uniswap V1 or Centralized Applications, without misleading consumers about their level of decentralization.

Clear Regulations and Long Term Success

The Tornado Cash situation looks like an issue (for sure for a lot of companies in the space who taken advantages till now of “no regulations”) but in the long run is the most succesful precedent in the ecosystem to let builders back to build!

The Tornado Cash situation marks a significant stride towards regulatory clarity, definitively outlining the responsibilities that crypto teams bear for their applications.

I'm eagerly anticipating the growth and exploration of killer apps and use cases in this new industry, following this latest dark chapter of Ponzi-like schemes.

In the crypto space, we must always remember that if we continue to build Ponzi schemes and cult-like followings without real utility, the bubble will inevitably burst, leaving us all rekt.

🔮 Follow me at @baseToschi on 𝕏

Why Privacy

Blockchain technology, with its secure and transparent transactions, is a cornerstone of the digital age. However, its public ledger can expose one's entire financial history, leading to potential risks. Companies could exploit customer spending patterns, thieves could target victims with high-value transactions, and nations could monitor and potentially manipulate citizen spending. Without proper privacy tools, a transparent blockchain could lead to extortion, surveillance, and unprecedented public data exposure.

Examples:

Cyber Extorsion

Tod uses its Ethereum wallet to purchase online products, and hackers track website data and create deeper and deeper profiles of Tod, Using data leaks or even government tax data the hackers can quickly know the emails and personal data of Tod, starting phishing attacks until they stole Tod's money or even worst, extort Tod to do several actions with its wallet, like illegal trafficking buy a specific coin and more.

👉 UNC School Of Law: La Crypto Nostra: How Organized Crime Thrives in the Era of Cryptocurrency

In Real Life Extorsion

The unlucky Tod visits a clothing store and purchases a new pair of jeans using his Ethereum Wallet. Amanda, the store manager, can access all of Tod's transactions and gain insights into his private activities and history, using this private data without adhering to any Privacy Law. The situation worsens as Tod typically shops near his home, which could potentially allow thieves to determine his residence. They could then follow him and attempt to steal money from his ledger or even operate like a mafia, extorting money from all the shops and people in Tod's neighborhood. Or Tod can even be murdered if it sells a specific token or NFTs.

👉 NYT: Bitcoin Thieves Threaten Real Violence for Virtual Currencies

👉 People: Missing Crypto Millionaire, 41, Found by Children Dead and Dismembered in Suitcase in Argentina

👉 CVT News: Ontario crypto king apologizes to investors in video while appearing badly beaten from kidnapping

👉 Independent: Teen crypto trader and investment influencer found shot dead in his Porsche

👉 I&T Today: 4 Crypto Billionaires Found Dead Under Mysterious Circumstances During FTX Collapse

Entities Extorsion

The unlucky Tod is captivated by Application A and wants to use it with his Ethereum wallet. However, Application B wants to stifle competition and discourage the use of Application A by creating economic disincentives for its users. In the real world, we have anti-trust laws to prevent such practices, but in the crypto world, this is starting to become common. Tod should have the ability to anonymize himself and use Application A without leaving any trace for Application B to exploit.

👉 Boxmining: Blur Increases Loyalty points if users don’t list NFTs in Open Sea

👉 Coin Telegraph: Friend.tech threatens to punish users if they use copycat apps

Country Extorsion

The unlucky Tod lives in a country that wants to use the information stored in the blockchain for a Social Credit Score system (if you're pro-Social Credit, this article and my thoughts may not align with yours). The country might even create economic and legal incentives to steer its citizens towards spending their money on a particular application or buying specific products. This would effectively strip citizens of their freedom to choose the products that best suit their needs.

👉 YT: Self-explanatory clip from a Valuetainment video

These are just some examples of what Blockchain payments without privacy tools can empower in the years to come.

Why The privacy situation is critical in crypto and not in traditional banking?

In Western Civilization, the banking system safeguards the privacy of people's funds by keeping transactions confidential. However, in recent years, particularly in Europe, regulators have started facilitating the transmission of user transactions to national commissions to combat terrorism or tax evasion.

Even though banking doesn't completely preserve privacy between individuals and the state, it does maintain privacy among individuals.

Moreover, using banks as custodians for assets significantly complicates the process for thieves attempting to extort money from individuals. In contrast, in the crypto world, users have direct access to wallet funds without intermediaries, leading to a new set of challenges. These issues can only be addressed if countries participate in the conversation and strive to ensure taxpayer security and privacy, rather than solely focusing on taxation.

History

Since Bitcoin and its private ledger came along, people discussed the value of privacy, the implications of a public ledger, and its risks. Even Satoshi stated that this could become a problem.

As the crypto ecosystem evolved, people began using Centralized Exchanges in an attempt to anonymize their wallets and enhance their security. However, Centralized Exchanges have a significant issue. These tools used for privacy depend on a centralized entity that holds highly sensitive data. These entities can either fall victim to data breaches or misuse their power to extort users. In the worst-case scenario, they could even collude with terrorists by sharing false data about wallets and reserves, leading institutions to flag the wrong wallets. As such, there's been a momentum shift towards enhancing privacy in public blockchains through advanced technological solutions.

One of the earliest substantial privacy measures that gained traction was CoinJoin. This method allowed small groups of users to pool their coins in a single transaction, making it challenging to trace specific input-output pairings on the chain.

Monero expanded on this concept by employing a linkable ring signature mechanism, enabling users to blend their coins with a select few, eliminating the need for interactions outside the blockchain.

As technology evolved, the participant pool in each blend expanded, amplifying each transaction's potential origin points. Yet, these recurrent small-group blending methods weren't devoid of data vulnerability.

The next significant step in cryptographic privacy came with the integration of universal zero-knowledge proofs, showcased in blockchains like Zcash and smart contract systems like Tornado Cash. These systems enabled the potential origin of each transaction to encompass the entirety of prior transactions. The industry and academic sectors often dub these zero-knowledge proofs as "ZK-SNARKs."

Tornado Cash emerged as a decentralized and encrypted privacy tool for Ethereum users, with zero reliance on third parties and 100% security.

👇This is when things started to get weird👇

https://home.treasury.gov/news/press-releases/jy0916

I’ll never forget that August, 8 2022, I was driving to San Sebastian, Spain for a small surfing vacation, I stopped in a gas station, unlocked my phone to read some news and my twitter timeline was full of posts about the Tornado Cash sanction.

Indeed, following this, GitHub cancelled and blocked the accounts of anyone who interacted with the Tornado Cash repository. $USDC blocked the Tornado Cash contract, Infura and Alchemy were compelled to block RPC to the Tornado website, .limo ceased hosting tornadocash.eth and GitCoin removed the TC grant page.

https://twitter.com/TornadoCash/status/1557048526986780677?s=20

Two day after, the Tornado Cash founder Alexey Pertsev was arrested in Amsterdam by Netherlands’ Fiscal Information and Investigation Service (FIOD) without any sentence and any possibility of defence in front of a jury.

👉 Bitcoin.com: Suspected developer of crypto mixer Tornado Cash arrested

Based on the evidence available at the time, Alexey Pertsev's only action was deploying open-source code on a public virtual machine (Ethereum). While it's clear that North Korean terrorists used Tornado Cash (TC), this in no way implicates the TC developers who published an open-source public good for privacy. This incident raised significant concerns among Web3 builders, sparking fears about the potential illegality of writing open-source code and speculation about who might be the next target.

👉 Tech Crunch: Crypto Community Responds to Tornado Cash Sanctions, Privacy Advocates Say 'There Are Many Legitimate Reasons to Seek Financial Anonymity'

The influence of the FOMC over companies and WEB3 app providers spread faster than ever before. Some apps introduced (and later removed) a FOMC-compliant interface for their smart contracts because the founders were afraid of facing the same unfortunate and unjust fate as Alexey Pertsev.

I'll never forget the palpable sense of injustice that permeated the ecosystem, especially coming from the U.S., a country that, in theory, should uphold privacy and freedom of speech.

👇This episode from Bankless resume the mood of crypto builders during that time👇

In March 2023, Ethereum's hero, Ameensol, launched PrivacyPools, a solution for Tornado Cash to comply with regulators. Essentially, it extends the Zero-Knowledge (ZK) proof of Tornado Cash to verify that the sender's wallet involved in the privacy transaction is not one of those sanctioned by the FOMC, while still maintaining privacy for the sender.

👇Here you can see it in action👇

https://twitter.com/ameensol/status/1632089405220442116?s=20

This idea was initially suggested by Vitalik Buterin, soon after the FOMC sanction to Tornado Cash.

👇 Here an infographic 👇

https://twitter.com/MessariCrypto/status/1699432461464141905?s=20

In August 2023, other two Tornado Cash developers, Roman Storm and Roman Semenov were arrested and charged with facilitating terrorism through wash trading. This is an unprecedented question for the decentralized ecosystem. Lawmakers have set a precedent where any smart contract developer can be held accountable for crimes committed using their application.

👉 Coin Desk: Tornado Cash Devs Charged With Helping Hackers Launder $1B, Including Infamous North Korean Attacks

The U.S. Department of Justice (DOJ) indicted Roman Storm and Roman Semenov, the developers of Tornado Cash. The DOJ alleges that they designed Tornado Cash with various privacy features, knowing that their service could be used for illegal activities. Furthermore, the DOJ claims that despite their public statements to the contrary, Storm and Semenov maintained control over Tornado Cash. This control could have been used to implement transaction monitoring or other anti-money laundering features to prevent illicit use of the service.

👉 Justice.gov: US Gov Roman Storm and Roman Semenov sentence

The US regulators, for the first time charged a team, because they have (even if via governance proposals) the possibility to update the network and make Tornado Compliant with the FOMC. This also raised concern for every team who run upgradable DAOs and their legal implications against anons votes.

But, you know… I always sad that upgradable contracts should be regulated and this is the precedent. Upgradable Contracts is the point of fail for an application and makes founders in a tricky situation. Sad but true! 👇

https://twitter.com/BasedToschi/status/1619950633108512773?s=20

Vitalik Buterin with ameensol, Jacob Illum from Chain analysis, Fabian Schär and Mat Nadler double down in the conversation with a Paper:

👉 Blockchain Privacy and Regulatory Compliance:Towards a Practical Equilibrium

In this paper, they described Zero-Knowledge proofs, the importance of privacy in blockchains, and how solutions like Privacy Pools are crucial for both builders and regulators to find common ground.

https://twitter.com/ameensol/status/1699424914229321966?s=20

Countries

The response from countries, particularly in the West (the champions of Freedom and Human Rights), to crypto, privacy, and regulations has been disappointing. These countries are implementing complex structures to track the crypto holdings of their population and levy taxes on them. However, they are not providing clear regulations to help taxpayers maintain their privacy on-chain, nor are they establishing rules and standards for entrepreneurship. Furthermore, they are doing nothing to curb the scams that persist in the market, thereby failing to protect the money of inexperienced taxpayers.

The situation get worst from the facto that Countries require more and more data from On-Chain transactions about citizens, let them to be more and more at risks of extortion, surveillance, and public data exposure, but without help them in any way possible.

I criticised several times western countries for:

🔮 In this tweetstorm from Nov. 2022, I strongly criticized why countries aren't defending taxpayers and why they aren't taking any action to regulate Centralized Exchanges (Cexes)

🔮 Here I express how Western Countries are stressed to regulate tax but they don’t even try to build simple regulation to secure tax payer money

👇Long Story Short 👇

https://twitter.com/BasedToschi/status/1592521517518446595?s=20

What we have learned from the TC situation?

• If you can upgrade the contracts (no matter if via DAO or not) developers are legally responsable if the contracts are use by terrorist or wash traders.

• We still don’t know the governament approach in a situation without upgradability features.

• Regulations are still unclear.

• If terrorist use your app to wash-trade you’re legally colluded with them.

• In this situation, anyone who operates a secure and permissionless application could potentially face imprisonment in the blink of an eye.

What’s next?

All Ethereum enthusiasts MUST vocally demand that governments provide clear regulations and tools to preserve privacy. This will allow builders to create privacy-focused and decentralized solutions for their users, without the risk of facing legal repercussions due to regulatory uncertainty.

Solutions like PrivacyPool from Ameensol have the potential to significantly alter the landscape, striking a balance between anti-terrorism needs and privacy for end users. However, given the current market situation, any DAO or upgradable dapp is at risk based on this precedent. Western lawmakers must quickly decide whether they want to prevent a mass surveillance scenario, which could lead to a dystopian future or even serve as a source of data for competing countries.

Currently, scammers are allowed to steal billions in taxpayer assets, while privacy advocates and builders of secure smart contracts, who have zero possibility of stealing customer assets, face the threat of imprisonment. They live their entrepreneurial journey with constant anxiety about the legality of doing the right thing for their users' security.

A Western Civilization that has grown over decades by incentivizing innovators and imprisoning scammers is becoming the exact opposite in the crypto space.

Crypto enthusiasts, spread the word. Regardless of who your current president is, they will change in the coming years. However, your public transactions and your data will remain forever, potentially becoming the biggest problem of your future. Let's share this message and take action!

🔮 Follow me at @baseToschi on X

How everything started

Before 2019, the NFT market was stagnant, to the point where the Open Sea team even considered shutting down the company. However, in the background, Crypto Punks started gaining momentum. Simultaneously, a new culture was on the brink of exploding in the crypto world - Crypto Art.

Crypto Art played a crucial role in shaping what was to come next. New players like Super Rare and Rarible entered the market, spreading the concept of Royalties.

Royalties, in 2020, became the transformative tool that led to the growth of the industry as we know it today. Royalties are a marketplace deal where a percentage of the transaction is sent to the Royalties Owner.

This concept was initially designed for artists, but it quickly became a successful business model for Blockchain games, Profile Pictures (PFPs), and every project using ERC-721 or ERC-1155, with a few exceptions like ENS.

As the industry grew, the NFT space gradually shifted from artists to brands like Bored Apes, Clone X, Azuki, and more. These companies discovered how to monetize this ecosystem by creating recognizable brands, launching airdrops, hosting events, designing adventures, and offering In Real Life (IRL) redeemable contents.

To be clear Yuga Labs was able to earn more than 31,000 ETH from BAYC, more than 20,000 ETH from MAYC, more than 6,000 ETH from BAKC, more than 8,600 ETH from Meetbit, more than 30,000 ETH from Otherdeed for Otherside and more.

Yuga Labs’ total earnings since April 21 (ONLY from Royalties) combined are more than 95,600 ETH (~$178M), without taking into account mints and some smaller collections/events.

The Importance of Royalties

The royalties economy emerged as the driving force of the NFT space, transforming it into a royalties-centric space that also features art, rather than an art space that simply incorporates royalties. This economic model is what attracted major companies like Adidas, which collaborated with GMoney, Punks, and Yuga Labs to create Adidas Metaverse redeemable products (of which I am a holder).

The royalties model also piqued the interest of AAA gaming companies like Ubisoft, which is exploring the ecosystem for its gaming items. Fashion giants like Gucci and influencers like Gary Vaynerchuk and even Donald Trump have also been drawn to this model.

The 🐘 in the 🚪

Guess What! Royalties in NFTs were just a mental bubble with 0 reality behind it!

Yes! What happened was that an entire industry was born and flourished for two years, raising billions of dollars from VCs with in business terms nothing backing it.

In 2021, the Elephant in the Room was already there for every eye, but royalties became so normal and successful that nobody ever thought they could be out of the game in the blink of an eye. Nike bought RTFKT (CloneX creator’s company) for more than $1B, and AZ16 led a $450M funding round in Yuga Labs with a $4B valuation.

The future of these companies appeared incredibly promising. They had discovered a way to thrive in a new El Dorado of digital objects, brands, and limited-edition products.

HOWEVER… NO, AT LEAST NOT NOW :(

The entire concept of royalties, as we know it, never truly existed. It was merely a commonly used approach by marketplaces that was on the brink of extinction.

Allow me to explain why. It's simpler than you might expect.

NFTs are commonly based on the ERC-721 and ERC-1155 standards. Neither of them enforces or even mentions any kind of Royalty or Tax method.

This implies that when Yuga sets its royalties for BAYC to 2.5%, it modifies the status in the Open Sea smart contract. However, there is no guarantee that Yuga's royalties will be respected. This is merely a common grant model from Open Sea and a few other exchanges.

In fact, during the 2021 bull market, there was strong support from NFT holders for NFT creators, primarily based on royalties. NFT holders were reluctant to trade their JPEGs using DeFi integrations like NFT20 or Items, even though they could have traded them more cheaply and with better capital efficiency using Automated Market Makers (AMMs).

Even Sudo, a highly innovative AMM designed specifically for NFTs, missed out on mass adoption because it didn't respect royalties.

This unique relationship between NFT creators and their communities was quite rare in the crypto space, a space where anonymous users typically seize any opportunity to increase their earnings or arbitrage.

In fact, building a business based on the goodwill of anonymous users in the crypto space can work to some extent.

The Hacker - Blur

The NFT space managed to weather the bear market, maintaining a delicate balance between holders, creators, traders, and marketplaces.

However, in the midst of the bear market, when only a few were making profits and most were down by 90%, this equilibrium was on the brink of disruption. The only question was who would be the disruptor.

Blur emerged as the game-changer, executing a flawless strategy with perfect timing. They recognized that the era of royalties in the NFT space was drawing to a close.

The timing was crucial.

Had Blur been launched during the bull market, it could have ended up like Looks Rare - a short-lived Ponzi scheme enticing traders with the $LOOKS airdrop based on their trading activities.

Blur understood that their airdrop strategy could potentially devolve into a Ponzi scheme, with the token's value likely to decrease as more tokens were airdropped. However, they skillfully maneuvered through this challenge by taking sufficient time and implementing strategic actions to establish Blur Marketplace as a premier NFT platform before the market expectations for $Blur started to decline.

At the time of writing, Blur is the leading NFT marketplace, with more than 60% of the daily volume in the NFT space.

Let's delve into how Blur achieved its supremacy.

The Fees war

Historically, Open Sea enforced a 2.5% Marketplace fee + The Collection Royalties set (usually from 0.1% to 10%) on every trade.

Blur used perfect timing to market to dethrone Open Sea by building an NFT Aggregator designed for Floor Price trades and bulk orders with no fees and 0.5% fixed royalties.

The Blur move started with an ingenious airdrop campaign of the $Blur token, with loyalty points for Floor Price bidders and buyers and it built as much NFT liquidity as possible from it, but this was just the beginning.

This situation attracted numerous NFT whales who took advantage of the circumstances, making NFTs as liquid on Floor Price (FP) as never before. The timing was extremely impactful. Amidst severe bear market anxiety, many NFT holders decided to exit at a loss, and whales played a very complex liquidity game to increase the $BLUR airdrop.

Open Sea tried some moves to compete with Blur's aggressive strategy:

The first move was Open Sea 0 Fees for a limited time back in February, triggering Blur to add the mentioned offensive Extra “Loyalty” Rewards for those who don’t list in Opensea.

The second move was Open Sea Pro, in April, a Blur-like UX for OpenSea with the integration of Gem (An NFT aggregator OS bought a year ago). Open Sea Pro added tremendous powerful features for analytics, order bulks, and whales trades tracking, but still, Open Sea Pro today achieved only a small portion of the Market Share, even smaller than Crypto Punks and X2Y2.

In the meantime, Blur made NFT even more financials, introducing Perpetual Lending With NFT Collateral in May, extra points for Blue Chip bidding, and Trates bidding.

https://twitter.com/blur_io/status/1653101755809562624

Blur's strategy of introducing a variety of financial tools for NFTs underscores their role as financial products rather than art. This strategy effectively corners OpenSea by pursuing functionalities that OpenSea has been trying to avoid for a long time.

Simultaneously, Blur is exerting pressure on NFT Teams by capitalizing on their holders' desire to earn and arbitrage valuable $BLUR tokens. By dominating the daily volume in the NFT space, Blur forces NFT Projects to relinquish most of their royalties, essentially disrupting their business model.

This leaves OpenSea with no choice but to adapt in order to avoid risking its entire market share…

https://twitter.com/opensea/status/1692224335136633075?s=20

OpenSea has ceased to enforce creators' fees aka Royalties

This shift is crucial for the space as OpenSea was the last stronghold of the Crypto Art concept, as opposed to the DeFi-like NFT scenario. This update from OpenSea signifies the end of an era for the NFT ecosystem and indicates a capitulation from the industry as we've known it for years. Blur's vision for the NFT industry has triumphed, marking the end of the era of royalties.

Blur has catalyzed a transformation in OpenSea and the NFT culture, steering them away from the crypto art and royalties model. This has left OpenSea resembling a slow dinosaur without a clear direction, struggling to compete with the new king Blur, which has a decidedly more DeFi-oriented vision for the industry and its post royalties new opportunities.

However, Blur normalized the practice of not respecting royalties, knowing that in the NFT market, this approach would be more competitive and was bound to happen sooner or later.

Is it possible to roll back Royalties?

Enforce Royalties by NFTs contracts

New EIPs are there to let NFT creators manage their royalties directly in their NFT collections, having more control over Marketplace decisions like:

• ERC-6105: adds a marketplace functionality to ERC-721 to enable non-fungible token trading without relying on an intermediary trading platform. At the same time, creators may implement more diverse royalty schemes.

• ERC-721C: Built to extend and be fully backwards compatible with the existing standards, ERC721-C and ERC1155-C curb the problems of wash trading and puts the “Non-Fungible” back into NFTs by giving the creator the option to choose their distribution platforms and allow interactions from only those contracts and applications they deem safe and useful.

Both approaches are intriguing and can work to some extent. However, if they are not quickly adopted by most of the major players in the space, those who do adopt these standards at the moment may suffer from limited compatibility between marketplaces and reduced liquidity. This could result in the creation of collections that no one trades because there are no accessible platforms for regular users to do so.

Building a New Open Sea

Yuga was one of the first companies that replied to the Open Sea hard decision:

https://twitter.com/yugalabs/status/1692627502999691453?s=20

On Crypto Twitter, there was speculation about a potential response from the company to construct another marketplace that respects royalties. The goal would be to gain approval and broaden their user base with assistance from other NFT teams, while leveraging Yuga's dominant position in the space. However, this would likely involve wrapping Yuga collections and transitioning most of their popular products to new smart contracts, or engaging in significant legal battles against any marketplace in the space to prevent people from trading their assets. While this scenario is possible, in my opinion, it's quite unlikely to occur.

Custom Collection Stores

Some projects have created custom stores for their NFTs, making them tradable only on their platforms. This is another potential approach to preserving royalties. Crypto Punks has always employed this strategy and it continues to work, even though with this solution it’ll become increasingly complex for a new collection to succeed without some form of aggregation.

Law Enforcements

One non-decentralized approach disregarding the "code is law" principle could involve legal enforcement from collection companies, forcing marketplaces to include royalties in their sales. However, due to the regulatory uncertainty in the crypto space, which is still akin to the Wild West, most companies are based offshore. This makes it very difficult to enforce such recognition under the laws of various countries.

Point of no return?

All potential solutions to reinstate royalties have a point of failure. Today's volume is in Blur and increasingly moving towards the DeFi era of NFTs. This implies that enforcing actions against this new world could be risky for both holders and companies. It could render their collections illiquid and exclude them from the game.The era of Crypto Art as we know it has come to an end. However, what lies ahead is more mathematical and concrete - it's what the NFT space should have always been.

What if

Royalties were indeed an impressive tool that supported creators and experiences, steering the industry onto a new path. While I can't predict exactly how, the challenge for the NFT industry as we know it is to find new ways to sustain itself outside of the crypto art cult. This is a mathematical challenge, a true crypto challenge!

In an industry of liquid NFTs, what distinguishes an NFT with royalties from a meme token with marketing fees derived from swaps? Something to ponder on! ;)

Is DeFi the next step?

I can’t predict the long-term success of Blur and how the royalties disruption will bring more attention to its no royalties competitors like Sudoswap, Items, or NFT20. The only secure thing is that the industry is transformed and the next Yuga Labs will introduce DeFi for its NFT collection.

While the demystification of crypto art may seem villainous in the short term, it will transform the industry in the long run. It will make NFTs more liquid, imbue them with more utility value, and pave the way for more financial tools than ever before. Disruptions like Blur and Sudo are what the industry needed to grow, for the NFT space this is the “Uniswap Moment”.

Welcome to the new world where NFT and DeFi come together to explore what's next.

But Wait a SEC!

NFTs have always been a part of DeFi.

Now that we've opened Pandora's Box and faced the reality that NFTs are financial objects just like ERC20 tokens, now that we have the tools to trade them like ERC20 tokens, and now that we've dispelled the Crypto Art myth and acknowledged that Blur is not the adversary of the market but merely capitalized on an unsustainable situation, we can move forward with a clearer understanding of the NFT landscape.

In simpler terms, both NFTs and ERC20 tokens are tradable assets on the Ethereum blockchain. They can be bought, sold, and owned, much like any other asset.

What are the legal differences between an ICO and a Drop?

Essentially, the only difference is the name. Those who have been in the space long enough to have experienced the 2017 ICO bubble have also seen the same promises of utility (plus games) in NFT drops as in ERC20. Sometimes, it's even the same people capitalizing on the confusion caused by the term "Crypto Art" among regulators.

In both cases, a supply of something is sold for ETH (Ethereum). The market cap of a collection or a token is calculated based on the last order filled or the equivalent of ETH in an Automated Market Maker (AMM). NFTs can be as liquid as tokens, with their value often based on the Floor Price (FP). The industry is moving towards treating the collection, rather than the individual ID, as a significant entity.

Once an object is on Ethereum, it becomes part of the DeFi (Decentralized Finance) ecosystem, irrespective of whether it's an NFT or an ERC20 token. They are both tradable assets. Platforms like Blur, NFT20, Items, and Sudo have shown that NFTs can technically be traded in the same way as tokens. The industry was previously in an intellectual bubble, treating NFTs and tokens differently, but it's becoming clear that they should be treated the same, both legally and financially.

SEC is already moving forward

The ICO bubble in 2017 concluded with the SEC beginning to regulate these approaches, albeit in an uncertain manner. They started filing against various projects, leading to a more concrete method of funding. With the rise of the DeFi space, tokens became more decentralized in their use cases and liquidity, making the industry cleaner and more resistant to scams and regulatory scrutiny.

While regulations in the ERC20 space were initially seen as bad news by some, they eventually drove the need for a more decentralized infrastructure, which we now refer to as DeFi. The cat-and-mouse dynamic in the crypto industry is interesting, and in the long run, it tends to promote a healthier ecosystem.

Lawmakers have already begun to classify NFTs as securities, albeit not very quietly. Yes, NFTs CAN be securities! They are not just pieces of art; they are transferable and tradable objects on the Ethereum network. They are commonly sold as investments, whether this investment is driven by the hype of people in a brand and some redeemable content or for some promised off-chain utility like games.

By 2023, it will be undeniable that there are differences between the classic 'degen' investors who invest in an ICO on PinkSale for a new meme token and those who participate in an NFT drop. While their actions may differ, both are purchasing an Ethereum object with the expectation of a return.

So, What Next?

Even in the darkest hours of the blackest night, there is a glimmer of hope, if you know where to look.

Here's the silver lining: the cat-and-mouse dynamic of the crypto space can lead to remarkable developments. DeFi, the first real-world use case, emerged after the demystification of White Papers. If history repeats itself, this means it's time for NFTs to become more decentralized and unlock real utilities that will shape the world!

It’s a new exciting beginning!

A final note for CT anons 👇The NFT market didn't crash because of Blur. It crashed due to a lack of utility, and cult-like markets tend to collapse in bear markets. In fact, the NFT market is now more liquid and healthier thanks to Blur. The Floor Price (FP) of your favorite NFT collection was illiquid before, making the FP impractical.

If you like this article don’t forget to follow me on X 👉 @BasedToschi

New to the 'Flippening' buzz? Get up to speed with this essential read before diving deeper:

https://mirror.xyz/toschi.eth/3ufk3OHNCx8HvBpOCUrZ1CNDSx_QjJi1_3hZSr2P3xU

INTRO - What drives the industry today

The trading volume of Bitcoin dominates the current Crypto industry. Dominating the market in terms of volume, Bitcoin's movements have become the compass by which other cryptocurrencies set their course. This dominance isn't merely a testament to Bitcoin's pioneering status or its widespread adoption; it's intricately tied to its unique economic model and the strategies employed by market makers. At the heart of Bitcoin's design is the halving mechanism, a pre-programmed reduction in mining rewards that occurs approximately every four years. This event, coupled with the constant push-and-pull of price pumps and dumps (PnD), has shaped the cryptocurrency landscape.

Bitcoin operates on an economic mechanism that halves inflation approximately every four years. This model triggers a constant supply shock, prompting miners to mine as many blocks as possible to recoup their expenses on electricity and hardware. The prevailing market theories about Bitcoin are as follows:

1. The higher the price of BTC in relation to mining costs, the more bullish the price action becomes. This is because miners need to sell fewer BTC to cover their expenses.

2. As fewer Bitcoins are mined per block, the selling pressure in the market from miners decreases.

While these theories technically hold true and drive the macro trends of Bitcoin bull markets, their counter theories also hold weight, contributing to Bitcoin's extreme volatility:

When the price of BTC exceeds mining costs, new, smaller miners, particularly those in regions where energy is less affordable, enter the game. This competition for blocks increases mining costs for larger miners. Consequently, it becomes more profitable for these larger miners to act as a cartel and depress BTC prices to eliminate smaller miners from the game.

This power struggle for BTC rewards leads to bear market pressure. In fact, during the last bull run in 2021, many companies, including the Ethereum Foundation and NON-Labs (where I served as CEO at the time), predicted the bear market and managed to sell their internet coins for USD before BTC miners destabilized the market.

Here you can find deep research for Bitcoin mining: investment cycles led by Coinbase in 2022:

https://www.coinbase.com/institutional/research-insights/research/market-intelligence/bitcoin-mining-investment-cycles

The industry's current status is a 🤡 for three reasons based on $BTC behaviors:

1. Investors’ Mindset: The current industry is heavily influenced by Bitcoin's price fluctuations, causing all cryptocurrencies to follow its cyclical bull and bear movements. This creates a predominantly short-term speculative mindset among investors. During a bull market, long-term investors often face losses if they don't engage in speculative trading, attempting to sell at the peak and buy back at the trough. Holding assets with intrinsic value can lead to significant losses of around 70%-90% of their value, as speculators take advantage of Bitcoin's movements. This dynamic significantly impacts investor psychology, inducing anxiety during bull markets as they rush to make quick profits before the market downturn. Evidence of this trend was apparent in the 2021 bull market, where savvy investors favored short-term investments like meme coins and Ponzi schemes over valuable long-term holdings. Given the current market conditions, their approach seems justified.

2. Entrepreneur Mindset: Many entrepreneurs prefer anonymity and, given the market conditions, often create short-term replicas of existing applications. Building long-term technology is costly and can lead to legal issues during downtrends. Consequently, many entrepreneurs opt not to build technology at all, instead creating meme coins or NFTs without any backing projects. They play into the investor mindset discussed earlier and act as short-term Ponzi schemes. This approach proved to be the most lucrative during the last bull market and continues to be so in the current bear market.

3. Community Mindset: The number of genuine builders in the community is dwindling over time due to the current market PnD. With volatile bull runs and 90% downtrends, building is risky, time-consuming, and not lucrative. Crypto communities are now dominated by gamblers who enjoy the thrill of seeing their portfolio increase a hundredfold. This can turn toxic during a crypto downtrend, as they search for short-term gains and try to recover their substantial losses.

The current market status is a stark contrast to the 2017 bull market when the bull/bear trend was not as apparent, and builders outnumbered gamblers during the bear market. As of 2022, the situation has reversed. Whether we like it or not, the focus has shifted away from technology. The bull/bear cycle has led people to prioritize short-term hyped investments, slowing down the pace of innovation in the industry.

The Industry situation is not sustainable, but soon it’ll happen that will change the game “THE FLIPPENING”

The Flippening is when Ethereum ($ETH) will overtake Bitcoin ($BTC) per Market Cap, becoming the market maker of the industry. If you’re new to this concept, I’ll advise you to read my last article:

https://mirror.xyz/basedtoschi.eth/3ufk3OHNCx8HvBpOCUrZ1CNDSx_QjJi1_3hZSr2P3xU

Why The Flippening will change everything

Ethereum has a completely different economic model based on four pillars:

1. Staking: To secure the network ethereum didn’t use the Proof Of Waste, which means that it did not require huge expenses in electricity and hardware. Consequently, miners (called validators in the POS) are not incentivized to dump their mined coins to fill operational costs. Also, POS incentive validators to re-stake the earned coins to increase their yield over time. 👉 How ETH POS works

2. Burn: Ethereum has a better monetary policy than Bitcoin. Bitcoin is based on ~4 years of halving events that constantly decrease its inflation by 50%. This is one of the most important why of its PnD scheme that drives bull/bear markets. Ethereum has a mint/burn system, $ETH are minted to pay the POS validator (as $BTC), but instead of an arbitrary halving system, $ETH are burned based on network usage. This gives the ecosystem (Once ETH will e the market maker, tremendous stability against solid price fluctuations). 👉 How ETH Economy works

3. Cartels: Bitcoin mining poses a substantial entry barrier. Mining Bitcoin necessitates advanced computer hardware and strategic agreements with electricity providers. This challenge is intensifying due to Bitcoin's inherent system structure. Large miners are competing to lower electricity costs and build vast mining facilities, rendering Bitcoin mining at home virtually unfeasible. However, with the advent of Proof of Stake (POS) and the removal of these costs, Ethereum mining becomes both accessible and affordable, even with a $100 hardware setup in a standard home. It's crucial to note that in the current context, anonymous Bitcoin mining is impossible. The ability to mine anonymously and the presence of a large number of solo miners reduces the likelihood of cartels or country influences.

Bitcoiners can argue: “Oh but you need 32 $ETH”, yes staked not sold to pay expenses for hourly hardware work. Also, ETH allows you to join shared validators like Rocketpool VIA SMART CONTRACT!

LAST BUT NOT LEAST - UTILITY: Ethereum has an organic market demand, driven by the technology built into it. Ethereum, which requires Ether ($ETH) for usage, is increasingly becoming an unstoppable network state, akin to an offshore entity, powered by the world's first global computer empowered by validators and Proof of Stake (POS) acting as its defense army and governed by mathematical principles. The only requirement to participate is holding some $ETH (a very low amount with Layer 2) to pay for the computation needed to execute your financial operations freely.

In contrast, Bitcoin lacks this utility. Its sole purpose is to be bought in the hope of selling it at a higher USD price later. This lack of constant demand for utility amplifies the pump-and-dump (PnD) core that Bitcoin introduces to the industry as a market maker.

How the flippening will change everything

In my opinion, the 'flippening' could be a game-changer for the cryptocurrency industry. It could establish a framework for financial incentives that promote the development of truly valuable applications capable of transforming people's lives rather than perpetuating Ponzi schemes. Let's explore why this could be the case.

A Stability that the industry deserves

Ethereum, as the market maker of the industry, has the potential to disrupt the volatile bull/bear cycles we're accustomed to seeing. Firstly, its economy is designed to avoid pump-and-dump (PnD) schemes. Ethereum's Ether ($ETH) has real-world utility, which consistently drives demand for the asset. Ethereum doesn't have to grapple with high costs to maintain its security, eliminating the need for miner collusion and price manipulation. Moreover, its supply and inflation are usage-dependent, leading to gradual increases and decreases in supply rather than a drastic 50% reduction every four years.

Once Ethereum becomes the market maker, the crypto market will likely transform into a more stable environment. While fluctuations will still occur, they will be legitimate market movements rather than arbitrary PnD schemes, making the market less volatile and more predictable.

A switch into investors and communities mindset

In a stable industry, the current winners may become the losers, and vice versa. Smart investors and communities will no longer be driven by the anxiety of cyclical fluctuations and 80% pump-and-dump schemes triggered merely by Bitcoin movements. In this environment, gamblers stand to lose, while builders emerge as winners. Finally, real blue-chip assets can grow organically based on their utility, without an 80% dump in the middle that renders their utility meaningless for investors. Moreover, investors will become more discerning, avoiding assets without utility as they will no longer pump merely due to market conditions. I recall during the last bull market, many investors shied away from holding valuable assets, aiming instead for a hundredfold return before the inevitable market dump. Sadly, but truly, they were smarter than others. After the 'flippening', this scenario will cease to exist, and these individuals, instead of gambling for quick gains, will participate in accumulating blue-chip assets for long-term gains.

A new way to calculate values

In a stable environment, Total Value Locked (TVL) and adoption will allow robust applications to thrive. Holding their assets will result in consistent gains, without the 80% downturns typical in the current pump-and-dump market. This will direct most of the money flow towards the winners, rather than short-term pump-and-dump schemes, as these assets will finally become genuine blue-chip investments.

Simultaneously, the industry will see less gambling as investors focus on holding long-term, strong assets. This shift will positively impact legitimate applications and negatively affect assets without backing. It will also lead to a redistribution of growth, making it virtually impossible for Ponzi schemes to gain significant traction.

A new industry for entrepreneurship

In a stable industry, the approaches of entrepreneurs and venture capitalists (VCs) will undergo radical changes. Entrepreneurs will prioritize building long-term solutions and driving adoption. It will no longer be possible to secure VC funding solely by capitalizing on the hype of a bull run. VCs, too, will experience a significant shift. They will only succeed by identifying genuine blue-chip assets, without taking advantage of the irrational exuberance during bull runs and investing in any token with the intention of exiting before the bull market ends.

In a stable market, it is worth noting that situations like LUNA of FTX are less likely to occur. Why is that? Let's consider this tweet from 2022: “Everything is working because everything is going well.”

https://twitter.com/BasedToschi/status/1506744738740854790?s=20

In a stable market, the prevalence of such schemes diminishes as the industry becomes less reliant on the volatile movements of Bitcoin. While it may not completely eliminate these behaviors, it reduces their impact, for sure more helpful than regulators lol.

Decentralization will matter… MORE

In the current pump-and-dump (PnD) industry, individuals who prioritize decentralization often face significant losses. They miss out on numerous opportunities driven by short-term speculators, who unfortunately emerge as the winners. These speculators focus solely on short-term gains and have no intention of holding assets for the long term.

As a result, the industry has lost its purpose, with money flowing from one Ponzi scheme to another, offering no real value to strong decentralized utility. However, after the flippening and a shift in the direction of money flow, decentralization will once again become a driving force for investors. They will place great importance on the health and longevity of their long-term holdings.

Conclusion

The flippening represents the industry's sole chance at redemption after a series of failures.

The pump-and-dump (PnD) aspect of the industry, driven by Bitcoin's fluctuations, has created a dangerous environment that discourages builders and incentivizes Ponzi schemes. This trend has become more pronounced after the 2020 bull run, with narratives focused on getting rich quickly rather than adding real value or utility. If the flippening doesn't occur and my predictions don't come true, we will all suffer significant losses. Unfortunately, we are currently in a bubble within a bubble, with little real value or utility being created since the emergence of projects like Uniswap, OpenSea, ENS, and stablecoins.

The flippening, with Ethereum as the market maker, is the industry's only hope for salvation. Its economy can create the right incentives for a decentralized future based on utility. In my opinion, this change is just around the corner.

Thank you for reading, and don't forget to follow me on X @basedtoschi. You can also support my work by minting this NFT. See you in the next article!

🔮 Follow me at @baseToschi on 𝕏

Table of contents:

INTRO

• A new industry

History

• My 2018 Flippening Research (Tech Prospective)

• My 2019 Flippening Research Draft (Narrative Prospective)

Flippening Analysis

• The 2023 Flippening Research Part 1 Analytics

• The 2023 Flippening Research Part 2 Financials

Conclusion

• Why still not happened?

A new industry

Currently, the cryptocurrency landscape is largely swayed by Bitcoin and Tether's dynamics. Bitcoin's halving mechanism orchestrates cyclical bull and bear markets, which reverberate throughout the sector. These market swings deeply influence investor sentiment. In bullish phases, there's a rush to liquidate assets before the bearish downturn, regardless of a project's intrinsic value or performance. Once the bear phase kicks in, prices often nosedive.

Such volatility breeds a set of entrepreneurs and investors who prioritize short-term gains over long-term vision. This stifles genuine innovation, leading to a surge of fleeting, hype-driven projects that often fade away under market strains. Yet, this narrative might pivot with the anticipated Ethereum/Bitcoin 'flippening'—a potential scenario where Ethereum's market cap overtakes Bitcoin's. If Ethereum takes the lead, it could pave the way for a steadier economic landscape.

Ethereum's Proof-of-Stake (PoS) consensus, coupled with its nuanced inflationary and deflationary tactics, promises a more equilibrated market. Contrasting Bitcoin's power-hungry mining, Ethereum's PoS involves validators 'staking' their coins to authenticate transactions. This eco-friendly method deters massive sell-offs, penalizing validators for dishonest actions.

Additionally, Ethereum's EIP-1559 mechanism incinerates a fraction of transaction fees, introducing a deflationary element to its inflationary framework. This results in a more consistent monetary policy, devoid of Bitcoin's price rollercoasters.

To sum up, Ethereum's ascendancy could transition the crypto realm from short-lived speculation to a focus on enduring growth and commitment. By tempering market unpredictability and curbing fleeting ventures, Ethereum's dominance could mark the onset of a more grounded and resilient cryptocurrency era. This potential post-flippening phase could spotlight enduring innovation, value generation, and industry stability.

The flippening will be the cure of the crazy betting industry we live today, to a new industry driven by real applications values. Once this happened we’ll live a golden age of worldwide entrepreneurship without cultural barriers.

Let’s try to understand together why the flippening is just around the corner and when!

History

Five years ago, I wrote this on Hackernoon:

https://hackernoon.com/what-if-bitcoin-could-be-surpassed-in-terms-of-values-is-that-possible-6531835d3734

In this old article (the industry was different then), I begin by questioning Bitcoin's status as the 'Digital Gold' of the cryptocurrency world. I pointed out that while Bitcoin was the first to introduce the concept of a trustable ledger, many other cryptocurrencies have since emerged that offer the same functionality but at a faster speed and lower cost.

I also highlighted the slow and expensive nature of Bitcoin's blockchain, which has not seen any significant improvements or plans for future enhancements. Often in the tech industry, first movers are overtaken by late entrants who offer better solutions, taking into account some points:

(REMEMBER THIS WAS WRITTEN IN 2018)

• Technological Perspective: Bitcoin, the first generation of blockchain technology, is slower and more expensive than many other cryptocurrencies that have since emerged. Bitcoin's technological stagnation could be a disadvantage.

• Community: The Bitcoin community is described as being driven more by speculators than innovators and is seen as conservative and stagnant. This lack of innovation and vision could hinder Bitcoin's growth.

• Historical Parallels: Parallels between Bitcoin and companies like IBM and Nokia, which were once market leaders but were eventually surpassed by more innovative competitors.

• Use Cases: Bitcoin's use cases are questioned, stating that it has failed as a payment system due to its slow, non-scalable, and expensive nature.

• Decentralization: While Bitcoin is decentralized, I have questioned whether this is a unique competitive advantage, as many other projects are also decentralized.

• Bitcoin as Digital Gold: I have challenged the notion of Bitcoin as 'digital gold', suggesting that other cryptocurrencies could potentially fulfill this role.

• Financial Analysis: Bitcoin's dominance in terms of market capitalization has significantly decreased since 2017.

One year later in 2019, I was drafting more profound research about the flipping, I didn’t have the time to publish it, because meanwhile I was starting my journey at DFOhub.

I published the draft here:

https://medium.com/@toschi.eth/old-2019-draft-about-flippening-9df465878fb7

This is a resume from that research:

(REMEMBER THIS WAS WRITTEN IN 2019)

Medium of exchange theory:

Bitcoin maximalists envision Bitcoin as the primary medium of exchange, similar to the role of the US dollar post-WWII. However, Bitcoin's dominance in daily trading has been surpassed by Tether (USDT), a stablecoin, which has also been transitioning from Bitcoin's OMNIA layer to Ethereum's ERC20 token. This shift challenges Bitcoin's position as the leading cryptocurrency and highlights the difficulty of recognizing Bitcoin as a medium of exchange.

Stablecoins like Tether, while useful for short-term speculation, are centralized, with their value tied to a custodian holding an equivalent amount of USD. This centralization contrasts with the decentralized ethos of cryptocurrencies and could pose a threat to the crypto ecosystem.

Meanwhile, the Ethereum ecosystem is witnessing the rise of Decentralized Finance (DeFi), largely due to DAI, a decentralized stablecoin by Maker DAO. DAI maintains its value without a centralized custodian, instead relying on complex algorithms and Ethereum as collateral. DAI is becoming the preferred medium in the DeFi world, fostering a secure ecosystem of decentralized applications (DApps).

In conclusion, while Bitcoin is a volatile store of value, DAI offers stability and security, making Ethereum, not Bitcoin, a more likely candidate for the role of a medium of exchange in the blockchain world.

Digital Gold Theory:

Bitcoin, often referred to as digital gold, has been the primary cryptocurrency exchangeable for USD, with altcoins' values typically calculated using Bitcoin's price. However, with the rise of Ethereum and its exchangeability with USD, this dynamic is changing.

Gold's value, unlike Bitcoin, is not solely based on scarcity but also on its wide range of industrial uses, including in dentistry, computer parts, data transferring cables, medicine, real estate, space vehicles, and jewelry, among others. Gold's value is thus determined by the demand for these uses against its supply, which continually increases due to mining and laboratory production.

Bitcoin, on the other hand, can only be held or transferred, with no industrial or service usage. Ethereum, however, shares similarities with gold in that it has intrinsic value beyond being exchangeable currency. Ethereum serves as the fuel for running smart contracts, decentralized applications, fungible and non-fungible tokens, stable coins, and Decentralized Autonomous Organizations (DAOs).

Much like gold is used as a semi-conductor metal to run our computers, Ethereum is used to run applications. These applications range from decentralized finance (DeFi) applications, digital items/collectibles, gambling and games, industrial tracking, and even semi-decentralized applications.

In conclusion, Ethereum's market cap, like gold's value, can be calculated based on its usage and demand against its supply, making it a more tangible asset than Bitcoin. (Remember this article was before EIP 1559).

The Mith of BTC fixed supply:

Bitcoin maximalists argue that Bitcoin's intrinsic value lies in its fixed supply, likening it to the scarcity of gold. However, this comparison is flawed as gold's value is also tied to its diverse industrial uses, while Bitcoin's value is more akin to a collectible object, driven by its mining and fixed supply.

The notion of Bitcoin's fixed supply of 21 million coins is not absolute. The Bitcoin protocol can be changed by community consensus, potentially altering the supply. For instance, with the introduction of the Lightning Network, discussions have started within the community about increasing Bitcoin's supply. The concern is that as block rewards halve every four years and on-chain transaction volume decreases with the Lightning Network's adoption, miners may lack sufficient incentive to secure the network, making it vulnerable to attacks.

https://news.bitcoin.com/proposal-to-increase-bitcoins-21-million-supply-sparks-debate/

Thus, while Bitcoin is often touted for its non-manipulable fixed supply, the reality is that its supply can be changed by community consensus, challenging the perception of Bitcoin's fixed supply.

The Dark Side of the BTC core community:

Bitcoin's community is currently focused on maintaining hype and price, with companies like Blockstream leading development in a way that some critics liken to a centralized organization rather than a decentralized community.

https://news.bitcoin.com/blockstream-when-will-the-level-of-dishonesty-and-manipulation-end/

The Lightning Network (LN), a state channel on top of Bitcoin, is a prime example of this trend. State channels, which are also present in Ethereum through projects like Raiden Network, allow for off-chain transactions between participants, with only the opening and closing of the channel being recorded on-chain. While this can facilitate faster transactions, it also means that transactions within the channel are not stored on-chain, leading to trust issues.

https://bitcointalk.org/index.php?topic=2792933.0

Despite heavy promotion, the LN has not gained significant traction, with only 850 BTC stored in it, a number that is decreasing. In contrast, Wrapped Bitcoin (WBTC), which is Bitcoin wrapped to become an ERC20 token on Ethereum to interact with the DeFi ecosystem, is growing rapidly.

2019 DATA from DeFi Pulse:

The DeFi ecosystem on Ethereum, with more than 2 million ETH locked, dwarfs the LN, indicating that users trust it more despite its less aggressive advertising. Critics argue that the LN's approach removes too many layers of security and trustless features, making it a less attractive option.

2019 DATA from DeFi Pulse:

Another point of contention within the Bitcoin community was the block size debate. While Bitcoin maximalists and developers often treat Satoshi Nakamoto's words as sacrosanct, they have been willing to censor ideas that go against the vision of Blockstream and the LN, such as colored coins, smart contracts, and especially the block size increase, now known as Bitcoin Cash.

After this point, I stopped writing at the time because I was focused 100% on DFOhub, BTW, I encourage all readers to go here to read the complete research and any associated link.

BUT NOW, Let’s take a time machine and come back to 2023 because now it’s evident more than ever that the flippening is near and is already happening.

Brace yourself; it’ll be sooner than you can ever expect!

Analysis

Now it is 2023, and we have a looooooooooot of data! Actually, I even feel like a 🤡 writing this article, because for me the flippening is the most secure thing in life after death. But this is what you voted for, so let’s respect democracy to my followers:

Let's delve into this topic with an analytical lens!

Three key metrics stand out when discussing the flippening argument:

Daily Fees: A network's true worth is reflected in the daily fees users willingly pay for its services. Relying on active wallet counts? That might not give the full picture. Many individuals possess several wallets. It's crucial to note that web3 prioritizes financial transactions over mere user counts and data sales. The traditional web2 approach to user adoption isn't quite apt for the web3 era.

TVL: Total Value Locked shines a light on the genuine value of a crypto network. It underscores the confidence and trust that both individual users and major institutions vest in the network.

Inflation: In assessing the credibility and enduring value of BTC and ETH from an asset perspective, the inflation rate emerges as a pivotal factor.

Daily Fees

The first fundamental metric to consider is transaction fees paid by users to use the network, this data is very important to consider as the request for ETH (Red) and BTC (Black):

Ethereum has truly been on a tear since 2020, riding the wave of the DeFi explosion! It hit a staggering ATH of $73M in daily fees, dwarfing BTC's peak of $14M back in January 2018, amidst the fallout from the 2017 bull run.

So, why is this data significant? It's not merely a reflection of the costliness of a blockchain, especially since many Ethereum transactions are facilitated on Layer 2 solutions like Optimism and Arbitrum. Rather, this data underscores the value users place on a network. It highlights the premium people are prepared to pay to leverage a particular network as the foundational layer for their financial operations.

TVL

Let's dive into another crucial metric, and hats off to DeFI Lama for their stellar insights! 🚀❤️ We're talking about TVL (Total Value Locked). Why does this matter? TVL is a testament to the amount of value a blockchain safeguards. In essence, this metric reveals how Ethereum (represented in green) is fundamentally undervalued when juxtaposed with Bitcoin (depicted in blue):

If Fees looked like smashing data for ETH, TVL is even more and more devastating for our old, slow BTC. Yes, it’s represented by that kinda invisible blue line.

Ethereum's ATH soared to an astounding $105B. In stark contrast, BTC's ATH lingers at a mere $200M. Post-2021, even on its most lackluster days, Ethereum's TVL outpaces BTC's by a staggering 220-fold.

Inflation

Inflation, that pesky little number everyone's chatting about, is becoming the uninvited guest in the FIAT currency party. It's like a stain on your favorite shirt that politicians just can't seem to wash out, and it's giving real-world countries a bad rep. Think of inflation as the 'limited edition' tag on my old boxers; it's not just about scarcity, but about value. People use it as their go-to yardstick when sizing up 'similar' assets, is not about only inflation, but about inflation, deflation and underline value of the asset and the important it plays in our society and economy.

Now, let's talk Ethereum. In recent years, it's gone through a glow-up with two major updates, turning it into a never-before-seen superstar asset. First up, ERC1559: in layman's terms, the busier the Ethereum network gets, the more ETH are burned.

Learn more about it here:

The second update was the Merge, which shifted from POW (Proof Of Waste) - and for those new to crypto, POW is what BTC currently uses. In simple terms, the more energy and computational power you burn, the costlier it becomes, creating deterrents for potential attackers. We'll dive deeper into its long-term viability later.

Now, ETH operates on an advanced version of POS (Proof Of Stake). This eliminates the hefty inflation tied to massive miner expenses. It's a greener, more cost-effective system in terms of inflation. Here, network validators earn by putting their staked $ETH on the line, rather than splurging on electricity and hardware.

Learn more about it here:

In the BTC (Orange) vs. ETH (Blue) showdown, inflation emerges as a pivotal metric. Here's the current state of play between these two crypto giants:

Examining ETH's inflation trends pre-merge and post-ERC1559 introduction (as depicted on the left metric), it's evident that during the bull market phase, ETH and BTC ran neck-and-neck in terms of inflation. Yet, when the bear market hit, ETH's inflation surged, primarily due to the hefty costs (inflation-wise) of compensating POW miners. Switching gears to the right metric, even amidst a bear market with subdued chain activity, POS ETH's performance is nothing short of remarkable when juxtaposed with BTC. As it stands, ETH's rate clocks in at a deflationary -0.2%/y, while BTC lingers at an inflationary +1.7%/y. This suggests that even in quieter times, ETH's economic dynamics are giving BTC's inflation rate a run for its money. The potential for the upcoming bull market? It's tantalizing to even ponder!

Network Value (Lets play a game)

Using Fees Paid, TVL, and Inflation as metrics, let's delve into a formula that, from my perspective, can encapsulate the Network Value (N.V.).

For Fees Paid, 0% equates to $0 and 100% aligns with $73M (The ATH)

For TVL, 0% equates to $0 and 100% aligns with $105B (The ATH) For Inflation, using the current annual rates

For Inflation (Current annual rate), 0% corresponds to 4% (approximate USD inflation in 2023 cumulatively) and 100% equates to 0%

BTC NV average score is 22.15% (20% for Fees Paid, 0.4545% for TVL, Roughly 46% for inflation)

ETH NV average score is 106.66% (100% for Fees Paid, 100% for TVL, 120% for inflation)

By this metric, Ethereum's market cap should be a whopping 4.8 times that of BTC.

Now, a word of caution: don't take this to the bank. It's a playful exercise, not financial counsel, and it's a broad-brush approach. This calculation doesn't factor in decentralization, even though the industry's focus on it seems to have waned over the past 3-4 years. But the idea of an Ethereum that's five times mightier than BTC? It doesn't seem too far-fetched to me.

The Demand

Evaluating the utility of BTC and ETH is straightforward when we consider Fees paid and TVL. In this context, TVL acts as a guarantee for sustained future use. The logic is simple: the more assets held in the network, the more people will engage with it to manage and utilize those funds. Concurrently, higher user fees indicate a more secure network, as they incentivize more "validators" or "miners" to uphold it.

Fast forward to 2023, Ethereum boasts a sophisticated ecosystem of DeFi applications, corporate integrations, billions in institutional and VC investments, regulated stablecoins, financial assets, user-friendly interfaces, and a thriving community of artists, brands, and games using it as their foundational layer. BTC, in contrast, offers... well, Ordinals. Essentially, NFTs with a whopping $51B in fees just to store image files on-chain. Some BTC advocates equate its Market Cap to TVL, but that's a slippery slope. It's akin to valuing a company based solely on its stock holdings, which is naive at best and eerily Ponzi-like at worst.

Ethereum is becoming indispensable, not just for individuals but also for businesses and investment funds. This widespread adoption solidifies its value and utility. BTC, however, seems to have a singular purpose: buy, hodl, and hope for a higher selling price. While some champion BTC as a hedge against inflation, that's not a unique BTC trait. ETH offers the same, arguably in a superior manner. Asset value isn't solely determined by inflation; demand plays a pivotal role. And when it comes to genuine demand, Ethereum seems to have a more concrete footing than Bitcoin.

The 🐘 in the 🚪 “PRESSURE”

Market pressure is indeed a pivotal financial and economic factor. BTC miners, with their real-world overheads like hardware and electricity, are in a perpetual cycle of selling the BTC they mine to cover these costs. This creates an unending downward pressure on the market. It's like the entire crypto realm is in a constant tug-of-war, trying to counterbalance the weight of BTC's inflationary push. the crypto space with BTC as a market maker is constantly swimming against the current like this:

You can visualize the comparison between BTC production costs and Miners selling pressure:

https://www.tradingview.com/script/eesNSyNo-Bitcoin-Miner-Sell-Pressure/

You can also find very cool metric to calculate the correlation between miners costs and market pressure here:

https://dataguide.cryptoquant.com/top-10-presets/miner-selling

On the flip side, Ethereum's POS system flips this narrative. The deterrents for validators behaving maliciously aren't rooted in tangible costs like electricity or hardware. Instead, it's about putting their ETH capital at stake. Ethereum validators aren't under the same compulsion to offload their earnings. In fact, they're nudged towards re-staking their rewards, fostering a distinct inflationary dynamic. The market pressure exerted by ETH's inflation can be visualized differently:

If you are a newbie in how the Ethereum economic machine works, I highly recommend this article from Bankless:

https://www.bankless.com/ethereums-economic-engine

The new yield era few people talk about

With the introduction of the EIP1559 burn mechanism, which is contingent on the natural activity of the network, $ETH gets incinerated every block. This has already transitioned it into an inflationary asset. This implies that even during periods of subdued network activity, the returns for Ethereum validators aren't derived from the inflation of the asset. Instead, they come from an asset that's highly likely to either retain its supply or even undergo deflation.

Now, if some are drawing parallels between BTC and gold (a comparison I've openly challenged, as highlighted in my 2019 research), then where does Ethereum stand? Do we have an asset in our current world that promises a sustainable yield (security budget) while boasting a deflationary market supply?

Absolutely, Ethereum's uniqueness stems from its decentralized nature and the trust it embodies. Traditional assets, like housing, are deeply intertwined with political decisions, local economic health, and the inflationary tendencies of fiat currencies. Dividends from companies, on the other hand, are a reflection of managerial competence and the company's ability to turn a profit. Bonds, while sometimes touted as being uncorrelated to inflation, often end up being influenced by it, especially in our current economic climate.

Ethereum, however, operates on a different plane. Its value and yield aren't just about market dynamics but are rooted in the trust and security of its decentralized system. It's not subject to the whims of political decisions, nor is it tied to the performance of a management team. Instead, it's a manifestation of collective trust in a system that operates transparently and autonomously. This makes Ethereum not just another asset but a revolutionary one, challenging traditional notions of value and trust.

Let’s show me in the comment what’s your position representing ETH as an asset perspective.

POW vs POS

POW is a very inefficient way to validate blocks, it’s very cost effective and it’s needs not just an incredible amount of security budget dumped to holders (aka inflation aka rewards per block), but also its bad for the environment, using the amount of energy needed to three million households and 10,000,000 tones of Co2/y only in US operations From NY Times

POW is also criticized in a recent paper from Humoud Alsabah (Kuwait University) and Agostino Capponi (Columbia University) about how the POW system mining led to a long term centralization, based on the competitive soul and higher growth of barrier to entry for newcomers:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3273982

POS is surprisingly efficient and enchain security, reducing the rush of hardware and expenditure to more elegant stake risk that let anyone to run a node and also be anon in this, FYI I don’t know how POW mining farm can be anon, the more they’re big the more they’ll be always subjected to countries regulations, POS validators in the other hands, they can just be everywhere with a cheap computerconnected to the internet.

Both POS and POW are not perfect, but Ethereum POS have by any means less chance of centralization or corporate/countries dominance than the BTC POW.

Community

I’ll argue this section with just one meme:

In 2023 a small portion of the BTC community started to building some new sexy tech on it, Artefact and Ordinals are very interesting researches, but the lead of BTC is still in the hands of maxis and Blockstream, so I see a fork like BCH more lickley than a discussion there.

Conclusion

Ok Toschi, but the market say that BTC is still the leader! Five years that you argue about the flippening, but…

That’s a trillion dollar question

Peter Thiel: “A true bubble is when something is overvalued and intensely believed”

The culture of BTC now is very correlated on ETFs, countries who adopt it, Billionairse who buy it and people who hold it. One day in the Ethereum ecosystem is like 3 years in the BTC community.

The arguments in the BTC events are cringy than ever before:

https://decrypt.co/72861/5-weirdest-moments-at-the-bitcoin-2021-conference-in-miami

https://cointelegraph.com/news/bitcoin-2022-miami-conference-recap-and-major-themes

The core community often dismisses arguments that don't align with the "get rich together" narrative or criticisms of the US economy. Even prominent figures like Udi Wertheimer, who contribute to the network, face significant criticism.

The "flippening" – Ethereum surpassing Bitcoin in market cap – may be catalyzed once the market rids itself of questionable players like USDT and Binance, who are believed to manipulate the industry's broader landscape. It's crucial to note that about 90% of the industry's volume is on unaudited offshore centralized exchanges, with 70% coming from an unaudited, unregulated offshore "Stable Coin." Given these factors, the current market data may not be entirely reliable or sustainable. The industry's future, especially when more regulated and transparent, will be intriguing to observe.

From Beeple:

We’ll talk about USDT Black Swan in another article!

The Ethereum vs Bitcoin to me in 2023 looks like the Science vs Church dilemma, I bet in science!

Ready to dive into the future? Discover how the industry transforms after the flippening here👇

https://mirror.xyz/basedtoschi.eth/uSkk1grZ_d_Bm1H0IzVYYKjXTu7dHkyKqm2ssD4Gtxs

🔮 Follow me at @baseToschi on 𝕏

Over the past months, I have immersed myself in an intense journey of automatizing our company's processes, bringing forth a vision that sings of progress and innovation, and ensuring N🟣N's operational independence. This transformation is not a mere business strategy; it is a manifestation of the grand vision we have as a team. Today, as I step aside, I am thrilled to pass the baton to Vasapower, the new supreme leader of the N🟣N Nation, ready to navigate the N🟣N Nation towards an inspiring and promising future.

Looking back, the experience of leading and developing the N🟣N team has been nothing short of extraordinary. The team - a unique blend of the wild, the wacky, and the visionary - is a testament to the true potential of collaboration. Together, we've crafted ideas, solved problems, and built tangible realities that once resided only in the realm of imagination.

To each member of this incredible journey, I extend a heartfelt thank you. Your commitment, ingenuity, and unwavering spirit have made this voyage unforgettable. Our collective synergy is the cornerstone of every accomplishment, every milestone that N🟣N has achieved.

The decision of my resignation is one I consider deeply personal and choose to keep as such. Let me assure you this decision does not reflect any wavering belief in N🟣N's mission or product. In fact, I remain steadfast in my conviction that our solution meets a market demand that continues to grow exponentially.

Moreover, I am as much a believer in N🟣N as I ever was, holding steadfastly onto every $NON I own. It's crucial to note that each $NON in my possession was acquired through purchase, not gifted, underscoring my personal faith and investment in our mission and vision.

As I transition into a new phase, I will temporarily step away from the social media spotlight, including Twitter and Discord. I’ll also take some time to ensure the N🟣N team is well-equipped to buidl ahead without me. However, rest assured, this is not a permanent goodbye. I will return to the digital world soon enough, just in a different context.

As I turn a page in my professional journey, resigning as CEO of N🟣N, I can't help but reflect on the incredible path that led us here. A path marked with grit, resilience, and an unwavering dedication towards achieving our mission.

Building N🟣N was no easy task. It demanded sleepless nights, relentless work, and an unfaltering commitment to the vision that ignited us all. Yet, if asked whether I would endure it all over again, my response would be a resounding yes, again and again and again.

Why? Because the journey of building N🟣N did not just give birth to a groundbreaking company, it sculpted me into the person I am today. It pushed my boundaries, forced me to confront my limitations, and ultimately, revealed a strength I didn't know I possessed.

Each struggle we encountered was a lesson learned. Each failure, a stepping stone towards success. Each challenge, an opportunity for growth. And each night of relentless work, a testament to our tenacity and determination.

But this transformation was not unique to me. Each member of the N🟣N team has been shaped, molded, and honed by this grand mission. From the humblest beginnings to the heights we've reached, every moment of our journey was a chisel stroke, creating extraordinary individuals out of ordinary people.

Today, as I bid adieu to my role, I do so with the confidence that each person on our team has been fortified by the same experience. The trials, triumphs, and tribulations we have weathered together have bonded us, strengthened us, and prepared us for the challenges and opportunities that lie ahead.

In my absence, I am certain that the indomitable spirit of the N🟣N team will continue to shine brightly. The future of N🟣N rests in capable hands, ready to carry our vision into the new dawn. I look forward to witnessing the incredible milestones the team will undoubtedly reach.

As for me, I am stepping away with no regrets, only gratitude. Gratitude for the journey that has shaped me, for the team that has stood with me, and for the mission that has inspired me. I am stepping away, knowing that the journey with N🟣N has been a crucible, transforming me and every member of our team into stronger, wiser, and more resilient versions of ourselves.

As the saying goes, "Smooth seas do not make skillful sailors." Our journey may not have always been smooth, but it has indeed made us skillful sailors, ready to conquer any storm that comes our way. I have faith that the N🟣N Nation will continue to sail towards uncharted territories, driven by the spirit of innovation, and guided by the stars of our shared vision.

To the N🟣N team and our supportive community, I extend my heartfelt gratitude for being part of this unforgettable voyage. I am eager to see what the future holds for us all. And remember, no matter where our individual paths may lead, we will always be bound by the shared journey that has forged us into who we are today.

With sincere gratitude,

toschi.eth