Discussion on the internal driving force and evolution logic analysis of the digital asset industry

Discussion on the internal driving force and evolution logic analysis of the digital asset industry

The digital asset industry has experienced more than ten years of development. From a social practice of a small number of geeks and idealistic people, through several rounds of ups and downs, it has developed to today’s one that allows countries, governments, institutions, universities, communities, and individuals. All began to pay attention to, understand, and participate in the emerging industries. During the period, there were various idealisms, doubts and denials, wealth-making movements, bubble bursting, financial innovation, regulatory compliance and other games of forces. Coupled with the influence of the overall social macro-economy, technological development, and regulatory policies, an emerging market that is diversified, competitive, and self-iterating has formed.

From the perspective of crypto-native practitioners, this article hopes to initially explore the model and framework of industry investment through research and analysis of the core factors driven by the industry , as well as the process and direction of self-iteration , and try to sort out preliminary investment return analysis tools to be more objective. And rationally predict investment returns and effectively control extreme risks.

#1 Internal and external driving forces for the development of the digital asset industry

The digital asset industry is such a controversial industry. The bottom of each cycle is accompanied by doubts and ridicule, and then it reflects its tenacious vitality. In the next cycle, it can further develop and grow, bringing greater wealth effects, and further. Attract more people into the circle. What are the core internal and external driving forces that promote the industry’s continuous self-iteration and self-development?

1.1 External driving force

1.1.1 The crisis of confidence in sovereign currencies

Since the financial crisis in 2008, central banks have started a new era of money printing. Therefore, Bitcoin has gradually entered people’s field of vision as an alternative asset to hedge against the devaluation of currencies caused by the continuous printing of money by central banks. Although there were various voices of doubt in the early stage of development, and the sharp rise and fall of Bitcoin price also made everyone doubt whether it can really become a tool for value storage or trading, but with the growth of the miner group and the cohesion of consensus, Bitcoin has become The industry benchmark value reference, and the subsequent emergence of stablecoins such as USDT has further strengthened some digital assets as a tool for value circulation.

In recent years, with the severe inflation in some countries, such as Turkey, Argentina and other countries, the local sovereign currency has depreciated, and more and more local residents choose to convert fiat currency into digital assets as a global liquid asset for value preservation. It is precisely the devaluation of currency caused by some national governance issues that indirectly promotes digital assets as an important means and tool for value storage.

Figure 1: Turkish cryptocurrency trading grows amid inflation and currency devaluation

Figure 2: Turkey has the highest percentage of cryptocurrency users in the world

1.1.2 Social needs of an open financial system

Since the inception of the blockchain, the choice between decentralization and centralization has been a topic of repeated debate. With the development of the industry, the current open financial system, or Permissionless, is more suitable to represent the definition of an open, free and permissionless blockchain system.

Only openness and Permissionless can better promote diversified innovation, bring about a fairer infrastructure, and promote the circulation and prosperity of the ecosystem on the chain.

Figure 3: Permissionless vs Permissioned matrix

At the same time, with the recent rise of populism and geopolitical conflicts, the process of de-globalization has begun, and the flow of capital and information between global markets has been impeded in disguise.Digital assets and blockchain continue to promote the interaction of capital and information from the perspective of finance and technology, and better meet the spiritual and emotional needs of users in the virtual space. This is also the reason why virtual scenes such as various DID digital identities, SBT soul-bound tokens, and Metaverse have begun to attract the attention of the world recently.

Figure 4: Metaverse Marketplace Project Map

In the future world, there will be scenes of multiple divisions and virtual coexistence. The real world will begin to divide and fragment due to factors such as the epidemic, geopolitics, etc., but the elites will create a new open financial system through the online world, and then create a virtual nation. In the state (province) where interests gather together , everyone constantly creates new infras and DApps, connecting nation and state and enriching users’ application scenarios.

Figure 5: DApps Project Map 2021

1.1.3 Social needs of an open financial system

The digital asset industry has gone through a hundred years of development in traditional finance in just over a decade, and is still catching up with it at a geometric level of iteration. The development history of traditional finance is in line with the needs of social, economic and cultural development, and the policies of various places and countries will also lead to differences in financial supervision policies in different places.However, the digital asset industry is practicing how to create a new financial system and ecology on the blockchain, while creating a global uninterrupted financial market. From OTC to exchanges, from spot to contract, from lending to AMM, from DeFi to GameFi, SocialFi, CreatorFi . Various new financial products are constantly emerging, of course, it is necessary to adapt to the development level of the industry infrastructure and the maturity of the industry’s current basic financial products.

If the design of financial products is too advanced, or the basic financial products have not been perfected, such products will stay in the conceptual stage, and it will take some time before the official application. Of course, the innovation of financial products is one of the core drivers of the industry. We can compare the current products in the traditional financial and digital asset industries, explore areas that have not yet been deployed and developed, predict the stage cycle of development, and deploy in a timely manner when appropriate signals appear.

1.2 Intrinsic driving force

1.2.1 Attraction to Idealists: A Declaration of Independence for IT Geeks and Financial Investors

Most of the native crypto-asset industry practitioners have a certain idealism. They have a certain professional quality, the ability to promote the change of things, and a certain spirit of adventure and innovation. From the innovative practice of a small number of people, it has gradually evolved into a broad social practice. If such social practice does not continue to inspire, or does not continue to attract more idealists, it will gradually decline. However, on the contrary, because of Bitcoin’s deflationary model, it is halved every four years, and the Tokenomics design of various tokens later, on the one hand, gave enough incentives and rewards to early participants, on the other hand, it also opened up attractive opportunities. A scene where more idealists join, contribute their talents, and continue to build new infrastructure. It is precisely because of such a wave of self-contributing builders that they have no organization, do not rely on wages, and spontaneously form a DAO organization, so that they can go through the bull-bear cycle, continue to develop new infrastructure and applications, promote new financial product innovation, bring More capital and a broader market continue to promote the development of the industry.

Therefore, investing in these idealistic geeks and entrepreneurs is more likely to grasp the true development direction of the industry and accompany them to grow together.

Figure 6: DAO Project Map

1.2.2 The pursuit of an ideal society: democracy, openness, autonomy, consensus, privacy

All kinds of dissatisfaction in the real society will prompt human beings to express in a virtual world through non-violent communication. Everyone forms a tacit understanding, anonymity, PFP avatar, ENS domain name, plus Twitter, Telegram and Discord, which constitute the standard identity of participants in the encrypted world. Humans seem to be re-opening a new world, building a new Avatar avatar, charging their Metamask wallet with ETH, and then starting to roam in various virtual spaces and platforms, Twitter Space chatting and sharing, anywhere in the world. When digital nomads, their work, communication and cognition are no longer affected by the quality of the outside world. At the same time, they can participate in decision-making, have the ownership of the core of Web3.0, and protect their privacy. Such a life and work state deeply attracts idealists of all ages, and also attracts millennials. The new generation, who have been accustomed to the online world since childhood, are more likely to accept the game rules and life attitudes of the crypto-native world. Their participation also represents the vitality of the industry and the continuous driving force for the development of the industry.

Figure 7: Panorama of the Blockchain Ecosystem

1.2.3 The underlying needs of human nature: greed and speculation

The development of any technology is accompanied by two sides, the technology itself is neutral, but different people will use the same technology to do different things. The development of the Internet is like this, and so is the development of digital assets. From the beginning of the good social world, here represents the original ideals of fundamentalists. However, as the industry has grown, speculators have seen digital assets become an important financial market speculation tool in the context of anonymity and unregulation. In fact, speculative participants also know what they are doing, and they also know the risks involved. Even if they experience losses and liquidate their positions, the memory of leeks is only three seconds. When the price starts to rise again, all previous losses will be thrown into their heads. back. Here, digital assets meet the most basic needs of human nature: greed and speculation, which are the deep and unchangeable things of human nature. Borrow money to think about paying back. Although countries have begun to protect ordinary investors, the needs of greed and speculation are engraved in everyone’s genes, which is why DeFi, GameFi, etc. have seized the core needs, which in turn led to the development of a new round of bull market. Therefore, all models that can stimulate greed and speculation are attracting more users to some extent.

Therefore, the underlying needs of human nature drive the digital asset industry to cross the bulls and bears, and in the next round of bull market, human nature will be amplified, attracting more funds and users to enter the market.

#2 Evolution logic and direction of digital asset industry development

After experiencing the ups and downs of the industry, seeing the ups and downs of various concepts and tracks, and the stories of various idealistic colors in the bull market, everyone put down the last bit of caution in the stories of various wealth effects, everyone in the chat group Teacher Dadan kept shouting in order to attract fans, and the new chives also happily shared their recent “successful investment experience”, as if such a happy time could go on forever. However, the newcomers have not had time to reap the investment income, and the market has begun to plummet. The cruelty and bloodshed of the financial market has a magnifying effect in the digital asset industry. Incessantly. Of course, when the next bull market starts, there will be new narrative logic and new leeks will enter the market, one after another, again and again.

However, after several rounds of bull and bear, we have to ask ourselves: what is the evolution logic and law of the industry? What hyped themes exist? Which are the core value-driven laws? Only by deeply thinking about these issues can we better predict and layout the next cycle. Therefore, this article attempts to answer and summarize the following logic and laws.

2.1 Performance and Efficiency Drivers

The impossible triangle of blockchain has always been the breakthrough direction of the industry’s continuous efforts to find optimization solutions. Compared with decentralization and security, the optimization benefits of scalability are more prominent, because it is directly related to user experience, on-chain transaction efficiency, etc., and also directly affects the cost of developing, deploying, and operating large-scale applications in the industry. Therefore, the continuous improvement of performance is the direction of the tireless efforts of industry technicians, and the increasing demand for on-chain transfers and transactions promotes the continuous improvement of infrastructure performance. Since Ethereum opened a new era of smart contracts, the new public chain has been constantly competing for TPS, Gas Fee, consensus mechanism, scalability, etc. The new public chain boom in 2018-20 has incubated a new generation of public chains such as Solana, Avalanche, Near, Polygon, Cosmos, etc., including Aptos and Sui, which have recently been popular in the United States, as well as the underlying MOVE language. The industry’s confidence in the continuous investment and improvement of the underlying infrastructure.

Figure 8: Comparison of three public chain technologies

Of course, higher-performance infrastructure can span bulls and bears, generate cash flow, have more room for imagination, become a Fat Protocol , and carry more data assets and value storage, all of which are in line with the investment logic of institutions and capital. , so it has become the most important investment track.

Efficiency is driven by asset transaction speed, handling fees, and user experience.

Figure 9: Proportion of value captured by the blockchain ecosystem over time

From the perspective of CeFi, for example, the evolution of exchanges reflects the market’s continuous pursuit of efficiency. From the offline OTC market at the beginning, to the primary trading platform with only a few digital assets, to the subsequent large-scale and high-concurrency trading platform, it is constantly carrying more and more industry participants and transaction volumes. The exchange has become the core of the industry’s value ecology and the core platform for assets, funds and users to match bids. Therefore, the exchange is constantly competing for the number of concurrent transactions, the efficiency of placing orders, the spread of orders, the depth of liquidity, low handling fees and more. good user experience. In this way, relevant subdivisions and products that conform to the above logic have won the choice of the market and users. Binance, FTX, OKX, Kucoin, Bybit, Huobi, etc. have all achieved certain leading positions in the fields and markets they are good at.

From the perspective of DeFi, UNI from V1, to V2, to V3, all reflect the pursuit of liquidity efficiency, the development of automatic market maker protocol (AMM), including the development of machine gun pool Aggregator, lending such as AAVE, etc. , all reflect the industry’s pursuit of efficiency. Therefore, we can continue to explore the pain points that currently affect the DeFi market and liquidity efficiency, and conduct track layout.

Figure 10: AMM and AAVE Market Size (As of March 2022)

2.2 Financial assets and model drivers

The continuous enrichment of digital assets and the continuous innovation of financial models are also a core development logic of the industry. Digital assets, from the original BTC assets at the beginning, to Altcoins brought by ETH, to stable coins, to various financial derivatives, are the direction of industry evolution. At present, new digital assets are also seen in the market, including various underlying treasury bonds, on-chain index products, interest rate derivatives, and fixed-income products. Of course, there may be regulatory requirements involved here, and the next round may see more innovative on-chain native assets.

Figure 11: Ecological transfer from CeFi to DeFi

Financial model innovation is also a catalyst for industry development and acceleration. From the earliest simple over-the-counter spot transactions, to centralized bidding and matching transactions, to contract products, to lending, pledge, DeFi, and derivatives. Every new bull market can see the continuous enrichment of financial models, contract transactions that started in 2018, and DeFi transactions that started in 2020. These are all through financial model innovation, which quickly provides users and investors with high leverage and liquidity. Then quickly create a wealth effect to attract more investors to enter.

Of course, part of the reason for the end of the bull market is also due to the overuse of the financial model and the high leverage multiples, which eventually leads to insufficient liquidity, which in turn leads to a crash, entering a bear market, and most investors losing money. DeFi in 2020, GameFi in 2021, and Luna/UST crash in 2022 all originate from financial model innovation, and failure is also due to excessive model innovation.

DeFi’s rich lending, leverage, and liquidity markets have further boosted leverage efficiency. Many DeFi projects began to attract users with an initial rate of return of more than 10,000%. With the addition of more users and funds, coupled with the behavior of mining, selling and withdrawing, as well as the advantages of large miners in the early stage, many DeFi projects have become The financial Lego model has gradually become a game to see who can run faster. The early Farmer can earn the first pot of gold, and the investment income of the late entrants continues to increase. From the beginning of 3-5 days to pay back the cost, it becomes a one-month payback, and then to dozens of months. Model innovations that do not generate real value are extremely harmful to market participants. Of course, DeFi’s model innovation also brings good industry infrastructure , such as DEX, lending, AMM, machine gun pool, derivatives, etc., and also allows each user to better access new applications through on-chain wallets, further reducing The cost of transaction and intermediary fees. DeFi has also begun to serve some traditional financial services, whether it is to provide payment channels for some projects or to provide liquidity funds for projects. At the same time, in some areas where the financial infrastructure is not yet perfect, such as Africa and other places, small loans are provided to local villagers through DeFi and digital wallets to support the development of the local economy and industry. This is DeFi of great social significance and value. landing application.

Figure 12: The DeFi ecosystem of Solana and Ethereum

Later, GameFi opened a new way of playing DeFi, which is actually the emperor’s new clothes. It only added some more engaging operations and interactions, but the core essence of GameFi is actually to compete with the sustainability of the Tokenomics model and the user acquisition ability of the project party. and the ability to trade in the secondary market. Of course, with the reduction of macro liquidity and the lessons learned from the loss of users participating in various GameFi games, the new round of GameFi games needs to find a truly sustainable attraction for users, and can truly balance the number of new users and the continuous unlocking. The core problem between token selling pressure, otherwise, it will soon lead to the emergence of a death spiral. In the last bull market period, most GameFi’s life cycle did not exceed three months, which is very similar to the life cycle of most projects of traditional trading projects. At the same time, when the GameFi project had a death spiral, the project party was powerless and unwilling to save the market. The cost of restarting a new game was relatively lower, and at the same time, no effective users and assets were accumulated. Most users saw that GameFi’s games lost Play-to -Earn’s incentives are quickly transferred to new projects. Therefore, GameFi games are extremely risky, and very few games like Axie are the sum of opportunities from various macro and micro factors, which do not have universal possibilities. Copy ability.

Of course, the industry is still constantly reconstructing the basic settings of GameFi, such as game distribution, chain game distribution studio, open Metaverse co-construction theme games, etc. The teams of traditional game manufacturers continue to go to the sea to launch games with higher quality and content, but the core point is to understand the contradiction between the token incentive model and the flow of new users entering the circle. After this round of market shuffling, I look forward to the next We can see GameFi projects that continue to create user stickiness and have a more robust economic model.

Figure 13: GameFi Market User Growth Trend

The crash of Luna/UST is the symbolic event that this round of bull market finally officially turned bear. In fact, from the peak of the last bull market to the outbreak of the Luna incident, mainstream currencies such as BTC have fallen by about 50%. Under such a background of declining liquidity and loss of users, Do Kwon continues to give high interest rates, while also taking Most of the funds were spent to buy BTC, which led to being targeted by short sellers, seized the loopholes in the additional issuance and destruction mechanism of LUNA/UST, and at the same time shorted LUNA/BTC to let UST break the anchor, which in turn caused the market to panic and flee. In addition, the project side’s reserves are not enough, which will lead to a run on it, which will then be transmitted to the entire system. LUNA will be issued indefinitely, and investors will suffer huge losses. In fact, LUNA is already a rising star of the new public chain, and many new development applications are also being developed, which are basically the light of Korean project parties. However, no matter how good the technology is, no matter how many VCs and market makers support LUNA, Genesis Trading also suffered heavy losses from saving UST. As long as leverage is too high, liquidity is in crisis, model growth is unsustainable, and there is not enough market awe, a crash seems to be a matter of time. It took only 72 hours for the entire LUNA/UST to step down from the altar. The clearing efficiency of the financial market is so high, which also reflects the bloody capital and the vulnerability of the mechanism.

Figure 14: The crash of Luna

Therefore, in the next round of the market, how to balance the innovation of financial models and the control of liquidity risks is also a very important direction.

2.3 Liquidity and narrative drive

The liquidity drive is divided into three aspects, including macro liquidity, capital liquidity and asset liquidity.Only when these three work together can a big bull market really form, and only when individual liquidity drives force, it will only cause a staged or partial bull market. Therefore, liquidity drive is an important promoter of the industry. , is also an important symbol of the transformation of bulls and bears.

Macro liquidity represents the development cycle of the global macro financial market. In cycles with sufficient liquidity, such as 2017-2018 and 2020-2022, a bull market erupts. When interest rate hikes began to reduce liquidity for inflation control, the digital asset market was now strongly correlated with the U.S. financial market. As a risk asset allocation, it was also affected by the investment preferences of institutional investors. Therefore, at the end of 2021, when the market expects the end of the new crown pandemic and the Fed will raise interest rates about 6 times in 2022, it has basically marked the end of the last round of bull market. Therefore, the end of 2021 from November to December is a good time to realize the last round of bull market.

Figure 15: Macro liquidity peaks in late 2021

Fund liquidity includes the volume of new funds in the market and the activity of existing funds. When hot money begins to flow into a certain track or project, it is likely to be accompanied by a phased or local bull market. For example, the hype of some model currency projects in 2019 also caused some local hot spots in the last round of bear market. New funds Start pouring in. When the 2020 DeFi Summer brings new funds and activates the existing funds, the liquidity of the market funds is very sufficient. With the boost of the model leverage, more liquidity is created out of thin air, which in turn triggers a new round of big bull market.

Asset liquidity includes the number of new financing projects, the activity of entrepreneurs, the activity of the community, the number of coins listed on exchanges, etc. These represent the supply of new assets and new projects in the industry, as well as the amount of active material for new narrative logic. Only When the number of these new assets is large enough, the liquidity of the assets will be abundant, and the primary and secondary markets will have enough investment themes, providing a broad and diversified selection of targets for the capital accommodation of a new round of bull market.

Narrative economics is also an important marketing and advocacy tool for the digital asset industry.Consensus meetings in the industry, traditional listed companies, well-known applications, and even sovereign countries have also joined this narrative trend: Paypal accepts Bitcoin merchant payments, El Salvador announces Bitcoin as legal tender, and Central African Republic issues Sango token in the country to attract investment. Traditional entities improve efficiency by accepting and using digital assets, and digital assets are endorsed by traditional entities. The two complement each other and promote each other.

Whether it is a utopian ideal country narrative or a realist technology-driven narrative, it requires a grand social development background, solves the pain points of industry development, and builds a more fair, autonomous and open financial system. Investors, users, and communities all need these narratives to drive the hype and rotation of various hot topics. Of course, a good narrative attracts the influx of traditional capital and talents, promotes the development of the industry, gives everyone confidence in a bear market, and creates a hot spot for the market in a bull market. Narratives also have the needs of self-iteration and market evolution. They need to meet the expected management role of the project party in different cycles, and also need to meet the needs of market stability maintenance and continuous manufacturing of hot spots.Of course, many narratives will be abandoned by the industry and users after being falsified. Therefore, for narratives that have been falsified, they should be withdrawn or stopped in time.

As an investor, you need to have a profound ability to distinguish true and false narratives. Here you need to have all-round knowledge and ability reserves, as well as a certain market and time verification.

Figure 16: Robert Shiller, The Economics of Narrative

2.4 Security and Privacy Drivers

Security drivers include the continuous improvement and improvement of asset security, account security and transaction security. The security of the digital asset market has always been the biggest concern for investors. Witnessed too many security incidents, from the loss of coins on the centralized exchange Mt.Gox, to the Rug & Pull of various DeFi protocols, to the hacking of various cross-chain bridges, such an unethical approach hurts Many investors have also affected the entry of large funds. Therefore, the industry is constantly self-correcting, constantly removing the false and keeping the true, and creating more secure asset custody solutions, wallet solutions, transaction protection solutions, etc. It can better provide investors and large funds with a safe, transparent and auditable security infrastructure, and it is also an important guarantee for the introduction of traditional capital in the next bull market.

Privacy is also an important direction that industry participants pay attention to. From the initial anonymous currency Monero, to Zcash, Tornado Cash, to the privacy project Aztec of the second-layer ZK rollup, they all reflect the needs and concerns of industry participants for privacy. After all, fundamentalists in the digital asset world all hope for anonymity, respect for privacy, and create value in a free and open financial world.However, as regulation intensifies, such as the sanctions on Tornado Cash, many in the industry worry about whether the next regulation will fall on them. Therefore, there are also discussions recently on how to counter sanctions and how to protect the autonomy and privacy of the encrypted world. The future privacy drive will be a process of integration. On the one hand, the supervision will conduct more KYC/AML for exchanges and wallets. On the other hand, the industry’s native privacy encryption protocols will continue to come out, and eventually there will be some protocols. Accepting certain supervision, it will also protect the privacy and autonomy of users to the greatest extent.

Figure 17: Comparison of Monero & DASH & Zcash Privacy Features

#3 Core Risk Laws for the Development of the Digital Asset Industry

The end of each round of bull markets or industry changes is due to the emergence of some core risk events. By summarizing and analyzing these issues, we can better predict the inflection point of the market or industry, prepare in advance, and protect our investment returns and asset safety. .

3.1 Trust Risk

Trust risks include trust in platforms, trust in projects, and trust in assets. Due to the savage growth in the early stage of the industry and the lack of regulatory constraints, the cost of trust in the industry is extremely high and the cost of default is extremely low. This leads to bad money driving out good money, which affects the normal development of the industry. It is also an important risk consideration for investors and institutions.

The trust risk of the platform includes a comprehensive assessment of the platform’s asset management capability, reputation level, risk control capability, etc. From the running of the exchange platform, which led to the loss of all small retail investors, to the bankruptcy and liquidation of asset management companies such as PayPal and Celsius, which led to the damage to the assets of large investors, it all reflects the trust risk of the platform. Of course, some investors do not have enough professional level and ability to investigate the trust risk of the platform. Therefore, in the next supervision process, there will be custody services, audit services, and insurance services similar to traditional finance. In terms of mechanisms and models Try to avoid the malicious behavior of the platform, so as to protect the rights and interests of investors. Investment institutions and individuals should also consider cooperation with platforms with strong capital, good reputation and high level of risk management.

The trust risk of the project includes a comprehensive assessment of the project party’s operational capability, moral level, and entrepreneurial spirit. Since the private placement stage, the market has been constantly filtering and screening project parties. The first is due diligence screening of investment institutions, the second is the listing of exchanges by exchanges, and the third is the screening of retail investors in the secondary market. Project parties who can survive these three screenings and continue to develop are few and far between after each round of bull-bear conversion. Therefore, as a market participant, in each round of screening, you need to keep a clear head, so as to better reduce the risk of running away due to the trust risk of the project party, the secondary market is smashed, and the project is returned to the community, etc. operate. The collapse of the star project Luna at the beginning of the year also taught the old and new leeks in this round of the industry. The core problem is the operation ability of the project side. The overly aggressive trading style has laid the groundwork for the collapse in this year’s bear market environment. Investors do not have a mechanism for in-depth analysis of the project, resulting in no timely stop loss or exit. Such learning costs are huge, and it also hurts many retail investors who have just entered the industry.

The trust risk of assets includes comprehensive consideration of the authenticity, liquidity, and tradability of the underlying assets. If the underlying asset is unreal, has no practical application value, or is not even on the chain, then it is a string of numbers that can be reset to zero at any time. Many projects that rely on the market-driven belt model are similar. The liquidity is reflected in whether there is a suitable exit channel, and whether the project party or the exchange has enough acceptance assets. If the platform or the project party does not operate well and cannot be realized, it will cause huge losses and psychological damage to investors. Finally, tradability is reflected in whether digital assets can be exchanged for other assets on the chain, and whether there is liquidity. If there is no counterparty, even if you hold 99% of the tokens of the entire project, it is basically equivalent to unrealizable. Numbers are worthless.

3.2 Risk of Liquidity Depletion

Liquidity drying up is one of the important parameter indicators of the bursting of financial bubbles.Liquidity drying up is an important assessment basis for each round of bull market highs. The evaluation indicators of liquidity exhaustion are as follows: 1. The volume of new market funds begins to decrease; 2. Most of the existing market funds have entered the market; 3. The market user activity and transaction volume indicators have reached their peaks; When the cyclical peak occurs, it basically means the emergence of a cyclical peak. Therefore, investors must view the market cycle objectively and rationally, and carefully evaluate the changes in market funds, users and trading volume, so that they can realize timely cash at the right position and keep profits.

3.3 Compliance and Regulatory Risks

Compliance and supervision are also important factors that lead to changes in the industry structure, track changes, and personnel changes. The need for compliance and regulation led traditional capital to chase Coinbase, creating a model for a global compliant exchange. Changes in local and regional compliance supervision have led to the regional transfer of the entire industry, and going overseas has become a helpless choice for domestic industry practitioners. Regulatory requirements for energy and carbon neutrality have also led to a reasonable ethical interpretation of POW-to-POS, but have also sparked controversy and debate that the switch to POS may be regulated as a Howey Test-compliant security token. The intensification of KYC/AML supervision has also led to the closure of many project parties and exchanges, and their withdrawal from certain markets. At the same time, some practitioners are also facing the problem of personal safety, which further leads to the shutdown of some miner platforms, users cannot withdraw coins, and investors face a long wait. Of course, compliance supervision is an overall trend, and future projects need to consider how to better achieve their own development within a reasonable regulatory framework.

Figure 18: Increased KYC & AML regulation

#4 Summary of Laws and Initial Model Construction

In view of the analysis of the underlying logic, evolution law, and risk factors of the above digital asset industry, this paper finally attempts to summarize and extract an overall framework and map of industry law analysis, and at the same time try to use a preliminary financial model to express the correlation between various factors. In order to serve as a model basis for subsequent empirical analysis of industry development and investment.

Figure 19: Analysis framework model of the overall driving force and evolution law of the industry

The initial construction of the macro-multi-factor model of investment return:


  • Alpha – subjective motivation factor
  • Beta — Macro Liquidity Impact Factor
  • Gamma — risk factor
  • δ — management level impact factor

Expected return on investment E® = [α1* performance and efficiency variables + α2* financial assets and model variables + α3* security and privacy variables]*[β1* macro liquidity and narrative variables]*[1- γ1* trust risk variables -γ2* Liquidity risk variable – γ3* Compliance supervision risk variable] + δ* [Investment research ability + Project acquisition ability + Team stability variable]

The above models show that internal and external driving forces are the core fundamentals for projects to achieve long-term benefits. Only projects that meet the long-term development needs and trends of the entire industry can obtain sustainable benefits. Of course, macro liquidity and financial market sentiment are the accelerators and levers of yield, and the exit yield of projects in a bull market is much greater than that of projects in a bear market. Of course, core risks also need to be considered, otherwise the project team will run away, Rug-Pull, leveraged positions will be liquidated, the market will be liquidated as a whole, and the key people of the project will be arrested, which may also lead to the risk of zero returns. Of course, the professionalism of the investment team or individual, the ability to acquire projects, and stable and continuous market participation are also important factors for obtaining excess returns.

The above model analysis is only for macro analysis reference. In the later period, more industry data will be collected continuously, and continuous tracking and research of different influencing factors and influencing factors will be carried out.

# Conclusion

The industry development of digital assets has its own endogenous driving force, coupled with the promotion of the social environment and the financial system, which makes the development of the industry show the overall characteristics of cyclical fluctuation and upward development. However, with the pressure of various trust, liquidity risks and compliance supervision, it will have an impact on project investment or industry development. Therefore, as an investment institution or high-net-worth individual, it is necessary to consider the layout of a track that conforms to the laws of industry development. At the same time, it is necessary to consider various external risks, and at the same time improve its own investment and research capabilities and project acquisition capabilities, in order to achieve long-term returns that exceed the industry’s average returns, while avoiding extreme risks.

Next, we will continue to explore investment themes in line with the above analysis ideas, as well as the analysis of the industry’s current mainstream track. We will start mining from the bottom, and then analyze the technical architecture, middleware, and finally analyze the native applications that may appear phenomenon-level products. We will also take this as the leading direction of our investment and incubation, and at the same time promote the sustainable and steady development of the industry, support excellent entrepreneurial teams, and personally promote the social practice of digital assets and blockchain technology.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/discussion-on-the-internal-driving-force-and-evolution-logic-analysis-of-the-digital-asset-industry/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2022-09-06 09:46
Next 2022-09-06 09:49

Related articles