Rational vs Absurd
In our usual research, we always encounter these two types of products, rational good children and absurd bad children.
rational good boy
Solve the existing rigid needs, have a clear PMF (product-market-fit) and business model, and have a clear moat, everyone likes such companies; they are Coinbase, Opensea, Nansen, Chainlink, the darling of venture capital, yes The topic of data analysts is the shining star.
ridiculous bad boy
It seems that it does not solve a certain rigid need, and the clear income is only the transfer fee, or the income of arbitrage speculation. Their way of attracting users is rude and makes people feel like they are going to crash at any time. They tend to be category definers; they are PFP NFTs, Meme Coins, Algorithmic Stablecoins, x-to-earn, etc., hot spots of controversy, ridiculous jokes, and popular trends.
We find ridiculously bad boys more fun, whose externalities are underestimated.
Try Thinking: Externalities
- Any economic action has: externalities
In economics, the impact of a private economic behavior on social welfare is called externality . Whether this private behavior is a kind of consumption or a kind of production, it is possible to generate externalities.
what is an externality
As can be seen from the figure above, in the area between the two Pareto Equilibriums, the magnitude of the externality can be calculated. Externalities can be negative (losses) or positive (gains).
negative externalities of technology
- Factory: Environmental pollution, noise
- Robots: Bringing Unemployment
- Internet: too much information, deprived of privacy and security
positive externalities of technology
- Factories: driving up rents in surrounding neighborhoods
- Robots: Keeping humans focused on creative work
- The Internet: Drives free creation and can monitor power and illegal acts
In a closed market, the link degree of market participants is very low, the flow of information and capital is blocked, externalities cannot be dissipated, and they are generally intervened by regulators.
In an open market, market participants are highly connected, and information and capital flows efficiently, so the externalities of each economic behavior will be more significant, resulting in the Rippling effect of externalities .
However, Web3 is one of the most aggressive open markets in history, and also has more externalities.
- Bitcoin is a ridiculously bad boy
Back in 2008, you saw the Bitcoin product. It is not a product with PMF, the payment speed is very slow, and there is no credit endorsement; the early users were niche computer enthusiasts, underground traders and speculators. Compared to Paypal, he is a terrible “payment company”, a not only ridiculous but dangerous bad boy.
But in the following 14 years, with high inflation and restrictions on financial freedom, the externality of Bitcoin has been continuously strengthened and transformed into a huge industrial chain. His number of users has reached 81 million, and the daily liquidity is about 18 billion US dollars. It is a digital asset that is conducive to storage and preservation, and may replace gold in the future. It is not the official Bitcoin organization that maintains these values and beliefs, but all external economic activity.
Bitcoin negative externalities:
- power consumption
- difficult to regulate
Bitcoin positive externalities:
- Driven the mining machine industry (Bitmain, etc.)
- Driven the trading industry (Coinbase, etc.)
- Added new asset classes to financial markets
- Inspired the development and application of blockchain technology
- Used by some small government countries
Externalities of Bitcoin
According to a study by Stanford academics “Can we mitigate the externality of cryptocurrencies”, more than 75% of Bitcoin transactions come from “external financial activities”, and these externalities in turn contribute to Bitcoin’s value.
If we only analyze Bitcoin’s inherent technical and product needs, we may never find the right answer.
Ridiculous bad boy who can’t measure his future grades with test scores.
Try Thinking: Externalities
- What is an external market
Among liberal economists such as Hayek, they believe that rather than suppressing “externalities”, it is better to build a market, attract participants, and form an economy.
Hayek advocates the use of market mechanisms to digest externalities
New species A —> external economic behavior —> new external market, new species B
We call such markets “external markets”, and we should look for new species with huge “external markets”.
- Web3 has a large market of externalities
The future world is more connected than in any era. From the perspective of Web3, token liquidity is extremely high, with a high degree of Openness and Composibility, so products and protocols will generate unexpected externalities.
Curve War stems from the huge externalities of Curve
- Curve has huge externalities. It’s not a simple transaction protocol, it’s a huge stablecoin launchpad
- Axie has huge externalities. It is the largest soil of the Guild economy, and some Guilds have become an inclusive financial service facility in Southeast Asia
- Terra has huge externalities. He spawned UST’s lending and arbitrage activities, and every time it rebases, there are more new users and liquidity.
- BAYC has huge externalities. He has used NFTs to build a huge crowd of high-net-worth investors, from sports stars to artists.
We must see the externalities of a product to judge its true potential.
- Summarize the externality market of Crypto and Web3 in these years (2018-2022)
The most classic externality market (before 2018)
- miners market
- Computing power market
- market place
- exchange market
The externality market after the emergence of Defi (2018-2021)
- Liquidity Provider Market
- Staking market
- Insurance Market
- Curator and Liquidator Markets
- MEV market
- Bribery Market
A market of externalities that is brewing and will take shape in the future (2022 – beyond)
- Guild Market
- Governance Market
- NFT creation marketplace
- Data Market
- Advertisement Market
We found that since the birth of the blockchain, the external market has been expanding, and even more external markets will be born, and it is almost impossible to stop.
These external markets are also strengthening the original platform where they were born, and jointly build a value network. When there are multiple externality markets in a network, it becomes infinitely stronger and more powerful, providing greater externalities to the real world.
Conclusion and enjoyment
In a special world, special time and special industry, excessive “rationality” is tedious and ineffective. Appropriately leaving opportunities to randomness and listening to absurd startup ideas can be opportunities to cherish.
Because the ridiculously bad boy is closer to a miracle than the normal “good boy”.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/embrace-the-absurd-web-3s-externalities-are-more-important/
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