“Bull markets optimize narratives, bear markets optimize fundamentals.” Although this argument is too general, it can still be used as a basic logic to explain how participants think and react in different market environments. This is true of most financial markets, but this guideline is clearer in the cryptocurrency market, which operates 100 times faster and faster than any other existing or historical market.
2022 is clearly a bear market, not only because most crypto tokens are down 80-90% from their all-time highs, but also because the attention of market participants has shifted from a hype-driven Ponzi economy to sustainable income and sound Cryptocurrencies are in demand for solving real-world problems. In a bear market, free capital flows stagnate, and the question of “why are we building this again” crept up.
While it’s true that cycles of bull narratives and bear market fundamentals are nothing new — for cryptocurrencies or any other financial market — it’s worth exploring what actually happened during past bull booms. In this article, I will discuss how I view the reflexivity of the capital rotation game (the theory of reflexivity in the market can be simply understood as the interaction between market trends and investors’ psychological expectations) and the adoption of blockchain projects in 2021. An almost unsustainable growth strategy.
Blockchain bandwidth supply/demand mismatch
Obviously, one of the main problems facing the cryptocurrency industry is the scalability of the blockchain, which is also a possible obstacle to the future development of cryptocurrencies. “The internet of money shouldn’t cost 5 cents per transaction,” Vitalik still affirms to this day. With a throughput of 15 transactions per second and transaction fees of several dollars, it is clearly not suitable for the vast majority of people.
Although this problem has come up in various forms over the years, it first emerged as the Ethereum community hit the Bitcoin community with high transaction fees, but then the script reversed. After the summer of DeFi 2020, we enter early 2021, Ethereum is becoming harder and harder to use for the masses, and the problems of network congestion and high fees become clear.
The above tweet perfectly encapsulates many of the key sentiments and anxieties surrounding Ethereum during 2021. They were forced out because of the price, arguing that the Ethereum community didn’t care about them and more about ideals around decentralization, self-validation, and a monetary premium. People refer to it differently, some will say it’s “out of touch with reality” while others will say it’s a “different priority”.
In an ideal world, scaling a blockchain would simply increase the block size and decrease the time interval between blocks. Here’s how Musk passionately laid out his expansion plans to reduce transaction fees by a factor of 100 on the Dogecoin blockchain.
To make the blockchain faster, adjust the parameter to 11, who knew it would be so easy! Of course, this is not the case in reality. Such an approach would lead to centralization, as running a full node would have higher hardware requirements and would break the blockchain’s security model. Maintaining the properties that make blockchains work while scaling is a challenge.
How Ethereum has served retail needs in the past
Ethereum’s scalability plans are constantly changing. In 2021, Execution Sharding and Plasma were wiped from the plan, and Rollup became a full-on focus just to meet the demand for block space while keeping Ethereum decentralized. Rollup blockchains decouple execution from consensus and data availability, allowing existing L1 blockchains like Ethereum to settle more transaction volumes without increasing the hardware requirements to run a full node.
However, speculation about how long it will take for Rollup to officially launch and reach scale is almost entirely at odds with the difficulty of existing problems. This mismatch of information about the timeline exists between Rollup’s development team and the entire Ethereum community (including you). In fact, in 2021, Rollup is simply not ready to meet the needs of retail investors. Even in 2022, Rollup is not quite ready to meet the demand that comes with global scale.
But this explanation is too nuanced, and retail investors don’t care. Decentralized? Full node hardware requirements? Multi-year expansion plans? Retail investors in 2021 just want faster and cheaper transactions so they can continue to easily bet on speculative coins. Not meeting this (at the time) very real market need would have meant giving up a lot of lucrative money. Will these users simply disable the blockchain and wait for Ethereum to scale? Of course not, in the meantime, their needs just need to be met somewhere else.
Massive move by retail investors to cheaper new opportunities
Ethereum scaling is like replacing two engines on a 747 mid-flight with the passengers of a mid-sized country and the capital value of a mid-sized U.S. bank. But what if we don’t need Ethereum scaling at all, and don’t need to care about “maintaining decentralization”? This will definitely make the problem a lot simpler. All of Ethereum’s code is open source, DeFi primitives are mostly established, plus people are bidding on all these largely worthless governance tokens…
In this way, “Layer 1 Cycle Theory” was born. It’s pretty simple: fork Ethereum’s code to make blocks bigger and faster (thanks Elon), fork all core DeFi dApps, pay people to use it. In this way, you can get a cutting-edge next-generation blockchain that is cheaper and faster than Ethereum. If the timing is right, then you will witness an influx of capital, and all the speculation that comes with hypergrowth.
This method is so simple and effective that it is constantly being performed. Every time a profitable new deployment emerges, retail investors, opportunistic capital, and other market participants gleefully rotate to the new chain to earn “money that fell from the sky.” Each chain often has secret new tricks, usually different narratives or subtle technical improvements, but fundamentally the same theory is at work.
In the midst of a cryptocurrency bull run, this dynamic is a win-win situation for all involved. Blockchain core developers can bootstrap chain adoption (and profit in the process), retail investors are able to engage with DeFi applications again (and profit in the process), and opportunistic capital is able to make their assets work (and profit in the process). It sounds unsustainable if everyone is profitable and there are no losers, and it is. The Layer 1 cycle theory is the extreme of the hyper-reflexive nature of cryptocurrencies. Everything has its ups and downs.
12 Simple Steps to Join a Layer1 Chain Cycle
To understand how this blockchain growth strategy works, and why it works, let’s first look at the steps involved. If we were still in a bull market, this explanation could serve as a playbook, but for now, it makes sense to look at the steps in hindsight as we look back.
Start (fork) a new blockchain, create tokens
The first step is the most obvious; a fork of the Go implementation of the Ethereum protocol (called Geth). Not only is Geth free and open source software, it has been hardened by years of extensive testing in production use. Why waste your time when you already have a low-paid development team building the core technology foundation for you.
Naturally, new deployments of Geth require native coins that users can use to pay transaction fees and support block producers through block rewards. Native coins are also needed to fund the eventual “money printing press” to attract users and pay for the core development team that worked so hard to fork Geth.
So you can’t just fork Geth, you need to start a token sale to supply the initial native coin to yourself (free), VCs (100x less than the public sale price), and maybe some users (leftovers) part below). Regulators are generally too busy sending out moral signals of “investor protection” and poking through legitimate projects without even noticing you.
Again, there is nothing inherently wrong with forking free open source software or launching a token sale, but these are just necessary steps to join the L1 chain rotation cycle that may accelerate blockchain development and allow you, your Investors, retail investors and everyone else make money.
Advertise your “unique” speed and cost advantages
Following the fork of Geth, there is little need to align the block size and block time parameters with the Ethereum mainnet. After all, this new chain exists to be cheaper and faster than Ethereum. After thanking Musk for his wisdom on blockchain infinite scalability, here are some other neat marketing tricks you can employ.
When a new blockchain is launched, the block and state tree is blank. This means transaction costs are almost zero (sub-cents) and they will be included on-chain (confirmed in seconds) in the next block. You want to show the difference between your new chain and Ethereum with a comparison chart to prove to people that only “masochists” will continue to use Ethereum.
Don’t worry that the demand for block space will eventually exceed the supply (at which point a fee market for transactions kicks in), or that uncontrolled “state bloat” will eventually make the chain inoperable (due to increasing disk IO bottlenecks) Big). These are questions that will come up in the future, but for now, your blockchain is faster and cheaper than Ethereum from a technical point of view.
Also, since the block and state tree is empty, the hardware requirements to run a full node will be low, even lower than Ethereum. Over time, as blocks fill up and the state tree grows faster than Ethereum, this will naturally change, but at the same time, you can claim that you have solved the scalability problem without sacrificing Centralized and self-validating.
Naturally, some people will try to point out that you use shortcuts to increase throughput, but they can easily be dismissed as “maximalists”, or simply ignored because they’re clearly NGMI (not gonna make it “certainly impossible”) ‘s commentator. If that doesn’t work, then some more advanced tactics are needed. At this time, marketing became more akin to the psychological operation “gaslighting effect”, and Twitter became the main battlefield.
Find and own a slogan like “Consensus is the bottleneck, scalability is not an engineering problem”, “Decentralization is the cost of destroying all copies”, or simply call those who don’t align with you “poor people” “, “their size is not the size”. It is also a good way to throw out the phrase “the future is multi-chain”.
Congratulations, you have successfully solved the scalability problem of the blockchain without making any trade-offs, that is your advantage. Additionally, you have launched and distributed your tokens, you now have a community of economically incentivized token holders who will mimic your narrative and defend your blockchain at all costs against FUDster (one who spreads fear, anxiety, uncertainty). Also don’t forget to regularly point out how expensive Ethereum is.
Fork and deploy core DeFi modules
By this point, you may have developed a niche community, but so far there is really nothing to do on your new blockchain. Retail investors want applications that can speculate on tokens, and there is demand for key DeFi modules such as non-custodial exchanges, money markets, over-collateralized stablecoins, and derivatives platforms. Looking back at Ethereum again, you will see that it has a free and open source, growing ecosystem of smart contracts that can be easily forked and deployed on new chains.
However, the blockchain core development team deploys its own forked dApps to its own forked blockchain, which doesn’t look like an ecosystem, so you’ll want to have other teams deploy these dApps, which can be done in two ways way to do it easily. The first is to distribute grants to opportunistic developers with innovative ideas to create “\[XYZ\]dApps of the \[ABC\]chain”.
In all fairness, forking and improving open source protocols does push the boundaries of what is possible, positively impacting the industry. But a lot of times, the idea is to simply fork an established protocol, deploy it on a new chain, and package it as something entirely new with different branding.
The second method is more nuanced, but generally less expensive in time and money. Fork these DApps yourself and hire a development team to pretend to be the founder and maintainer. If you can’t find a developer to play the role, play it yourself, but use a pseudonym so no one will know.
The end result and goal is the same – mimicking the Ethereum ecosystem, but on your blockchain, with new DApp tokens so retail investors can speculate. This makes people think “if this new DApp token reaches \[x\]% of its counterpart’s market cap on Ethereum…”.
Ensure dependencies are manageable and sell bridges to users
The benefit of forking Geth is that your blockchain runs EVM, which means that all the tools built around Ethereum and Solidity smart contracts work the same. Importantly, this means that Metamask (which your target audience has already downloaded) will work just like it does on Ethereum, with just an extra RPC connection. The developer community can also use Hardhat, Truffle and all other required development tools to create new dApps on your chain.
However, it’s also critical to make sure your other dependencies are under control. You need a block explorer and either fork the existing chain or pay Etherscan to clone it. You need to provide oracles for your forked DeFi application, you need to contact Chainlink. You need to provide liquidity and legal currency conversion channels for your tokens, and you need to cooperate with exchanges to list coins. You want the experience to be like Ethereum (but cheaper and faster).
Finally, you need to get people onboard your new chain from an existing ecosystem like Ethereum. A separate garden is no fun for people and greatly limits your growth potential. Therefore, you need to create a cross-chain token bridge with a small set of trusted validators managing multi-signature. Making good use of cross-chain bridges may not be easy, as more than $1 billion worth of cryptocurrency has been stolen from bridges in the past year alone.
To join the Layer 1 rotation cycle, you must take the risk of deploying a cross-chain bridge. Once deployed, be sure to inform users that you’re selling them a bridge—and the most seamless and secure bridge they’ve ever seen.
Start the “money printing machine” and start the growth cycle
At this point, you have created (forked) a new blockchain, and you have successfully persuaded some community members to believe and/or echo your claim that “blockchain is faster and cheaper than Ethereum”. But why should users move to yours from other “faster and cheaper than Ethereum” alt-L1 blockchains they are using? Your blockchain may have less liquidity, users, traction and traction than existing solutions.
There is only one answer: for the money.
This step is a key component of the Layer 1 cycle theory. Deploy, advertise, and market large-scale token subsidy programs where users can earn rewards for simply deploying their capital into your blockchain’s dApp ecosystem—often referred to as yield farming. These token subsidies can be on-chain native coins (you mint a portion yourself and can distribute) and/or governance tokens deployed by the dApp itself.
In a bull market, where retail participants speculate on anything moving, the tokens used to subsidize rewards will inevitably have a value above zero even on day one, which is enough to start a virtuous cycle that follows. Make sure to give the subsidy program a strong name, focus on the growth of the program, the growth of the ecosystem, and make sure it’s good growth. Welcome to the world of “money printing machines” that make money like water.
“Fundamentals” increase, enjoy TVL growth
The “yield” offered by your dApp on the blockchain will look quite attractive when subsidized by tokens. Lending rates in the money market will be higher, the return on providing liquidity in a DEX will be higher, and the return on investment of depositing tokens into a contract that does nothing will be higher. As long as the “money printing press” is issuing tokens and people are willing to buy those tokens, the “yield” will continue to flow. However, most don’t question the actual source of the gains, and even for those who do, it doesn’t matter because the “yield” will still be there.
The growing “yield” from the token subsidy program will attract retail and opportunistic capital, who will deploy assets into your blockchain ecosystem through cross-chain bridges. This capital deployment from yield chasers will lead to an increase in the Total Value Locked (TVL) of your blockchain versus dApps, a primary metric that will signal to users and speculators that your blockchain is growing healthily. The “fundamentals” of your blockchain are increasing, and TVL can prove it.
Promote TVL growth as a success
Naturally, this growth in TVL will be exciting, and now is the time to promote your success. Multi-channel marketing campaigns, tweets, and sponsored media articles are the fuel needed to accelerate this virtuous cycle. You will not be alone, as your core development team (who also acts as a marketer), VCs, token holders, dApp development teams and influencers will all be promoting the amazing growth of this new chain.
There is no need to stop at TVL, as users chase the subsidy income, a large number of indicators will rise. Active addresses, daily transactions, protocol revenue, market capitalization, and just about any metric that benefits from subsidized earnings can be used as publicity to prove that your chain is promising.
Don’t stress one metric however – how much money is being spent on token subsidies, or the resulting inflation rate. That massive number was impressive for the original announcement. But after deployment, the focus should be on driving revenue, TVL and growth. Your goal is to incite FOMO (fearof missing it “fear of missing out”) and WAGMI (we are gonna make it “we can all make it”) sentiment – “If you don’t deploy your capital on this new chain, you No speculation on these hot new tokens, so sorry my friend, you missed it.”
Witness Speculation Accelerates
By this stage, things really start to speed up. Retail investors will see this marketing blitz on social media timelines and feel they have to get in on it, after all, the opportunity cost is zero. Impressive, growing TVL and other growth metrics will be too bright to ignore. Therefore, retail investors will feel that these tokens are undervalued and start speculating, increasing their value. The inflation rate of the token, insufficient value capture, or an unsustainable economy are irrelevant, after all TVL is growing, which is a good thing.
Token speculators often not only justify their investments, but also aggressively publicize them, further accelerating the cycle through word-of-mouth marketing. Those pursuing risky and risky careers are addicted to it, but as the value of their portfolio rises, they will feel validated.
Anyone who is clamoring that this cycle is nothing but unsustainable hype just because they missed out and didn’t make as much money as everyone else is talking nonsense. The market has spoken, and these valueless governance tokens are actually very valuable because prices are rising. Forget the circular logic, just look at the growth of TVL.
Cycle Accelerates, Earnings and TVL Rise
The flywheel of Layer 1 cycle theory is now running at full speed. The price of tokens used for subsidized income increases due to market speculation, and the subsidized income provided to users will also increase. These increased earnings attract more capital into your DApp ecosystem, further boosting growth metrics such as TVL. You can re-promote these growth metrics on social media, resulting in more token speculation, which in turn leads to more revenue, more TVL…the cycle accelerates.
This virtuous circular flywheel effect is at the heart of the L1 chain cycle rotation theory
Speculation on the fundamentals of the blockchain ecosystem suddenly makes the fundamentals better. Can you see where this starts to go wrong?
At a certain point, the underlying blockchain reaches its breaking point. Blocks start to fill up, causing transaction fees to increase and confirmation times to increase. This is exactly what your chain should solve. Fortunately, you can simply increase the block size to solve this dilemma. But this increases the hardware requirements to run a full node and is not sustainable because eventually disk IO will become saturated and even the most powerful server-adding nodes cannot keep pace with the top of the chain.
But don’t worry, these are just “growing pains” that every blockchain like yours will run into at some point. It turns out that blockchain scalability issues are fairly nuanced and difficult to solve – it’s always been the case, but now you need to convince your audience because they may question whether you’ve actually solved all the problems. Time to find a fulcrum.
Continue the cycle through the pivot of the narrative
The cycle has been profitable so far, and it would be a shame if it ended like this. But you don’t have to, because what you have now is an interoperable blockchain, it’s not a single chain, it’s an ecosystem of sidechains that are connected to each other through a central hub chain.
It’s just that you can’t call them sidechains because of the negative connotation of poor network security. The name doesn’t really matter, the point is that you solve scalability problems by scaling horizontally. These new chains will not have the same level of security and decentralization as the first chain, but so far, on the way to success, it doesn’t matter.
What you’re trying to scale isn’t necessarily transactions per second, but the flywheel effect. A new sidechain means a new token for people to speculate on, a new DApp that can be subsidized with tokens, and a new blockchain where empty blocks and states can be filled. Eventually, these sidechains will get crowded, just like the deployment of the first blockchain, but thankfully you’ve fixed that. Just start another sidechain and that’s it.
(Again) Shift to Cheaper New Opportunities
The theory of interoperable blockchains is very good, but at this point, its secrets have been revealed. Sellers can become more than buyers for many reasons. The game of musical chairs is over, people have left, and the flywheel begins to reverse itself. As the price of the tokens used to subsidize the yields fell, so did the yields, causing people to withdraw their funds and either place them in other blockchain ecosystems to generate more yields, or simply be reluctant to take risks as the rewards dwindled.
This causes very important fundamental metrics like TVL to drop, making subsidized tokens no longer look like an attractive investment. As the fundamentals “change”, coin speculators become more bearish and start selling. This causes earnings to fall further, more capital to leave, … and the cycle accelerates.
This does not mean that your blockchain and its ecosystem are dead, but that most of the opportunistic capital and retail investors are leaving to find broader opportunities. The remaining users feel that they can benefit from your ecosystem, are satisfied with the existing benefits, or simply have become members of the community. Tokens will never really go to zero, even in times of high inflation, so subsidies will always have some meaning to support the ecosystem.
But in the first place, what caused more sellers than buyers? Most often, a shiny new blockchain that offers better yields, lower transaction fees, faster transaction speeds, and/or a better overall narrative. This blockchain may have the same problems as yours, but that’s okay, the fact remains that they are faster and cheaper than yours, and they’ll let users know.
Therefore, the rotation cycle continues.
Conclusion and key takeaways
The cryptocurrency market in 2021 is largely defined by the JPEG NFT frenzy and Layer 1 cycle theory. When money flows freely, projects can compete for attention, and nothing captures the attention of capital holders more than the opportunity to make a profit, whether through an investment tokenized JPEG that can be sold at a higher price, or Subsidized DeFi yields on blockchain forks.
While this article seems to be filled with pessimism about the alt-L1 blockchain, the growth strategy I described above is the simple logical route, as this approach has been positively rewarded by the market in terms of both attention and capital allocation . Clearly, not every blockchain other than Ethereum is a blatant, profit-making unoriginal fork, after all many blockchains have real merit and unique value propositions that can drive the industry moving forward. This article is not aimed at any specific blockchain ecosystem, but to emphasize that the crypto industry as a whole should not only passively accept but also actively support the capital game.
I am interested in cryptography because it provides a viable path to enforce agreements on a trusted neutral settlement layer that re-establishes trust between distrustful entities, visible to all and no one can tamper. I’m not interested in cryptocurrencies, because we can falsify returns out of thin air in various ways, and the creation of “financial weapons” that destroy retail capital is also out of aversion to assets that are highly reflexive and speculative. It’s just a matter of systemically poor incentive structures that no single project or entity can address, but at least it deserves attention and analysis.
Given the current market conditions, the Layer 1 cycle theory strategy is no longer as effective as it once was. One would expect a growth narrative to be matched with good economics and true defensiveness. I hope that by the time the next bull cycle arrives (whenever) we’ve all learned the lessons of the unsustainable
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/explain-the-investment-strategy-of-the-layer1-growth-paradigm-and-narrative-cycle/
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