Editors Note: This article comes fromOrange Book (ID: chengpishu)Editors Note: This article comes from
Orange Book (ID: chengpishu)
Orange Book (ID: chengpishu)
, by Chris Burniske, published with permission.
The next few quarters will be an intensive phase of mainnet launch for Ethereum challengers (that is, the next-generation public chain).
These public chains will not only launch the main network, but also release their own tokens to the open market for public offering or listing on exchanges. Transitioning from private placement to public markets, the new price discovery will be a process worth watching and understanding, especially considering that many public chains are expected to start at billions of dollars in valuation.
Next, let me talk about the analysis of the public chain after it goes online. Although Bitcoin maximalists may think that this is a meaningless survey of altcoins, the market performance and behavior after the new public chain goes online will greatly affect the sideways market we are currently in and the future of the bull market. develop.
First of all, I expect that the listing price of most public chains will face extreme downward pressure. Two signs that can be referred to are Algorands ALGO and Hashgraphs HBAR.
Of course, I write this article without the slightest schadenfreude mentality, because it also affects Placeholder and many entrepreneurs and investor friends in this industry.
Based on simple intuition, most public chains have too high expectations for their own valuation in the vibrant private equity market, and they need to continue to maintain such a valuation in the public market seeking blood after going online. In a bull market, anything can go up for no reason, but in a bear market, people’s trading psychology is to sell short, especially when there are problems with the fundamentals of the project. Fred Wilson recently wrote an article about how the public market can provide valuation calculations for the private market, and I think a similar phenomenon will appear in the blockchain industry.
Why are private equity valuations so high? Many have warned against this pattern, but Albert Wenger put it most clearly when he wrote in May 2017: In a bubble, everything is valued with reference to the rest of the bubble, not to the rest of the bubble. The whole real world outside the bubble.
To this day, the most common method of valuing a crypto network remains by assessing its network value, similar to comparing the market capitalization of companies [1].
At the beginning of 2018, the network value of Ethereum was more than 130 billion US dollars, while the public chains (such as Cardano and EOS) that were not online but have been traded publicly were valued at 10-20 billion US dollars (refer to the screenshot of CMC in January 2018 below ).
In this environment, it can be considered that a public chain with a private equity valuation of US$6 billion has 20 times the room for growth compared to the level of ETH, and compared to public chains with similar technologies that have already been launched, this valuation is almost the same. There are 40-70% off. Fast-forward to today, and the $6 billion valuation is mostly bleeding if dropped to EOS’s current market cap (down 55%, leaving $2.7 billion) and down to Cardano’s levels (83%, 980 million), or even lower.
The valuation of the public chain is too high, and the worse situation may be:
1. People continue to expect similar valuations to Ethereum because of the “high technical content” without understanding what exactly has supported Ethereum’s market cap thus far;
2. If the public chain cannot establish a strong charging market among users, then inflation will cause great problems to the market;
3. A large number of public chains launched too many homogeneous systems in a short period of time, which dispersed the few developers and investors in the market.
In the past few years, encryption technology has been limited by the relatively high-cost innovation environment. I hope that the public chain and Ethereum 2.0 can help us enter the era of low-cost.
Blockchain is not too dissimilar to the IT industry of the 90s-2000s. At that time, that industry over-allocated capital and produced excess capacity, which led to asset collapse and oversupply in certain sub-industries below IT (such as the Internet backbone network), allowing entrepreneurs to experiment and innovate at a lower cost.
The experiments that stalled later also received more capital and labor injections, not to mention a slew of imitators pushing similar models into new markets. In a fair system, the low cost of infrastructure is ultimately passed on to consumers, increasing real demand. Investors will win or lose because of timing, but entrepreneurs and consumers will always win.
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Advanced technology alone does not justify network value
I see a similar logic in almost every public chain project: our technology is better than Ethereum, therefore, we should get a similar or even better valuation. This faulty logic, perhaps, is to see software as a means of extracting centrally controlled profits (i.e. technology monetized through equity).
In the world of equities, superior technology differentiates a companys product and allows it to retain profits, thereby increasing the companys profitability and thus market capitalization. But in the open-source world of cryptocurrencies, technology has few barriers to entry, and protocols that try to maximize profits from suppliers and consumers are bound to lose out to other protocols.
If a good-enough technology receives sufficient third-party investment in complementary tools and distribution formats, the benefits of these network effects may outweigh the switching costs of other technology alternatives. That’s not to say that Ethereum’s lead can’t be wiped out, but that third-party investment and the value it generates will take time. To further illustrate this idea, lets analyze the expected behavior of early public chain holders, and then compare it to Ethereums capitalization path over the past 4 years.
First, we know that anyone who buys an asset for profit will want to sell it for more than what it cost to acquire. Otherwise, why should you acquire this asset earlier than others? Acquisition cost has become a psychological bottom line for people, and participants will only consider selling below this bottom line when the hope of asset recovery ability weakens [2]. For investors, the purchase price represents the cost of acquisition, while for miners, this cost is represented by amortized capital expenditures and ongoing operating expenses.
When a public chain is launched, the only cost visible in the market is the amount of funds raised by the founding team. Since public chain investors usually hold most of the circulating tokens, the main trading force on the order book is investors. So far, the progress of the public offering of public chain projects shows that the enthusiasm of investors is at its lowest point, because they hope to complete the exit above the cost. Without lock-ups, we can expect a cascade of sell-offs as each group of investors tries to outperform the price of the last round they participated in [3].
Where is Ethereum different?
Time and Proof of Work (PoW). Since the launch of the mainnet in 2015, Ethereum has been building a strong stakeholder group, making its transaction order book more diverse than next-generation public chains led by investors.
More importantly, the cost of miners, like BTC, provides the value basis for the value of ETH. Miners will only sell below cost if they are in trouble or lose confidence in the assets future prospects. Therefore, the miners cost naturally creates a price floor for the ASK price of the miners sell order [4].
In the early days, the cost of Ethereum miners was low because the network was not so competitive, and Ethereum at that time was held by investors who bought $0.31/ETH. The price was less stable in the first half of the year, but thats okay because the market as a whole was much less focused then than it is now, and expectations for Ethereum were relatively low. For example, on October 21, 2015, Ethereum was trading at $0.44 with a network value of $33 million.
As Ethereum becomes more popular, and people expect more from it, Ethereum becomes more competitive, increasing the cost of earning each unit of ETH. Rising costs require miners to increase their ask price (ASK), and more sells are required to cover these costs. Forced selling injects daily liquidity into the ETH market, thereby encouraging organic price discovery [5]. Now ETH is developing a monetary premium, so the flywheel continues.
Everything I said above applies well to the PoW world. In PoW, the market seems to be trying to value native assets as commodities. On the contrary, almost all public chains are using PoS, and I hope the market sees it as something capitalized by capital assets. As a capital asset, the value will be determined by the profitability of being a provider in the network (the asset is the access required to be a provider).
I dont know if joining PoS is good or bad for the public chain. For one thing, PoS is newer than PoW, and a skeptical market will often tend to underestimate the newer unproven stuff more than the older proven stuff. On the other hand, the value of a capital asset should not be fixed in the cost of production like a commodity/workload asset, but should be driven by supply-side profitability (i.e. revenue minus costs). If some public chains can provide high-value services to the world, while requiring their suppliers to provide low-cost services, then these networks may be highly profitable for the supply side, which makes the access rights of the supply side a Coveted property. In this way, the public chain may not need to step up its own cost curve like a PoW network.
In order for the more optimistic interpretation of PoS to be a reliable approach, there needs to be a competing market demand for the services provided by the public chain. In the long run, the players on the demand side will be the ones paying enough profits for the supply side (although these may still be much lower than we are in the services of equity and shareholder management due to openness and global competition and diversification of stakeholders the maximum profit that can be seen). As I discuss later, the high-throughput nature of these networks may ultimately make it difficult for competitive demand-side markets to develop.
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Inflation intolerance and a potential downward price spiral
In any network, if there are too many suppliers of network services (such as block space, smart contract processing power, storage capacity), then users have no incentive to pay for using the service (for example, weak electricity market).
Talk to any staking provider and the profits you make from staking pale in comparison to the downward price spiral.
If the market loses confidence in the networks ability to somehow charge users fees, the market may also stop tolerating inflation and misuse of the networks native assets, and weaken the security of the PoS network. The market throughput capacity of aggressive next-generation public chains makes them inclined to this model, because the advertised oversupply has brought resistance to the development of a robust fee-based market.
If the focus of these high-throughput networks is to enable applications that require Facebook-scale transaction volumes, once such applications are deployed and used, they will solve the weak fee market problem. Fees can be kept low because the supply side charges fees proportionally and PoS is less expensive to operate.
So it all boils down to a lack of killer apps and the developers who make them, which brings us to the next part.
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These teams have been under construction for the past two-plus years, and while a few have been launched, most have yet to be established. Teams are feeling the pressure as many are behind on their roadmap (a result of raising too much money and losing focus), or they want to grab market share before their competitors, so there is an urge to launch en masse.
in conclusion
Most engineers I meet are reluctant to speculate about the systems they are developing. They want to develop and know that the infrastructure they develop will work reliably. If developers get overwhelmed by the number of options and adopt a wait-and-see strategy, then I expect investors to do the same. This means there will be fewer BIDs to absorb the incoming supply of Ethereum challenger-grade ASKs.
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in conclusion
Originally, I wrote my own conclusions, but at the time of writing, Brad Burnham summarized the conclusions he drew from it, and Im leaning towards my own:
1. Even though the crypto bubble of 2017 was an irrational exuberance, it produced many valuable experiments
2. In networks where multiple stakeholders invest time and money, technology is not always the deciding factor.
3. In addition to the number of stakeholders, the diversity of ETH stakeholders is the biggest advantage.
4. ETH has gradually established liquidity, and mining has given it a bottom line of cost.
5. We have a better understanding of the characteristics of POW assets, but the understanding of capital assets created by POS is still in its infancy.
6. Unless high-throughput applications emerge to take advantage of the network, the market fees for high-throughput networks will be very low.
