Messari’s Crypto Theses report is a must read for everyone. The extracted passages below show how Harmony’s strategies align with the market potential and the industry leaders – in particular, Web3 Economy (NFT, DAO, Wallets) and Infrastructures (Bridges, ZKProofs, Privacy).
“Web3” is a good all-encompassing term that captures cryptocurrencies (digital gold & stablecoins), smart contract computing (Layer 1-2 platforms), decentralized hardware infrastructure (video, storage, sensors, etc), Non-Fungible Tokens (digital ID & property rights), DeFi (financial services to swap and collateralize web3 assets), the Metaverse (the digital commons built in game-like environments), and community governance (DAOs, or decentralized autonomous organizations).
Crypto will be an order of magnitude larger by 2030 because the user economics here are an order of magnitude more attractive. We’re at the brink of a total transformation of the global economy. One that’s bigger than mobile, and maybe even the internet itself... we rocket to a $20 trillion bubble that lasts all year, and sits on par with the dotcom boom in real dollars - unlikely, but possible given accommodative monetary policies worldwide, neverending government spending, and crypto’s accelerating narrative momentum.
Web3 gives us “the chance to upgrade networks into crypto asset centered economies, and build systems where the incentives of network owners, network participants, and third- party developers are fully aligned.”
DeFi offers savers 5% vs. Wall Street’s 0.5%. Non-fungible tokens (“NFTs”) give creators monetization opportunities without Hollywood’s 50%+ rents. Open games and social graphs remove the 100% take rate from tech incumbents and eliminate deplatforming risks... the user-owned economy will outperform the monopolist-owned economy in the long-term.
The American Web3 Council could run point on implementing things like Hester Peirce’s Safe Harbor, handing fraud and cases of bona fide securities offerings over to the SEC. It could work with the CFTC on oversight of DeFi market makers and rules for the perpetuals markets. It could work with the IRS on tax reporting standards to fix crypto’s 1099 problem. It could work with the IRS and others to create the new taxable legal structure for DAOs.
The winning long-term plays I like in the NFT space are infrastructure related, which will outperform - by a wide margin - the expected value of even the bluest chip NFT projects. Investing in infrastructure in a niche like art (e.g. SuperRare), might not outperform the eventual top 1% of NFTs, but your expected value will be higher, it will save you lots of time, and you won’t need to be a tastemaker to have success. As NFT infrastructure expands in every feasible asset category, the infrastructure space becomes especially appealing.
A Cambrian explosion of innovation within the NFT space is just getting started. I’m not sure how much longer the market for individual NFTs can bubble up, but I do know that reliable and ubiquitous NFT tooling is still largely missing. Marketplaces, financialization primitives, creator tools, community-oriented business models, and decentralized identity management / reputation management systems are all in their infancy.
The estimated NFT market cap [was] $14 billion in early September. Given the design space that NFTs have opened up for the entire crypto user economy, the long-term size and scope of this segment is... LVMH ($375B?), while Su Zhu thinks we’ll see 10% of crypto ($225B today) in NFT market cap... more to the opportunity for NFT creators and infrastructure builders than it does to the investability of most specific NFT projects.
The world’s dominant NFT marketplace is raking in cash hand-over-fist amidst NFT euphoria, though competition is coming. Coinbase has 3 million users on a waiting list for its soon-to-be-launched NFT platform (four times OpenSea’s aggregate historical users). FTX rolled out a platform for Solana-based NFTs. Gemini already has Nifty Gateway. Other exchanges will almost universally follow suit with products of their own. Then there’s the open-source tokenized competitors who are lurking, like Infinity, and the Fantom-based Andre Cronje project, Artion... OpenSea could be a $100 billion company.
Metaverse & Culture
If a big part of our future lives are spent living in global, virtual, interconnected worlds (the metaverse), then NFTs are some of the primary building blocks for everything in that world... NFTs can, should, and will transcend their underlying blockchains and metaverses... NFTs will impact every sector of the economy and kids will own more stuff that “look like NFTs than physical items.”
The bigger movement in NFTs surrounding community-owned collections of profile pictures, or “PFPs”, which have exploded to $5 billion in sales through Q3 this year. PFPs derive their value entirely from their early communities and their memes.
PFP projects with engaged, talented core community members that contribute to the project’s culture and economy (like Punks’ early NFT adopters), will attract other members. Their owners might even receive preferential access to new projects and events, share community earnings (through airdrops), take on governance tasks, and leverage their PFPs as capital assets (if they become sufficiently liquid). If NFTs continue to rally, more influencers and celebrities will want the oldest PFPs with the rarest attributes, earliest on-chain records, and strongest memes.
Just like brands rely on memes like slogans, images, brand ambassadors, etc. as intangible assets, crypto collectives could leverage NFTs in similar ways, as they have a way of wrapping entire sub-cultures in a single public PFP and gated discord.
In music, film, sports, fashion, gaming, etc. Fan tokens are simply collectibles with member rights. Those rights can be financial (tickets, shared royalties), or non-financial (social signal as a super fan, experiential access).
Identity & Names
One of the biggest trends we’ll see in 2022 is the move towards meritocratic, earned NFTs... Composable membership, earned semi- transferable NFTs, and yes, TCRs [Token Curated Registry].
The decentralized domain name services, and the data marketplaces that will make personal data relicensing trivial... Verisign ($27 billion market cap) manages nearly 85% of the world’s 200 million websites today, but the domain space for identities in Web3 could be 2-3 orders of magnitude larger... With the market for data analytics swelling to nearly $100 billion.
It was sort of a part of my identity. It was a mask. What are masks? They’re objects that you can project identity onto. And for 7804, the wise alien, I felt a bit different wearing it.
[Worldcoin uses] zero knowledge cryptography to secure the identities on-chain, and an incentivized network of “Orb Operators” to onboard new users $10 at a time.
DeFi on NFT
Price discovery in the NFT market, not only for secondary sales, but for virtual asset collateralization... will be one of the most important areas of NFT infrastructure development in the years ahead.
[How NFTs] fractionalize their ownership effectively... multiple real world analogs: timeshares, and subletting in real estate, Rent The Runway in fashion, personal seat licenses in sports.
The Uniswap v3 automated market maker... was largely spawned by Paradigm’s Dan Robinson. Things like Floor Perps (synthetics that allow NFT holders to borrow against assets), and RICKs & Mortys (NFT Fractionalization primitives) aim to tackle illiquidity challenges in the NFT markets. Power Perps (liquid options-like exposure without the need for strikes or expiries), TWAMM (large AMM orders spread out over time), and Everlasting Options (co-written with FTX’s Sam Bankman Fried) could bring larger and more sophisticated investors to DeFi markets.
... DAO tooling, which is an existential need right now across crypto communities, where voter apathy is reaching crisis levels and investments are taking far too long to process. If you take the 10 year view that open, token-governed marketplaces will replace companies (as I do); and recognize that their communities will need 100x improvements in collaboration tools in order to operate more efficiently than centralized competitors; and understand that every DAO treasury transaction is essentially subject to a board-level proxy vote today; then you can appreciate why 2022 will be the year of DAO tools.
I’ve bet on [DAO tools]... via Messari’s bet-the-company move to build an operating system for Web3 participation.
The 2020 DeFi boom supplied the “throughput infrastructure” of self-custodied, permissionless trading (like routing and bandwidth in Web1), which allowed NFTs to take off. The explosion of demand for NFTs (plus DeFi) pulled forward demand for more scalable Layer 1 and Layer 2 blockchains earlier this year. All of that will spur growth in DAO infrastructure in the new year: NFTs provide on-chain identity and reputation for DAO contributors; DeFi gives DAO members massive liquid pools of capital to govern; and scaling solutions will make on-chain governance economically feasible.
Community relations impacts how a DAO communicates with investors, liquidity partners, technical counterparties, core contributors, users, and other net promoters. Strong, transparent financial disclosures are the backbone of good corporate governance... Token Terminal (fundamental data), The Graph (on-chain data), Nansen (funds flows), Dune Analytics (aggregated metrics), DeFiLlama (TVL), and Messari (market data and off-chain events).
Quadratic payments... Gitcoin powers “public goods” funding programs that are scaleable (communities vote on proposals vs. committees), open for debate, and democratic without being plutocratic. This is how DAO treasuries will ultimately get unlocked effectively at scale.
“Digitally native communities that center around a shared mission.” Where the communities are bottoms-up, flexible, and loosely organized. They have a shared mission and protocol (on the blockchain), internal capital, and enforceable social norms, and they can be used to manage just about anything: an open-source library, an NFT collection, a social club, a newsfeed, pooled labor.
DevOps, Research, Governance, Data Science... present one of the most lucrative ways to build a portable reputation that will persist across projects.
What’s wild about the web3 ecosystem, though, is its global accessibility. You don’t need to be born in the right city or earn admittance to the right computer science program. The bottoms up model and opt-in membership of DAOs invert the talent sourcing model. You can join a discord server with one click. You can earn bounties and display your proof of work to earn reputation points with the community’s decentralized HR, community vouches. You can apply for grants or submit proposals for full-time employment directly to the DAO membership.
Breaking roles into “bubbles” which allows for sub-DAOs and discrete, fluid teams, something that Yearn pioneered and currently uses... it also pushes organizations to scale via written documentation.
Particularly transformative types of DAOs: Curation DAOs... curation markets could replace centralized, ad-driven algorithms, improve credentialing and social signaling, reduce low-value redundant work, and crowd-fund high-value unique work in information services.
Leverage NFTs as access tokens that give members to a “pod” some discrete responsibilities and DAO treasury rights... as electing sub-committees and holding them accountable for results on a periodic basis. The oversight responsibility falls on the collective... good information (performance analytics) and voter incentives (to overcome apathy).
Governance: those with the money make the rules... DAO contributors and users can earn liquid political capital and delegated authority... pseudonymously.
DAOs are fluid online communities whose assets are managed by the community’s contributors. The organizing primitive of a DAO is code committed to a public ledger vs. articles filed in Delaware, and the blockchain guarantees user accessibility, transparency, and exit-rights (via forks). A DAO’s token determines voting power, allocates funds according to group priorities, incentivizes participation, and punishes anti-social actions.
Fixing the contributor liability issues, and bringing DAOs and their communities into global and local tax, banking, and employment compliance is going to be important. a16z has some good proposals for how to create legal DAO entities as unincorporated non-profit associations that may have flexible, siloed sub-structures... Wyoming took the national lead on this already with its recognition of DAOs as a type of LLC... meeting reporting requirements, paying individual taxes, and filing disclosures... general partnerships that issued unregistered securities.
Going back to the “Howey” securities test (an investment into a common enterprise with the expectation of profits based on the efforts of others), this is the very best way to limit jurisdictional overreach by the SEC and ensure tokenized networks can operate legally in the U.S. Cleanly defining DAOs as a new corporate primitive would serve the dual purpose of clarifying a) what constitutes a “common enterprise” and how to interpret the “efforts of others” in that enterprise, and b) how these legal structures can streamline global tax compliance.
Bridges & Interoperability
Blockchain ecosystems remain divided. They’re like isolationist nations, with limited transportation systems or international trading arrangements. Today there is still no scalable, decentralized, widely integrated protocol that moves value and data between blockchains without relying on trusted third parties. Instead users mostly rely on centralized intermediaries like exchanges and custodians to move value between blockchains, exposing them to custodial risks and seizure/censorship risks.
Just as Ethereum’s composability enabled developers to package protocols together and build new dynamic applications (e.g. Yearn depositing assets into Compound, Aave, Curve, etc, for automated yield), we’ll likely see similar cross-chain applications that emerge once the bridge infrastructure is ready and capable of unlocking crypto collateral.
A bridge that’s credibly decentralized, battle-tested, and well-integrated across Layer 1s would likely emerge as the preferred choice for cross-chain liquidity simply due to its predictability and reliability. As the multichain economy grows, it’s inevitable that cross-chain bridges will facilitate an enormous amount of asset and data transfer volume. Prediction: the most popular L1 <> L2 / L1 <> L1 / L2 <> L2 bridge protocols will have higher daily volumes than the most popular centralized exchange within five years.
The real PoS decentralization comes from the thousands of interoperable PoS blockchains, which will each offer their own unique token incentives, emissions schedules, governance rules, target applications, etc. over the long-term.
Cross-Chain & Layer 2 Rollups
Layer0 Interoperability: Ethereum 2.0, Polkadot, and Cosmos IBC all make similar assumptions that their networks will essentially be networks of interoperable chains with shared settlement layers... Crypto is going modular at an accelerating rate. Ethereum plans to rely on a roster of Layer 2 execution platforms like Optimism, Arbitrum, StarkWare, and ZKSync... Vitalik highlighted the need to move quickly on cross-L2 portability for NFTs.
Ethereum’s persistent scaling challenges, its Layer 1 competitors, and the willingness of infrastructure companies and application builders alike to embrace the likelihood of a multi-chain future... consider whether Layer 1 platforms collectively flippen bitcoin.
The “interchain” thesis has won.. and Ethereum’s rollup-centric scaling plans sealed the deal... Terra to expand its reach cross-chain through Cosmos’s Inter-Blockchain Communication Protocol (IBC). A new insurance protocol on Terra (Ozone) helped add the $3 billion of UST (via LUNA burns) to its community treasury within mere weeks. In addition, the cross-blockchain bridge, Wormhole V2, launched support for Terra, bringing Terra UST to Ethereum and Solana. Momentum for UST is accelerating, as it is now positioned to become the de facto inter-chain stablecoin.
Coinbase’s inclusion of interoperability (a stand to protect wallet-to-wallet transfers and ensure “exit” from exchanges remains painless)... apply a non-discrimination principle to crypto as well (no preferential treatment for TradFi vs. DeFi).
Terra is actually being used at scale as collateral for the second largest crypto collateralized stablecoin UST, which now sits at $7.2 billion in market capitalization, up from (checks notes) $0 last fall. 3) The breadth of Terra infrastructure (Anchor for lending, Vega for derivatives, Mirror for synthetic securities, Mars for AMM), rivals that of any other blockchain not named Ethereum, and may sit on a more stable, interoperable technical foundation (Cosmos’ Interblockchain Communications Protocol) for the long-term.
... 2) cross-chain bridges have been susceptible to a number of hacks so far, the cross-chain availability of some of these tokens opens up a number of compounding technical risks, 3) validator downtime early on in the post-merge environment could lead to slashing, which would impact the staked tokens’ collateral backing.
ZK-rollups: zkSync and StarkWare use these (two sections from now), and dydx is live in production using StarkWare’s technology. ZK-rollups are lightning fast because they use something called validity proofs, making them instantly verifiable and eliminating the need for a liquidity-sucking challenge period.
They have also made strides on becoming EVM-compatible, with StarkWare’s StarkNet and ZKSync 2.0 sporting built-in compilers to support the execution of smart contracts written in Solidity and Vyper.
In August, Polygon’s merge with Hermez – an open source ZK Rollup scaling solution – was a step towards integrating ZK into the core Polygon ecosystem. The team also announced a $1B strategic fund to invest in ZK technology and revealed “Miden” an upcoming STARK-based rollup that will be EVM compatible.
Vitalik thinks that ZK Rollups will process the vast majority of Ethereum transactions long-term.
ZK might be the only solution that will enable crypto to scale to billions of users, and it provides the only privacy guarantee institutions might need to participate in public, interoperable blockchains so they adequately safeguard proprietary customer data... Loopring, Immutable X, and dYdX are early adopters.
Wallets & Security
The backbone of the Web3 economy and the wild world of DAOs are your personal wallets, which are sort of like your personal data vaults... become more important in the years to come... when our wallets can double as universal identifiers and data managers.
Coinbase Earn is doing $60mm+ annualized in revenue... The “learn to earn” plays will be easy to integrate into the Web3 wallets and hosted wallets alike. They’re user education initiatives that pay for themselves in the form of more crypto natives, and thus, more long-term holders... “quest developers” will end up being a lucrative occupation within DAO communities.
User funds are frequently at risk, even in “secure” browser wallets. Exchanges get hacked. Keys get lost in boating accidents. People get SIM swapped. Protocols get exploited.
Defi has a dirty secret. While the smart contracts themselves are fully decentralized, developer teams still have substantial control over the user through their control of the frontend. We’re excited to be announcing Homescreen, a new application on Skynet that allows users to fully decentralize their web3 frontends.
Custody... opens the door for staking, lending, market-making, governance participation... Coinbase holds 10% of all outstanding bitcoin... Ledger is estimated to “hold” 15% of all crypto.
2.7 million Salvadorans will get airdropped $30 in BTC for downloading their new Chivo wallets, and which allow users to pay with Lightning on their phones.
Crypto entrepreneurs and investors want smarter crypto policy... Set clear guidelines on KYC/AML reporting while preserving privacy (FinCEN).
Using crypto for nefarious purposes leaves an excellent paper trail for prosecutors to lock in a conviction. People who build products that aim to serve dark markets almost always get caught and go to jail... Treasury has asked for more funding to track and fight crypto crime. The DoJ has set up a national cryptocurrency enforcement team... the State Department agrees! They are paying pseudonymous cybercrime whistleblowers in crypto.
Crypto tax reporting leads to some fourth amendment concerns around unreasonable searches and seizures, but it’s really the eight amendment (cruel and unusual punishment) that should be cited in tax audit defenses... TaxBit isn’t a $1.3 billion company.
The Infrastructure Bill... the 6050i reporting provision... could be applied to capture individuals who write code, validators who process transactions, and active crypto governance participants. The language was ostensibly written to ensure DeFi transactions could be monitored and taxable events reported to the IRS... The other big battle, of course, is with 6050i, which usually obligates businesses to file reports (including names and Social Security numbers) whenever they receive more than $10,000 in cash from a counterparty. The infrastructure bill updated 6050i to include crypto reporting... non-compliance could lead to a felony charge and up to five years in prison. That would effectively bans intermediary-less transactions, as it would make compliance in certain markets (NFT art sales) functionally impossible.
Taproot makes bitcoin transactions cheaper, its adoption of “Schnorr signatures” will enhance bitcoin’s privacy defaults and fungibility by making all transaction types (simple payments, lightning channels, and multi-sig transactions) look the same... v22.0 (released this fall) connected bitcoin to a second anonymous communication protocol, the Invisible Internet Project, in order to complement the Tor integration and build resiliency to bitcoin’s secure messaging capabilities, making it even harder to de-anonymize users.
Layer 1 Protocols
ETH sits at ~60% market cap dominance [versus 98% in early 2021] among Layer 1s... with five dominant $1+ trillion technology companies... on the size of their entire economies, their developer ecosystems, the value they secure, the interoperability and incentives they offer, their value capture mechanisms, and which technical tradeoffs you believe the largest applications will choose to optimize for.
It’s likely that we’ll see >80% of on-chain EVM transaction volume move to L2 chains within the next 12 months. The speed of the migration will be incredible once it’s been derisked by other top applications, and the PoS Merge gets implemented in early 2021. Time is of the essence as other Layer 1s continue to gain market share.
Interoperability of state and value is likely to place downward price pressure on layer-1 blockchains that have no monetary premium, while enabling strong middleware protocols to achieve cross-chain, winner-takes-most dominance in their respective services... Base layers have instead continued to grow fatter.
Bitcoin dominance slid from 71% to 42% this year. Bad. But ETH’s smart contract platform dominance also slid from 80% to 60%, and might bleed additional value to its new Layer 2 rollup “allies” that come to market in early 2022.
Fears over stablecoins’ independence, censorship resistance, or collateralization could lead to more interest in bitcoin-collateralized crypto dollars... BTC has a 2.5x market cap lead, and a much lower rate of collateralization as working capital today, which means it’s being underleveraged, and there’s a much higher ceiling for new BTC as DeFi collateral than ETH. I think wrapped / synthetic bitcoin tradeable on other blockchains will double again in 2022... as more long-term bitcoin holders realize they can borrow more cheaply against their holdings in DeFi than on centralized services.
Su Zhu who loves Doge “fundamentally” due to its virality, community, humor, and unserious user base... [but] jokes get old, and even early holders will eventually realize they’re sitting on real gains and find a less expensive joke. Reflexivity isn’t fun on the way down, there won’t be an institutional buy wall for cute Shiba Inus when the trend reverses. An unserious user base could also lead to a large swath of users who panic sell in Q1 once they get their tax forms and realize the magnitude of their obligations.
Bias for user activated “soft forks” make it the only crypto protocol to protect minority rights amidst the “tyranny of the majority” offered by hard forks... the most likely path to censorship is in soft-forked code activated by a validator network whose incentives are tied to ongoing transaction processing... Bitcoin’s bias for soft fork upgrades prioritizes “user coercion over secession” - keeping the family together sort of like a “drag along” shareholder provision. You’re ultimately getting pulled through to the new version of the protocol automatically once a large enough contingent of users signal their support of the fork.
The Bitcoin futures ETFs that were approved in mid-October are terrible for non-Wall Street investors. Despite nominal fees of just 65-85 basis points, it’s likely these toxic assets will cost investors closer to 5-10% / year in hidden costs due to their structures, bitcoin’s ongoing volatility, and the market’s long-term bullish trend.
Issuing the BTC futures ETF... a massive arbitrage opportunity... to add multiple new intermediaries who all make profits - the ETF provider, clearing house, futures broker, administrator, auditor, law firm, CME and hedge fund arbs.
Grayscale’s Bitcoin Trust.. 1) the public float hits the OTC markets in slow motion after the 6 month lag and 2) there’s no redemption mechanism to get your bitcoin back by converting the underlying shares... The Rule 144 loophole paved the way for accredited investors to pile into Grayscale trusts early, then flip them to retail for mega-premiums after the lockup period.
The $6-10 billion gap between GBTC and the trust’s NAV... DCG pays itself (through Grayscale) the 2% management fee on its GBTC shares... Investors lose as GBTC trades at an average 15%+ discount to NAV.
Eight years of SEC foot dragging limited the bitcoin float in ETF-like vehicles to just 5%. An earlier approval could have created centralization risks in bitcoin’s money supply - risk that is minor today, reducing the odds Wall Street can ever manipulate the bitcoin markets... As other large institutions build positions, the smart ones will go for direct exposure, and lower fees... such as Ark Invest’s $400 million of GBTC holdings in ARKW.
Day ONE Startup
If you’re overthinking, write. If you’re underthinking, read... Your boss is tired of being your manager. (How you can manage up)... “Don’t follow your passion”... maintaining zero direct reports who aren’t insanely organized, communicative, and capable of managing up.
How can you survive the remote-first, globally-distributed, hyper-growth, crypto chaos without writing well? Reading helps me identify blind spots, but it’s writing that helps me focus and streamline my thoughts... Good prose elegantly communicates your ideas to other humans, incepting new ideas into their heads (through memes)... converting missionaries to your cause.
Crypto companies are simply bigger, faster, more aggressive, and unshackled by the distractions of maintaining 50 year old parallel TradFi infrastructure. The talent pool only moves one direction, too... into crypto, where we’re still early in the multi-decade migration of financial, technical, and creative talent to crypto.
Over the past 18 months, OpenSea has enjoyed one of the fastest revenue ramps of any business in history. They’ve gone from a seed-stage startup to a potential decacorn, and I think they could eventually be a $100 billion company.
Launched in March 2021... OlympusDAO may be the year’s most important new project, and non-pegged stablecoins may be the best bet this industry has when it comes to de-pegging from the US dollar.
Kyle Samani’s Multicoin Capital had a historic year - by crypto standards and venture capital standards, period - with multiple billion dollar winning bets across a variety of crypto segments. The Graph, Helium, Arweave, Solana all reached billion dollar network status this year, and the rumor is Multicoin eclipsed $10 billion in AUM in the process... [among the best performing investment firms of all time].
Crypto Theses for 2022 - Messari
This year has been a roller coaster of a decade. DeFi 2.0, NFTs, DAOs, Interoperable Chains and regulatory gyrations from China to DC - the last 12 months have been wild.