We need to escape Ponzinomic hell

A few thoughts on the state of the crypto landscape and what we need to break out

Over the past few weeks, the rate of new ponzis is only becoming faster... and bigger. For new market participants, everything seems exciting. For those that have been around the block a bit longer, it’s pretty sad to see. I mean everyone is free to do what they want with their money but it’s important to be clear about the state of the industry and where we’re at.

Context

Let’s start with the basics. Every token is basically a sort of “game”. Each game has many factors to it but the one everyone cares about the most is price. The only problem is that people place way too much importance on price but few think about liquidity. But anyways, let’s ignore that for a second.

A lot of crypto games right now have a very similar trajectory:

1. Promise something quite far-reaching but somewhat believable

2. Allow people with the most influence in the network to get in at valuations that almost guarantee to make them money

3. Launch scheme and use influence to increase perceived value of said game

4. Early market participants catch on and get their entry point and then use their influence to further perpetuate the scheme

5. Majority of market participants are convinced that the far-reaching but believable promise will be achieved and price the asset as if it achieved that promise

6. Given a high price point and liquidity (due to lots of attention), people earlier in the pyramid scheme slowly start cashing out their chips given the liquidity is there to support it

7. The earlier market participants realise this and then start cashing out their chips

8. Reflexivity on the downwards spiral takes over and before you know it you end up with tons of charts that look very ugly.

The question you may be asking is what happens between steps 5 and 6 that keep everyone in belief? The answer is....

Sophisticated financial abstractions.

You see, in crypto you can get one token, put it in this one protocol to get another token, which you move on another chain then put into this other protocol to get another token. To the end-user, they just think “oh, this is a fun yield farming game that makes me money.”

But really what’s happening behind the scenes is that each of these steps are like energy containers which capture energy and modify it in subtle yet important ways. The more abstractions you are from the original token the fewer people figure out what’s really going on.

By this point it’s too exhausting to even call out every intricate step but the question you need to ask is “what is the fundamental value being created here for an end-user?” If the answer is “high yield,” you’re almost always wrong. Think harder.

What’s the solution?

I’ve been thinking about this a lot and to me the biggest factor that escapes us from this hell scape is various forms of on-chain identity.

The problem with crypto right now is that if you’re a market participant you’re going to search for where the most money to be made is and the answer to that question is:

a) Participating in the latest ponzi game

b) Trading some half baked narrative

There isn’t any real innovation behind either of these two but it’s what gets the most attention and hype. For market participants that want to take a longer term view, the incentives aren’t as clear. Why? Because in order to make money in the current game you need to have one of the following traits:

1. Gain social influence to get in at the ground floor of the ponzi scheme (investors, influencers)

2. Research like crazy on-chain and on Twitter for the latest narrative to trade in/out while it’s hot (degens, users)

3. Be the creator of a ponzi scheme in a way that doesn’t label you as a scammer but enough to exit the system at its peak (builders)

So what happens if you don’t do any of these things? Well, it’s kind of hard. Let’s take for example some leveraged yield farming aggregator project.

1. The people who hyped/invested in the project have left and don’t bother talking about it

2. Initial yield farms have been depleted and now yields are “boring” non-speculative yields of ~5%

3. Team debates whether it’s worth building anymore because new ponzi is worth billions overnight while years of building has barely netted a single million

4. Building elaborate ponzi schemes is prioritised versus new innovation because creating a lucrative ponzi is the only way for number to go up

Sounds depressing. However, it’s important to think about why even “good” actors don’t support real innovation. The TLDR is that the incentives don’t exist. There’s one incentive in this market: that’s to chase the newest, biggest, narrative/ponzi to profit off.

Perverse short-term incentive schemes exist because to reward users you either: do a “reward everyone” or “reward no-one” approach — which means that the market for “reward everyone” is highly competitive.

Given that crypto is one of the largest, always-on markets, the cost to compete in the “reward everyone” game is often in the billions. Think about the Curve Wars, NFTs or Alt-L1 narratives being peddled. They have to out-compete each other for mindshare in order to ensure that the $ amount for market participants to get involved is sufficient.

Not all hope is lost though, I do believe that there are ways to escape this ponzi-hell but I’ll leave that for another article.

I’d love to hear your thoughts on what I call “ponzinomic hell”.