Do crypto prices actually mean anything?

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The events of 2022 have challenged the survival or survival of crypto. Before FTX collapsed in November, there was the collapse of stablecoin Terra and its related coin LUNA, as well as the associated implosions of crypto lender Celsius, crypto broker Voyager Digital and hedge fund Three Arrows Capital, for to name just a few of the most dramatic. failures. At the end of the year, there were questions about former FTX rival Binance, which faced large-scale customer takedowns and criminal investigations over its compliance practices. Just 12 months ago, many of these companies were being hailed as examples of how vision, bold thinking and daring could build multi-billion dollar empires overnight. Now they offer very different courses.

After every high-profile crypto meltdown, there have been new calls for more space surveillance. The idea is that if we regulated crypto players like traditional financial institutions, they would start behaving like them. But a regulatory framework specifically designed for the technology would only solve part of the problem. This would definitely improve consumer protection and market integrity. However, that wouldn’t change the underlying incentives in the space or end some of the reckless and fraudulent behavior it has attracted to date. For the crypto industry to have a positive impact on society, we must first review how it measures progress and success.

From the beginning, crypto participants have obsessed over the price, market capitalization, and trading volume of competing coins. These measures distorted the incentives of well-meaning crypto entrepreneurs and made it easier for bad actors to blend in, attract capital, and generate hype around their scams. For crypto to truly go mainstream, the industry needs to stop blindly trusting these convenience metrics and pay more attention to dimensions that closely track progress against real consumer and business needs.

The Trouble With Crypto Prices and Related Metrics

It all started in the early 2010s with the first alternative coins (or altcoins) being introduced to compete with Bitcoin, and with an abundance of what seemed like objective, market-driven metrics. Since cryptocurrencies are based on public ledgers, a host of metrics including price and market capitalization were easily accessible from the start. The resulting sense of transparency and deceptive similarity between cryptocurrencies and public stocks legitimized these measures far beyond their usefulness. Moreover, since crypto markets lack many of the protections that were introduced over decades of trial and error in traditional finance, it is far too easy for bad actors to play and exploit. these measures.

The result is an environment where it is possible to launch a new crypto token and quickly appear at least on paper to have created a network worth billions of dollars. In truth, these skyrocketing valuations are manufactured by limiting the supply of coins available for trading, and quickly plummet when the hype machine supporting them slows down. But when faced with the option, it’s very difficult for entrepreneurs and investors to resist the temptation to use these now-standard metrics as evidence of positive momentum. It’s human nature to believe that your token’s price, no matter how inflated, accurately reflects the potential of what you’re building.

By giving fledgling crypto businesses an aura of scale and a competitive moat, these measures also make it easier to attract developers, secure partners, and raise more capital, creating a vicious circle where founders have no choice. other alternative than to fake it until they do it. It’s as if the founders of today’s tech giants had their stocks traded in real time from the time they announced a beta product rather than the time of their IPO. Amid the investment frenzy, uncertainty and hype, it’s easy to get distracted by the numbers, even if they’re unrelated to reality.

This premature financialization of the crypto innovation process has a distorting effect. The incentives it creates dictate the types of issues founders prioritize, how the market rewards their actions, and the long-term sustainability of what they build. Entrepreneurs’ attention shifts away from the more difficult and uncertain dimensions of technical progress, and crypto tokens and their prices essentially become the commodity. As a result, real progress is stagnating.

We have seen where this way of doing business and innovating leads. Pump and dump schemes, exit scams and good old scams lurk well and thrive among legitimate projects when a projects market cap and that number increases a meme that has become somewhat of a religious situation in some parts of crypto are all about that.

Leave bad encryption metrics behind

Ironically, in a context where everything can be easily measured, there is an urgent need for better measurements. After all, measurement is a means of assigning value, it reflects the guiding philosophy of organizations, markets and systems. To stop being misled, crypto entrepreneurs and investors need to rethink how they measure progress.

Consider the profound ways metrics affect innovation.

Every business needs to identify key metrics to align teams, quantify progress, and ultimately compete. Examples range from transistor density at Intel following Moore’s prediction, to the race for megapixels in digital cameras, to progression free survival in oncology, to the developer’s net score in customer loyalty, and more. By channeling attention to a small number of dimensions, metrics force companies to ruthlessly prioritize resources and commit to progress in a specific direction.

This is especially useful when dealing with unstructured problems that have great uncertainty about the best path forward, exactly the kinds of problems that are abundant in infant industries such as crypto.

Once established, however, metrics can last far beyond their practical usefulness: while James Watt developed horsepower at a time when a comparison between steam engines and horse-drawn transport was important, the metric was carried on trains, ships and car engines. Centuries later, although not informative for electric vehicles over alternative measures, it remains an undisputed industry standard.

The same kind of metrics inertia is suffocating crypto and has done serious damage as attention, talent, and dollars have driven out a handful of convenient, but misguided metrics. While coin prices and the value circulating on a network can become reliable indicators of quality when crypto markets mature, today, intentionally or not, they are far too easy to play. Extreme examples of this are stablecoin Terra and FTX’s FTT token, both of which created an illusion of value through aggressive marketing and subsidized growth, only to crash and burn in a death spiral when their faulty economy was put to the test. In surprisingly transparent versions of a Ponzi scheme, investors blindly trust measures of market capitalization as tangible proof of real value.

Unfortunately, honest entrepreneurs can’t completely escape the tyranny of these metrics either, whether because their venture capitalists (VC) pushed them to include a token and drive up its price through a design incentive something that helps VCs show progress with their own investors or because they believe the only way to compete with others is to promise developers and early adopters the same unrealistic financial returns.

A better approach

It doesn’t have to end that way. Crypto is transformative because it allows two parties to transact directly without ceding control to an intermediary: Alice can send value to Bob, enter into a financial contract with him, or transfer ownership of a digital asset or device. a work of art with little friction and cost. Importantly, although they can still use intermediaries to streamline these tasks, Alice and Bob have more control and bargaining power. Like the Internet, crypto networks are open networks, and this openness provides consumers and businesses with more choice, lower prices, and new products and services.

So how can crypto provide these benefits? Entrepreneurs and investors must reject current measures and develop new ones. These new measures should be closely aligned with the impact a crypto application hopes to have on the world. Ironically, this is exactly how inventors and founders have always created value: recognize a problem worth solving for your customers and bank on your startup’s existence to fix it. By obsessing over the problem at hand, rather than early crypto prices and volatility, entrepreneurs can get back to identifying metrics that track progress toward a solution.

For example, founders who want their cryptonets to replace traditional payment rails should compare their growth to the same metrics that payment holders have been using for decades. They should also directly measure the savings they bring to consumers and businesses when rebuilding basic financial services using crypto. Similarly, Web3 entrepreneurs concerned with bringing more choice and competition to the creator economy should measure the economic value they pay to creators and compare it to that of incumbents. While it’s true that crypto can truly eliminate friction and empower creators, these new metrics will quickly show the benefits the technology brings to society.

The gain from going back to basics is substantial. Metrics can turn complex problems that crypto hopes to solve into manageable ones that entrepreneurs, managers, and engineers can optimize on, while giving investors, consumers, and even regulators a much better assessment of the nascent space. It is only by bridging the gap between digital records on a blockchain and their impact in the real world that crypto will make a difference, and building better crypto metrics is a prerequisite for unlocking this potential.

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