Generational Revolution: How Should Long-term Investors Seize the Big Cycle?

Author: NEST

The end of every bull market is always accompanied by various popular projects and hype. The last cycle was about CryptoKitties, and this round is about Bored Apes. So when Bored Apes exploded in popularity, we clearly pointed out that the tail end of the bull market had arrived, and the market was nearing its peak. Why does this characteristic exist?

We must see through the entire development history of the blockchain industry, which contains the codes of the industry's ups and downs, as well as the internal mechanisms of market changes. Investors interested in the long-term value of blockchain may find some inspiration from it. This article attempts to sort out the history of the blockchain industry based on the generational innovation of its intrinsic mechanisms, as well as the phenomenon of its rise and fall, and share it with everyone.

First Generation: Satoshi Nakamoto's Contribution

Satoshi Nakamoto's innovation was a groundbreaking step for the industry; he proposed a solution for the assetization of information. We all know that information is different from general goods or social relationships; it can be easily copied. All cryptographic technologies can only solve the "value loss" (theft) of information during transmission, but cannot solve the "double spending" problem during its use. Satoshi solved the double spending problem that had troubled the crypto community for 30 years by abandoning the natural intuition of token issuance—issuing by the designer—and instead handing it over to a decentralized network for issuance, using consensus to control the usage environment of asset balances. This reverse thinking truly resolved the double spending issue.

In the Bitcoin network, the miner community actually participates in a very special non-cooperative game: token distribution based on HASH calculations and consensus games based on the longest chain mechanism, which laid the foundation for digital currency. Bitcoin, as a new asset prototype, made a stunning debut in the white paper, but after going live, it became merely a toy for programmers.

Characteristics of General Equilibrium

For Bitcoin to become an asset, it must solve one problem: its participants must be allowed to enter and exit freely, without audits, and all relevant information must be known to everyone. This is because assets differ from goods; assets are generally equilibrated. The broader the group of participants and negotiators, the better.

Ordinary goods are locally equilibrated; any two buyers and sellers at any location can reach an agreement. This characteristic naturally determines Bitcoin's openness and censorship resistance; otherwise, it would rely on a specific team to capture value or depend on niche groups for trading, which cannot establish a new type of asset. This general equilibrium characteristic allowed Bitcoin to globalize from the very beginning. Various traders in the Bitcoin ecosystem, from miners to investors and speculators, must consider everyone's specific information to decide their actions. The expansion of Bitcoin adopters means an increase in the breadth and complexity of equilibrium, which profoundly affects its price volatility.

Halving Cycle Effect

Bitcoin's algorithm includes a halving cycle every four years, meaning that under the same computational power conditions, miners' BTC earnings will be halved every four years. This is a cliff-like change, which is impossible in traditional economics. As a general equilibrium of Bitcoin's game, it will inevitably adjust to this change.

It can be anticipated that the Bitcoin ecosystem, and even the entire blockchain ecosystem, will undergo a process of equilibrium disruption and re-equilibration during the four-year halving cycle. This process will not be too continuous or stable, leading to periods of severe price fluctuations. This adjustment process has gradually become a consensus expectation among all groups in the industry: the four-year cycle of bull and bear markets in the digital currency market, with Bitcoin's price becoming the major index in the blockchain field.

The Tragedy of Forks

Bitcoin's design is pioneering and great, but like any new thing, it cannot be perfect; for example, its throughput and scalability have always been criticized. People always hope for perfection, so many have tried to change the Bitcoin protocol, such as larger blocks, faster speeds, etc. However, once equilibrium is formed, change is difficult. Those who control computational power attempt to achieve their goals through forks, leading to the dramatic BCH fork movement.

With the support of large mining pools, BCH's price skyrocketed, reaching 40% of BTC's market value at one point. But the power of equilibrium eventually manifested; BCH could not mobilize all participants in the BTC world and gradually declined, with its market value dropping to about 1% of BTC, essentially declaring the challenge a failure. Simply trying to improve the existing blockchain system in terms of technology and performance, while ignoring the difficulty of challenging equilibrium, is almost destined to fail—a hard-to-overturn social science law.

Second Generation: The Rise of Ethereum

Being entangled in performance improvements is an obsession that obscures the direction of industry development; however, this obsession has a significant market. Ethereum is what breaks this obsession and truly pushes the industry forward. It is not an enhancement of Bitcoin's performance but an expansion of its functionality. Before Ethereum, there were already some projects attempting to add functionalities to the blockchain, such as BTS back in the day, but their attempts were mostly non-systematic and even embedded.

Ethereum's success lies in developing Bitcoin's scripting language into a Turing-complete virtual machine, greatly expanding the application scope of blockchain, and the entire design did not exceed Satoshi Nakamoto's architecture.

To express it in abstract terms, Bitcoin is equivalent to assetizing simple information like digital balances, aiming to transform it into digital currency. Ethereum goes a step further by restoring the programmable characteristics of digital information, extending basic assets like digital currency into functional assets characterized by variables and functions, with ERC20 being a relatively successful case. ERC20 can be understood as a functional representation based on address sets and balance information. Of course, smart contracts can achieve more complex function structures and function nesting, opening up imaginative space for achieving economic closed loops on-chain.

Sub-cycle One: The Token Issuance Boom

Even if Ethereum fully grasped the pulse of industry development, it might not quickly determine its application value because there is a process of exploration for new things. From the various contents established in its white paper, ERC20 ultimately gained market traction. A booming ICO craze started in 2017, igniting the industry's bull market. In hindsight, this application seems very simple, yet it was the breakthrough that Ethereum could find early on.

The token issuance boom was a feast of imagination, with all sorts of magical ideas floating around. From space to quantum, from ride-hailing to music, running, and dining—nothing was off-limits. Some aimed to create public chains and various new application chains. But these projects first issued their tokens on Ethereum for fundraising.

Others directly created applications on Ethereum and conducted ICOs using smart contracts. This wave made people see the power of smart contracts, as anyone could quickly issue a token and raise funds globally. Undoubtedly, the pursuit of innovation and wealth naturally led to a bull market, combined with Bitcoin's cycle, providing certainty of price increases and bringing about some unrealistic illusions.

Bull Market Illusions, Bear Market Hopes

The bull market illusion was embodied in the explosive chain games of 2018, which pushed the market to its highest point. Many people saw the potential of Ethereum beyond fundraising from a small game called CryptoKitties, while subsequent projects like FOMO3D repeatedly pushed gas fees to new heights. People began to believe that Ethereum's imaginative space was much larger than initially thought, and projects aiming to recreate a so-called application chain began to attempt to transition to development on Ethereum.

Even many unfamiliar with Ethereum's workings entered the scene. The bull market brought about an illusion of applications, leading people to believe that Ethereum had infinite possibilities, and everyone could join in to realize their dreams. However, most of these applications were forcibly inserted into a blockchain TOKEN based on traditional internet applications, but the rising token prices made people not think about whether this combination was reasonable; success seemed imminent, and the blockchain illusion continuously inflated the market bubble.

When all the bubbles are pierced by the truth, the bear market arrives. Yet, people were still reluctant to accept it, believing it was merely deviations in certain development directions. Thus, various investors and media, along with traditional business institutions, began to invent certain macro concepts, attempting to quickly establish connections with traditional industries. In the bear market of 2018, STO emerged as a star of hope pushed from the top down.

It led discussions for a long time and seemed to be closely tied to many traditional industries, giving the impression that institutions previously abandoned by technology and blockchain finally had a chance to enter the market and share in the profits. After repeated discussions among investment institutions and traditional brokerages, the bear market appeared full of expectations. However, STO has since vanished, its only role being to provide hope during the bear market.

Sub-cycle Two: On-chain DeFi

What truly brewed the next round of market conditions during the bear market was not the imagined model of linking on-chain and off-chain, nor the explosion of "blockchain plus" off-chain, but purely on-chain closed loops—DeFi, decentralized finance. The decentralized finance projects brewed during the bear market were initially not well-regarded. Whether it was UNISWAP, COMPOUND, or MAKERDAO, they all started in the previous bull market but were drowned out by a plethora of magical projects. Those magical projects faltered in the bear market, with some even facing liquidation.

DEFI gradually seized the narrative with a purely decentralized concept and a CRYPTO NATIVE style during the bear market. From MAKERDAO to COMPOUND, the establishment of the bull market's tone was ultimately based on on-chain contract mining. This mining algorithm based on block production was initiated by a project called NEST, which originated as a lending project. NEST consistently ranked first in trading volume on DAPPRADER during the bear market, driven by on-chain mining, later known as liquidity mining.

The explosion of DEFI primarily stemmed from the pursuit of on-chain closed loops, which has always been the mainstream direction of blockchain development: seeking the possibility of fully decentralized applications, building an on-chain world, and continuously mining the intrinsic value of data on the blockchain. Regardless of how attractive the narrative of attracting users from outside the blockchain may be, it is this pure developmental direction that ultimately establishes the main tone of a bull market. Conversely, the projects inspired by CryptoKitties have not reappeared in the public eye. Even the gambling projects that held firm during the bear market gradually faded away, while those trying to find more possibilities in gaming had to align with the on-chain financial closed loop. In the next bull market, they changed their names to something closer to on-chain assets: GameFi.

Once again: The Super Fantasy of NFTs and the Illusion of Web3

You might say that today's NFTs are different from the previous CryptoKitties. I do not entirely deny this viewpoint, but the similarities between them are quite evident—in a sense, I firmly believe this is a commonality at the tail end of a bull market. They are simple, easy to hype, and more accessible, attracting a large number of participants and enthusiasm from those unfamiliar with blockchain principles.

However, what is truly profound is not these superficial aspects, but what value NFTs actually capture on-chain? Or rather, is the truly important value on-chain or off-chain? If the core value is off-chain, then the blockchain becomes merely a simple signature recorder, and the development space for such applications is extremely limited. If it is on-chain, the visual attraction and pursuit cannot be directly correlated with data, presenting inherent logical flaws. But like the previous bull market, no one cares about such trivial considerations.

When Bored Apes surged to nearly $10 billion in market value, people could find value in various directions: trendy culture, new community models, new paradigms of art, etc. At that time, "I don't understand it, but I'm deeply shocked" became people's catchphrase. This kind of bull market madness and super fantasy always stimulates many people's nerves, leading to bubbles.

After entering the bear market, people found points of connection between a large number of traditional internet companies and blockchain: web3. No one could accurately articulate its typical examples, nor could anyone clearly argue how information interaction could survive on a blockchain with increasing marginal costs, and what necessity there was for it. Ultimately, the understanding of web3 was simplified to linking wallets. This is reminiscent of the top-down promotion of STO back in the day. Traditional forces could intervene (a group of internet companies looking for growth points became excited, just like a group of brokerage firms looking for new business back then), the policies above could be challenged, the clients below could understand, institutions continuously hyped it, and some confused individuals joined in the speculation, only for it to ultimately fizzle out. How similar this is!

In summary: the simpler, the noisier; the more off-chain, the more fervent; and the truth always lies on-chain! Those that cannot capture value on-chain are all false blockchain applications—either to circumvent regulations and oversight or to deceive oneself.

Third Generation: Innovation Begins at the Margins

Every true innovation is not a concept or direction touted at the tail end of the previous bull market. This is because substantive innovations are always bottom-up. These innovations are initiated by certain entrepreneurial teams from the industry's margins, finding new paradigms and pointing out real examples, rather than top-down concepts propagated by institutions or information disseminators. As we pointed out above, the mainstream direction of blockchain development is to explore the boundaries of a decentralized world, seeking more possibilities for decentralized applications, and continuously enriching the intrinsic value of on-chain data, without needing off-chain mappings or guarantees.

Clearly, this mainstream direction is inconsistent with the WEB3 that attempts to quickly break out and capture more people who do not understand blockchain. Every bull market turning into a bear market sees people viewing the world from the dreams of the previous round. Those who do not understand blockchain gradually drift away during years of bear markets, leaving behind developers who are dedicated to the concept of decentralization.

Some creative teams have designed entirely new paradigms from certain marginal positions, leading to the next generational explosion. This new generation will certainly not be an enhancement of Ethereum's performance but an expansion of its functionality—this seems difficult, as true generational revolutions are always challenging.

However, some projects have gradually touched upon the next generational model, such as MakerDAO, Synthetic, and the previously troubled LUNA, etc.

They have distanced themselves from most mainstream projects in terms of the interaction methods between traders and contracts; for instance, they do not require matching; users interact directly with contracts, with only one seller being the contract, not an LP or a liquidity pool. This model differs from AMM, and we call it the Universal Market Maker model (OMM).

While we were shocked by the collapse of LUNA and the mining of Uniswap, the failure of the former does not represent the failure of this interaction model, nor does the success of the latter guarantee it will lead to the next generation. We must extract lessons from failures and see through the illusions of success; this is where the difficulty of innovation lies. At that time, NEST created an on-chain mining distribution mechanism inspired by the failed project FCOIN, making significant improvements, while various liquidity mining initiatives merely repeated the paths they had taken.

Random Assets, Universal Market Makers, Probability Virtual Machines

Assetizing random variables or random processes, rather than assetizing deterministic variables (data), is the production of random assets. This process can only be truly realized in the context of blockchain technology. Think about it: we can not only turn information like data balances into assets, but we can also turn functions of basic vectors like addresses and balances into assets. This is the great innovation of Bitcoin and Ethereum, but the development of this main line has not ended here. We can go further and assetize a segment of random information or even a random process—what a disruptive step this is!

Once random information and random processes are assetized, they become a new class of things: random assets. Random assets cannot use existing tokens as pricing units. They must have an on-chain token that can be issued and destroyed at any time to ensure the settlement of random assets when determining their sample value, and the mechanism ensuring this issuance is the OMM mechanism (Universal Market Maker). Everyone is no longer matching each other; there is only one universal contract counterparty, ensuring that all random assets can be redeemed. Under given constraints, this system can converge.

We call this the system's first constraint condition, or the issuance constraint of random assets, C(x) ≥ E(X). For the token used to price random assets, we have chosen an interesting name: universal coin. Clearly, its risk-return structure comes entirely from on-chain, and unlike ETH and USDT, it belongs to a brand new asset.

With random assets, their inherent informational properties do not disappear, so we can still program random assets. This programming, aside from parts completed within traditional smart contract virtual machines, involves a more important type of processing: distribution transformation, which is the adjustment of the distribution of random assets.

They are often represented by some common functions. In practical applications, this type of function is relatively limited. We do not need to engage in overly complex discussions; we can simply liken this type of function to the instructions of a virtual machine, thus possessing a simple probability virtual machine model, where the expected function of distribution transformation is similar to the gas fees of the EVM virtual machine. This entire process can be illustrated with a simple example, particularly using a common option: under any price information flow that conforms to GBM distribution, we can use universal coin as the pricing unit to represent the "price coin" of price information, and then call common functions like max{x1, x2} to transform it into an option. Thus, the option corresponds to a random asset after a function call, with its cost being the option fee, eliminating the need to consider matching; it directly solves the risk hedging problem in one step.

This programming is akin to a mathematical formula editor; any risk hedging, asset synthesis, prop synthesis, or economic relationship you desire can simply be expressed as a mathematical equation, generating the corresponding contract with one click, making trading and transferring effortless.

Application Scope

Random assets have extremely broad applications in real life; almost all financial derivatives are random assets. Common financial services can also be understood from the perspective of random assets, such as lending and even trading. This structure can almost unify all of DeFi without needing to develop each one individually.

Similarly, the synthesis relationships of items in different games, as long as they possess the same mathematical structure, have almost equivalent intrinsic value (the additional value of the game can be referred to as a premium), allowing different games to fully interconnect without disrupting their respective economic systems. New phenomena, such as entirely new revenue streams based on random distributions—like index assets, square assets, square root assets, or the game items and economic relationships corresponding to these revenue streams—can all be quickly designed.

In summary, random assets or probability virtual machines provide a broader range of applications related to uncertainty and combinatorial aspects, without needing to prepare asset pools, requiring LPs, engaging in complex underlying development, or operating newly issued base tokens. This will significantly accelerate the speed of industry development, reduce development costs, and quickly realize economic closed loops.

Differentiation of Developers

In a decentralized ecosystem, developers can play a decisive role. If the developers of two projects are largely overlapping (similar in main functionality, not just differences in programming languages), then large communities will siphon off smaller ones; this is the harsh reality of general equilibrium having only one. Of course, many projects will seek to increase developer stickiness through differences in open methods and tools, but as long as they are Turing-complete virtual machines, their functionalities and goals will be fundamentally aligned, making it difficult to form differentiation in the end.

We must seek functional innovations for developers outside of Ethereum to ensure differentiation from the Ethereum development community. Just as there is a differentiation between the Ethereum and Bitcoin communities, both of which are in blockchain systems and under Satoshi Nakamoto's architecture. The Ethereum community focuses on contract development, while the Bitcoin community focuses on underlying development. Under these differences, Ethereum can gather a wave of sticky developer communities. If the Ethereum community were like Bitcoin's, based on underlying development, it would be hard not to be absorbed by the Bitcoin community.

In the new paradigm, developers are more focused on random transformations. Since we cannot directly use ETH tokens to achieve random transformations, we must choose a universal coin for development, creating significant differentiation. The more developers there are, the more stable the system becomes. This self-reinforcing property will automatically form a clustering effect and threshold, potentially paving a new path under the current dominance of ETH.

Future Outlook

Finally, we can mention the practitioner of this innovative generation of random assets, NEST. After creating a fully decentralized oracle, NEST has entered a new generation of random assets and probability virtual machines. Everyone knows that if a centralized virtual machine is used, then the issuance of tokens is completely controlled by centralized institutions, reverting to the era of internet tokens, contrary to industry trends. If the entire industry ultimately consists of guaranteed assets, then the development of decentralization will stagnate. Only a fully decentralized oracle can give birth to generational innovation: random assets.

Over time, with the involvement of serious investment institutions and the improvement of development, especially the maturity of community operations, everything will become clearer.

From the development of the market, every bull market is endogenously driven (by innovations in the essence of the industry) rather than exogenously (by concept speculation). We believe that random assets will nurture the genes of the next bull market and sow the seeds for the next bull market because their evolution and emergence are very natural and logically clear.

As for whether everyone will ultimately use the concepts described in this article, that is a matter of market convergence. However, the essence of these concepts will not change due to changes in nomenclature, just as Ethereum called itself a world computer, and ultimately the public gave it a new name: public chain, leading to two waves of magnificent bull markets. We firmly believe that the expansion of on-chain functionalities will always be the mainstream direction of blockchain development, and we look forward to the explosion of random assets in the next generation.