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

Author: NEST

Every bull market's end is always accompanied by various popular projects being hyped. The last cycle featured CryptoKitties, and this round is dominated by Bored Apes. So when Bored Apes became incredibly popular, 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 intrinsic 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 development 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 ordinary 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 plagued the crypto community for 30 years by abandoning the natural intuition of token issuance—issued 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 problem.

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 merely became 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 are different from goods; assets are in general equilibrium. The broader the group of people participating and bargaining over an asset, the better.

Ordinary goods, on the other hand, are in partial equilibrium; any two buyers and sellers at any location can reach an agreement. This characteristic naturally determines Bitcoin's openness and anti-censorship properties; otherwise, it would rely on a single team to capture value or depend on certain niche groups for trading, which cannot establish a new type of asset. This general equilibrium characteristic made Bitcoin global 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 incorporates a four-year halving cycle, 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.

One can anticipate that the Bitcoin ecosystem and even the entire blockchain ecosystem will undergo a process of equilibrium disruption and re-equilibrium 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 is now gradually becoming a consensus expectation among all groups in the industry: the four-year cycle of bull and bear markets in the cryptocurrency market, with Bitcoin's price becoming a 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 try 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 around 1% of BTC, essentially declaring the challenge a failure. Simply trying to improve the original 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 does not enhance Bitcoin's performance but expands 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 akin to assetizing simple information like digital balances, aiming to transform it into digital currency. Ethereum goes a step further, 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 example. ERC20 can be understood as a functional representation based on address sets and balance information. Of course, smart contracts can implement more complex function structures and function nesting, opening up imaginative space for achieving economic closed loops on-chain.

Sub-Cycle One: The Token Issuance Craze

Even if Ethereum fully grasped the pulse of industry development, it might not quickly establish its application value, as the exploration of new things takes time. From the various contents established in its white paper, ERC20 ultimately gained market traction. A booming ICO craze began in 2017, igniting a bull market in the industry. In hindsight, this application seems very simple, yet it was the breakthrough Ethereum found early on.

The token issuance craze 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. However, these projects first issued their tokens on Ethereum for easier financing.

Some directly developed applications on Ethereum and conducted ICOs using smart contracts. This wave showcased the power of smart contracts, allowing anyone to 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 in price increases and bringing about some unrealistic illusions.

Bull Market Illusions, Bear Market Hopes

The bull market illusion was embodied in the explosive growth of blockchain games in 2018, which pushed market conditions to their peak. Many people saw the potential of Ethereum beyond financing in a small game called CryptoKitties, while subsequent projects like FOMO3D repeatedly pushed gas fees to new heights. People began to believe that Ethereum had much greater imaginative potential than initially thought, and project parties pursuing the creation of a so-called application chain began to attempt to transition to development on Ethereum.

Even many entrepreneurs and new users unfamiliar with Ethereum rushed in. 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 integrated with a blockchain TOKEN based on traditional internet applications, yet the soaring token prices made people neglect to consider whether this combination was reasonable; success seemed just around the corner, 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 unwilling to accept this and believed it was merely deviations in certain developmental directions that caused it. Thus, various investors and media, along with traditional business institutions, began to invent certain macro concepts during the bear market, 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 brewing during the bear market were initially not well-received. Whether it was UNISWAP, COMPOUND, or MAKERDAO, they all began during the previous bull market but were overshadowed by a multitude of magical projects. Those magical projects faltered during the bear market, with some even facing liquidation.

DEFI gradually seized the narrative with its extremely pure decentralized philosophy and 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. The initial mining algorithm based on blocks was a project called NEST, which originated from 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 will always be the mainstream direction of blockchain development: seeking the possibility of completely 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 circle 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 remained strong during the bear market gradually faded away, while those attempting to explore more possibilities in gaming had to align with the on-chain financial closed loop. In the next bull market, they adopted a name 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 completely deny this viewpoint, but the similarities between them are quite evident—in a sense, I firmly believe this is a commonality at the end of a bull market. They are simple, easy to hype, and more accessible, attracting a large number of participants and enthusiasts who are not familiar with blockchain principles.

However, what is truly profound is not these superficial aspects, but what value NFTs 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 a simple signature recorder, and the development space for such applications is extremely limited. If it is on-chain, that visual attraction and pursuit cannot be directly correlated with data, as it has inherent logical flaws. But just like the last bull market, no one cares about such trivial considerations.

When Bored Apes reached nearly $10 billion in market value in one breath, everyone could find various directions to justify its existence: 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 existed 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 securities companies looking for new business back then), the policies above could be challenged, the clients below could understand, institutions continuously promoted it, and some uninformed individuals joined in the hype, only for it to eventually fizzle out. How similar this is!

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 end of the previous bull market. This is because substantial innovations are always bottom-up. These innovations are initiated by certain entrepreneurial teams from the margins of the industry, discovering entirely new paradigms and pointing out a real example, rather than top-down concepts spread by institutions or information disseminators. As we pointed out earlier, 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 mapping 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 everyone looking at the world from the dreams of the previous cycle. 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 former's failure does not signify the failure of this interaction model, nor does the latter's success mean it can 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, and made 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 there. 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 the sample value of random assets, and the mechanism ensuring this issuance is the OMM mechanism (Universal Market Maker). No one is matching each other anymore; there is only one universal contract trading counterpart, 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 in hand, their inherent informational properties will not be lost, so we can still program random assets. This programming, apart from the parts completed within traditional smart contract virtual machines, includes 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, and we have 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, especially 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 a common function 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, without needing to consider matching; it solves the risk hedging problem in one step.

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

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 item synthesis relationships in different games, as long as they possess the same mathematical structure, have almost equivalent intrinsic value (the added value of the game can be referred to as a premium), allowing different games to interoperate 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 combinatoriality, 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 functions, rather than 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 functions and goals are 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 the differentiation between the Ethereum and Bitcoin communities exists, both being 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 this differentiation, 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 concerned with 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-enhancing property will automatically form agglomeration effects and thresholds, 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 completely 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, returning 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 completely decentralized oracle can give birth to generational innovation: random assets.

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

From the perspective of market development, every bull market is driven by endogenous (innovations inherent to the industry) rather than exogenous (concept hype). We believe that random assets will nurture the genes of the next bull market, planting the seeds for the next bull market, as their evolution and emergence are very natural and logically clear.

As for whether people 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 names, 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 market trends. We firmly believe that the expansion of on-chain functionality will always be the mainstream direction of blockchain development, and we look forward to the explosion of random assets in the next generation.