Bull Market Assessment Project 3 Key Elements: Technological Innovation, Token Minting, and Narrative
Key criteria help assess the potential of cryptocurrency projects and their ability to attract and maintain a focused community.Original Title: "Three Pillars of Booming Crypto Ecosystems"
Original Source: Ignas
Original Compilation: Shenchao TechFlow
How to choose which tokens to invest in during a bull market? How do you conduct your research? Are you just looking for potential targets on Twitter?
Given the multitude of tokens and narratives in the crypto space, how should you evaluate which tokens have the potential to outperform BTC?
In my view, the success of any crypto ecosystem is driven by three key elements: technological innovation, token minting opportunities, and the narrative level of the project.
These key criteria help assess the potential of crypto projects and their ability to attract and maintain a focused community.
In this article, I will integrate and expand upon some methods I mentioned in previous blog posts and Twitter threads.
Additionally, I will use some examples to support my points.
1. Technological Innovation: The Key to Project Development
Technological innovation is the driving force behind new crypto projects or upgrades. The more innovative the technology, the more narrative power a project has.
Bitcoin started it all with its distributed ledger. Then Ethereum launched, enabling complex transactions through smart contracts. The 2017 bull market was partly sparked by the invention of ERC20.
"However, the most significant impact of Ethereum and ERC20 was not technical; it was social. Before ERC20, coins were primarily seen as currencies for payment or store of value. With ERC20, everything became tokenizable. As crypto prices rose, the use cases for cryptocurrencies also increased." - My thoughts in the blog post “Echoes of the Past”.
The last bull market was marked by the emergence of DeFi, which included multiple technological innovations: AMM, lending protocols, algorithmic stablecoins, etc.
In every bull market, the crypto industry sees new technological innovations. Without them, the industry would stagnate and eventually disappear.
Many innovative solutions are built during bear markets, so maintaining and researching during tough times can indeed pay off.
Since the last bull market, exciting new technologies have emerged:
- Optimistic Rollups and ZK Rollups to reduce transaction fees and increase speed on the execution layer;
- Innovations in data availability layers;
- Account abstraction and intent to improve user experience;
- Soulbound tokens, non-transferable tokens used to represent personal identity on-chain;
- Real-world assets or on-chain tokenization;
- Next-generation on-chain derivatives and DEX;
- Inscriptions and DeFi on BTC;
- Re-staking.
AI is another technological innovation that has a significant impact on crypto, although it originated outside the crypto ecosystem. Time will tell what crypto projects can truly do to decentralize AI.
However, not all technological innovations are equal or capable of delivering wealth benefits.
Their differences lie in their token economic models/token minting aspects, and these differences will attract investor attention, thus becoming dominant narratives.
2. Token Minting Opportunities: The Monetary Aspect
Token minting, or what I like to call "printing money," is similar to how central banks inject new fiat currency into the economy. In the crypto realm, this is seen through the issuance of new tokens within an ecosystem.
When Ethereum launched, the first thing we did was to thank the invention of ERC20 by launching more tokens. However, due to a lack of substantial technological innovation, the rapid collapse of tokens in 2017-18 revealed the limitations of mere narratives.
More importantly, they failed to integrate into a comprehensive flywheel effect that would incentivize users to hold tokens through project revenues, staking, and other mechanisms. Learn the lessons from the 2017-18 bull market!
In 2020, the invention of AMM and staking contracts created a powerful money-printing machine. Staking a liquidity pool token (50% "altcoin," 50% ETH) to earn more altcoins was a powerful but unsustainable Ponzi scheme that made early participants wealthy, but the model was not sustainable.
Then Curve invented veTokenomics, providing higher rewards and voting power for long-term staking. But this model is gradually losing its appeal.
Token minting is not limited to the token layer.
2021 was the bull market for NFTs, with limited edition NFTs becoming popular in the market. Even though ERC721 innovatively launched CryptoKitties in 2017, the 1+1=3 minting model of CryptoKitties led to super inflation of tokens and a sudden price crash.
NFTs also experienced booms and busts as hundreds of NFT series launched, diluting user attention and investment amounts on each NFT. The flywheel effect generated by Yuga Labs' Bored Apes rewarded BAYC holders with new NFTs, tokens, and ongoing narratives to prevent community sell-offs.
DeFi once allowed many to gain substantial profits due to airdrops and high yields.
One could earn thousands of dollars just by trying out a DeFi protocol. But currently, airdrops have become less generous and harder to obtain, relying more on the depth of your interactions with airdrops (trading volume, staking amount, etc.).
While new tokens should be supported by the aforementioned technological innovations, not all innovations provide the same wealth opportunities.
Monetizing narratives like "account abstraction" is very difficult; monetizing the narrative related to soulbound tokens (SBT) is even more challenging! (Considering that SBTs are address-bound and non-tradable).
RWA is also a strong narrative, but the inherent low volatility of RWA may not allow the project's token to achieve significant gains.
So, where are the wealth opportunities now?
Ordinals, BRC20, and Bitcoin DeFi
Every day, many new Bitcoin NFTs and BRC20 tokens are launched, which can often be freely and fairly minted.
However, Ordinals and BRC20 lack the flywheel Ponzi token economics. I worry that Bitcoin NFTs will suffer the same fate as Ethereum NFTs, as the investment amounts and market attention for each series are diluted by other NFTs. BRC20 also lacks the smart contract features that make ERC20 more Ponzi-like and user-friendly.
However, I believe the situation is changing. For example, Bitmap Ordinal holders received BMP token airdrops, and this trend may continue, so holding early Ordinals inscriptions and BRC20 tokens may yield higher returns. But the market still needs more technological innovations to realize a flywheel token economy.
I think Stacks may be able to capture this grand narrative and join the Bitcoin DeFi ecosystem.
L1 Ecosystems
Seven months ago, I mentioned the zkSync Era ecosystem in a tweet.
I believe the technological innovation of ZK Tech is strong enough to attract developers and new funds into the ecosystem, thus driving token development. However, this has not happened.
It turns out that the ZK Tech narrative is not compelling. There is also a lack of innovative dApps and flywheel token minting opportunities. Since then, the narrative around airdrops has weakened, insufficient to maintain hype in the market.
Now, there are some promising L1s:
Injective offers wealth opportunities for INJ token stakers. The ecosystem is brand new, so user funds and attention are currently concentrated on a few protocols and NFTs.
Kuji is similar to Injective, but it emphasizes the flywheel effect in ecosystem project airdrops and the real yield potential without more new KUJI token issuance.
The Solana ecosystem has been devastated but is being rebuilt. It is launching new tokens and airdropping to loyal ecosystem users. Solana is also dominating the modular blockchain narrative.
Avalanche is becoming the chain for RWA and Forex, which is a more sustainable growth model.
Polygon's POL is transforming into a chain of chains, with new partners choosing Polygon to expand Ethereum.
Fantom, like Solana, lost most of its DeFi ecosystem during the bear market. But with the Sonic upgrade, it aims to be a modular blockchain.
Celestia dominates in data availability but needs to launch more chains and reward TIA dollar token holders.
SEI is a low-market-cap competitor to SUI and APTOS, but as a new ecosystem, I hope they will reward SEI token holders as the ecosystem expands.
Re-staking Using Liquidity Re-staking Tokens
I discussed this in a previous blog post. I believe that when Eigenlayer fully launches its mainnet, it will be one of the most exciting narratives.
So how about L1 and L2? In terms of token economics, I am more optimistic about L1. L1 tokens have native staking yields and ecosystem airdrops for stakers. Therefore, if L2 tokens are used for fuel fees, staking, and ecosystem token airdrops to L2 token holders/stakers, L2 tokens may be more attractive.
The recent vote by Arbitrum DAO involving fake "staking" shows the uselessness of L2 token economics.
3. The Power of Narrative
The power of narrative in the crypto space is insane! Narratives play a huge role in explaining what causes tokens to rise.
Technological innovation is important, but their success often depends on how they are communicated and understood by the community. Complex narratives can lead to a loss of interest, no matter how successful the innovation is.
Narratives give life to the technical aspects and token economic models, turning them into something investors can relate to, believe in, and become a part of. It captures people's imagination and belief, creating a strong, positive community.
Narratives are crucial in maintaining the value and demand for new tokens. Without engaging narratives and belief in the potential of these tokens, new users have little motivation to join and invest in the ecosystem.
Pure narratives can drive tokens, but with substantial technological innovation and token minting opportunities, tokens can maintain high prices for longer. Without the other two elements, tokens may rise quickly and then fall sharply.
For example, DeFi has all three key pillars. It relies on technological innovations in smart contracts and self-custody, allowing for innovative token value creation, but also has a powerful narrative of creating a new financial system.
Terra's UST is a notorious example, but it also perfectly embodied these three pillars with its algorithmic stablecoin technology "innovation," money flywheel effect (Ponzi), and the story of 20% APY passive income.
So, which narratives align with the three pillars of a thriving ecosystem?
One of them is Restaking + LRTs, which conveys the story of being "protected by Ethereum." DeFi on Bitcoin is another narrative.
Modularity versus holistic L1 is a huge story in this bull market, with Solana, SEI V2, and Fantom challenging the modular visions of Ethereum, Avalanche, and Polygon. Which approach will succeed? It's not easy to answer, but both approaches may have a place in the crypto space.
AI is a powerful narrative, but currently, there is little technological innovation in AI, and the token minting opportunities are low. However, as I mentioned, AI tokens are emerging, but without real technological innovation and a flywheel effect, they can rise as quickly as they fall.
Let me ask you a question: What other ecosystems meet these three criteria? Please leave a comment.
The Difference Between "Booming" and "Sustainable" Ecosystems
I initially titled this article "Three Key Factors Driving Sustainable Crypto Ecosystems," but that is not accurate.
These three key factors help ecosystems thrive, but as new competitors emerge, the pace of innovation slows, and the newly minted funds in the ecosystem exceed the attention and amounts entering the ecosystem to maintain prices, narratives are also replaced by hotter plays in the market.
Axie Infinity is a good example of a "booming" ecosystem. Blockchain gaming was a novelty, and Axie perfectly showcased the Play-to-Earn vision to the world.
Thousands of Filipinos believed they could make money by playing games. However, its growth depended on the speed at which new projects entered the ecosystem, as more and more NFTs and Smooth Love Potion tokens were minted.
In the crypto space, we continuously play this similar chain game. New innovations and narratives are monetized through the issuance of new tokens. Unless the ecosystem manages to continue innovating and reshaping itself while managing token inflation, once-booming ecosystems will shrink, and tokens will fall.
DeFi "boomed" through liquidity mining, but we need to continue to innovate it. DeFi 1.0 projects have passed the initial hype phase and are now entering a phase of sustainable growth.
But the narratives I mentioned in this article have yet to thrive. Their ecosystems are young, with new exciting tokens about to launch. Our task is to find ecosystems that build the most sustainable and thriving ecosystems.
It is a delicate balance, with each element reinforcing the others, creating an environment of growth and sustainability. As we continue to see the development of this bull market, I believe these three keys will help you find sustainable crypto ecosystems amidst the decline.
