What is quality?
The bull run of 2020/21 saw the rise of new ‘blue-chip’ projects that became the bread and butter of every crypto portfolio. These projects seemingly had it all, from the smartest minds to the deep pockets of large VCs and the most scalable technology in their category. Communities were built around these projects as activity on their networks exploded. But what was it all worth? Has real value been created in the crypto economy or was it just another flash in the pan?
A quality crypto asset depends on the perspective that you take. An investor looking to diversify their portfolio with ‘quality’ assets will have to look far and wide for projects that can provide a market hedge. All alt-coins bleed against ETH in the bear market, and ETH bleeds against Bitcoin. Does that mean there are no quality assets to invest into? Quality depends on the type of market participant you are, it depends on what your goal is in this market and what you are looking to get out of it.
A perspective on quality
A quality crypto asset is the undisputed category leader in a major use case. We’ve seen an array of new cryptocurrencies launch since Satoshi first released Bitcoin, while many of these have been vaporware, a few have remained to stand the test of time and grown to be the market leader in their respective category.
Quality crypto-assets do not become irrelevant in a bear market. They remain useful during a downturn in retail interest and still fulfill a core use case within the crypto ecosystem. Their value is not derived from hype cycles or inflated expectations. Quality crypto-assets play a fundamental role in the functioning of the broader ecosystem by providing a major use case and enabling new technologies to be built on the foundation that they have already established.
Quality crypto assets enable ‘economic activity’ in the crypto-economy by acting as a building block for new applications. This may be the concepts or technology that was introduced or the actual resources they provide to protocols and projects. It means they are resistant to bear markets in the sense that their effectiveness and relevance do not fade as the market prices fall, they still play an intrinsic part in the crypto-economy.
Understanding the bear market landscape
Before we dive into different quality crypto assets, it’s important to understand what the bear market landscape looks like and how these assets will be tested during this period in the market cycle.
2022 has been marked by rampant inflation across developed nations as the money printer went brrrrr’ throughout Covid-19 lockdowns. Inflation in the US has accelerated to 9.1% for June 2022, surprising many market participants that thought we had seen a top in inflation in May. This level of inflation was last seen in the 1980s but is no surprise to anyone that understood the repercussions of printing trillions of dollars.
Higher interest rate environment
Higher inflation prompts central banks to tighten monetary policy by raising interest rates. These higher interest rates are not a good thing for risk assets, as valuations of tech-stocks fall money flow to ‘safer’ options. $BTC and the broader crypto market have shown a stark correlation to the Nasdaq in 2021/22. A broader risk-off sentiment has developed amidst higher inflation and the expectation of higher interest rates, this has resulted in risk-on assets (Equities and Crypto) being sold off. The macro-economic developments will determine when this bear market ends. Quality assets are those that can weather the storm and come out stronger on the other side.
Deleveraging and loss of retail interest
A bear market usually starts with a deleveraging event, leaving market participants with their fingers burnt. The collapse of Terra was the start of this deleveraging process, it broke investor confidence and resulted in huge losses for everyone involved – which included many high-profile funds. As liquidity dries up and retail interest fades, the tide rolls out and you discover who has been swimming naked.
A few weeks after the Luna debacle, we see Three Arrows Capital (3AC) become insolvent and Celcius halt withdrawals. These are large players in the market and their collapse spells danger for the rest of their market. Events like these are all part of an ‘ordinary’ market cycle here in crypto. However, it is the true quality assets that fulfill their function in the ecosystem regardless of what market volatility is taking place.
BTC may be the only true quality asset, depending on where you are on the maximalist spectrum. As the saying goes, you enter crypto through BTC, then you get introduced to ETH, and you leave them both for degenerate altcoins and make life-changing gains. You then proceed to lose it all in the market crash before coming back to BTC and having a revelation of its value and you become a BTC-maxi.
Jokes aside, the fundamental problems that Bitcoin solved were the double-spend problem and being able to transfer something without a trusted third party or intermediary. Bitcoin has since developed into something more akin to digital gold and digital property. A digital asset that is secured by thousands of nodes around the world, it has been described as ‘hard money’ which is the ultimate ‘store of value’. The more hashing (computing) power in the network, the greater its security and its overall resistance to attack. The hash rate continues to rise year by year, increasing the security of the network.
Bitcoin’s major use case is to be hard money. The elasticity of Bitcoin is zero, this was programmed into the code at its inception. This is because the rate of Bitcoin creation will never expand, no matter how parabolic the price goes. As the rate of production of Bitcoin falls steadily over time because of the 4-year halving, gives it certain attributes that make it ‘hard money’.
Bitcoin is still the market leader. Whether we like it or not, it has stood the test of time and fended off every single ‘competitor’ that has risen to challenge its position. We still don’t know who Satoshi Nakamoto is, yet an entire industry has developed around what Bitcoin started. It just keeps chugging along, block by block, being a monetary standard you know will not change.
Ethereum is the leading smart-contract platform, holding the top spot for TVL and boasting the most developers and dApps on any network. It was the first project to introduce the concept of smart contracts, which revolutionized the industry and birthed innovative decentralized applications. Developers were drawn to this and started building dApps on the network, this created a network effect and attracted TVL from users.
Ethereum’s technology enabled decentralized finance (Defi), this was one of the first waves of adoption in crypto and led to some of the most popular dApps being built. Projects like MakerDao, Uniswap, Curve, and AAVE created a frenzy of activity on the network and still remain the leaders in Defi today.
But Ethereum is so slow and expensive, how can it still be the category leader?
The key is the network effect and the first-mover advantage. Once a network has this, it becomes very difficult to overtake and grow beyond where the leading network is. This is mainly due to the time it takes to build economies of scale, brand recognition, trust, developer tools, and a community of people that care about the technology. Ethereum is still leading the smart contract race despite its slow TPS and expensive transactions.
Is Ethereum the category leader?
For now, yes. Developer activity on Ethereum continues to grow, it still holds the number one spot for TVL and the upcoming Ethereum upgrades will improve scalability, security, and sustainability of the network. Despite many new ‘Ethereum killers’ coming onto the scene like Solana or AVAX offering superior scalability and TPS, it has stood its ground as the top layer 1 blockchain.
Will it remain the category leader?
Only time will tell, but with the layer 2 scaling solutions like Polygon, Arbitrum, Optimism, Loopring and many others – the ecosystem growth around Ethereum is signaling that teams believe it will continue its dominance. The network also has some major network upgrades that are coming:
- ETH 2.0
- Switch from POW to POS
- Many more technical improvements)
- Developer network grows stronger
- L2 scaling projects gain adoption
TVL remains sticky
The TVL on Ethereum may seem to have dropped quite significantly when viewing it in USD terms, but when you look at TVL in terms of ETH, it is still pushing all time highs.
In addition, EVM chains are consistently growing and gaining TVL – supporting the incumbent and making it easy for Ethereum developers to migrate smart contracts to an EVM compatible chain without having to write the code from scratch again.
Chainlink decentralized oracle networks provide tamper-proof inputs, outputs, and computations to support advanced smart contracts on any blockchain. Chainlink ($LINK) is the most popular oracle, securing over $16bn of assets and integrating with over 1300 projects. Link currently commands ~54% of the Oracle market and supports some of the leading Defi protocols like AAVE, Compound, and dYdX.
Chainlink is the dominant market player and therefore the category leader. But beyond looking at market share %, when new projects use Chainlink oracles it is often viewed as a ‘bullish’ development in the development of the project. It is regarded as the ‘blue chip’ oracle network amongst many market participants and when projects integrate with Chainlink, it gives credibility to the project and assures users of that protocol that data feeds will be the highest possible standard.
Chainlink provides crucial infrastructure
Chainlink solved an important issue called the ‘Smart Contract Connectivity Problem’. This is the inability of a smart contract to interact with any external data feed or another resource that is run outside the node network in which the smart contract itself is executed.
Chainlink is essentially middleware between blockchains and external APIs. Before Chainlink, projects created their own oracles that were responsible for aggregating off-chain price data and sending it to their smart contracts. This is obviously easy to tamper with and relies on one centralized data feed.
The importance of Chainlink in the crypto ecosystem cannot be understated. If you are using smart contracts you will most likely need Chainlink at some point. The oracle network provides Defi applications with secure and reliable data feeds and is well respected in the industry.
But can I make gains by holding $LINK?
Chainlink is down 87% from its all-time high, which is not ‘that bad’ when compared to other altcoins. However, it has been bleeding against Ethereum since August of 2020 – the true test for the longevity of any altcoin. There is some hopium though, even though $LINK has been hit hard in this bear market, the fundamentals of Chainlink continue to grow. The use case for oracles becomes more established as Defi and the broader industry grow.
Oracles are an important part of this industry and Chainlink is the outright leader in this category. One reason for its underperformance against ETH has been that the $LINK token doesn’t benefit from new integrations with projects. The value does not accrue to $LINK through any tokenomics mechanism, even though it makes the Chainlink service more reputable. But if you were looking for a fundamentally sound project, Chainlink is a good play in the oracle category.
Monero is focused on private and censorship-resistant transactions. Unlike Bitcoin and Ethereum which use transparents public ledgers, Monero uses various privacy-enhancing technologies to ensure the anonymity of its users. So you might ask “Doesn’t this support black market activies?” – yes it does but that was not the reason it was created (We do not support any black market activities).
Monero was founded in 2014 and was one of the first cryptocurrencies where every user is anonymous by default. The sender, receiver, and amount of every single transaction are hidden through the use of technologies like Stealth Addresses, Ring Signatures, and RingCT.
Privacy – is this a big deal?
Most blockchains have a public ledger, meaning everyone can theoretically see every transaction on the network, the government, a bank, or anyone who wants to see where your money is going. If your identity can be tied to a specific wallet then you have a full history of every transaction you’ve ever made. While this is good it is also not ideal.
Public crypto addresses are pseudonymous, not anonymous. Monero solved a real problem by developing a form of digital cash which is like Bitcoin, but keeps your activity confidential. To dive a bit deeper into why privacy is so important and why you should care about it you can do more research into Monero here.
Is Monero the leading privacy network?
Monero is well respected in the crypto community, it had a ‘fair launch’ because there were no ICO, pre-mining, VC overhangs and the founders didn’t keep any coins for themselves. It is the largest privacy coin as measured by market capitalization ($2.1 bn) and continues to be used daily by people all around the world. Furthermore, the number of transactions on Monero continues to dwarf its closest competitor (Zcash) – showing its market dominance.
Monero has stood the test of time
Monero has a passionate community that care about anonymity. The token has lasted this long because people actually use it – for better or for worse. In a world where privacy is becoming a luxury, the use case for Monero continues to grow. After two market cycles, Monero is still relevant and is the outright leader amongst privacy coins.
But Ser, can $XMR make me gains?
$XMR was outperformed by $ETH this market cycle, which is not usually a good sign for an altcoin. However, its likely that Monero will continue to be used throughout the bear market until the next bull run again. So if you’d like to get some exposure to the privacy category without being too degenrate, this would be a good play.
What about leading Layer 1 tokens?
A new breed of ‘blue chip’ quality assets was born in the 2020/21 bull market. These projects were backed by deep pockets, had huge runways, and seemingly unlimited access to capital. Cult-like communities formed around each project as people were drawn to what each chain had to offer and the incentives that were on the table.
Layer 1 protocols are essentially selling decentralized computation, something that will become more important as we gradually shift to Web3. These protocols outperformed throughout the bull cycle and have become a large portion of many people’s portfolios. For investors trying to value L1 tokens, the question is how much value can the chain extract from consumer demand for that block space.
Each protocol followed a similar playbook to build traction and attract developers, users, TVL and build its ecosystem:
What are the PROS/CONS of investing in them now?
- A network effect is there
- The developer network has been established
- Core infrastructure has been built
- The community has been built
- Established name
- Deep pockets backing them
- Token inflation is likely very high as unlocks are still ongoing
- VCs might dump bags on you and move on to the next investment
- Can they truly operate at scale? Its uncharted waters as they grow
- New technology might unseat the current winners
- Steep competition
Layer 1s will continue to grow
I believe that the top L1 tokens will continue growing as long as their ecosystem continues to expand and they keep up with new technological innovations in the space. Crypto participants often exhibit sticky behavior, meaning that once they commit to a particular ecosystem they don’t easily move outside of that. This is why many market participants remain extremely loyal to the ecosystem they first dived into. It is an investor bias that often results in maximalist behavior. It does however bode well for retaining people in your community and is one of the reasons I expect the current L1s to continue growing.
Will L1s be the quality assets of the future?
As mentioned before, a quality crypto asset is the undisputed category leader in a major use case. L1s are offering block space for dApps to be built and are competing on the points of scalability, security, decentralization, developer support, and a host of other factors. A quality crypto-asset will play a fundamental role in the functioning of the broader ecosystem by providing a major use case (block-space) and enabling new technologies (New dApps) to be built on the foundation (Their Ecosystem) that they have already established. It is likely that these L1s will be an important part of our industry going forward and I expect them to be an integral part of enabling ‘economic activity’ in the crypto-economy.
A quality asset is defined as the undisputed category leader in a major use case. Quality crypto assets enable ‘economic activity’ in the crypto-economy by acting as a building block for new applications. This bear market will test the new ‘blue-chip’ projects that have risen to prominence this cycle, their role in the functioning of the broader ecosystem will be tested by time and the loss of retail interest. As the market shakes out weak hands and exposes the facades of different projects, take an objective view of the projects that remain and bunker down for the crypto winter.