Rapture #152: Speculative Circularity

Rapture #152: Speculative Circularity

I have always posited that DeFi, like the other major industries within crypto, is largely circular in nature at this point, making it incredibly cyclical. DeFi's success in terms of revenue is directly correlated to the macro crypto cycle, just look at the revenue for various projects based on the market cap of total crypto overall.

How could it not be? Largely, DeFi is used to fuel further speculation within the crypto markets. Most users borrow on Compound or Aave to either go short various assets or to gain leveraged exposure. Similarly, Uniswap's core utility is to enable traders to speculate on various other tokens.

To be quite frank, most of crypto today largely services itself in a circular fashion. The most successful products in crypto today in terms are really meant to further that speculative itch so many have.

While I do not think that is inherently bad, it can be confusing to many people. Why should crypto retain any value over time if most of the major applications are really built to further speculation within this insular ecosystem?

Crypto industries that have taken off are based on this speculative circularity

NFTs, DeFi, and gaming are really the core industries of crypto at this point beyond stores of value. Despite there being fundamental innovation that blockchain technology has already enabled, such as the ability to pretty much instantaneously send money to anyone, anywhere around the world, most of the popular applications today are purely driven by speculation. NFTs of course are driven by speculation, as the only value that can be attributed to art is speculative value. Play to earn games effectively at this point boil down to speculating on the user growth of the respective games, as the core commodity tokens that power the games tank when user growth decelerates.

Yet crypto is not unique in this regard

While many believe crypto will fail because of the speculative circularity that drives this market, that feeling could be not be further from the truth. Arguably, the entire Venture Capital industry operates on the principles of this speculative circularity. Companies often raise hundreds of millions, or even billions of dollars before they actually are able to create real fundamental value in terms of profitable ventures. How long did it take Facebook to figure out how to monetize their incredibly fast growing user base in a way that added new fundamental value to the economy?

It took Amazon, one of the most successful companies of all time, decades to become profitable. Instead of opting to become profitable early on, Amazon focused on building an innovation machine that would allow itself to dominate the market in the future.

In my opinion, crypto is following the same path. While right now an entire financial industry is being built that largely fuels speculation, the machinery of this new financial ecosystem will be the foundation for the creation of massive applications that deliver incredible fundamental value to the world. Building the machinery that supports innovation will enable the impact of this innovation to be far larger, as the financial instruments will allow applications to scale faster with more resources than ever before.


With all the media attention crypto has gained in the past couple of years, many might think that a substantial amount of fundamental value has been created.

Yet as often occurs with hype cycles, the amount of fundamental value crypto delivers today in my opinion is less than what the average market participant believes.


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