Comment by nlh
4 years ago
A thought exercise you should undertake if you're thinking about / talking about crypto/NFT/web3-related projects: If the financial instrument that underlies the project were to stop going up in value XX% per month, would you still be interested in the project?
I do this a lot because I've made the conscious (and perhaps financially foolish) choice to stay away from everything crypto/blockchain related (for now, at least). So I have some perspective in being able to ask myself "Why is this interesting?" without any emotional-financial attachment. I do this little exercise every time I read about some new brain-twisting scheme to move money around and capture some of the XX%/month rise.
Play-to-earn seems to fit the same mold: You can talk all you want about how play-to-earn is "the new new" and how it's helping people out of poverty and changing the dymanics of gaming and yadda yadda yadda. But just ask yourself: If the money music stopped tomorrow, would you play the game?
Is there a "there" there without an underlying token that's gone up XX% in the last N months and everyone hopes will still go up XX% in the next N months?
It sounds like the answer, at least when it comes to Axie Infinity, is no. It doesn't sound fun. It doesn't sound compelling. It DOES sound like an opportunity for people to extract money from the crypto system that's fundamentally based on the assumption that the crypto system will continue rising in value forever.
> Is there a there there without an underlying token that's gone up XX% in the last N months and everyone hopes will still go up XX% in the next N months?
Alternatively, even simpler: where is the money coming from? A bunch of people playing a game are a closed system, and no value is created by playing the game. If the only reason why players are earning money from this game is because more people are continually buying into the game and entering that system, that sounds more like a pyramid scheme than anything.
This is what people don't seem to understand about BitCoin. It is cashflow negative, Money has to keep coming in to keep the price up due to paying miners. It is totally fine if you think BTC is better than the USD or Gold for whatever reason. But Bitcoin is still cashflow negative. You have to keep pumping money into it to keep up its value. Where is that money going to come from? Is it coming from Tether? Is it coming from people looking to make quick money? And when BTC hits 1M/coin, then what? You still need more money coming in to keep it above 1M.
Bitcoin has a use case for money laundering, tax evasion, evading China's exchange controls, and drugs. That market turned out to be larger than expected.
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Isn't the same true of gold?
The gold supply is inflating at about the same rate as bitcoin right now, but has enough incoming cash flows to keep the priced propped up enough to maintain a $10 trillion market cap. Obviously some of that incoming cash flow is for actually generative industrial use cases, but it's a minority, https://www.statista.com/statistics/299609/gold-demand-by-in.... The lion's share of incoming money flow is for jewelry, long term savings/investment, and central bank holdings, and you could argue that most of the jewelry use case only exists because it's a good store of value, since we can easily make jewelry that looks as pretty for much cheaper than the real thing.
So, since most of the cashflows into gold are just people holding long term with the expectation that there will still be people wanting to buy it for investment purposes in the future, and this scheme has worked incredibly well for 5000 years, why couldn't the same be true of bitcoin?
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How is that different at all from fiat currencies? Every electronic transaction you make, like credit card or money transfers, has fees. Central banks have to keep pumping money into the economy so we can have the same nominal amount of cash in the system(albeit with lower value, because inflation).
So, my question is, is fiat currency cashflow positive? How?
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You aren't talking about the intrinsic value of Bitcoin. You are talking about it's value relative to USD. These are completely different things.
Bitcoin has intrinsic value outside of the fiat system. It can be used entirely independent of fiat. Whether that will become common is another matter, but the value of Bitcoin does not have to depend solely on it's value relative to USD.
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> This is what people don't seem to understand about BitCoin. It is cashflow negative, Money has to keep coming in
Pretty sure a sizable portion of Bitcoin holders understand and know that. They don't hold Bitcoin as a form of bespoke investment to be exchanged for money at some point in the future. They hold it because they believe it is sound and incorruptible money.
And as long as they (not any additional people!) continue to believe that, it will hold value.
It is to be seen if they are right or wrong, but they know how cash flow works.
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I must admit I don't understand why it is "cashflow negative". I'm not invested in any crypto, but I have thought about it, and my casual thoughts have come to the opposite conclusion. The higher the price of a cryptocurrency, the greater the interest in mining and investing. It seems like a positive feedback loop to me. Why is it not?
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This negates the idea that bitcoin or it's ilk could replace USD.
Crypto technologies are interesting to me because of their great potential for good (defi) and bad (dystopian black mirror gold farms, dyson sphere fueling crpto mine, etc).
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This is addressed in the original white paper. In a world where BTC is valued at 1M USD/coin you’d also expect a decent amount of day to day usage. Miners could still make decent profits based on transaction fees just from confirming blocks even once the Coinbase rewards stop. I’m not saying that’s currently the case, but that is the design. Also if miners are making a profit off let’s say $40k/coin and the price goes down to 30, yet there’s still a profit for some miners, how exactly does that become unsustainable?
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Just about every project is cashflow negative. Most projects start Worthing $0 and rises to another number later on
> Money has to keep coming in to keep the price up due to paying miners
This is incoherent. It's hard to refute this because it's not even on the right page.
Demand for Bitcoin comes from demand for money (to transact, to store wealth, etc.).
It sounds like you're trying to model it using some idea of how equity pricing works - is that accurate?
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This is the most crucial question about everything crypto-related.
Because it turns out every crypto market is a negative-sum game. If you invest, you are guaranteed to lose on average. If you do happen to win, your gains are coming out of the pocket of someone else who lost even more.
The price of the token in question doesn't enter into this at all. It can rise, fall, anything. It is still a negative-sum game, but some people have not yet realised that they lost.
>It is still a negative-sum game, but some people have not yet realised that they lost.
And some people have not lost at all. As a lifelong poker player, the calculus is very much the same. A poker game where rake is taken out is a negative-sum game. But that doesn't mean that every player loses, even if they play forever. There will be more net losses than net wins, but these are not evenly distributed.
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> Because it turns out every crypto market is a negative-sum game.
[Citation needed]
You can't just hand wave and assume this to be true. If the world's major investors decide that crypto represents a store of value, then that's a positive-sum game for crypto. If stablecoins transacted on smart contract chains generate demand for Ethereum to pay for the network transaction fees, then that's a positive-sum game for crypto. If new enterprises start raising capital through DeFi and DAOs instead of traditional capital markets, that's a positive-sum game.
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If the game were actually fun, there could be money coming in from players who value the fun more than making money. Axie may have an element to this, but I hear it's not fun. The term for these players is "whales." They are willing to spend a lot for fast progression and domination. A game which pays Filipinos may have money coming in from a well-off player in China. There could be schemes where whales hire Filipinos to grind for loot and gold. However, it's hard to see a situation where a game could pay for development and support thousands of grinders. It would be interesting to see how big the MMORPG grinding economy is. That might give us an idea of how many people these games might support.
One day a trillionaire will build a blockchain game built around proof of humanity. You will have to spend 1 hour solving a problem that can only be solved by humans but verified by a machine to earn $4 an hour. World hunger solved :)
Where the money was coming from when Facebook, Google, Youtube, Twitter etc were really good places that were free to use? They all were working to "make the world a better place" and not making money as they were burning billions each year, challenging the traditional and profitable companies. With Amazon prices were amazing, you had unlimited rights and not only buying but also selling was great. Bezos was worth quite a much but his company never made any profit up until a few years back.
The news business was destroyed in the process, just as the retail and once the establishment lost its ground the money began poring in. From 90's up to late 2000's the internet was amazing as everything was paid by people who were about to reap their investment back a decade later.
My point is, following the money is tricky. Maybe we are at the verge of another change where the costs are payed by crypto bros who will be splitting countries and starting wars once they are done growing the landscape.
> Where the money was coming from when Facebook, Google, Youtube, Twitter etc were really good places that were free to use?
I don’t think this is very mysterious. It’s coming from investors who are spending money in the expectation of future profits as the business scales and reaches greater efficiencies and increases monetization.
In the case of this cryptocurrency there’s no obvious point where these tokens suddenly become useful. People only buy them because somebody else will be willing to buy them later (which, of course, relies on ever-increasing amounts of money entering the system). With a stock you are at least theoretically anchored to real world value, since you can buy out a company with stocks and then liquidate the company’s assets.
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> Where the money was coming from when Facebook, Google, Youtube, Twitter etc were really good places that were free to use? They all were working to "make the world a better place" and not making money as they were burning billions each year, challenging the traditional and profitable companies.
But they were visibly creating value. Seeing what my friends are up to and organising parties together is pleasant. Being able to find what you want on the internet in 1 second rather than 30 minutes is an obvious improvement to your life. So even if they weren't profitable in the short term, you could see that there was legitimate money to be made.
There are no closed systems, and players playing a game does create value. It's almost the only important aspect of software's value - users. Anyone can write some garbage software, or hire people to do it, not anyone can make things people will want to use.
> There are no closed systems
This single fact destroys most arguments about almost anything, but especially in economics
Money doesn't have to come from anywhere. Sometimes new value is created and the money is brand new. This is how GDP grows.
In the case of BTC, it's pretty clear that a huge portion of the market cap didn't come from anywhere. It's new capital. That doesn't mean it can't go to 0 and vanish overnight. But it does mean that play to earn games don't always need money coming in to pay out.
Fiat is created by banks - by originating loans. A bank does not actually need to have that money to create the loan - it is not transferred from somewhere else, it is just that the bank's balance sheet expands. There are rules on how much a bank is allowed to create, as you might imagine.
The BTC system does not create money - you can follow the creation of a coin system to its eventual destruction and discover that exactly the same amount of fiat went into it as came out (less mining). In fact, at any moment in time, the same also holds! If you buy $100 of BTC, somebody somewhere has just sold $100 BTC. No money is ever created or destroyed. Of course (if you were a lunatic), you could get a loan to buy BTC, and so money would be created, but by the banking system, not BTC, and it would go straight to whoever you bought BTC from.
As soon as people decide they don't want to put money in, then no money can come out. You will know this because the 'price' of BTC will be zero.
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It's not just a closed system, it's zero sum. It's only possible to cash out for a profit if there are more people willing to buy in.
Some of the anti-bitcoin crowd tried to make the term "Nakomoto Scheme" a thing, and clearly failed. The basic idea is that things like Axie Infinity have some of the aspects of a ponzi scheme, without the central organization and coordination that makes an actual ponzi scheme illegal. While there isn't a central operator paying out old investors with new investors money, anyone currently invested can only cash out if new people join. This begins to look a bit like a decentralized ponzi, with everyone currently invested in it motivated to evangelize it and convert new people in order to ensure the fresh supply of new buyers to keep the price up and/or let them cash out.
Probably a Ponzi, not a pyramid, scheme, no?
I did a report on this game for a client a few months back -- the amount of daily earnings a player can expect has crashed significantly over the past few months, and it's only gotten worse ever since.
https://twitter.com/larsiusprime/status/1459191090100244483
That's pretty impressive. What do you know what caused the May 2021 spike? what is your feel of how 'sustainable' the whole eco-system of this game is..
The May Spike: they migrated off of Ethereum and on to their own private blockchain, Ronin, on April 28th, which massively lowered transaction costs and increased transaction speeds. You see this pattern a lot with blockchain games, they migrate off Ethereum onto a proof-of-stake L2 or even L1 and you get a surge.
Sustainability: The entire eco-system is not sustainable at all. The game's revenue model is dependent not on the size of the user base but on the pace of user growth. The majority of their players are "scholars" and are being paid to play the game. They've effectively turned their users into liabilities rather than assets, and Axies themselves and SLP are caught in an inflationary spiral.
If you look at official communications the founders themselves have essentially written off the existing "1.0" version of the game and are promising people that the land-based gameplay and "Battles v2" are going to fix everything.
We analyzed the major issues with their future plans here: https://naavik.co/business-breakdowns/axie-infinity/#whats-n...
There's several problems with Battles v2:
- Their stated plan (as of the report) is to feed more users into the crypto version of the game, which doesn't fix the unsustainable treadmill
- Their original plan was to get Battles v2 onto iOS, Android, and Steam, but many of those platforms have cracked down on Crypto games lately and Axie could have a hard time getting approved for release in App stores
There's even more problems with land-based gameplay:
- There is a finite amount of land
- Land grants resource bonuses and the ability to deploy user-generated minigames
- If you don't have land you will have to pay a landlord to access its benefits
- Land goes for extremely high prices (and will thus have very high rents)
This is an extremely puzzling model for a User Generated Content platform. Land speculators will buy all the land and charge rent to the people who actually want to create value. There is no limitation to the number of "slots" available for publishing on Steam or app stores. Given that I have to make an experience that will only run on Axie's platform, why would I invest the time to do that just to pay rent to a virtual middle-man for the privilege of creating value for Sky Mavis?
Basically, they're headed for a land shortage / housing crisis, which is something we've also observed in the 30 year history of MMO's. Anytime you have a game with true "land like assets" you get these shortages and perverse incentives, with scalpers hoarding productive assets they can use as leverage, and it leads to a sort of recession. It has eerie parallels to the real-world housing crisis we're living through right now!
https://www.gamedeveloper.com/business/digital-real-estate-a...
Sky Mavis could realize this and try to change things so that there's a lot of communal land available, or just make more land on demand, or any number of other things. But they're caught in a trap. They promised all these land investors that new land wouldn't be created and that land would be this excellent investment that lets them collect value from all the people building on Axie in the future, kind of like snapping up domain names in the early days of the internet. So, Sky Mavis has to choose between opening the doors for landless peasants, or protecting the land values of landed aristocrats. Either choice will cause problems for them.
Agree with this reasoning - NFTs seem like they clearly have little to no real value and I think the people buying them understand that and are just doing speculation (and we know how that ends up). BTC/ETH are a little harder to gauge because they market themselves as alternative currencies rather than a product in-and-of-itself, but I still get the same fear that it's entirely based on sentiment and nothing in the real world. One article (or Elon tweet) could cause it all to drop overnight.
The USD might fall the same way, but it'd be slower and would require real-world change to happen instead of people just deciding not to use something anymore, and it's so tied up in the global currency exchange that we'd have way bigger problems to worry about than "my investment account lost all it's money". I'm pretty risk averse so I get that other people would want to play that game, I'm just not much of a gambler.
Ethereum seems slightly better than Bitcoin for the reasons you stated as well - ETH could drop to almost zero value and smart contracts would still be cool, but ultimately I'm into the tech. Feels a lot like having a lot of reddit karma to me - it's cool to the people that think it's cool, but doesn't mean much outside of that, unless you can convince someone that does think it's cool to take your fake assets and trade them for "real" assets.
> A thought exercise you should undertake if you're thinking about / talking about crypto/NFT/web3-related projects: If the financial instrument that underlies the project were to stop going up in value XX% per month, would you still be interested in the project?
There are hundreds of ways for that answer to be yes, and this is what is attracting so many builders to the space and why it builds so fast.
Many crypto enthusiasts and the skeptics that surround them are looking at linear bets. Put in X capital, receive X+Y% of capital back, or lose X-Y%. Although very popular approach, it is basically the tip of the iceberg of what's going on.
You can start with no capital and earn the crypto. You can earn lots of it. The price of what you earn can stay flat. The price of what you earn can decrease and you still come out ahead, because you are earning a lot. Not different than earning shares at a FAANG (or NAAAM these days?), except in crypto the earning is is waaaay faster than FAANG vesting periods, and every project has waaaay more upside without wasting decades of your life praying for exit liquidity at a private startup.
So the basis of your question is really project dependent. If I found a way to earn Axie SLP, NFTs, or Axie tokens fast, I wouldn't care about the exchange rate of any of those (unless the dilution outpaced the point of earning) and I think you - and many others - are missing that.
A lot of people stand up smart contract products that accept existing assets as deposit, and take a few basis points of the assets upon deposit or withdrawal, and thats the whole business model. They all do different things thats usually solving an interest or need for the people with the other assets. Completely passive income. I've even seen code that will accept an asset, take the cut, and immediately exchange the cut for a stablevalue asset, all initiated and paid for by the user that made the deposit.
There are many non-linear earning opportunities in this space. Many rival what the largest tech companies offer, even if the exchange rates of the things earned stayed flat. So the calculus is pretty clear: smugly exploit yourself for an ad conglomerate, or directly earn and build in this other even faster moving economy.
> If the financial instrument that underlies the project were to stop going up in value XX% per month, would you still be interested in the project?
I use this yard stick when reviewing all of my tech investments. Providing real value with interesting technological innovations is why ETH outperformed every other alt-coin, just like why Amazon and Google survived the dotcom bust. It seems fundamentally unfair to ask this question specifically of “crypto/NFT/web-3” when it applies equally to all assets and projects.
Bingo. If you couldn't sell at profit, would you ever buy anything crypto-related? That's what I tell any new crypto speculator.
I agree with your point that the operative word here is "earn", and not "play".
To play the devil's advocate: many crypto developers continue to build in the space (or have done it in the past) despite large drawdowns in token prices (denominated in USD). Would that constitute a sufficient signal that "there is something real there", distinct from the question of "is the valuation too high"?
I'd say no.
This might just as well be an "emperor's new clothes" situation, in which a significant number of people are either deluded in thinking there is something of value or heavily invested in making others believe so. Neither of which means there is actually anything "real" there.
Shared delusions are a thing.
Nah, it's just that the target audience ("investors") won't care about the few bucks.
What finclout does differently here is that there is a clearly defined regulated external incoming stream from Proof of Stake treasuries. That avoids that the project needs to rely on a scammy "need to purchase" and in addition with more people overall reward volume increases as well.
I know that there were many people who stayed interested through 4 years of bear market
If the SP500 stopped going up in value would you still be interested in the project?
Yes. The stocks in the SP500 sometimes go down in value, sometimes in the aggregate for a long time. Individually some of them go down forever.
If a stock goes down in value and it still pays a dividend it becomes more valuable for this. Setting that aside all stocks have a not very senior claim on assets. As the stock goes down sometimes it is worth less than the assets it has a claim to. At that point its better to buy up a controlling interest and sell the assets. Thats what private equity does. So yes I am interested when the value goes down.
I would expect it to pay dividends or do stockbuybacks until no more shares are publicly traded.
Surely you see how hypocritical and ponzi that is.
>would you still be interested in the project?
Sure, my fear is that my average peer won't be though. Even if I can see the technical merits...if all my peers are just in it for that quick buck this is going to end badly
Is there any difference why anyone would invest in the stock market? Of course people asset prices to inflate. Isn’t that the whole point of investing in anything?
Actually, originally no; stocks paid dividends.
Ok, fair. But that was when again? How is this relevant today, when people hate crypto and think stocks are ok?
Ethereum also pays dividends in the form of staking rewards.
About 7% today, and most likely going to 10%+ post-merge. That makes the yield on Ethereum significantly higher than the majority of stocks in developed markets.
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But Web3/Crypto/NFT is so much more than the financial incentives. It's much more about culture, belonging, tribalism (the good version) and the endless opportunity space of what I would call a resource. Digital assets that behave as if they are physical.
I have been involved in crypto since the beginning and the least interesting things for me is about the value. It's just a savings account. All the fun stuff is what we build on top of that.
I hope web3/crypto/NFTs are what will finally make us realize that money is essentially meaningless, so that we can forget the concept of monetary value altogether in the long term.