"What are your thoughts on altcoins/crypto", asks the noob

An attempt to have a general answer to this common question

(I’m probably gonna rewrite this post better at a later date fyi, was more to get something out there for some friends quickly)

Another day another DM:

All to common.

Altcoins is a loaded term.

Altcoins is a term left over from an earlier age when there was Bitcoin, and everything else being a near exact clone. We’ve moved beyond that in terms of nuance particularly since the launch of Ethereum. Even more particularly since the launch of DeFi (Decentralized Finance). A big part of this change is Ethereum allows for virtually any conditional structure to be encoded on chain. This meant real businesses, not just currencies could be built. Here’s a good summary and see if you can guess which falls into which of the below categories (not all of them fit)

To me there is:

1. Bitcoin, Bitcoin clones (limited currency platform)

   • Clone example LTC, DOGE, etc

2. Ethereum, Ethereum clones (unlimited base platform)

   • Clone example ADA, BSC, TRON

3. DeFi Applications, DeFi clones (decentralized finance applications)

   • Real example: MKR, AAVE, UNI, CRV

   • Clone example: CAKE

   • Not all of these applications have tokens, but some do

4. Memecoins (not even their own chain, just memes)

   • Example: SHIB

   • These have no purpose

5. Oracles, and poser oracles

   • Provide off chain data on chain

   • Example of good oracle: LINK

     • Plug and Play. Good data aggregation

   • Example of poser: BAND

     • Limited network, bad aggregation

6. NFTs : too deep a spiral here, lets try to stay focused on more direct assets.

1. Bitcoin and its clones

I am extremely biased towards Ethereum, so let me just say that out front, but the ask was for my thoughts, so be aware.

Bitcoin is the name of both the network and the currency. I’ll use BTC to describe the currency and follow that pattern going forward.

Bitcoin is designed to be a permissionless network for P2P exchange. It’s origin was in retaliation to banks printing assets after the 2008 financial crash. This action had put on full display that a government can redistribute wealth not by taking it from people, but by issuing more and choosing the recipients. This is inherently unfair.

To address this Bitcoin primarily focuses on monetary supply. The monetary policy is of utmost importance, with all other considerations falling second. The theory being it can wean off network subsidies by the time 21 million BTC are issued and secure the network purely on fee revenue.

To me, this is a pretty meh design as a monetary policy is only useful in a secure network and Bitcoin and other “money first” assets put security second. Issuance can be good. It ensures the network is secure even when its not busy. Fees on transactions tax users. Issuance taxes holders. While at present Bitcoin is still chugging along to 21 million issued and has inflation to a degree, at a certain point Bitcoin will only be able to tax users but not holders as it loses the ability to issue new supply (as well as while the issuance reduces). This can lead to problems down the road securing blocks as it gets more expensive to transact and the network must attract transactions to live.

To me while Bitcoin can have some merit as a hedge which focuses on minimizing change (despite how self defeating I think that is), clones of Bitcoin like LTC, Doge, Bitcoin Cash, quite literally serve no purpose and have no draw. There is no reason as an investor to choose any BTC clone unless you are purposely speculating on dumb money movements.

LTC served its purpose as overflow for an overcrowded BTC network in 2017. Now you can use BTC in wrapped forms on Ethereum, BSC, Solana, Polygon, Loopring, and many others which provide additional features such as built in trading platforms, and more. Why use a network just for transfers between exchanges when so many options exist which can do more, better.

Early on Bitcoin demonstrated two primary things.

1. Assets are useless unless there is a market to utilize them.

   • Centralized Exchanges to trade BTC became big

2. Assets are boring without alternative exposures to trade between.

   • Altcoins and centralized stable assets became bit to trade against BTC

Basically holding an asset forever does nothing. You need to be able to capture your asset’s value by exchanging it for a new asset in order to take advantage of that purchasing power. If your asset grows 100x and then crashes below where you bought in, unless you’ve traded to an uncorrelated asset, you’ve accomplished nothing. Bitcoin only enables holding, or trading with friends. (effectively since no decentralized markets available on network). Everything else is done through a centralized service.

2. Ethereum and it’s clones

Ethereum is designed to be a permissionless network for any conceivable agreement. While previous networks built to include specific features built in, Ethereum is built to have minimal features built in but allow anyone to build more complex features on top which are opt in.

It supports smart contracts which are self enforcing agreements. While many traditional forms of contracts are chalk full of middlemen, Ethereum does not need third parties to ensure a contract is executed as agree. This is handled by the contract itself allowing for greater composibility (or lego-ness) of decentralized applications built on top.

For example, lets say you have a mortgage. The bank wants to foreclose on you because you haven’t met your end of the agreement. They need to go through a court, and a lengthy legal process to move forward. Its high cost, since lots of people’s time is involved. They then must spend resources trying to match with a buyer. On Ethereum, your debt would be held by a smart contract which also owns the house. The network would recognize you did not meet your agreement allowing a foreclosure condition to be executed by the lender. No third parties needed.

These smart contracts create demand to interact with Ethereum on its blockspace, creating a native demand for the network beyond the desire to send and receive Ether, the native currency of Ethereum. Looking at Cryptofees.info can be helpful to demonstrate this.

The white rows represent Protocol Fees, while the pink rows represent Application fees. Uniswap, Sushiswap, AAVE, Balance, Compound, Bancor, MakerDAO, Sythetix, Curve, Hegic, Futureswap, are all applications built on Ethereum and their use requires paying a fee in Ether to the Ethereum network. Quickswap is built on Polygon which inherits some security features from Ethereum and is aligned with Ethereum’s goals. Else the only things to make the screen divide not Ethereum based in some context are Bitcoin, Avalanche, which is an “Eth Killer” (spooky clone), Dogecoin an actual meme with no devs, monetary policy, or really anything else but Elon.

All the real money, real fees, and real demand exist on Ethereum, and build its network effect. The demand causes the price to use the network to skyrocket on occasion, often during large market spikes. This leads to many a complaint, but when you zoom out, you see Ethereum and all its applications were available and functioning if you could pay the fee to get ahead of the line and included in a block. Centralized solutions like Coinbase, Kraken, Binance, and others often just crash and are inaccessible. Idk about you, but I’d choose expensive but accessible when it matters most, over offline, but maybe that’s just me.

No network has put more research on scaling than Ethereum. A lot will be coming out this summer from EIP 1559 which will reduce ETH emissions and create deflationary pressure on the supply from burnt fees to Optimism PBC, ZKSync, and others Rollups which will distribute demand to layers built above Ethereum but inherit its security. A migration to a Proof of Stake system is expected later this year and has already begun with phase 0 launching late last year.

Clones take shortcuts to gain minor improvements but don’t understand why things are the way they are or how they are secured. BSC for instance cloned ETH, changed some variables, was super fast, but quickly hit its limit crashing forked projects, freezing withdrawals, and more.

The Scalability Trilema

Ethereum’s critics often claim its centralized, or can be replicated in a centralized manner. For years they’ve stated that DeFi is pointless and inefficient vs a centralized solution. It really depends what you are optimizing for. As discussed earlier, when it counts most, often Ethereum supports the only markets able to meet demand. On a normal Tuesday perhaps it is cheaper to use Coinbase or the like. However, Coinbase is limited. I can trade on Coinbase. I can leverage on FTX. I can do anything imaginable on Ethereum and own a piece of the protocol while I’m at it. This boarderlessness empowers Ethereum to dominate blockspace demand as seen by fees, and its potential is put on a pedestal with DeFi.

3. Decentralized Finance (DeFi) and DeFi Clones

DeFi took permissionless network to a whole new level. While other projects lazily compete to be the best “money”, DeFi applications compete to become the most sought after services. What services can really go deep and maybe that’s best saved for another time.

On the surface DeFi applications are a set of conditions encoded in a smart contract. Conditions can be simple. “Don’t accept transfers from any token I haven’t approved”.

Conditions can be complex: “Here are my assets. Thanks for the loan. You do not have permission to utilize my assets unless the price of X drops below Y. In that case you can sell my assets to pay down the debt I owe you at the market rate according to these sources”

But things get really powerful when you can stack these applications together. Imagine for instance you have your assets deposited in a savings account making 10% APR on dollar like assets (impossible rate in tradefi, average in DeFi). Say you want to send your friend money. You could remove your assets from a savings account and send them dollars. Now they have dollars sitting stagnant until they do something with them.

In DeFi, instead, these deposits are often tokenized, so you can just send your friend $100 dollar like assets earning 10% interest from your application deposit. Now your friend is never sitting on unproductive assets.

This kinda thing happens a lot. Opportunity cost is something normally not considered in everyday life, but its a vast opportunity in DeFi. Take for instance Balancer V2, a decentralized exchange. They found that the way their market making program works, there is a lot of dormant value. To address this, they’ve iterated so that assets committed to specific Automated Market Maker Liquidity Pools (robot asset managers which trade between assets on users behalf. I’ll write more about later) are deposited into yield earning strategies under the hood. This entitles you to internal swap fees from the trading strategy, internal yield from the investment strategy under the hood, and external incentive reward where applicable, rewarding participants for providing the service of putting their capital up for market making.

Source Article on the update

This ability to max out opportunity on assets and earn yield from many avenues at once allow DeFi to compose into massive passive income potential, custom fit to your needs that is simply impossible to offer in traditional finance due the closed nature of services.

These yield generating opportunities are valuable and often have the option, if not have implemented, the ability to take a fee from activity they facilitate. These fees can be passed on to the applications Governance Token Holders, or be invested into new productive opportunities. These services live on chain and users must pay fees to the host network (Eth) as well as any present application fees.

There is also liquidity mining where dapps pay users in their native governance token to provide services to the application. These services can include, borrowing/lending, providing liquidity to Automated Market Makers of the governance token and friendly assets.

Some DeFi applications without a governance token later retroactively give governance tokens to past users, and this has been quite the boon for early DeFi investors, and has spread speculative use, where many try using new DeFi platforms without tokens in hopes of a retroactive airdrop.

To summarize. DeFi applications provide services which can earn revenue. Investing in the governance token of these applications can give you exposure to this revenue, as well as other income earning opportunities. It can also give you voting power to help shape the applications growth towards your wants. These can be very powerful tokens and imo have a tremendous amount of upside.

4. Memecoins

Memecoins are tokens that ride on pure hype. Things like Shib which is just, “hey people like dog tokens at the moment. Doge is popular, lets make a dog token”.

Not gonna lie, you can make incredible amounts of money in these schemes, but you also take on an incredible amount of risk. Without the meme’s and hype, there’s nothing substantial there.

5.Oracles

Oracles are services which provide off chain information on chain. Things like centralized exchange prices, sports scores, among other info. There are several cryptocurrencies which act as currencies for Oracle Networks.

Oracles are a tough problem to solve. Ultimately their trying to solve, “what is truth” and philosophers for generations have struggled on that front.

Not every application needs an oracle network which needs oracles. For instance, MakerDAO has their own oracles, as does Compound Finance.

Chainlink is the most popular Oracle project and provides the simplest onboarding and specializes in aggregating offchain information from many sources in an attempt to reduce to risk of a single information provider. There are still many problems to solve on this front, but if you are to invest in Oracles, try to avoid projects which are hard to integrate. This can be seen by the number or projects which have actually integrated them. If they are hard to use, for the same effort a project may end up just rolling their own.

6. NFTs

Non Fungible Token or NFTs are a token standard for unique items. This is often represented with art, however can also represent a unique market position as seen in Uniswap V3’s new liquidity pools. To put it in noob terms, imagine if you want to start selling a token A at price X for token B. At price Y you want to be totally in token B. You can represent this as an NFT in Uniswap V3 based on your uniquely input price points.

Anything unique can be represented as an NFT. NFTs themselves do not imply scarcity. While they can impose supply caps, that is a setting, not a guarantee.

I personally don’t see single image or unrelated art collections becoming strong investments. From my perspective, the future of NFTs in relation to artwork is related to how cashflows can be incorporated into these tokens, and how they relate to the greater metaverse. Unless its already considered an OG or has high potential to be, would avoid investing in art NFTs unless your cash rich or you love the art.

Some NFT games can be cool though. Aavagotchi is a fun game that incorporates rarity and AAVE based DeFi lending opportunities under the hood. Axis Infinity has cashflow incentives which result in those in poorer countries being able to earn good relative income just by playing.

Anyhow, NFTs are a very competitive and dangerous investment vehicles unless they are well established or you know what you are doing.