By Nick Saponaro, Chief Executive Officer of Divi Labs
For some time, the crypto industry has been in thrall to what I call the Hype Cycle. A common feature of the recent bull run, the sequence goes something like this. A crypto project or influencer puts out a statement of intent, nothing concrete but enough to elicit excitement. Hype ensues. Investors pile into the coin, boosting its price and triggering additional waves of trading as more people, fearful of missing out, jump in.
While hype will likely be an ever-present force in our industry, as it is in other financial markets, the Crypto Winter will have significantly curbed its influence. Retail and institutional investors, who have seen the value of their portfolios drop considerably over the past year, are now much wiser to the machinations of the market and will want more than hyperbole to drive their interest and activity.
In lieu of the hype cycle, the market will have to shift to a more concrete metric of value that has its roots in reality. That metric is utility and by extension, use.
As we move towards the next bull run, vaporware will give way to more traditional measures of a project’s promise and future success. Fundamentals will be critical, including a robust technical infrastructure, the ability to quickly and efficiently build and deploy engaging applications people want to use, and of course, the mass adoption of those applications.
Reaching Technical Maturity
Despite progressing rapidly compared to other technical paradigms, the technology and those developing it have been trying to catch up with expectations since its inception.
We are still very early in the crypto industry’s life cycle. At 14, you could say that Bitcoin is the unruly teenage brother. Meanwhile, the rest of the industry is kicking and screaming its way through adolescence and about to hit puberty, complete with its own set of growing pains.
That said, we are now entering a more mature phase of tech development, which will help to hasten the inevitable tipping point for utility and use. While significant advances like Ethereum’s move to proof-of-stake and Cardano’s Vasil Hardfork dominate the headlines, many others are not so widely reported in the mainstream.
Cryptocurrency, tokenization and more importantly, blockchain technologies are becoming increasingly common in the applications for networks and computing, security, industrial applications, commodities and securities. Combine this with interest from large-scale traditional brands to enter the space, and utility and its value to the industry become clear.
Why Utility is Essential
A currency can’t be successful without demand, and you can’t rely on hype alone to drive it. You need a reason beyond the hope of future riches to entice users. Critically, there has to be a value accrued for participating in the ecosystem, which is precisely why the cryptosphere was created. To give people a new finance system where anyone can participate and derive value.
Ethereum’s move to proof-of-stake is a step change. It is such a big deal not only because of energy efficiency but also because it enables everyone to accrue more ETH by participating in the ecosystem. However, there is no point in increasing your holding if its value continues to decline. We are seeing the same thing happen in DeFi, where Liquidity Providers are losing money because impermanent loss becomes, well, permanent.
There are two crucial, interdependent factors to consider when thinking about utility. The first and most apparent is the need for crypto-driven services that people want to use, feel safe using and are easy to use, all of which will increase adoption. The second is a circular system of commerce where people can spend the value they accrue.
The first drives adoption, liquidity and value, while the second makes it worthwhile to participate, generate a profit and keep people in the system. In sharp contrast to the current cycle of decay, this is now a virtuous circle.
The Use-Case for Crypto
During the last bull run, the adoption and use of crypto as a mechanism for finance were driven by two use cases, decentralized finance (DeFi) and Non-Fungible Tokens (NFTs). DeFi, while still the preserve of more advanced users will, in time, become more accessible to the mainstream. NFTs, on the other hand, have already had a significant impact on consumer adoption.
The non-fungible space has exploded, going rapidly from niche to known. They are an easy, open door to the use and ownership of digital assets. As more consumers explore NFTs, they become more familiar with the tech, which unlocks their understanding of cryptocurrencies and allows them to explore other industry propositions.
Sure, there’s been some backlash, but there have also been notable successes. Reddit completely flipped the script on NFTs with their community, which was abhorrently against them initially. Changing the name to "digital collectables" and making it fun made all the difference.
Whatever you think of their relative value, NFTs have also triggered another key component for the mass adoption and use of crypto-related services and tokens. They have piqued the interest of brands now moving into the space in droves, and this newfound popularity among enterprises is the most important catalyst.
While crypto companies do an excellent job of enticing users, the impact of major brands entering the space cannot be underestimated. Ultimately, they own the relationship with the consumer and can bridge the divide between the worlds of Web2 and Web3. They have the persuasive power and the trust necessary to onboard consumers into applications and experiences in truly large numbers.
So far, these attempts have been quite brash. Focusing as they have on NFTs, they’ve enjoyed varying degrees of success. As the cryptoverse and traditional brands find alignment, the propositions offered will grow exponentially.
Rather than being sucked into the promise of what is coming in the future, savvy investors will now be watching for projects who are implementing applications, growing their user bases and generating genuine revenue. They will monitor the trends to see which applications draw the greatest number of consumers and target the projects and coins that underpin them.
About the author:
Nick Saponaro is the co-founder and CEO of Divi Labs, developers of a decentralized payment ecosystem that aims to improve people’s lives by making crypto easy and accelerating its mainstream adoption. A dedicated proponent of the founding principles of the crypto movement, Nick is working towards delivering a new paradigm for financial services. One that is truly decentralized, accessible to all, and works for everyone.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.