🟪 The Crypto Theory of Everything

The crypto theory of everything 

If you have worked in crypto long enough, you understand the exquisite pain of trying to describe what crypto is to newcomers.

After six years of being in crypto full-time, I still get butterflies in my stomach when one of my parents asks me to describe what it is. 

Typically, I default to the standard Bitcoin-centric answer.

I start by describing the problem: Central banks are printing too much money, so Bitcoin was created as a digital currency that can’t be debased by a central entity.

But I have begun to find that answer unsatisfying because, while that is true, crypto today is really much more encompassing than that.

Today, there are vast swathes of the crypto industry that don’t interact with Bitcoin and don’t care about solving issues related to money.

It’s a credit to how much crypto has grown that it’s become difficult to describe a single overarching theory for what the industry is and why it matters. I’ve been wrestling with this for some time now, and finally think I have one theory that unites many of the seemingly disparate theories about what crypto is.

The creation of a new commodity

The fundamental innovation behind crypto lies in the creation of a new commodity: blockspace.

To use an overly simplistic definition, blockspace is storage that exists in cyberspace where any developer can either run code or store data.

What makes blockspace unique as far as software goes is that it isn’t subordinate to a centralized owner of hardware.

This is the status quo for the software we all use today. Companies like Google have created extremely valuable pieces of software that we all use: Google Search, Gmail, Chrome, etc.

But if Google ever wanted to, they could unilaterally change anything. As it turns out, there are some (even many) advantages to this organization.

As a centralized organization, Google can quickly patch bugs. They can hire excellent talent and leverage economies of scale. I think you could also argue that fewer cooks in the kitchen leads to better products.

However, there are some applications for software that aren’t applicable for software that could be co-opted by a single party.

These tend to be applications where trust and importance to society are extremely high.

For instance, as much as we trust Google, we wouldn’t trust them to administer our currency.

Why? Because they could change the amount whenever they wanted with little oversight.

And no matter how much we trust Google, we all implicitly understand that the incentive to cheat is too strong.

These sorts of high-trust applications that traditional software hasn’t been suited to is what blockspace is incredibly useful for.

Because it is verified independently by a high number of independent actors around the globe, it actually turns the existing dynamic on its head and makes the hardware operators subordinate to the software.

(Side note: this is why many Silicon Valley folks in my opinion don’t grok crypto. It is essentially the opposite of their business model.)

Different flavors of blockspace

As it turns out, just like any commodity, there are many different ways to refine blockspace.

Bitcoin’s blockspace, for instance, has many unique characteristics that make it suited to the money use case.

Ironically, the attributes of Bitcoin’s blockspace that make it uniquely suited to the money use case is how restricted its performance is.

The Bitcoin network produces one block roughly every 10 minutes that maxes out at 4 megabytes.

These limitations (among many others) preclude Bitcoin from a number of use cases — high-frequency trading, gaming, etc.

However, for the money use case these limitations are actually a strength because it forces the network to side step the complexity that would be needed to accommodate these applications.

Other blockspace producers like Ethereum have opted for a different set of trade-offs.

Ethereum’s blockspace is general purpose, and more suited to a wider variety of applications.

This decision opens Ethereum up to a much wider set of consumers of the blockspace it produces. But the complexity it’s had to grapple with as a network has degraded some of its monetary properties.

I could spend multiple paragraphs going into the different flavors of blockspace (app-specific vs general, blockspace which is subordinate to another blockchain’s sequency a la rollups, etc.).

The key point to take away here is that we are in the very early innings of experimenting with and refining blockspace.

In the future, my expectation is that there will be a large and diverse market of blockspace producers and consumers that are suited to different use cases.

Why do we care that blockspace is a commodity?

It’s important to understand the commodity-like nature of blockspace if you are considering their associated tokens for investments.

Here’s the important thing to understand about commodities. Although there are many investors in commodities, they are almost all traders.

Almost no one buys and holds commodities for 20-year periods of time because commodities are engineered by society to stay flat, or more ideally go down.

(Note: when I say "go down" I mean in real purchasing power terms, pls do not @ me with charts of the price of oil from 100 years ago.) 

The reason for this is obvious — we use commodities! If the price of oil goes up too far, our policymakers will eventually move heaven and earth to make it go back down.

The same is true of other important commodities like steel, food, etc.

This is basically the opposite for equities, which are engineered by society to go up. If the stock market goes down for long enough, policymakers will start to look for ways to make it go back up again.

I’m being intentionally simplistic and there are other reasons why equities outperform (compounding, etc.) but that’s the high-level overview.

But I’ve been told to HODL

The implication of this is one that is going to be very unpopular with almost every reader of this newsletter.

If it’s true that especially layer-1 blockspace is a commodity, then none of the assets we talk about at Blockworks (Bitcoin, Ethereum, Solana, Atom, etc.) are long-term investments.

From the vantage point we just laid out, these are all trades instead of long-term holds.

But wait, you say. The data doesn’t support this theory!

I am a student of the fat protocol thesis.

Bitcoin and other layer-1 tokens like Ether are the best-performing assets in crypto, far outperforming the equity of even the most successful companies like Coinbase.

That is true, but I don’t expect that to continue forever for the simple fact that the incentives for blockspace are similar to commodities.

For instance, if Bitcoin is going to be a successful money, it can’t continue to grow 100% per year.

Similarly, for blockchains that produce blockspace for applications to consume (Ethereum, Solana, etc…) the long-term incentive is for prices to max out at some point.

Some will point out that blockspace markets and token markets aren’t 1:1. I understand that, but they are correlated because blockspace is denominated in the token, so they are intrinsically linked.

I think the best analogy for the last decade of crypto has been a good old-fashioned commodities boom.

There are a few examples you could look at in recent history, but the one I think is most relevant is the commodity boom of the 1970's.

The 1970's comparison feels the most apt to me because of the similar economic and geopolitical climate. The commodity boom was initially kicked off by Arab-Israeli conflict, but made worse by the underlying climate of inflation.

During that same period, Nixon famously suspended the Gold Window, leading to rapid expansion in the monetary base and an explosion in the price of gold.

Now, the point that I am trying to drive across here is not that the 1970's were exactly like today and that monetary debasement and inflation are what’s driving crypto prices (although that is part of it).

My point is that there have been various periods in history that have fooled investors into believing that commodities could sustain equity-like returns over long periods of time.

One interesting comparison that will make the crypto natives on this email chuckle is that during the 1970's and 2000's, people also started saying that we were experiencing a commodity supercycle (shout out Su Zhu).

My mental framework for the current period is that this first phase of crypto has been the world’s first digital commodity boom.

Blockspace is a novel commodity that can be used for an extremely broad number of applications, which is why it’s expanded so exponentially.

But, like all commodity booms that happened before this one, financial gravity will set in. In the fullness of time, your favorite layer-1 will begin to trade similarly to corn, steel, or soybeans.

One final comparison between the 1970's commodity boom and the 2010's digital commodity boom is the psychological impact they have had on market participants.

There is a very interesting comparison to be made between the gold bugs in particular and the tribalism in crypto today.

What’s interesting about the gold bugs to me is that after the stunning price appreciation during the 70's, gold went on to basically underperform every other asset on earth.

But 40 years later, that community remains more evangelical than ever. It’s pretty incredible if you really think about it.

I think those same underlying dynamics exist in crypto. There is just something that happens to most people’s brain chemistry when you own an asset that goes up 10x or 100x that is difficult to unlearn.

Within crypto, I think there are two additional underappreciated dynamics that contribute to the prevailing tribalism.

Loneliness in the internet age. Young people are increasingly looking for sources of community in an isolated world, and large crypto communities (s.c Bitcoin, Solana, Ethereum) offer that.

Layer-1s need large communities to come together on roadmaps that have very meaningful technical tradeoffs that only a small group of engineers truly understand. Thus, the strategy has been to manufacture narratives around these tradeoffs to marshall support (see the blocksize wars as an example).

So my prognosis for the foreseeable future while this crypto commodity boom is going on is more tribalism, not less.

The crypto theory of everything TL;DR

To some, this prognosis might sound bearish. It doesn’t to me.

I think we are still in the early days of experimentation and expansion of layer-1 commodity blockspace.

So the good news is, I don’t think we are close to the end of this blockspace commodity boom. If I had to guess, we still have a good 5-10 years left of this regime.

So if you still love Ethereum, or Solana, or Celestia, or whatever, there is still plenty of room left to run and I would guess existing and new layer-1s will be the best risk-adjusted trade of the decade (not financial advice!).

Eventually though, I expect the market will align on the flavors of blockspace it needs and it will become commoditized.

To some I will understand that sounds bearish, but I disagree. I think that is a good thing.

My long-term view of crypto is a substrate that enables new use cases and businesses that weren’t possible before.

In order for that wave of generational businesses to get built, we need abundant, cheap, useful blockspace. And that’s exactly what is being built today.

So if you have made it this far into the newsletter, here is the TL;DR:

• The fundamental innovation behind crypto is the innovation of a new commodity: blockspace

• The last decade of crypto has been a blockspace commodity boom, that will likely continue for the next 5-10 years

• Eventually though, this blockspace will become commoditized and layer-1s will begin to trade sideways

• This will pave the way for the first generation of businesses to be built on blockspace that will cross the chasm to the mainstream

• The equity of these blockspace enabled businesses will then start to outperform the underlying layer-1s

The one exception to this theory may be blockchains like Bitcoin, whose use case is not to build businesses on it but instead to act as money.

I think this is a valid exception, although as I pointed out earlier, if Bitcoin is going to act as money, its volatility and returns will go down over time.

So ultimately I think the end result ends up being pretty similar. (Side note: I think this exception is understood by crypto communities, and is why Ethereum has tried to rebrand itself as “ultrasound money.”)

Taken together, this is all enormously exciting to me.

During the next decade, I expect to see the Cambrian explosion in blockspace experimentation continue. Investors and users alike will do well (not financial advice!).

Personally, I am excited for what comes next, which is the wave of generational businesses that will be built on top of this blockspace.

I think we will all be astounded when we look back in a decade on how much has changed and what we’ve built.

As Bill Gates once famously said, “We overestimate what we can do in one year but underestimate what we can do in ten.”

– Mippo

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