Embrace the absurd? Web 3 'externalities' matter more

rational vs absurd

In our usual research, we always encounter these two types of products, the rational good boy and the absurd bad boy.

rational good boy

Solve the existing rigid needs, have a clear PMF (product-market-fit) and business model, and have a clear moat. Everyone likes such a company; they are Coinbase , Opensea, Nansen, Chainlink, and they are the darlings of venture capital. The topic of data analysts is the shining star.

ridiculous bad boy

It seems that it does not solve a certain rigid need, and the only clear income is transfer fees, or income from arbitrage speculation. Their methods of attracting users are rough, making people feel that they will collapse at any time. They are often the category definers; they are PFP NFT, Meme Coin, Algorithmic Stablecoin, x-to-earn, etc. They are hot spots of controversy, ridiculous jokes, and enviable trends.

We find absurdly bad kids more interesting, whose externalities are underestimated.

Try Thinking: Externalities

• Any economic behavior has: externalities

In economics, the impact of a private economic behavior on social welfare is called an externality . Regardless of whether this private behavior is a kind of consumption or a kind of production, there may be externalities.

what is an externality

As can be seen from the above figure, in the area between the two Pareto Equilibrium, the size of the externality can be calculated. Externalities can be negative (losses) or positive (gains).

for example:

negative externalities of technology

• Factory: environmental pollution, noise

• Robots: Bringing Unemployment

• Internet: information overload, privacy and security deprived

Positive Externalities of Technology

• Factories: Driven by rent increases in surrounding neighborhoods

• Robots: Freeing Humans to Focus on Creative Work

• Internet: Enabling Freedom of Creation, Policing Power and Illegal Behavior

In a closed market, the link degree of market participants is very low, the flow of information and capital is blocked, externalities cannot be dissipated, and regulators will generally intervene.

In an open market, market participants are highly connected, and information and capital flows are effective, so the externalities of each economic behavior will be more significant, forming a rippling effect of externalities .

However, Web3 is one of the most aggressive open markets in history, with more externalities as well.

• Bitcoin is a ridiculous bad boy

Back in 2008, when you saw the product Bitcoin, it was not a product with PMF, the payment speed was very slow, and there was no credit endorsement; early users were niche computer enthusiasts, underground traders and speculators. Compared to Paypal, he is a terrible "payment company", a bad boy who is not only ridiculous but dangerous.

But in the following 14 years, with high inflation and restrictions on financial freedom, the externality of Bitcoin has been continuously strengthened and transformed into a huge industrial chain. Its number of users has reached 81 million, and its daily liquidity is about 18 billion U.S. dollars. It is a digital asset that is conducive to storage and value preservation, and may replace gold in the future. It is not the official Bitcoin organization that maintains these values and beliefs, but all external economic activities.

Bitcoin negative externalities:

• power consumption

• Difficult to supervise

Bitcoin positive externalities:

• Driven the mining machine industry (Bitmain, etc.)

• Driven the trading industry (Coinbase, etc.)

• Added new asset varieties to the financial market

• Inspired the development and application of blockchain technology

• Used by some small government states

Externalities of Bitcoin

According to the research "Can we mitigate the externality of cryptocurrencies" by Stanford scholars, more than 75% of Bitcoin transactions come from "external financial activities", and these externalities in turn contribute to the value of Bitcoin.

If we only analyze Bitcoin's inherent technology and product requirements, we may never find the right answer.

Ridiculous bad boy with no test scores to measure his future performance.

Try Thinking: Externalities

• What is an external market

Among liberal economists such as Hayek, they believe that instead of suppressing "externalities", it is better to establish a market, absorb participants, and form an economy.

Hayek advocated using the market mechanism to absorb externalities

New species A —>external economic behavior —> new external market, new species B

We call such a market an "external market", and we should look for new species with a huge "external market".

• Web3 has a large market for externalities

The future world is more connected than any other era. From the perspective of Web3, tokens are extremely liquid, highly Openness and Composibility, so products and protocols will produce unexpected externalities.

Curve War stems from the huge externality of Curve

for example:

• Curve has huge externalities. It's not a simple exchange protocol, but a giant stablecoin launchpad

• Axie has huge externalities. It is the largest soil of Guild economy, and some Guilds have become an inclusive financial service facility in Southeast Asia

• Terra has huge externalities. He gave birth to UST's lending and arbitrage activities, and every time he rebases, there are more new users and liquidity.

• BAYC has huge externalities. He used NFT to form a huge crowd of high-net-worth investors, from sports stars to artists.

We must see the externality of a product in order to judge its true potential.

• Summarize the externality market of Crypto and Web3 in these years (2018-2022)

The most classic externality market (before 2018)

• miners market

• Computing power market

• market place

• exchange market

Externality market after the emergence of Defi (2018 - 2021)

• Liquidity Provider Market

• Staking market

• Insurance market

• Curator and Liquidator Marketplace

• MEV market

• Bribery Market

The externality market that is gestating and will take shape in the future (2022 - later)

• Guild Market

• Governance market

• NFT creation market

• data market

• AdvertisementMarket

We found that since the birth of the blockchain, the externality market has been expanding, and even more externality markets will be born in the externality market, which is almost impossible to stop.

These external markets are also strengthening the platforms on which they were originally born, and jointly building a value network. When there are multiple external markets in a network, it will become stronger and stronger, providing greater externalities to the real world.

Epilogue and enjoyment

In a particular world, at a particular point in time and in a particular industry, excessive "reason" is tedious and ineffective. Properly leaving opportunities to randomness and listening to absurd entrepreneurial ideas may be an opportunity worth cherishing.

Because the absurdly bad boy is closer to a miracle than the well-behaved "good boy".