The future viability of cryptocurrency has been questioned in light of the events of 2022. The crash of stablecoin Terra and its partner coin LUNA, as well as the linked explosions of cryptocurrency lender Celsius, cryptocurrency broker Voyager Digital, and hedge fund Three Arrows Capital, to mention a few of the more dramatic failures, occurred before FTX fell in November.
As the year came to a close, there were concerns regarding FTX’s former rival Binance, which had been subject to significant client withdrawals and legal inquiries regarding its compliance procedures. Many of these businesses were hailed as shining examples of how daring, creativity, and bold thinking could create multibillion dollar empires over night just a year ago. They now provide distinctly different lessons.
New demands for increased regulation of the space have been made after each high-profile crypto catastrophe. The theory is that if crypto players were subject to the same regulations as traditional financial institutions, they would begin to act like them. However, a regulation structure created specifically for the technology would only address a portion of the issue. Both consumer protection and market integrity would unquestionably increase. However, it wouldn’t alter the fundamental incentives in the sector or put a stop to some of the careless and dishonest behavior it has attracted thus far. In order for the cryptocurrency sector to benefit society, we must first change the way it gauges success and advancement.
Participants in the cryptocurrency market have been fixated on the price, market capitalization, and trading volume of rival coins since the beginning. The incentives of well-intentioned crypto entrepreneurs have been tainted by these measures, and it is now simpler for dishonest people to blend in, acquire money, and create buzz around their schemes. The industry needs to stop blindly relying on these convenience indicators and start paying closer attention to metrics that closely monitor development against actual consumer and corporate needs if it wants cryptocurrency to actually become mainstream.
Cryptocurrency Prices and Related Metrics Issues
Beginning in the early 2010s, a plethora of what appeared to be objective, market-driven metrics were launched along with the first competing alternative coins (also known as “altcoins”) to Bitcoin. Because they are based on public ledgers, cryptocurrencies have always had easy access to a wide range of data, such as price and market capitalization. The resultant feeling of transparency and the misleading resemblance between cryptocurrencies and publicly traded stocks gave these indicators far more legitimacy than they deserved. Furthermore, it is far too simple for bad actors to manipulate and take advantage of these measures because crypto markets do not have many of the safeguards that have been added through decades of trial and error in traditional banking.
As a result, there is now a climate where it is feasible to introduce a new cryptocurrency token and have it immediately appear, at least on paper, as though you have built a network worth billions of dollars. In actuality, these high prices are created by reducing the number of coins accessible for trading, and they soon plummet when the hype machine that keeps them going slows. Entrepreneurs and investors, however, find it extremely difficult to resist the urge to cite these measures, which have become conventional, as proof of good momentum when given the choice. Human nature leads us to think that the value of our token, however, inflated it may be, truly reflects the potential of what we are creating.
These measures also make it simpler to attract developers, secure partners and raise additional funding by giving nascent crypto enterprises an aspect of scale and competitive advantage. This creates a vicious cycle where entrepreneurs are forced to “fake it until they make it.” It appears that rather than waiting until their initial public offerings (IPOs), the founders of today’s technology behemoths had their stocks traded in real-time as soon as they revealed a beta product. It is simple to become distracted by numbers, regardless of how disconnected they may be from reality, in the midst of the hype, uncertainty, and investment rush.
This early financialization of the development of cryptocurrencies affects it. The types of issues that founders prioritize, how the market rewards their activities, and the long-term viability of what they construct are all determined by the incentives it creates. The focus of entrepreneurs shifts away from the more difficult and ambiguous aspects of technological growth, and cryptocurrency tokens and their value basically become the “product.” Real progress becomes stagnant as a result.
We’ve seen where this mode of operation and creativity go. When a project’s market capitalization and the “number go up” — a meme that has evolved into something of a religious crisis within portions of crypto — are all that count, pump-and-dump schemes, exit scams, and good – old grift hide well, and thrive among respectable enterprises.
Leaving behind bad crypto metrics
Ironically, there is a critical need for better measurements in a situation where everything can be measured with ease. After all, measurement is a method of putting a value on something; it reveals the underlying assumptions that underlie systems, markets, and organizations. Crypto businesses and investors need to reconsider how they gauge success in order to avoid being misled.
Think about how metrics have a dramatic impact on innovation.
Each organization must determine the critical key metrics (KPIs) that will be used to measure progress, compete, and align teams. Examples include the competition for megapixels in digital cameras, the progression-free survival rate in oncology, the transistor density at Intel following Moore’s forecast, and more. Metrics force businesses to ruthlessly prioritize resources and commit to making progress in a particular direction by focusing attention on a select few variables.
This is especially useful for tackling unstructured issues where the optimum course of action is very unclear, which are prevalent in emerging businesses like cryptocurrency.
However, once established, measures can endure well beyond their actual usefulness: Despite the fact that James Watt created horsepower at a time when comparing steam engines to horse-drawn transportation was crucial, the measure was later applied to trains, boats, and automobile engines. Even after all these years, it is still the industry standard, even if it is useless for electric vehicles when compared to other criteria.
The same kind of metrics inertia that has severely harmed cryptocurrency is constraining it as resources like skill and money have chased a small number of handy but unreliable metrics. When crypto markets mature, coin prices and value moving through a network may become trustworthy indices of quality, but they are now too simple to manipulate, whether on purpose or not. Extreme examples of this include the Terra stablecoin and the FTT token by FTX, which both used aggressive marketing and growth subsidies to create the appearance of value before eventually collapsing into a death spiral as a result of their inefficient economics. Investors blindly believe market capitalization indicators as concrete evidence of true worth in what are fairly clear Ponzi scheme variations.
Unfortunately, sincere business owners are also subject to the tyranny of these metrics. Whether it’s because their venture capitalists (VCs) pressured them to add a token and raise the price of it through incentive design — a move that helps VCs demonstrate progress to their own investors — or because they think the only way to compete with rivals is to guarantee developers and early adopters the same inflated financial returns, these entrepreneurs are unable to fully escape from this trap.
A Better Strategy
This is not how it must finish. Because it eliminates the need for a middleman, crypto allows two parties to deal directly. Alice can pay Bob money, engage into a financial agreement with him, or transfer ownership of a piece of digital asset or work of art with little hassle or expense. Importantly, even though they may continue to engage middlemen to speed up these chores, Alice and Bob are in a stronger position to negotiate. Similar to the internet, crypto networks are open networks that give customers and businesses more options, more affordable goods and services, and novel goods and services.
How does crypto accomplish these advantages then? Entrepreneurs and investors must abandon existing measures and create new ones. The impact that a cryptocurrency application aspires to have on the world must be tightly correlated with these new measurements. Ironically, this is exactly how founders and inventors have historically added value: identify a problem that deserves to be solved for your clients and stake your startup’s existence on doing so. Entrepreneurs can return to developing indicators that monitor progress toward a solution by worrying about the problem at hand rather than about early cryptocurrency prices and volatility.
For instance, innovators who want their crypto networks to take the place of conventional payment rails should compare their growth to the same metrics that established payment providers have been using for decades. In addition, as they use crypto to restore fundamental financial services, they should quantify the savings they provide to customers and enterprises.
The same goes for Web3 businesses which are focused on increasing choice and competition in the creator economy. They should assess the economic value they provide to creators and contrast it with the market leaders. These new measures will reveal the societal advantages that the technology is bringing about swiftly if it is true that crypto can really reduce barriers and give creators greater power.
Returning to the fundamentals has a significant payback. Metrics can make the complicated issues that cryptocurrencies aim to solve manageable issues that business owners, managers, and engineers can optimize on while also giving consumers, regulators, and even consumers a far better understanding of the young field. Building better crypto metrics is a requirement in unlocking that potential. Crypto will only make a difference if it can bridge the gap between digital records on a blockchain and their influence in the real world.
