Original source: Blockworks

Original compilation: Deep Chao TechFlow

“Most technologies tend to have workers perform menial tasks. However, blockchain is different in that its automation is decentralized. Instead of putting taxi drivers out of work, blockchain put Uber out of work and taxi drivers out of work. Drivers work directly with customers.”

– Vitalik

How to explain everything about cryptocurrency

If youve been working in the crypto space long enough, you understand how painful it can be to try to teach newbies what crypto is.

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

Normally, I default to Bitcoin-centric answers.

I start by describing the problem: central banks print too much money, so Bitcoin was created as a digital currency that cannot be devalued by a central entity.

But Im starting to find this answer unsatisfactory, and while its objectively true, cryptocurrencies today are actually much broader than this answer.

Today, there are a lot of people in the cryptocurrency industry who don’t interact with Bitcoin and don’t care about solving money-related problems.

Cryptocurrency is evolving so quickly that it’s difficult to describe with an overarching theory what the industry is and why it’s so important.

Ive been struggling with this for a while and now I finally think I have a theory that unifies the answer to the question of what cryptocurrencies are.

Cryptocurrency innovation: creating a new commodity

The fundamental innovation of cryptocurrencies is the creation of a new commodity: block space.

To oversimplify the definition, blockspace is storage that exists in cyberspace where any developer can run code or store data.

What makes Blockspace unique as software is that it is not subordinate to a centralized owner of hardware.

Centralization is the current state of all our software. Companies like Google create incredibly valuable software that we all use: Google Search, Gmail, Chrome, and more.

But Google can change anything unilaterally if they want. But it turns out that such an organization has many advantages.

As a centralized organization, Google can patch vulnerabilities quickly. They can hire great talent and take advantage of economies of scale.

However, some software applications are not suitable for software that may be occupied by a single party. These are often applications with extremely high trust and importance to society.

For example, although we trust Google, we would not trust them to manage our currency. Why? Because they can change the amount at any time without supervision. No matter how much we trust Google, we all know that the incentives to cheat are too strong.

These high-trust applications where traditional software is not suitable are where blockspace is very useful. Because it is independently verified by a large number of independent participants around the world, it effectively subverts existing rules and subordinates hardware operators to software. This is why I think many people in Silicon Valley don’t understand crypto. Its essentially the opposite of their business model.

Block spaces of different styles

It turns out that like any commodity, there are many different ways to perfect the block space. For example, Bitcoin’s block space has many unique properties that make it suitable for monetary purposes. Ironically, the properties of the Bitcoin block space that make it particularly suitable for monetary purposes limit its performance.

The Bitcoin network produces a block approximately every 10 minutes and has a maximum capacity of 4 megabytes. These limitations (among many others) prevent Bitcoin from entering many use cases - high-frequency trading, gaming, etc. For monetary purposes, however, these limitations are actually an advantage because it forces networks to sidestep the complexity required to accommodate these applications.

Other blockspace producers, such as Ethereum, have chosen a different set of trade-offs. Ethereum’s block space is universal and more suitable for a wider range of applications. This decision exposes Ethereum to a wider consumer base of the block space it produces. But the complexity it has to deal with as a network reduces its monetary properties.

I could spend multiple paragraphs discussing the different flavors of blockspaces (application-specific vs. general-purpose, subordinate to another blockchain sequence, such as Rollup, etc.).

The key point to remember here is that we are in the early stages of experimenting and refining the block space. In the future, my expectation is that there will be a large and diverse market of blockspace producers and consumers, suitable for different use cases.

Why do we care that block space is a commodity?

If you are considering investing in its associated tokens, it is important to understand the nature of the block space.

This is an important point to understand about the product. Although there are many commodity investors, almost all of them are traders. No one is going to buy and hold commodities for 20 years because commodities are designed by society to stay flat, or better yet, fall. (Note: when I say decrease, I mean actual purchasing power will decrease)

The reason is obvious – we use products every day! If oil prices rise too much, policymakers will eventually do whatever they can to bring them back down. The same goes for other important commodities such as steel, food, etc.

This is basically the opposite of stocks, which are designed to rise. If stocks fall for an extended period of time, policymakers will start looking for ways to get them rising again.

Of course, this statement is a simplification, and there are other reasons why stocks rise (compound interest, etc.), but this is the high-level reason.

But I was told to hold cryptocurrencies

This means that almost every newsletter reader strongly dislikes this.

If L1 block space were a commodity, then all the assets we talk about at Blockworks (Bitcoin, Ethereum, Solana, Atom, etc.) are not long-term investments. From the perspective we just laid out, these are short-term trades rather than long-term investments.

But wait, you might say, the data doesn’t support this theory!

I recognizedFat Protocol(Fat Protocol Theory).

Bitcoin and other L1 tokens like Ethereum are the best-performing assets in cryptocurrencies, far outpacing stakes in the most successful companies like Coinbase. But I don’t think this will last forever, for one simple reason: the incentives for block space are similar to commodities. If Bitcoin is to be a successful currency, it cannot continue to grow 100% every year. Likewise, for blockchains that produce block space for consumption by applications (e.g. Ethereum, Solana, etc.), the long-term incentive is for the price to peak at some point.

Some people will point out that the block space market and the token market are not 1:1. I understand that, but they are related because block space is denominated in tokens, so they are intrinsically linked.

I think the best analogy for cryptocurrencies over the past decade is a traditional commodities boom.

You can look at some examples from recent history, but I think the most relevant is the commodities boom of the 1970s.

Due to similar economic and geopolitical climates, I feel the comparison to the 1970s is most appropriate. The commodities boom was initially triggered by the Arab-Israeli conflict but was exacerbated by an underlying inflationary climate.

During the same period, Nixon suspended the gold convertibility window, leading to rapid expansion of the monetary base and a surge in gold prices.

Now, the point I’m trying to make is not that the 1970s were exactly the same as they are today, with currency debasement and inflation being the factors driving cryptocurrency prices higher (although that is part of it).

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

An interesting comparison that will make crypto OGs laugh is that in the 1970s and 2000s, people also started saying we were going through a commodities super cycle (hat tip to Su Zhu).

My view of the current period is that this is the first phase of the digital goods boom in the world. Blockspace is a novel commodity that can be used for an extremely wide range of applications, which is why it is expanding so quickly.

But, like every commodity boom before it, financial gravity eventually takes effect. Over time, your favorite L1 will start trading like corn, steel, or soybeans.

A final comparison between the commodities boom of the 1970s and the digital commodities boom of the 2010s is their psychological impact on market participants.

There is a very interesting comparison between the gold standardists and today’s cryptographers.

The interesting thing about the gold standard to me is that after the spectacular price increases of the 1970s, gold lagged basically every other asset in the world. But 40 years later, the community is more fervent than ever. If you really think about it, this is pretty mind-boggling.

I think the same situation exists in cryptocurrencies. When an asset you own goes up 10x or 100x, most peoples brain chemistry changes and its hard to forget.

In the cryptocurrency space, I think there are two other under-recognized dynamics that contribute to the prevailing tribalism.

Loneliness in the Internet Age. Young people are increasingly looking for community in a siled world, and large cryptocurrency communities (e.g. Bitcoin, Solana, Ethereum) can provide that.

Layer-1 requires large communities to come together to develop roadmaps that have very meaningful technical tradeoffs that only a small group of engineers truly understand. Therefore, the strategy is to create narratives around these trade-offs to gain popular support (think of the block size wars).

So, my prediction for the foreseeable future is that tribalism will increase, not decrease, during this crypto commodity boom.

Summarize

To some, this prediction may sound pessimistic. Not to me.

I think we are still in the early stages of experimentation and expansion of L1 blockchain. So the good news is, I think we are far from the end of this blockspace commodities boom. I expect it will be another 5 to 10 years.

So if you still like Ethereum, Solana, Celestia or others, there is still a lot of time left for you, I guess existing and new L1, will be the best venture transaction in ten years (this is not investment advice).But eventually, I expect the market will adjust to the style of block space it requires and will become commoditized.

To some, I would understand that this sounds bearish, but I disagree. I think this is a good thing. My long-term view of cryptocurrency is that it is an underlying foundation that enables new use cases and businesses that were previously impossible. In order to build waves of businesses from generation to generation, we need abundant, cheap, and useful block space. And thats exactly what is being built today.

If youve read this far, heres a brief summary of the article:

• The fundamental innovation of cryptocurrency is the innovation of a new commodity: block space;

• Cryptocurrency over the past decade has been a block space commodity boom that will likely continue over the next 5-10 years;

• But eventually, block space will become commoditized and Layer-1 will start trading sideways;

• This will pave the way for the first generation of businesses built on the blockchain space that will cross the chasm into the mainstream;

• The interests of these companies that support the block space will begin to surpass the underlying Layer-1;

An exception to this theory might be blockchains like Bitcoin, where the use case is not to build businesses on it, but to act as currency.

I think this is a valid exception, although as I pointed out before, if Bitcoin is to serve as a currency, its volatility and returns will decrease over time.

So ultimately I think the results will be very similar. (Side note: I think this exception is understood by the crypto community, which is why Ethereum is trying to rebrand itself as an ultrasonic currency.)

All in all, this is very exciting for me. Over the next decade, I expect to see the Cambrian explosion in block space continue. Investors and users will do well (non-financial advice). Personally, Im excited about whats going to happen next, which is the wave of businesses being built on top of this blockchain space.

I think when we look back in ten years well be surprised at how much has changed and what weve built.

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