This is a clip from The Breakdown newsletter. To read the full editions, Subscribe.
“Revenue growth cannot outpace growth in people who can execute and sustain that growth.”
– Packard’s law
Tree ecosystems operate according to a brutal but necessary paradox: for a forest to grow, it sometimes needs to burn.
Without these seemingly horrific fires, the forest floor becomes choked with underbrush, preventing the new growth needed for regeneration and long-term viability.
Dion Lim He says This is how technology courses work too.
“The first Web cycle burned through the dot-com glut and left behind Google, Amazon, eBay, and PayPal: the stalwart survivors of Web 1.0,” he explains. “The next cycle, driven by social and mobile, burned out again in 2008-2009, brushing past Facebook, Airbnb, Uber, and the Y Combinator offspring.”
The speculative frenzy of investment bubbles burns up unproductive capital like forest fires consume dense fuel – and their inevitable collapse paves the way for a reallocation of market resources.
Without these horrific market conflagrations, the presence of perpetually failing startups would drain the tech sector of the resources it needs to grow.
This may be the reason why cryptocurrencies seem to be lagging behind this year: the intertwined growth of large projects that never seem to die has been storing up the resources that the ecosystem needs to develop.
In the real economy, labor is constantly being reallocated from failing companies to successful or promising ones: “Many of Google’s best early employees, Lim says, were founders or early employees of failed Web 1.0 startups.”
This seems to happen less in cryptocurrencies.
To name a few, the Polkadot blockchain – collected $72 fee Yesterday – it is Supported By 482 full-time developers and 1,404 contributors.
If a project like this – in its sixth year of operations – had been funded through equity and not tokens, I believe these resources would have been released back into the ecosystem by now.
This is a problem because Packard law It indicates that if the scarce resources of cryptocurrency developers are not redeployed to successful projects, cryptocurrencies will have difficulty growing.
Non-producing cryptocurrency projects also store investment resources.
Cryptocurrency founders are famous for Excessive fundraising from investors Living on returns, with no market-imposed urgency to find product-market fit.
For example: One of the original cryptocurrency projects, Golem, stored 820,000 ETH in its 2016 ICO, and is still holding it. 231,400 From until last year.
Traditional investors in startups expect their capital to be deployed much more quickly than that.
In other cases, projects with inexplicably large market valuations fund themselves seemingly forever by selling their native tokens from the treasury. Cardano, for example, He carries Nearly $700 million of its ADA token is in the treasury, which would keep the project funded almost forever.
Collectively, cryptocurrency protocols hold billions of dollars in capital and have little to no incentive to deploy it efficiently — no activist shareholders to appease, corporate raiders to fear, or quarterly earnings estimates to meet.
In short, cryptocurrencies may be too financialized to fail.
Ben Thompson recently expressed similar concerns about traditional technology, worrying that giants like TSMC, Nvidia, and Alphabet have become so dominant that the entire ecosystem is in danger of stagnating.
So he welcomes the bubble: “What encourages us or why we should embrace the mania, embrace the bubble, is that the phrase ‘too big to fail’ is starting to affect technology as well.”
The benefit of private enterprise, Thompson points out, is that “the stupid things” eventually stop working. But when companies become entrenched monopolies (or government-backed entities), stupid things don’t die. It has become too much and ineffective.
He argues that we need investment bubbles precisely because they bring risk back into the equation: “You don’t take upside risk without downside risk.”
This may explain why cryptocurrencies have felt so stagnant this cycle. We have the “dumb stuff” — protocols that have few users and minimal revenue — but we lack the mechanism to stop them from working.
“Growth becomes difficult when everyone’s roots are intertwined,” warns Lim.
Until the forest fire is allowed to spread through the tangled roots of hyper-funded zombie protocols, the nutrients – capital and developers – will remain trapped, and the next era of growth will remain elusive.
Get news in your inbox. Explore Blockworks newsletters:
