The Breakdown - Crypto's War of the Roses: The 7 Factions of the 2021 Bull Market

Episode Date: May 1, 2021

On today’s episode, NLW gives a comprehensive view of the battleground for attention and resources that makes up this 2021 bull market, including: Bitcoin Ethereum and DeFi Ethereum alternatives  Ponzi coins Stablecoins and CBDCs NFTs Doge Where do the next fights and fault lines lay? Listen and find out. -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io and neared.org and produced and distributed by CoinDes. What's going on, guys? It is Friday, April 30th, and today we are talking the seven factions of the bull market. This week saw an interesting inflection. I think we've officially, hit the part of the bull cycle where different groups within the larger crypto market have started to try to press their advantage to get more narrative mindshare than the others. I've been listening to a lot of Patrick Wyman's Tides of History podcast recently and just relisten to the whole arc around

late medieval politics and the War of the Roses in specific. His argument in a nutshell is that the War of Roses in England and more generally, many if not most of the conflicts of the late Middle Ages, the 14th and 15th centuries, were about who had the right to rule and what it meant to exert royal authority. The War of the Roses was a 33-year period of political turmoil between 1455 and 1487. It was a crisis that was sparked by the power vacuum left by the feckless Henry the 6th unwillingness and inability to exert royal rule. It is one of the most bloody, dramatic, even cinematic episodes in European history, which is probably why it has inspired so many great works of fiction throughout the ages, from Shakespeare all the way to Game of Thrones. Robert Barathean,

the man who sits on the Iron Throne at the beginning of the Game of Thrones arc, and whose death precipitates the next years of struggle, is in many ways a direct model of Edward IV, both famous warriors with big jovial attitudes, who, once ascending the throne, focus mostly on women and wine before an early indulgent death. So back to the crypto markets. There isn't a power vacuum in exactly the same way that there was in late medieval England, but what there is is a big open tear on the face of the traditional monetary system and the traditional financial world. And with it, a sense that there is an opportunity for a total remaking of that system, a process which by definition will involve huge transfers of money and power. And so there is jockeying, if not outright bloody war

between those that would seek to remake the system in a new image. I promise that I'm going to end the actual historical analogies there, but what I do want to do is briefly look through the seven factions that are in the mix this bull market. Some are actively competing to reshape the financial world in a new way. Others just have some different implications. And some are there just to meme absurdity into existence. But all are a part of this cycle for good or ill. Of course we start with Bitcoin. Bitcoin is the foundation of this bull market. In many ways, it is an even stronger foundation than was the case in 2017. In 2017, it was the ICOs that were a huge driver of attention. It's hard to remember now, but before the music stopped, ICOs represented the easiest, fastest way to concentrate resources

that had ever existed. For those who could get close to the spigots of the firms and promoters who were pushing the ICO, they also represented an extraordinary way to make a quick buck. Now, of course, there were tons of hodlers and bitcoins who had specific conviction around BTC and were recruiting and evangelizing even then. But a fair bit of the buy pressure for Bitcoin was that it was being used to turn into ICOs. Frankly, many ICOs posited themselves as either being the next big thing, e.g. don't miss out on the next Bitcoin, or on the other hand, offered an entirely alternative narrative for what the industry was all about. In 2021, there's a broad and clear focus on the primacy of changing the monetary and financial system. In 2017,

for many people in crypto, it was all about the idea of, doing the power of the web giants and a variety of other decentralization missions. The point is that in 2017, Bitcoin was, yes, the biggest asset, but in many ways it wasn't in the driver's seat from a narrative perspective. Remember, it also fought some pretty serious existential battles in the block size wars during this period. In 2021, Bitcoin is absolutely the foundation of the show. We've been over this a huge amount so I don't need to dwell on it, but I'm not sure in Bitcoin's entire existence. There has been as profound and as clear and explanatory moment as when the Bitcoin having a planned, programmatic, predictable, unchangeable reduction in issuance coincided with the

most aggressive money printing experiment ever. It took six to seven months to fully incubate from there, but the knock-on effects were huge. Remember, Michael Saylor didn't really start digging in and thinking about Bitcoin until the COVID-19 crisis. So you have all of this groundwork being laid in 2020 for the big catalyst of the 2021 bull market, which was, of course, the entrance of the big institutions. After years of saying, the institutions are coming, the institutions are coming, well, they finally came. We've seen companies moving treasury to Bitcoin, including the vanguards like micro-strategy and Tesla, but also insurance account general funds like Mass Mutual. We've also seen big traditional financial institutions move to spin-up Bitcoin products for their

investors. And right now, that is moving down the chain from pure investment houses to actual retail banks. Honestly, I don't need to dwell on how significant Bitcoin is to this bull cycle. It's the catalyst for new money coming in so far, full stop. But what about where it goes from here? As we'll see in a minute, there's a ton of chatter from Ethereum's about flippinings. That's not particularly interesting to me, as I think it represents a lot more of inner community, internecine psychological warfare and trauma than things that actually matter. What I think is Bitcoin's interesting question vis-a-vis these institutions is how much its value proposition stays locked in the idea of being an anti-inflation hedge store of value versus other properties, notably things

like settlement finality and speed, and how much those additional properties become a part of the reason big institutions find it valuable. My episode from a couple days ago argued that one of the biggest positive impacts of Tesla's Bitcoin's sale was reinforcing those other elements as part of the narrative. But now let's come to Ethereum and DeFi. To be clear, Ethereum is more than Defi, and Defy is bigger than Ethereum. However, for the sake of the factionalism I'm addressing here, I'm going to feel comfortable lumping them in for the purposes of this show. As I mentioned before, in 2017, the ICO Bonanza that Ethereum enabled offered not just

a competition for resources that might have gone into Bitcoin, but a totally different vision of what crypto was for. It was an idea of Web 3 that was perhaps best summed up in why decentralization matters by Chris Dixon. I think it's really, really important to understand how much. much that shifted in the intervening bear market. Sure, there are still projects out here trying to build Web3 and decentralized social networks and all of this, but by and large, the mainstream of crypto is squarely focused on money and finance and has been since Defy started sucking

most of the oxygen out of the Ethereum space. Defy has had an undeniably huge run. On May 1st of last year, there was less than a billion dollars deployed into Defy applications. Today, more than $65 billion is locked up in DFI protocols according to DFI pulse. Coin Gecko has that number at more than $115 billion and lists the total Defy market cap as nearly $128 billion. Whichever these numbers are the most accurate, the growth has been phenomenal. Now, given that we've posited this show as crypto-factionalism, it's worth asking, how different are the visions of the future being offered by Bitcoin and Defi?

To be undoubtedly a little overly reductive, Bitcoin is reimagining what might be. money should be while Defi is concerned with how finance should work. These things are related, of course, but distinct. As I discussed before, the driver of the Bitcoin narrative and the foundation of this both cycle has been a recognition of the differentiation of a hard money whose supply expansion is programmatically reduced on an eventual path to no inflation at all, as compared to highly dynamic and expansionary fiat money supplies. In other words, it offers a competing an alternative vision of what money should be at core. Defi offers a different vision in organization for the rails and plumbing that make up the financial

system, one that is more open and permissionless to use, where users of the network that make up finance are incentivized to maintain those networks by owning a piece of them. In many ways, it is not only an assault on the way traditional finance is organized, but also on the way institutions are built. To be clear, there is absolutely nothing incompatible with the money alternative offered by Bitcoin, and the finance and organizational alternative represented by Defi. According to Defi Pulse, there are currently $11.26 billion worth of Bitcoin at work as the locked asset in Defi protocols, a little under 20% of the total value locked. Now this is, however, where the competition and factionalism heat up. Let's say you're one of those folks out there they

don't tell you about on Twitter, who likes Bitcoin and likes DeFi. Which asset is the reserve asset at the foundation of your system? Is it Bitcoin with its sound money properties an utterly predictable fixed monetary policy? Or is it ETH, the native asset of the chain whose smart contracts enabled the defy architecture to spring up? There is a clear area of tension, at least to those who feel like they have a stake in the battle. To me, I have to admit that much of the language I see around this particular battle feels like past trauma reenacted. For Bitcoiners who continue to fight doggedly about Ethereum pre-mines and talk about protocols being cool tech but not needing tokens, the short reality is that they were right about a ton of the bullshit

in 2017 and 2018. They were also right that most of the retail users who got in on the promise of some next new thing got completely wrecked. They were also right that the tactics used by promoters of that time, especially those who did things like go out and recruit Korean pensioners, were downright gross. And so they have these lingering triggers and feel an obligation to call out things as retail starts to take notice of this cycle again. On the other hand, Ethereum's, especially those who have been building these base defy protocols the whole time, have a different type of scar tissue. They have the scar tissue of having been on the other side of those critiques from Bitcoiners, all the while building things that they genuinely believed in, believed had value,

and weren't out trying to make a quick buck. Now that their thing is working and is widely seen as valuable. They want to throw it back in the Bitcoiners' faces who have been antagonizing them for years. Now, there is a whole other side for Ethereum's in the form of the actual alt-coin challengers, which I'll get into in a minute. But all of this is to say, from a human psychological perspective, it's not hard to understand why there is simmering tension that occasionally spills into open Twitter warfare. I would only say that as compared to 2017 especially, the distance between these camps and their goals is radically reduced. Looking for the best way to unlock your crypto's liquidity. Nexo.io is exactly what you need. Barrow against your digital assets at just

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Bridge confirmed that nearly all of their conversations are strictly focused on Bitcoin, not Ethereum. Since then, however, CME has launched ETH Futures. Four Ethereum ETFs have been improved in Canada. And what's more, there is now huge buzz around EIP 1559, specifically with regard to its supply constraining properties. This probably deserves its own show to actually get into, one, what the dynamics of the supply issuance reductions are, two, the origins of the ultra-sound money meme, which, by the way, guys, holding aside the concept, you clearly are not parents if you think ultrasound is going to suggest anything other than looking at fetuses in a pleasantly dark doctor's office. For now, though, let's sum up the new battle lines with this.

Jay Harold tweets the day, even Bitcoin wishes it could have as big as a supply squeeze coming up with EIP 1559. The rejoinder, meanwhile, from Bitcoiners, was perfectly encapsulated by a Stephen Cole tweet, which said, when someone boasts about ETH's new issuance policy, just say, wow, neat, can't wait to see what the change it to next. So I said no more direct historical analogy, but I have to do one. As I mentioned, one of Patrick Wyman's key points about the War of the Roses was that it was about who had legitimacy to rule. There are many potential sources of legitimacy in any power system. In this new financial economy, perhaps the most powerful, are network effects. That said, one of the things that makes Bitcoin such a unique force is its claim to

immutability that relates directly to its lack of a traditional leader. Satoshi vanished 10 years ago this week. That is a pretty unique phenomenon in the history of modern human networks. In fact, it's an entirely unique phenomenon. Part of the test over the next few years will be how much that matters to the market. Now, a final note on this before we move on, I don't believe Defi's battle is with Bitcoin or frankly should be in any way chain-specific. It's regulatory.

Ethereum is in the regulatory clear, as much as any crypto can be. DeFi is pushing some serious frigging bad. boundaries. The very composability that makes money Legos so fascinating and dynamic, also creates the sort of systemic risk that makes the people who lived through the great financial crisis shudder. And by the way, remember, one of those people is now the chair of the SEC. Now we've spent a really long time on the two main forces, the Yorkists and Lancastrians, if you will, of this modern battle. I'll spend a little less time talking about the other factions, but for a complete picture of this bull market, I think that they're important to at least give some voice to.

The next group I'll call the Eith Alts, and let's just take a second on the term Altcoin. After the term crypto itself, this may be the worst term this industry has ever invented. It pisses off Bitcoiners because Altcoin, quote unquote, presents things like they're A, trying to be different or better to Bitcoin, and B, credibly have a chance at doing so. This is despite the fact that most have totally different ambitions, and to the extent that they are coming after the king, well, let's just remember the immortal words of Omar from the wire. You come at the king, you best not miss. The term altcoin also pisses off all the altcoins themselves that are trying to establish their own identity and do their own thing. So yes,

for those asking, it's a stupid distracting term. I'm colloquially using the term ETH alts here to describe this faction because they are on some base level trying to offer an Ethereum alternative for apps, particularly decentralized finance apps to be built on. There are a few worth noting. There are the Cosmos and Pocodot ecosystems, which use a slightly different technical architecture to address scalability. Pocodot is much invested in by the VC set. Cosmos has had its own internal fracturing over the last years, but has also had a lot of activity. Then there is Solana, which has rushed onto the scene to offer an alternative to defy and other crypto applications. But easily the one that causes the Ethereum's the most consternation is Binance Smart Chain.

Binance Smart Chain, launched by the exchange of the same name, is on the one hand, an opportunistic way to address high gas fees on Ethereum with a high functioning alternative. Another way to view it, however, since we're talking in factioning in battle terms, is as a huge stress test of how much people, specifically app developers, actually give a crap about decentralization. What's driving many mad is that it's actually getting traction. All the way back in February, Chow Wang wrote, I can't tell if crypto Twitter is actually sleeping on what's happening on Binance chain or is too proud to talk about it for whatever reasons. The metrics speak for themselves. Legit teams are building on it. I'm not here to chill Binance for their tokens, genuinely curious why there is such a big disconnect

and lack of conversation around it. I would say that in the intervening months, there has been no shortage of conversation. So, in this war of the crypto roses, don't forget CZ coming up from the side. All right, I'll try to get through the last few factions even faster now, and I do have to talk for a minute about what I'm calling Ponzi coins. While this cycle has had so far, much less of the gratuitous cash grabbing of the last cycle, there are absolutely some new bastions of total bullshit. TikTok in particular has become ground zero for this stuff,

a horror zone of get-rich quickism and pseudo-sophisticated TA. It did a show about how Safe Moon was emblematic of this, with its quadrillion token supply and promises to get to a cent per token, aka a $10 trillion market cap. Now, it is undeniable that a lot of this is popping up on Binance Smart Chain, and it's one of the good reasons that some are frustrated with BSC. At the same time, something something, permissionlessness. But even if you take that, hey, permissionless systems means you're going to have to take some of this,

I do think it's important for the social layer to call it out. There is no faction in this War of the Roses that is less actually relevant while having more power to fucking ruin everything for everyone else than this. I'm gratified right now that it makes up such a small part of the market, but TikTok's promotion algos are really good, and the human desire to get money fast is profound, so I'm keeping an eye on it. Fifth in our factions are stablecoins and CBDCs, and to me it's actually insane how comparatively little attention this is getting. It shows just how much emphasis there is on the foundational

Bitcoin stuff and the aspirational defy things in the institutional narrative. However, a huge part of the institutional story is actually in stable coins. First, from a regulatory perspective, stable coins have never been in a better spot. The New York Attorney General's settlement with Tether lifted a huge albatross off the industry. There's now more than 50 billion billion dollars of USDT in circulation. USDC is also growing extremely fast with more than $14 billion in circulation as well. Second, these stable coins are being integrated in a major way. USDC is now one of 25 global currencies that Visa formally settles in, a monumental step in

global adoption. And speaking of companies like Visa, you can see in their actions indications of the other side of stable coins, which is official fiat stable coins, aka Central Bank Digital currencies. Companies like Visa, Mastercard, PayPal are all positioning themselves to provide infrastructure and support for what they clearly believe is an inevitable CBDC era. How fast is that era coming? Well, for China, they're pushing it faster and faster, and it feels to me like we're going to see a full-scale rollout starting by this fall. I could be completely wrong. I have no insider information. It just feels like that's their intention. For the U.S., Powell is sticking

aggressively with the line, better to do it right than do it fast. But we're also getting prototypes from the Boston Fed in MIT this summer on what a digital dollar might look like. So, there's obviously a lot more to say here, but because we're running along, I want to make mention of two more factions first. The sixth faction of the bull market is, of course, NFTs. Now, ETH Partisans will make sure you know that the majority of NFTs are issued on Ethereum and priced in ETH, and so it is. Why I wanted to put them as their own category, however, is that from a cultural perspective, they really are distinct. In fact, as a part of the bull market, they're something very different from 2017. On the one hand, they're undeniably a part of crypto.

Digital scarcity is only available through this technology. But the drivers of their interest are pretty wholly outside crypto and increasingly don't have to buy into crypto to get into it. The biggest NFT platform by far is NBA Topshot. Not only do they not talk about crypto, Roam, the CEO of Dapper Labs, said on a panel I recently moderated. that they see conversion go down massively if they use any terms related to crypto. Meanwhile, a lot of the drivers of new audiences to NFTs are from the entertainment industry. Some may be interested in crypto, but many aren't. Eminem isn't out here shilling salon, is all I'm saying, at least not yet.

Which gets to another thing that's interesting about this faction. To the extent that we're viewing these things as competing for bull market money and attention, I don't know that NFTs really qualify. Sure, there is undoubtedly some overlap, for example, only the new crypto, wealthy are buying Cryptopunks, but a lot of the energy is coming from outside and staying one one step removed. It feels to me like this may create a bubble firewall. But even the bubble dynamics are interesting to watch. I'm seeing a ton of people even who are super stoked on NFTs talking down current prices. That doesn't mean those prices still won't be pumped

to high hell, but it's interesting to note. All of this together makes me feel like I'm not entirely sure that this generation of entertainment and culture-related NFTs are really part of the crypto space. it feels more like a branch off of a new species. Sure, we share a common ancestor and are still interbreeding and stuff, but they're kind of off on their own path. The last faction that we have to talk about is, of course, Doge. I honestly don't even really know if this is a faction, or if it's more just like that awesome, multicolored food that the kids in Hook imagine to have that epic food fight with. If you get that reference, by the way, we're definitely at the same age. Anyway, one of the things that the crypto industry absolutely shows that if you believe in something enough and

another people believe in it with you, it can come to life. That's Bitcoin, but it's also and especially now Doge. This random thing created as a joke eight years ago that somehow just continues to be. Now, when the story of Doge in 2021's bull market is written, it will inevitably be tied to the trickster god of the industry himself, Elon. Like Loki, Elon seems primarily concerned with chaos. Beloved when he champions BTC is inevitable, more confusing when he calls himself the Doge father on his way to SNL. What is clear is that to the extent that this really is a war for attention and resources and to shape the future of finance, Doge doesn't really have a dog in the fight. It is simply an agent of chaos, so proceed as you will. Okay, there we are, the seven factions of the bull market.

What should be clear is that there's a lot going on, and if you feel like it's hard to keep up, you're not alone. On tomorrow's weekly recap, I'll do a quick look at the news from a number of these factions, and I hope you join me for that. I appreciate you listening, guys. If you're enjoying this show, please go keep rating, reviewing. It makes a big difference, and I appreciate each and every one of them. Until tomorrow, be safe and take care of each other. Peace.

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