The events of 2022 question whether crypto will (or should) survive. Before FTX collapsed in November, there was melting of the stablecoin Terra and its companion coin LUNA, as well as related crypto lender implosions Celsiuscrypto broker Voyager Digitaland hedge funds Capital of the Three Arrows, to name some of the most notable failures. As the end of the year, there is questions about FTX’s rival Binance, which faces many customers withdrawals and criminal investigations in this regard compliance practices. Just 12 months ago, many of these companies were hailed as examples of how vision, bold thinking, and courage can build multi-billion dollar empires overnight. Today, they offer very different lessons.
After every high-profile crypto meltdown, there are renewed calls for greater governance in the space. The idea is that if we regulate crypto players like traditional financial institutions, they will start acting like one. But a regulatory framework designed for technology can only solve part of the problem. This will certainly improve consumer protection and market integrity. This will not, however, change the underlying incentives of the space and stop some of the frivolous and fraudulent behavior it has attracted so far. In order for the crypto industry to have a positive impact on society, we must first change how it measures progress – and success.
From the beginning, crypto participants have been concerned about the price, market capitalization, and trading volume of competing coins. These standards distort the incentives of well-intentioned crypto traders, and make it easier for bad actors to blend in, attract capital, and generate hype for their scams. In order for crypto to truly become mainstream, the industry needs to stop blindly relying on these metrics of convenience and pay more attention to metrics that closely track progress against actuals. consumer and business needs.
The Problem with Crypto Prices and Related Metrics
It all started in the early 2010s with the first alternative coins (or “altcoins”) introduced to compete with Bitcoin, and there were plenty of what looked like objective, market-driven metrics. Because cryptocurrencies rely on public ledgers, many metrics including price and market capitalization are readily available from the start. The resulting sense of transparency, and the deceptive similarity between cryptocurrencies and public stocks, legitimizes these metrics beyond their usefulness. In addition, since crypto markets lack many of the protections introduced by decades of trial and error in traditional finance, it is very easy for bad actors to game and exploit these metrics.
The result of this is an environment where it is possible to launch a new crypto token and quickly appear – at least on paper – to have created a network worth billions of dollars. In fact, these valuation increases are created by limiting the supply of coins available for trading, and quickly collapse when the hype engine that sustains them slows down. But when faced with the option, it is very difficult for traders and investors to resist the temptation to use these current fundamentals as evidence of positive momentum. It is human nature to believe that the price of your token, no matter how high it is, accurately reflects the potential of what you are building.
By giving nascent crypto ventures an aura of scale and competitive moat, these standards also make it easier to attract developers, secure partners and raise more capital – creating a vicious cycle where the founders have no alternative but to “fake it until they make it.” It seems that the founders of today’s tech giants have their stocks traded in real time from the moment they announce a beta product rather than when they IPO. Amid investment turmoil, uncertainty, and hype, it’s easy to get distracted by numbers — even when they may not be from the truth.
This premature financialization of the crypto transformation process has a warping effect. The incentives it creates dictate the types of problems founders prioritize, how the market rewards their actions, and the long-term sustainability of what they build. Traders’ attention has been diverted from the more challenging, uncertain dimensions of technical development, and crypto tokens and their prices have essentially become “commodities.” As a result, real progress has stalled.
We see where this way of doing business and innovation is leading. Pump-and-dump schemes, exit scams, and good old-fashioned grift are well hidden and thrive among legitimate projects when the market capitalization of a project and that “the volume goes up” – a meme that has become a cult status within crypto circles — that’s all important.
Abandoning Bad Crypto Metrics
Ironically, in a situation where everything is easily measured, there is a dire need for better metrics. After all, measurement is a way of assigning value — it reflects the guiding philosophy behind organizations, markets, and systems. To stop the misleading, crypto traders and investors need to rethink how they measure progress.
Consider the profound ways metrics impact innovation.
Every company needs to identify key metrics to align teams around, measure progress, and ultimately compete. Examples from Intel’s transistor density follow Moore’s prophesy in the race for megapixels in digital cameras, no improvement in oncology survival, the net promoter score of customer loyalty, etc. By focusing on a small number of dimensions, metrics force companies to ruthlessly prioritize resources and commit to progress in a specific direction.
This is especially valuable when dealing with unstructured problems with a lot of uncertainty surrounding the best path forward – exactly the types of problems that abound in nascent industries like crypto.
Once established, however, metrics can last well beyond their practical use: While James Watt was developing horsepower at a time when comparisons between steam engines and horse-drawn transportation were important, metric was transferred to trains, boats, and car engines. Centuries later, while it was no information for electric vehicles in relation to alternative metrics, it is still an undisputed standard in the industry.
The same type of inertia metrics are holding crypto back and causing serious damage as attention, talent and dollars chase some quick, but wrong metrics. While coin prices and amounts flowing through a network can be reliable indicators of quality when crypto markets mature, now – intentionally or not – they are too easy to game. Extreme examples of this are Terra stablecoin and FTX’s FTT token, both of which created an illusion of value through aggressive marketing and subsidized growth, later crashing and burning in a death spiral when they false economy stressed out. In what are surprisingly transparent versions of a Ponzi scheme, investors blindly rely on market capitalization metrics as hard proof of actual value.
Unfortunately, honest entrepreneurs also cannot completely escape the tyranny of these metrics, even because their venture capitalists (VCs) push them to include a token and raise its price through incentive design. – something that helps VCs demonstrate progress to their own investors – or because they believe that the only way to compete with others is to promise developers and early adopters the same unrealistic financial return.
A Better Way
There is no need to end this way. Crypto is revolutionary because it allows two parties to transact directly without handing over control to an intermediary: Alice can send value to Bob, enter into a financial contract with him, or transfer to own a digital asset or piece of art with less friction and cost. Most importantly, while they may still use intermediaries to facilitate these tasks, Alice and Bob have more control and power over the transaction. Like the internet, crypto networks are open networks, and that openness brings consumers and businesses more choice, lower prices, and novel products and services.
So how does crypto provide these benefits? Entrepreneurs and investors need to discard current metrics and create new ones. These new metrics should be closely aligned with the expected impact of a crypto application on the world. Ironically, this is exactly how inventors and founders often create value: identify a problem worth solving for your customers and bet your startup’s existence on solving it. By observing about the problem to be solved, rather than about early crypto prices and volatility, traders can return to identifying metrics that track progress towards a solution.
For example, founders who want their crypto networks to replace traditional payment networks need to benchmark their growth against the same metrics that payment incumbents have been using for decades. They also need to directly measure the savings they bring to consumers and businesses as they rebuild basic financial services using crypto. Similarly, Web3 entrepreneurs focused on bringing more choice and competition to the creator economy should measure the economic value they provide to creators and compare that to incumbents. If it is true that crypto can eliminate friction and give creators more power, these new metrics will quickly show the benefits that technology provides to society.
The payback is basically huge. Metrics can turn the complex problems that crypto hopes to solve into tractable ones that can be optimized by traders, managers and engineers, while giving investors, consumers and even regulators a better assessment of the nascent space. It is only by crossing the divide between digital records on a blockchain and their impact in the real world that crypto can make a difference, and building better crypto metrics is a prerequisite to unlocking that potential.