Original title: First Principles - Compounds, L1s, IR, Buybacks Original author: 0xkyle__, member of DeFiance Capital Original translation: ChatGPT
Editor's note: The author believes that the biggest problem in the field of encryption is not talent or capital, but the lack of first-principles thinking, which leads to the industry's deep in the cycle of short-termism, culture extraction and low integrity. The author analyzed the reasons why compound interestrs are difficult to appear, proposed to promote long-term thinking from the top and focus on creating income-rich products. At the same time, he criticized the inefficiency of the general Layer 1 blockchain, suggested that it focus on specific areas and build its own ecosystem to give token value. In addition, it emphasized that liquid token projects should set up investor relations roles to enhance transparency, rather than relying solely on repurchase and destruction, and advocated the use of funds to expand products and consolidate long-term competitive advantages to break the current nihilistic dilemma and achieve sustainable growth.
The following is the original content (to facilitate reading comprehension, the original content has been compiled):
The biggest problem in this field is neither talent nor capital. Simply put, it is the lack of first-principles thinking. This is a culture that must be changed. That 1% need to start pushing the field forward.
If you follow my Twitter recently, you'll find that I've been making crazy shouts about some extremely low-hanging fruits that seem to have a high leverage effect that looks very easy to achieve, but no one seems to "understand" or execute well. Here are some of the opinions I have made:
The real question is: Why do more chains not use their funding program to incubate their own dapps and build dapps that are obviously consistent with the chain? Instead of hoping that these dapps won't give up on the chain within two years.
· The reason this industry has its current price trend is largely because everyone has the idea: "You have to sell because one day it will go to zero." And the reason is that no one has really built a good product that people want to continue to invest in. Encryption requires compound interest.
· "Marketing" in the crypto field is not consistent with the product in most cases. If you are not a consumer-oriented product—such as you are a revenue platform, why do you even want to market to retail users? The best marketing is often the price increase. And the one who is best at doing this is liquidity funds.
I will discuss each topic in this article, i.e.:
· Compound interest, culture, short-termism
· General L1 is dead and must be changed
· Liquidity tokens and investors' relationships
Repurchase and destroy are the least bad, not the best
I named this article "First Principles" because all of these perspectives came to mind when I was doing a simple thinking exercise, which is how to use common sense to change the industry today.
This is not profound. Crazy is doing the same thing over and over again, but expecting different results.
We've gone through three cycles, doing the same thing over and over again - basically creating nothingness, zero value accumulation, maximum tokens and applications, because for some stupid reason, we decided to open casinos in this fanatical way every four years, attracting capital from all over the world to gamble simultaneously.
Guess it? After three cycles, ten years later, people finally realize that dealers, fraudsters, machines manipulators, people who sell you high-priced food and drinks in casinos are taking all your money. The only thing you can show after several months of hard work is how you lose all your history on the chain. A field built on “I will come in, make my money, and then leave” will not lead to the establishment of any long-term compounder.
This place used to be better, and was once a place for legitimate financial innovation and cool technology. We were once excited about novel and interesting applications, new technologies, "changing the future of France (finance).
But due to extreme short-termism, maximum cultural exploitation and low integrity, we have fallen into this self-eating cycle of permanent financial nihilism, which is collectively triggered when everyone thinks it is a good idea to keep investing in random fraudsters’ tokens because “I’ll sell it before he lie to me.” (Seriously, I've seen people say they know that "SBF tokens" are scams, but they'll be sold for "quick profits" before being cut.)
You can say I have no experience in building – that's right. But this is a small field and it has not existed for a long time; working in this field for four years, while working with some of the best and smartest funds, gave me an in-depth understanding of what works and what doesn’t work.
Again: Crazy is doing the same thing over and over again, but expecting different results. As a field, we experience the same thing year after year—after the inevitable collapse of prices, feeling this nihilism, deeming that it is worthless. I felt this way when NFTs crashed (good, it's all a scam), and now people have this feeling after the recent meme coin slump, and in the ICO era, people have it.
It’s simple to change the status quo: we just need to start doing different things.
Compound interest, culture, short-termism
Compound interestrs simply put it as assets that only rise but not fall over the years - think about Amazon, Coca-Cola, Google, etc. Compounders are companies with the potential to achieve sustainable and long-term growth.
Why don’t we see compound interesters in the crypto space?
The answer is more subtle than this, but basically – extreme short-termism and dislocation of incentives. Indeed, there are a lot of problems with the structure of the incentive mechanism, which Cobie’s private capture, Phantom Pricing article covers well. I won't go into this in depth, because the focus of this article is, as individuals, what exactly can we do now?
For investors, the answer is obvious – Cobie points out here: You can opt out (you probably should)
reallyPeople have opted out: This cycle we have seen the decline of "CEX tokens" because retail participants choose not to buy these tokens; while individuals may not be able to change this systemic problem at the system level, the good news is that the financial market is quite efficient - people want to make money, and when the existing mechanisms do not make money, they do not invest, thus making the whole process unprofitable, thus forcing the mechanism to change.
However, this is only the first step in the process – to truly build compounders, companies need to start instilling long-term thinking in this area. It’s not just that “private market capture” is bad, but the whole chain of thinking that takes us to this point – like a self-fulfilling prophecy, the founders seem to collectively think “I’ll make my money and leave”, and no one is really interested in playing long-term games – which means that the chart always looks like McDonald’s’ M-shaped.
The top level must change: a company is only as good as its leaders. Most projects fail not because of the lack of developers, but because the senior management decides to leave. This industry must begin to regard founders with high integrity, high initiative, and long-term thinking as role models, rather than the founders who ideally "short-term pull-up and smash-up".
The average quality of founders in this field is not high, which is no longer news. After all, this is a field that calls those who bind pumpfun tokens "developers" - the threshold is really not high. As long as you have a vision that surpasses the first two months of the token launch, you are already ahead of everyone else.
I also believe that the market will start to inspire this long-termism economically, and we are already starting to see that. Despite the recent selloff, Hyperliquid is still 4 times higher than the initial offering price, something few projects in this cycle can boast. When you know that founders are aligned with the long-term growth of products, it is often easier to make the argument of "long-term holding".
This natural conclusion is that high integrity, high agency founders will start to take up a large part of the market because frankly, when everyone is tired of scams, they just want to work for someone with a vision and won’t quit the scams—and there are so few people doing so.
In addition to having a good leader, the establishment of compounders also depends on the assumption that the product is good or not. In my opinion, this problem is easier to solve than finding a good founder. The reason why there are so many nihilistic products in the crypto are because the people who created these nihilistic products also have the mentality of "making money and leaving" - they therefore choose not to take on new problems, but just fork the hot stuff and try to make money from it.
However, the fact is, the industry does choose to reward this idea of nothingness—like the AI agent boom in the fourth quarter of 2024. In this case, we will see the usual McDonald's M-shaped pattern when the dust settles – so companies must also start focusing on building products that make money.
No income path = No long-term believers/holders = Buyers with no assets because there is no future to bet.
This is not an impossible task – business in the crypto space does make money. Jito earns 900 million annually, Uniswap 700 million, Hyperliquid 500 million, Aave 488 million - in a bear market, they continue to make money (just not that much).
Looking ahead, I believe that the short-lived and narrative-driven speculative bubble will become smaller and smaller. We've seen this – gaming and NFTs are priced at hundreds of billions in 2021, but this cycle, the peak of memes and AI agents is only a few billion. This is a macro-level euthanasia roller coaster.
I believe everyone is free to invest in what they want. But I also believe people want their investments to pay off – when the game is so obvious that “it’s a hot potato and I have to take it off before it goes to zero”, the roller coaster will get faster and smaller, as people choose to quit, or lose all their money.
Income solves this problem – it makes you as an investor understand that people are willing to pay for their products and therefore have some long-term growth prospects. When something has no income path, it is almost uninvested on a long-term basis. On the other hand, the income path leads to the growth path, attracting buyers who are willing to bet on the continued growth of assets.
In short, building compound interest requires:
· Top-level long-term thinking
Focus on building money-making products
General L1 is dead and must be changed
If you sort the Coingecko homepage by market value, you will find that blockchain accounts for more than half of it; in addition to stablecoins, Layer 1 accounts for a lot of value in our industry.
However, the chart of the second largest digital asset after Bitcoin looks like this:
If you buy Bitcoin in July 2023, you will rise 163% at the current price.
If you buy Ethereum in July 2023, you will rise by 0% at the current price.
This is not the worst. All bubbles in 2021 triggered a wave of "Ethereum killers" - a new blockchain designed to surpass Ethereum in some technological way - whether it is speed, development language, block space, etc. But despite the hype and a lot of capital investment, the results did not meet expectations.
Today, four years after 2021, we are still facing the consequences of that wave – there are 752 smart contract platforms launching tokens on Coingecko, and there may be more that have not been launched.
Not surprisingly, most of them look like this—which makes Ethereum’s chart look good by comparison:
So—despite four years of hard work, billions of dollars in funding, over 700 different blockchains, only a few L1s have good activity—even those that haven’t reached the “breakthrough user adoption level” that everyone expected four years ago.
WhyBecause most of these projects are built with the wrong ideas, as Luca Netz pointed out in his article What is Consumer Crypto, many blockchains today follow a common approach, and each dreams that they will "carry the Internet economy."
But it takes a huge effort and ultimately leads to fragmentation rather than penetration, because a product that tries to do everything usually can’t do anything well. It’s an effort that takes too much money and time – frankly, many blockchains have trouble even answering a simple question: “Why should we choose you over blockchain No. 60?”
The L1 realm is another case where everyone follows the same script but expects different results – they compete for the same limited developer resources, trying to outperform each other in funding, hackathons, developer houses, and now we still seem to be making phones (?)
Let's assume that an L1 succeeds. Every cycle, some L1s can break through. But does this function last? The success of this cycle is Solana. But here is a point that many of you won't like: What if Solana becomes the next Ethereum?
Last cycle, there was a group of people who believed in the success of Ethereum that they invested most of their net assets in Ethereum. Ethereum is still the highest chain on TVL, and now it even has ETFs – however, prices are stagnant. In this cycle, people of the same type are saying the same things - Solana is the chain of the future, Solana ETF, etc.
If history has any indication, the real question is – can today’s victory guarantee tomorrow’s relevance?
My point is simple: Instead of building a universal blockchain, it makes more sense to build around a core focus. Blockchain doesn't need to do everything to everyone. It just needs to do well in a particular area. I believe the future is blockchain-free – it just needs to perform well, and technical details are not that important.
Today, builders have shown this sign—the founders of D-app are mainly concerned with the speed of the chain, but the distribution of the chain and end-user consumption—will anyone use your chain? Is it necessary to distribute the product to gain appeal?
44% of the network traffic runs on WordPress, but its parent company Automattic is valued at just $7.5 billion. 4% of internet traffic runs on Shopify, but it is valued at $120 billion – 16 times that of Automattic! I believe L1 has a similar final state, and value will accumulate to applications built on the blockchain.
To this end, I think L1 should take groundbreaking measures to build an ecosystem on its own. If we use cities to compare blockchains (thanks to Haseeb’s 2022 article), we can see that cities start because of specific advantages that make them viable economic and social centers, and then focus on a dominant industry or function over time:
· Silicon Valley → Technology
· New York → Finance
· Las Vegas → Entertainment & Hotels
· Hong Kong and Singapore → Trade-centered financial centers
· Shenzhen → China's Hardware Manufacturing and Technology Innovation Center
Paris → Fashion, art and luxury goods
· Seoul → K-pop, entertainment and beauty industries
The same is true for L1 – demand is driven by the appeal and activity they provide; therefore, teams must start focusing more on doing their best in a vertical field – curating the appeal that draws people into their ecosystem rather than building a variety of exhibitions, hoping to attract users.
Once you have that attraction that attracts people into the ecosystem, you can build cities around that attraction. Again, Hyperliquid is an example of a team that does a good job and iterates over first principles in this regard. They built local perpetual DEX order book, spot DEX, staking, oracle, multi-sign-all-built internally and then expanded to HyperEVM, a smart contract platform for people to build.
Here is a simple breakdown of why it works:
· Focus first on “building attractiveness”: By first building a sustainable trading product, Hyperliquid attracts traders and liquidity before expanding.
· Control Stack: Having critical infrastructure (oracists, stakes) reduces vulnerabilities and creates moats.
· Ecosystem Synergy: HyperEVM is now a licensed playground for developers, leveraging Hyperliquid’s existing user base and mobility.
This “attraction first, city second” model reflects successful web2 platforms (for example, Amazon starts with books and then expands to everything else). Solve an exceptionally good problem and then let the ecosystem expand organically from that value core.
So, I think blockchain should start integrating its own products, building its own appeal, having a stack; as a captain, you are a visionary person—this allows you to align your blockchain with your larger, long-term vision for L1; and make sure projects don’t give up immediately when chain activity starts to fall, because everything is built internally;
Most importantly, this process brings monetary to your tokens – if the blockchain is a city, the token is the currency/commodity that people trade; by using it, drive value to the tokens – people need to buy your tokens to do interesting things on the chain. It gives your currency value and gives people a reason to hold it.
Oh, but it’s important to remember – just because you’re professional doesn’t mean the market has a demand for it. Another unacceptable reality is that L1 has to work on the right opportunity in the right way. Blockchain must develop products that people want – sometimesPeople don't really want "web3 games" or "more data availability" liquidity tokens and investors relationships
The next topic is about how I think liquidity token projects should develop in this area. It's simple—a liquidity token project requires starting an investor relations (IR) role and quarterly report, allowing investors - whether retail or professional investors to see clearly what the company is doing. The role is not new or revolutionary – but it is seriously lacking in this field.
Nevertheless, this field has done very little in terms of IR. I was told the business development leader of multiple projects that if you have some kind of "regular calls to sell your liquidity tokens to the fund", you are doing 99% more in this field than other projects.
Business development is cool in attracting builders and ecosystem funds, but the IR role that tells the public what tokens are doing is better – it’s really that simple. If you are a token that wants to attract buyers, you need to sell yourself—and the way you do this is not to rent the largest booth at a conference or advertise at an airport, but to sell yourself to a capital buyer.
By performing quarterly growth updates, you start showing investors that the product is legal and can accumulate value—so that investors can speculate on the long-term prospects that the product may perform well in the future.
As for how you should do it—a good list of starts is:
· Report discusses quarterly expenses/revenues, protocol upgrades, numbers, but no MNPI – posted on the blog/site
·Monthly communicate with liquidity fund managers to discuss your products/sell yourself
· Organize more AMAs
Repurchase and destroy are not bad, but not the best
The last thing I want to discuss is about repurchase and destruction in this field. My point is: If the money has no other purpose, I think repurchase and destruction are a good purpose. In my opinion, crypto hasn't reached the scale that companies can rest assured, and there is still a lot to do in terms of growth.
The first and most important use of revenue should always be to expand products, upgrade technologies and enter new markets. This is consistent with driving long-term growth and building competitive advantage; a good example of this is Jupiter’s acquisition frenzy, who have been buying names in cash to acquire products and important talents in the field.
While I know some people like buybacks and destruction and will call for dividend payments, my view is that most crypto operations are similar to tech stocks because the investor base is a similar type: Investors seeking high returns want asymmetric returns.
To do this, it doesn’t make much sense for companies to return value directly to token holders through dividends – they can do so, but if they build a larger moat with their cash reserves and serve them in 5 to 10 years, that would greatly benefit from the product.
Crypto is now in its beginning to mainstream stages—so it doesn’t make sense to start slowing down momentum now; instead, cash should be invested to ensure the next winner is ahead in a longer time frame, because despite all prices falling, the institutional setup of crypto has never been so good—the adoption of stablecoins, blockchain technology, tokenization, and more.
Therefore, although repurchase and destruction are much better than leaving with money, they are still not the most effective way to use capital, considering how much work is left to be done.
Conclusion
This bear market has begun to make people realize the need to build income-generating products as a profit path and the inevitable need to serve as a legitimate investor relationship role that demonstrates the performance of the token.
There is still a lot of work to be done in this area
