As the blockchain community matures slowly, there is a mechanism of sensemaking happening for the 1000’s of alt-cryptocurrencies available for trade. This sensemaking process is what drives customers to buy and/or list tokens on exchanges or on balancers, which support liquidity pools.While most of the tokens we see are utility tokens that have launched with a primary sensemaking mechanism to it, with proven marketplaces – several new blockchains create tokens which have to create a primary sensemaking mechanism by proving their own security, seamless integration and adoption in a crowded globally competitive marketplace rife with regulatory uncertainties.
REPUTATION OF THE INITIAL COIN OFFER and COIN GOVERNANCE POLICIES ACES ALL OTHER SENSEMAKING FACTORS
Off all factors that matter to a coin or a token’s success, despite the technology powerhouse and the high end technical capability of the development team, cryptocurrency markets value reputation of the token issuance and governance mechanism the most. Retail investors and possibly institutional investors value the trust retail investors place in a blockchain’s token mechanism much more than the reputation of the team or the technology behind the blockchain. The technology puzzle, since it is open source will slowly – if not surely catch up – to the same if not better level. For example, Algorand was the only blockchain that has solved the blockchain trillemma and is live when it launched. However, now we have ethereum’s becaon chain being launched and AVAlanche protocol being launched with similar properties if not better. Others will also join the “Trilemma solving party” soon.
As two examples, we look at uniswap and algorand. The first built on top of Ethereum, and the second an entirely new blockchain.
The uniswap community proved itself as a working protocol supporting a decenetralized exchange, and today there are a few hundred functional uniswap exchanges, that replicate the functionality, but also build useful applications on top of it e.g., zapper fi, etc. The protocol itself was built by Mathew Hayden and had significant traction before the team garnered investment from venture capitalists for further development. This stands out as an example where the primary protocol and market mechanism was first validated by markets and the reputation of the system to do what it was supposed to do, neatly and without any issues exceedingly improved upon their credibility. To top it all, uniswap rewarded all its initial investors with an airdrop of 400 UNI tokens which bought significant bounties to individuals who held multiple accounts on uniswap. However, Uniswap is not without governance issues. A token vote mechanism failed to garner enough support to continue yield farming. So today, all those liquidity pool investors are left hanging without yeild interests and expensive rollback transaction fees, with very little incentive to continue on uniswap. As a result mass migration to sushiswap and other yield returning protocols will take place. Markets have memory and are non forgiving.
Another example, is that of Algorand, which in a year where most crypto-tokens doubled and in some cases tripled in their value, saw their token fall 92%. The team has great technology and the greatest of the technical minds there ever existed in economics, and computer science. In addition their platform, technology and the types of applications built on-top are second to none. Their programming language i.e., TEAL is in my opinion too one of the most, elegant programming language interfaces that resembles the most essential instruction set on top of which programmers could build wrappers for any programming language. So why did their token fall 92% from the IEO value, and why does it continue to falter? This is a puzzle and searching the archives of reditt.com or other forums the answer becomes apparent. The initial touch base – tokenomics – for the ICO was possibly not handled well wherein initial investors dumped a lot of tokens onto unsuspecting retail investors who purchased it at the ICO price, raking in more than 2000% profits. The sensemaking process of the markets, possibly never forgave this gaffe in the markets, because once trust is lost in markets, it possibly takes a lot of effort to regain it.