Graduating from Ponzinomics

how web3 can onboard billions & fund long-term operations

Since this is my first post, I’d like to introduce myself and explain the intent behind these blogs.

I’m David Attermann — Co-founder & Managing Partner of Omnichain Capital, a liquid token hedge fund. We make long-term investments in general-purpose infrastructure (layers 1 & 2) with a strong focus on technical design, network fundamentals, and economic sustainability. I previously worked in IB/PE/HF primarily covering networking technology companies. Orange pilled in 2014.

My motivation for these posts is to test my investment & technical logic, not to be right, but to better understand what I could be missing. So please comment or reach out if you disagree with any of my points — my goal is to be 100% intellectually honest with myself.

None of my posts should be considered investment advice and I will always disclose if we have any positions in the tokens mentioned. Again the intent isn’t to shill, its to test my logic:

Since Terra’s collapse last month, CT has been flooded with the term “ponzi,” albeit with a slightly different meaning than the original definition. Traditionally, the word is associated with a fraudulent business that continuously funds itself by finding new victims. In crypto, it has come to mean a blockchain or dApp that cannot fund its operations on its own — value created is less than the cost to run. In order for the network to keep going, it must rely on unprofitable funding from investors, token holders, and/or users, in the hope it’ll someday be self-sustainable.

This dynamic actually sounds a lot like most tech start ups: burn investor cash to grow to a large enough scale, then ease off spend to return capital to shareholders. In this context, crypto “ponzinomics” are likely unavoidable when bootstrapping dApps & blockchains, but should only be tolerated if the project is working towards long-term self-sustainability. Ironically, the Terra vision of a decentralized stablecoin payment network was a path to self-sufficiency, whereas something like BTC is arguably more ponzi-like. To be clear, I don’t think its a “bad” thing, but ultimately the system falls apart when inherent token value is questioned.

So under the assumption most blockchains & dApps today are “ponzis” what does the path forward to sustainability look like?

A self-sustaining ecosystem is one that provides enough value-generating utility to sufficiently compensate & incentivize all participants (miners/validators, developers, users, investors) to keep the network running long-term. To get there, dApps need real-world use-cases, tokens with actual utility, and 10x easier onboarding, and L1s need more efficient security economics. More color on each below:

1) dApps need to offer real-world utility that billions of users will find valuable

Many crypto skeptics cite the lack of use-cases today as a reason the tech has failed. I 100% agree utility today is very limited, but its not from lack of focus or technical capability. The most exciting use-cases for blockchain technology (real-asset tokenization, securities trading, stablecoin payment networks) have been stymied by regulatory hurdles, and will require ongoing collaboration between policy makers and web3 leaders to bring these ideas to market. This will likely be a decade-long transformation, but the amount & pace of innovation in the last 2-3 years has been astonishing and mostly only visible/understood by crypto-natives (which is why many are so bullish long-term).

2) dApp tokens need utility

Why tokens at all? In short, they’re extremely effective incentive instruments that enable early users to participate in the upside, aligning all stakeholders (node operators, investors, users, developer community) to make the product successful. Compare this to web 2, where early users don’t get rewarded at all and therefore aren’t incentivized to market the product to others. Only investors & early employees benefit from the product’s success.

Ok so why has utility and value accrual been such a difficult problem to solve? Because token design has several challenges today:

• Tokens that accrue value through cash flow are at risk of being labeled securities by the SEC.

• Many dApps run on blockchains that have their own native gas token (e.g. ETH), therefore the dApp token isn’t really needed to use the product.

• “Yield” generating use-cases (staking, bonding, providing liquidity, etc.) have had limited success since they are mainly funded by VC investment or inflation (token holder tax), and not sustainable in the long-run.

• Market doesn’t seem to value/care about governance-only tokens.

I’m optimistic dApps will continue to innovate design and find creatives way to grow token utility, but in the long-run I think they must be able to accrue some value directly from cash flow. This will require cooperation with the SEC and Congress, and likely take a lot of time and effort.

3) Many dApps will likely have to adopt reverse-gas models: instead of users paying gas fees, dApps pay them directly to the L1.

• This would enable non-technical customers to easily access the product (no need for tokens & wallet) which will materially reduce onboarding friction, one of the biggest adoption hurdles today.

• It would also enable dApps to offer freemium models, where users onboard for free utility, then upgrade to premium options if the incremental utility is worth the cost. This model has proven to be extremely effective historically.

4) dApps likely need the ability to accept fees in fiat

dApps could potentially use a fiat-to-stablecoin trust-minimized intermediary smart contract, then convert the stablecoin to the L1 gas token when needed to fund operations. I imagine this would ultimately fully transition to crypto-native assets (given the attractive attributes of tokens), but UX/UI + education is nowhere close for web3 to scale today.

• The largest crypto-related applications (centralized companies like Coinbase) effectively already do this today, and it would likely help web3 dApps be more competitive in the market.

• Similar to the reverse-gas model, enabling fiat payments significantly lowers onboarding friction for users w/o wallets & tokens.

• Could potentially reduce market volatility and token correlation if dApp treasuries and user purchasing power were less connected to token prices.

5) L1s must be able to generate enough revenue from dApps to pay for the security necessary to protect value on-chain — while also not overcharging users

• L1s fund network security by charging transactions fees and/or inflating token supply. Both methods are ultimately a tax on users and/or token holders.

• Security is binary; different ecosystems have different thresholds that must be reached to appropriately protect assets. Once that threshold is reached, incremental fees are unnecessary expenses to users & token holders.

• L1s that can optimize security expense efficiency will also optimize dApp/user recruitment & long-term economic activity and sustainability.

• Therefore L1 chains should be working backwards – figure out what level of security is needed, then charge for blockspace accordingly. I understand the technological constraints today make this difficult (e.g. ETH scaling issues) but when the tech is ready this should be the L1 framework for designing long-term on-chain economies.

Crypto has never been portrayed fairly by the mainstream media and for good reason — on the surface, its products aren’t particularly useful today. It takes a much deeper understanding of the pace and scope of innovation happening under the hood to appreciate the promise the technology brings. The general public therefore won’t really care about web3 until dApp utility and value outpaces legacy systems. In order to get there, figuring out sustainable blockchain economics will be paramount to determining the winning use-cases of the future.

Disclosure: we have positions in ETH & BTC