the problem with shitcoins12 Dec, 2022
The world of decentralized finance is rife with scams. Hyped up projects designed top down seemingly tackle convincing narratives of why you’re not rich, and they flood the niche in crypto known as defi. Really, defi just stands for decentralized finance, and in itself has nothing to do with a degenerate, albeit naive majority within decentralized exchange swapping culture (NFT degens, you are not spared). When I refer to defi in this post, I’m not explicitly talking about loan or yield farming protocols, as it is sometimes limited in discussion to. I mean the whole animal. The wheat with the chaff. The ape without the liquidity.
I have a bit of a love hate relationship with the entire scope of crypto here. When I first learned about defi, I flirted with the different ideas it had seeing a more disregulated approach to economic transactions. It was truly an intense infautation, as they are, until you can’t help but notice that they are deeply, and obviously flawed. In seeing the projects for what they were at their core after all the dopamine drained was drained I returned to my senses, I began to taste the beer on its breath.
What is a shitcoin?
Anything created as an asset, either meant to be used as currency or ancilarry in relation to another currency.
Sounds entirely vague, but there’s massive variation in the types of shitcoins that exist. They’ve always been peddled in one form or another, but the explosion of crypto as a speculative investment tool has given birth to the canonical forms that you’ve probably heard of. Classic shitcoins: doge, safemoon, shiba inu, etc. One could argue that every crypto except for bitcoin (à la michael saylor) is a shitcoin, in particular if it’s analogous to a company security. If there’s a governing body behind the project in some fashion, ‘decentralization’, ‘distribution’, ‘on-chain governance’ bends a knee to the executive developer who commits the code. For what its worth, most of the gold that exists is African, and the geopolitics of commodities is a contentious enough topic on its own that can’t be addressed in a demo blog post. I won’t tackle if bitcoin itself currently is a shitcoin here, but let’s assume for now that commodities are validly ‘decentralized’ because they’re still fundamentally limited resources that can’t have their value restricted in any artificial sense. in the strictest sense being as long as you can use it and need it, it holds some value. wood, coal, oil etc.).
Crypto is also limited. The valuation backing the limited supply of some assets is proportional to the amount of energy spent to mint them. We have this great digitally scarce resource (or millions of them), but now also with the ability to move that money infinitely more efficiently than before, given that it exists primarily as a network. Final settlement can happen faster than has ever been the case before, safer than before, and more effective than before, in particular across governments, countries, economies etc. The velocity of this money transfer in the retail sector has with this leap, paved the way to a new type of speculative asset hype, largely based on its tokenomics.
the study of parameters that determine the characteristics of cryptocurrencies or cryptographic tokens to create economic value. Both cryptocurrency and tokens are the subclasses of digital assets that use the technology of cryptography.
Copper compared to gold or even silver has a place, based on the characteristics that gives it some notable value and thus able to be priced into markets with the value being closely dependent to that function. Copper is arguably more useful than gold in the world, used for things such as electrical wiring, roofing, coins, water desalination etc. One could imagine that based on this level of economic use, it would be a valuable commodity, but what differentiates it in the eys of the markets from being a store of value like gold? Gold has, perhaps, a less obvious use but is also considered more valuable. It’s rarer, more durable, used as a resource in several industries, and is historically and culturally associated with wealth. Clearly in most conditions so far, gold has more relative demand to its supply than copper. It’s important to note that this is not static however, and in the case of industrial demand, economic growth, infrastructure projects, and other geopolitical conditions, it’s within reason to imagine that if 3 Shenzhen-like cities were built every few years, then copper would, at the very least, temporarily skyrocket in demand relative to gold.
So, you can increase the value of a good, by meddling with its demand relative to its supply. We can also obfuscate the demand, by creating all sorts of links so that its usecase look to be overwhelmingly in demand
If copper were a shitcoin with a 10% swap fee where 4% goes to the miners, 4% goes back into the mining pit, and 2% goes to everyone who currently holds some copper how would this affect the value of copper? Clearly we change something in the supply and demand curve, but what exactly? We can run plenty of calcluations with these and perhaps even come out with a favorable effect on valuation if we make some assumptions based on its demand.
Imagine now that news comes out, that our copper token dev team is creating a new token, which uses copper token as a sort of supplementary asset to its own (soon to be released) ecosystem. Maybe it’s another dex aesthetically themed “coppery”, and providing your copper tokens as liquidity in the pool gives you back some 3% copperDxDy tokens for every 0.1g of copper you hold, as well as 0.4% of the volume traded on that dex for a particular grouping of pairings all with their own associated ecosystems! Awesome! You can redeem these, so long as there is some kind of liquidity in the pool of course, for crystalline sugar at the counter.
What’s wrong with that?
These peddlers will have you believe that because some structure takes the input of the other object, that it by cause and effect creates the demand. The dex will take the copper which needs it as tokenized fuel for the engine: Therefore, if the dex is in demand, then copperToken is too. Marketing is useful here in persuading the masses that “passive income for life” is possible in the case of simply holding some of these tokens. If you hold a lot of this copper token, and if every swap from another asset is taxed 10%, where 2% goes back to holders of copper token, you can linearly track and fool yourself into focusing on the gamification, rather than the economic reality.
interlocking system complexity in defi is intended to obfuscate. a system’s demand is not the same as real demand!
It can be very hard to track true demand. Some analysts are paid phenomenal salaries just to track the complexity of financial systems in order to deduce real vs. assumed demand, and while it’s unreaasonable to assume you should spend the same effort for a gamble based shitcoin or NFT, just keep in mind the nature of the thing itself. It’s just systems inside of systems, relating to systems affecting other systems. Technology engineered for technology’s sake, used for speculation, and designed to fool gullible investors into thinking they’ve found a truly revolutionary asset. Allow me to offer a communications method for unethical and valid misdirection to make any digital good succesful in 2023:
- focus investors on your tokenomics,
- have them pay particular attention to the ‘potential’ for the ecosystem’s ability to route demand,
- play into their ’early/angel investor’ psychology while you reshift focus away from the sustainability and true demand underlying its relative demand.
All you need for copper to be more valuable than gold, is to create massive structures that implicate the need for copper. (create 3 shenzhens all within the next couple years).