Original Article Title: First Principles - Compounders, L1s, IR, Buybacks
Original Article Author: 0xkyle__, DeFiance Capital Member
Original Article Translation: ChatGPT

Editor's Note: The author believes that the biggest problem in the crypto space is not talent or capital, but a lack of first principles thinking, leading to the industry being stuck in a cycle of short-termism, extractive culture, and low trust. The author analyzes the reasons why compounders are hard to come by, proposes the need to drive long-term thinking from the top and focus on building revenue-generating products, criticizes the inefficiency of general-purpose Layer 1 blockchains, suggests they focus on specific areas and build their own ecosystem to give the token value, also emphasizes that liquidity token projects should establish an investor relations role to enhance transparency, rather than relying solely on buybacks and burns, advocates for using funds to expand products and solidify long-term competitive advantage, to break the current nihilism trap and achieve sustainable growth.

Below is the original content (slightly reorganized for ease of reading comprehension):

The biggest problem in this space is neither talent nor capital. Simply put, it is a lack of first principles thinking. This is a culture that must change. That 1% of people need to start pushing this space forward.

If you've been following my Twitter recently, you'll see that I've been screaming about opportunities that seem readily available, highly leveraged, ridiculously simple to operate, seemingly easy to achieve, but apparently no one "understands" or executes well. Here are some points I have made:

· The real issue is: Why aren't more chains using their treasury funds to incubate their own dapps and build dapps that are explicitly consistent with the chain? Rather than hoping these dapps won't abandon the chain within two years.

· The reason this industry has the price action it does now is largely because everyone has this idea: "You have to sell because one day it will go to zero." And the reason is, no one has really built a good product that people want to consistently DCA into. Crypto needs compounders.

· The "marketing" in the crypto space is, in most cases, not aligned with the product. If you're not a consumer-oriented product—say you're a yield platform, why are you even marketing to retail users. The best marketing is often price appreciation. And the best at that are liquidity pools.

In this article, I will discuss each of the following topics:

· Compounders, Culture, Short-termism

· The general Layer 1 is dead, it must change

· Liquidity tokens and investor relations

· Buyback and burn is the least bad, not the best

I am naming this article "First Principles" because all these points come from simple thought exercises I have done on how to change the industry today using common sense.

It's not profound. Madness 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—essentially creating a vacuum of zero-value accumulation, maximum token and app extraction, because for some foolish reason, we decided to open the casino in this feverish way every four years, drawing capital from around the world to gamble.

Guess what? After three cycles, a decade later, people finally realize that the house, the scam artists, the manipulators, the ones running the casino, the ones selling you overpriced food and drinks in the casino, are taking all your money. The only thing you have to show after months of hard work is how you manage to lose all your history on-chain. An industry built on the foundation of "I'll come in, make my money, and leave" will not lead to the building of any long-term compounding.

This place used to be better, once a legitimate venue for financial innovation and cool tech. We were excited about novel, interesting apps, new tech that "changes the future of France (finance)."

But due to extreme short-termism, maximal extractive culture, and low integrity individuals, we have fallen into this perpetual financial nihilism of self-cannibalization loop, where everyone thinks continuously throwing money into random scam tokens is a good idea, triggering this collective loop of self-implosion because "I'll sell before he scams me." (Really, I've seen people say they know the "SBF token" is a scam but will sell before getting rugged for a quick profit.)

You can say I don't have the build experience—true. But this is a small space and doesn’t have a lot of history; I've been in this space for four years, working with some of the best and brightest funds, giving me a deep understanding of what works and what doesn't.

Reiterating: Madness is doing the same thing over and over again but expecting different results. As a field, we've gone through the same thing year after year—feeling this nihilism when the price inevitably collapses, thinking it's all worthless. I felt this when NFTs crashed (wow, this is all a scam), people felt it after the recent meme coin debacle, and people felt it during the ICO era.

Changing the status quo is simple: we just need to start doing things differently.

Compounding, Culture, Short-Termism

Compounding is simply an asset that only goes up over many years—think Amazon, Coca-Cola, Google, and so on. Compounding is about companies with the potential for sustainable, long-term growth.

Why haven't we seen compounders in the crypto space?

The answer is more nuanced than that, but essentially—extreme short-termism and misaligned incentives. Indeed, there are many issues with the structure of incentives, and Cobie's piece on private capture and vampire mining articulates this well. I won't delve into this as the focus of this article is: what can we as individuals do right now?

For investors, the answer is evident—Cobie points this out here: you can choose to exit (you probably should).

Indeed, people have chosen to exit: this cycle, we have already seen the decline of "CEX tokens" as retail participants choose not to buy into these tokens; although individuals might not have the ability to change this systemic issue at the protocol level, the good news is that financial markets are quite efficient—people want to make money, and when the existing mechanism doesn’t make money, they stop investing, rendering the entire process unprofitable and forcing a mechanism change.

However, this is just the first step of the process—to truly build compounders, companies need to start instilling long-term thinking in this space. It's not just about "private market capture" being bad, but the entire chain of thought that led us to this point—like a self-fulfilling prophecy, founders seem to collectively believe "I'll make my money and leave," with no real interest in playing the long game—meaning the chart always ends up looking like an M for McDonald's.

Top-down change is necessary: a company is only as good as its leaders. Most projects fail not due to lack of developers but due to high-level decisions to exit. This industry must start holding those high-integrity, high-velocity, long-term thinking founders as role models rather than idealizing founders who engage in "short-term pumps and dumps."

The average quality of founders in this space is not high, this is not news anymore. After all, this is a field that calls those tied to pump tokens "developers"—the barrier to entry is really low. Just having a vision that extends beyond the first two months of token launch already puts you ahead of the pack.

I also believe the market will start economically incentivizing this long-termism, and we are beginning to see that. Despite recent sell-offs, Hyperliquid is still up 4x from its initial offering, which is a feat few projects can boast in this cycle. It's typically easier to make the case for "hodling" when you know the founder's alignment with the long-term growth of the product.

The natural conclusion is that founders with high integrity and high drive will begin to dominate the majority of the market share because, frankly, when everyone is tired of scams, they just want to work for someone with a vision who won't exit scam—and there are so few of those.

Aside from having a good leader, the establishment of a compounding entity also hinges on the assumption of whether the product is good. In my view, this issue is easier to solve than finding a good founder. The reason the crypto space has so many vacuous products is because the people creating them also have the "make money and leave" mentality—they thus opt not to take on new problems but instead just fork popular things and try to make money off of them.

However, the fact is, this industry does indeed choose to reward this vacuous thinking—an example being the AI agent craze in Q4 2024. In this scenario, after the dust settles, we will see the typical McDonald's M-shape pattern—so companies must also start focusing on building revenue-generating products.

No revenue path = no long-term believers/holders = no buyer of the asset because there is no future to bet on.

This is not an impossible task—businesses in the crypto space do indeed make money. Jito with yearly revenue of 9 billion, Uniswap 7 billion, Hyperliquid 5 billion, Aave 4.88 billion—they continue to make money (just not as much) even in a bear market.

Looking ahead, I believe the ephemeral, narrative-driven speculative bubbles will become smaller and smaller. We've already seen this—2021's gaming and NFT valuations were in the trillions, but this cycle, the peaks of memes and AI agents are just in the billions. It's a macro-level euthanasia rollercoaster.

I believe everyone should be free to invest in whatever they want. But I also believe people want their investments to yield returns—when a game is so clearly foreshadowed as "this is a hot potato, I must get out before it goes to zero," the rollercoaster goes faster and faster, the market size becomes smaller as people choose to exit, or lose all their money.

Revenue solves this problem—it makes you as an investor understand that people are willing to pay for the product, thus indicating some long-term growth prospects. When something has no revenue path, it is nearly uninvestable on a long-term basis. On the other hand, a revenue path leads to a growth path, attracting buyers willing to bet on continuous asset growth.

In summary, becoming a compounding builder requires:

· Instilling a long-term mindset from the top

The Death of General-Purpose L1, Change Is Necessary

If you were to sort the Coingecko homepage by market capitalization, you would find that blockchain makes up over half of it; besides stablecoins, Layer 1 holds significant value in our industry.

However, the chart of the second-largest digital asset after Bitcoin looks like this:

If you had bought Bitcoin in July 2023, based on the current price, you would be up 163%.

If you had bought Ethereum in July 2023, based on the current price, you would be up 0%.

And that's not the worst part. The bubble of 2021 brought about a wave of "Ethereum killers" — new blockchains aimed at surpassing Ethereum in some technical way, whether in speed, programming language, block space, etc. But despite the hype and significant funding, the results have not lived up to expectations.

Today, four years from 2021, we are still facing the consequences of that wave — 752 smart contract platforms have launched tokens on Coingecko, with possibly more yet to launch.

Not surprisingly, the charts of most of them look like this — making Ethereum's chart look relatively decent in comparison:

So — despite four years of effort, billions of dollars in funding, over 700 different blockchains, only a few L1s have decent activity — and even those have not reached the "breakthrough level of user adoption" that everyone expected four years ago.

Why? Because most of these projects were built on misguided principles. As Luca Netz points out in his article "What is Consumer Cryptography," many of today's blockchains follow a general approach, with each blockchain dreaming that they will "host the internet economy."

But this takes immense effort, ultimately leading to fragmentation instead of penetration, as a product trying to do everything usually ends up doing nothing well. It's an effort that costs too much money and time — to be honest, many blockchains struggle to even answer a simple question: "Why should we choose you over Blockchain #60?"

The L1 space is another case of everyone following the same playbook but expecting different results — competing for the same limited developer resources, trying to one-up each other in grants, hackathons, developer houses, and now it seems we're still making phones (?)

Let's assume an L1 succeeds. Each cycle, some L1s do break through. But can this success be sustained? The successful one from this cycle is Solana. But here's a take that many of you won't like: what if Solana becomes the next Ethereum?

During the last cycle, there was a group of people so convinced of Ethereum's success that they put most of their net worth into it. Ethereum is still the chain with the highest TVL, now even with an ETF — yet the price remains stagnant. This cycle, the same type of people are saying the same things — Solana is the chain of the future, Solana ETFs, etc.

If history is any indication, the real question is — can today's victory guarantee tomorrow's relevance?

My view is simple: rather than building a general-purpose blockchain, L1s should build around a core focus that is more meaningful. Blockchain doesn't need to be all things to all people. It just needs to excel in a specific area. I believe the future is blockchain-agnostic — it just needs to excel, and the technical details won't matter that much.

Today, builders have already shown signs of this — founders building D-apps are primarily concerned not with the chain's speed but with its distribution and end-user consumption — is your chain being used? Does it have the necessary distribution to make the product appealing?

44% of the internet runs on WordPress, yet its parent company Automattic is valued at only $7.5 billion. 4% of internet traffic runs on Shopify, but its valuation is $120 billion — that's a 16x of Automattic! I believe L1s will also reach a similar end state, where value accrues to applications built on top of the blockchain.

To achieve this, I believe L1s should take a groundbreaking step and build their own ecosystem. If we were to analogize blockchains with cities (thanks to Haseeb's 2022 article), we could see that cities started because particular advantages made them viable economic and social centers, and then over time focused on a dominant industry or function:

· Silicon Valley → Tech

· New York → Finance

· Las Vegas → Entertainment and Hospitality

· Hong Kong and Singapore → Trade-Centric Financial Hubs

· Shenzhen → China's Hardware Manufacturing and Technology Innovation Hub

· Paris → Fashion, Art, and Luxury Goods

· Seoul → K-pop, Entertainment, and Beauty Industry

L1 is no different – demand is driven by the attractiveness and activity they offer; thus, teams must start focusing more on excelling in a particular vertical – crafting the kind of attractiveness that draws people into their ecosystem rather than building various exhibitions hoping to attract users.

Once you have that attractiveness that draws people into the ecosystem, you can then build a city around that attractiveness. Again, Hyperliquid is an example of a team that has done this well and iterated on first principles in this regard. They built a native sustainable DEX order book, spot DEX, staking, oracle, multisig – all built in-house, then expanded to HyperEVM, which is a smart contract platform for people to build on.

Here's why it's effective in a simple breakdown:

· Start with "Attractiveness Building First": By initially building perpetual trading products, Hyperliquid attracted traders and liquidity before expanding.

· Control the Stack: Owning key infrastructure (oracle, staking) reduced vulnerabilities and created a moat.

· Ecosystem Synergy: HyperEVM now serves as a developer's permissionless playground, leveraging Hyperliquid's existing user base and liquidity.

This "Attractiveness First, City Second" pattern mirrors successful web2 platforms (e.g., Amazon starting with books then expanding to everything else). Solve an exceptionally good problem, then allow the ecosystem to organically expand from that core value.

Therefore, I believe blockchain should start integrating its products, building its attractiveness, owning the stack; as a captain, you are a visionary – this allows you to align your blockchain with your larger, long-term vision for L1; and ensure the project doesn't immediately give up when on-chain activity starts to decline since everything is built in-house;

Most importantly, this process has brought monetary value to your token — if the blockchain is a city, the token is the currency/good that people trade; by imbuing value into the token — people need to purchase your token to do interesting things on-chain. It gives currency to your currency and gives people a reason to hold it.

Oh, but it’s important to remember — just because you specialize doesn’t mean there’s demand for it in the market. Another bitter pill to swallow is that L1 must work in the right way at the right opportunity. Blockchain must develop products people want—sometimes, people don’t really want 'web3 games' or 'more data availability'.

Liquidity Tokens and Investor Relations

The next topic is about how I think liquidity token projects should evolve in this space. Quite simply — liquidity token projects need to start establishing Investor Relations (IR) roles and quarterly reports to let investors — whether retail or institutional, see clearly what the company is doing. This role isn’t new or groundbreaking — but severely lacking in this space.

Nevertheless, this space does very little on the IR front. I've been told by multiple projects' biz dev leads, if you have some kind of ‘regular calls pitching your liquidity token to funds,' you're doing 99% more than other projects in this space.

Biz dev is cool in attracting builders and ecosystem funds, but an IR role telling the public what the token is up to is better — really that simple. If you're a token that wants to attract buyers, you need to market yourself — and you do this not by renting the biggest booth at a conference or advertising at airports, but by pitching yourself to buyers with capital.

By doing quarterly growth updates, you start showing investors that the product is legitimate and can accrue value — allowing investors to speculate on the long-term prospects of the product.

As for how you should go about it — a good starting list is:

· Reports discussing quarterly expenses/revenue, protocol upgrades, numbers, but no MNPI — published on blog/website

· Monthly calls with liquidity fund managers, discussing your product/pitching yourself

· Hosting more AMAs

Buybacks and Burns Aren’t Bad, but Not Always Best

Lastly, what I want to discuss is buybacks and burns in this space. My take is: if that money has no other use, I think buybacks and burns are a fine use of it. In my view, crypto hasn’t reached a point where companies can sit back and relax, there’s still a lot to do in terms of growth.

The first and most important use of revenue should always be to expand the product, upgrade the technology, and enter new markets. This is consistent with driving long-term growth and building a competitive advantage; a good example of this is the Jupiter acquisition spree, where they have been using cash to purchase talent and products in the space.

While I know some people like buybacks and burns and will call for dividends, my view is that most crypto operates more like tech stocks because the investor base is a similar type: seeking high returns investors who hope for outsized returns.

As such, returning value directly to token holders through dividends doesn’t make much sense for companies — they could do that, but if they build a bigger moat with cash reserves that serve them 5 to 10 years down the line, the product will benefit greatly.

Crypto is now at a stage where it’s starting to enter the mainstream — so slowing down now doesn’t make sense; instead, cash should be deployed to make sure the next winner is ahead for a longer period of time because even though all prices are down, the institutional setup for crypto has never been better — adoption of stablecoins, blockchain tech, tokenization, etc.

So buybacks and burns, while much better than cashing out, still aren’t the most efficient use of capital given how much work there is left to do.

Conclusion

This bear market is already making people realize the need to build revenue-generating products as a path to profitability, as well as the inevitable need to take on a legitimate investor relations role to showcase token performance.

There’s still a lot of work to be done in this space. I remain optimistic about the future of crypto.

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