Bear Market, Return to The Formula for Paradigm Shift to Find Investment Opportunities
Forest, Foresight Ventures Co-Founder
Foresight Ventures is an investment institution focused on Blockchain and Crypto industry. This article uses a lot of cases from traditional industries, because we believe Crypto is a constantly-evolving industry and various unprecedented technology stacks and application stacks are yet to be born. That is why neither reference to previous crypto cycles nor reference to traditional companies can help us predict what comes next. At present, crypto projects are overly obsessed with Tokenomics and Ponzi designs, being keen to dump tokens and auction NFTs. To get to the essence, we try to zoom into the needs of human nature and the laws of innovation to discover investment opportunities.
The formula for paradigm shift
The formula by which the paradigm shift occurs has been continuously validated over two hundred years since the first industrial revolution in 1769, (by game changers such as steam engine, alternating current, the Internet, and Bitcoin.)
Demand and technology alone aren’t enough
Amazon, with a market value of $1.5 trillion, was the first company to sell books online. Bezos found out that the book market was very huge, but with a very low concentration ratio. The result of that was high commission fees and large costs to off-line book stores.
In this case, users needed: 1. Lower prices. 2. More books. 3. Faster searching. And How does technology match these needs: 1. Internet commerce does not require a physical store and high labor costs. 2. Compared with the limited area of physical bookstores, Internet storage space is almost unlimited. 3. Electronic retrieval infinitely shortens the time to find books.
ByteDance, the world’s largest unicorn, earns more revenue than Twitter and Snap combined by its subsidiary company Tiktok. The original intention of the founder Yiming Zhang was to use algorithms to push content to users. He tried comics, jokes, news, and short videos, all with varying degrees of success. Among them, the short video app ushered in a new age for the Internet.
In this case, users needed: 1. Diverse content. 2. Content that carries more information. 3. Content that meets their preferences. 4. Like-based social relationships.
When Yiming Zhang raised his first VC round, he did not get much approval, which Neil Shen later explained in an interview with two main reasons:
1. The algorithm-based recommendation model has not been successful before. 2. Other giants are also trying the same thing.
The success of ByteDance is inseparable from the support of technology: 1. Zhang Yiming has developed an algorithm that is more in line with user needs. 2. 4G has brought a faster network experience to watch short videos online. 3. Short videos carry more information than text, photo, and audio. 4. High-frequency content allows the algorithm to obtain more data, so as to quickly optimize the push results.
In these two examples, it seems that technology determines whether the paradigm shift occurs or not, which is also why we often say: technology revolution brings business revolution. So let’s find some examples of failure where even though the technology was adequate, demand was lacking.
- The Segway Nineboat, which was driven by a reporter during the Beijing Olympics and knocked over the sprint world champion Usain Bolt, ceased production in 2020.
- Various new medical devices have not gained market recognition, largely because doctors need more patients, not cooler operating rooms.
CB Insights once listed 20 reasons for entrepreneurship failure, and the №1 reason is rashly developing products without analyzing the needs, accounting for 42%.
Narratives are the nexus of human societies
1. Importance of narratives
According to Everett Rogers’s Diffusion of Innovation (DOI) Theory, users experience a fist-increasing-then-decreasing slope from Awareness to Adoption of a new innovation. During a complete innovation cycle, diffusion also spirals upward.
Narratives are crucial in the transformation of human society for they are the foundation of trust in social organizations. Yuval Noah Harari wrote in his “A Brief History of Humanity” that Homo sapiens could communicate through language 70,000 years ago. Narratives can convince people of gods, and make them work for someone they don’t know.
Narrative is also a central way in which human knowledge is transferred and stored. Through constant repetition and inheritance, narratives continue to strengthen themselves and guide human behavior. The humanistic spirit of ancient Greece as well as the Confucian culture of ancient China still exert a huge influence on countries, governments and industries of today.
In the Crypto world, the ability to tell good stories is often appreciated. In 2014, Gavin Wood came up with the Web3 narrative, which continued to be explained and strengthened by pioneers like Chris Dixon. Entrepreneurial projects represented by Polkadot and Dfinity have made continuous effort to realize this vision. The same goes for concepts like Metaverse, DAO, Ownership, and of course, the most important of them all: Decentralization.
Let’s analyze the development process and details of BAYC’s narrative: born with the rebellious power of Web3 against the traditional world; attached great importance to brand membership; expanded the content of its ecosystem; offered commercial rights to NFT owners; airdropped NFTs and issued Apecoin; acquired more NFT IPs; built Metaverse, Game and Movie; developed public blockchain and Marketplace, etc.
NFT is especially a narrative-driven business model. Its natural lack of utility is actually the very reason which makes its valuation ceiling infinitely high. We have to admit that in the bull market, secondary price performances are mainly driven by narratives. Market value of billions of dollars can be supported solely by narrative, without any products or actual users.
2. How to tell a good story
a good narrative is Concise and engaging while a bad narrative lacks of focus, does not address the main issue, and is difficult to understand.
We can see that the narrative of even the largest companies in the world can be summed up in one sentence:
Apple: Make products with world-class designs and protect user privacy.
Alibaba: Make it easy to do business anywhere in the world.
An entrepreneurial team usually needs an excellent narrative, through which it can attract like-minded employees, VC investors, users, and holders in the market to join. If the team lacks a good narrative, its opportunity to succeed is greatly diminished. Narratives that are too grand and difficult to understand are often “too big to launch”. In the actual financing process, the power of narrative often has a significant impact on the valuation of projects.
3.Narrative is not the answer to all
We must realize that narrative matters a lot, sometimes even more so than data in driving capital market prices. But narrative alone does not really bring about paradigm shift. We understand that projects such as on-chain exchanges and Blockchain games have impressed us in the last cycle, but they did not succeed in the end.
Allow me to use Loot as an example of a failed narrative. Loot can be said to be an absolutely phenomenal product in 2021. Its rapid rise and large number of supporters have left a deep impression on people and Multicoin Capital invested tens of millions of dollars on it. Today, its price today has fallen by 95%, from which we can say that Loot has failed to some extent.
Loot’s narrative is actually really interesting: giving the community open access to creation process from the bottom up. Players also like it for various reasons:
- Ethereum of NFTs
- Decentralized Fundamentalism
- Unlimited Compatibility and Scalability
Within a week, the price of Loots rose from a few hundred dollars to tens of thousands of dollars, and soon spawned a series of related projects such as Rarity, Loot Realm, TreasureDAO, etc.
Why did Loot fail?
- As an asset, it was too easy to fork, even easy to create a better one.
- Co-creation didn’t naturally produce good products, some of the texts didn’t make any sense.
- The chaotic community was difficult to form a consensus.
Technical iterative power
Rome was not built in one day, and the paradigm shift also takes place in twists and turns, eventually reaching a critical point. The iterative ability of the technology will significantly affect its large-scale application, and may even be replaced by other technical solutions.
In the 1980s, Nikon once occupied more than 50% of the lithography machine market. In 2020, Nikon’s market share was only 8%, ASML’s share exceeded 60%, and only ASML could produce EUV lithography machines. In 2004, ASML cooperated with Lin Benjian of TSMC and boldly tried Immersion Lithography, shortening the wavelength of the 193mm light source to 132nm in one fell swoop. On the other hand, Nikon was more conservative in its innovation, and the wavelength of the new product was only 157nm, which was far behind. In this example, Nikon had stronger technology accumulation and production capacity, but failed because of insufficient iterations.
The development of VR equipment can better reflect the impact of technological iteration on large-scale applications. Putting aside the products of the last century, Oculus Rift came out in 2012, and countless developers worked hard for ten years to create excellent products such as HTC VIVE and Valve Index. But up till today, VR devices are still not as popular as mobile phones and TVs. bulky volume, low resolution and frame rate are the main problems affecting the experience. Even if we are certain that VR devices will be mainstream in future interactions, the speed of its paradigm shift is severely constrained by the power of technological iteration.
The development of technologies such as Blockchain scaling will also dominate the development of upper-layer applications and the speed of user acceptance. At present, there is a big gap between Blockchains and centralized servers in terms of TPS and Finality.
Here we mainly discuss learning thresholds, usage thresholds and conversion thresholds. Learning threshold: The difficulty for new users to master the basic operations. Usage thresholds: the time, money and other things necessary to use the product. Conversion Threshold: The cost of switching from the old product to another one.
Stepn is a great example of this. The learning threshold for Move to Earn is 0: everyone can run, there is no big difference in the running habits of people from different countries, and the operation of the app is not difficult compared to traditional running apps. Stepn’s main usage threshold is the cost of buying running shoes NFT, and its NFT price is usually 1–2k US dollars. Of course, if users want to upgrade or buy rarer NFTs, it will cost more. The entry cost is acceptable even for non-Web3 users. This is an important reason for Stepn’s success since not all business models can apply the Web3 model in this way.
However, the conversion threshold of the Stepn model is not high, which is a challenge to its user retention. When facing similar competitors, users only need to sell the NFTs and download a new App. Of course, competitors may not have better anti-cheating, economic models, and more stable yields. I am only expressing that when users want to change to a new app, their actual cost is pretty low.
The iPhone has a very high conversion threshold. Most people think of Apple as a hardware manufacturer, but I think its biggest moat comes from the software ecosystem. As we all know, IOS is a relatively closed ecosystem with independent operating systems, development languages, office and entertainment apps. More importantly, its iCloud service saves the user’s data, which records the user’s behavior and habits in addition to backing up photos. When users change to a new iPhone, they can switch seamlessly by copying data, retaining all the original habits and experiences. But switching to Android can be difficult, meaning it takes users weeks to learn how to use a new device.
Uniswap has also been challenged by a low conversion threshold. Sushiswap managed to launch an LP attack and grabbed most of Uniswap’s LPs through incentives in a short period of time. As a result, Uniswap also had to issue its own tokens to counter competition. With the launch of Uniswap V3, however, Uniswap did not open source its code, which raised its conversion threshold, enabled higher capital utilization, built a stronger economic moat and received better reputation.
Outlook on the paradigm revolution
The paradigm revolution will be a revolution based on the technical characteristics of blockchain and Crypto as well as the needs of people.
The technical characteristics are: decentralization, interoperability, programmability, and composability.
The needs are: ownership, asset protection and appreciation, speculation, showoff, privacy, and more.
Let’s use the first principle thinking to imagine what the underlying paradigm revolution of Crypto might have.
- lower customer acquisition cost
- lower transaction costs
- Persistent, non-custodial operating environment
- Open protocols and composable apps
- Token-oriented programming
- User-owned platforms, assets, data, identities
- Immutable trust system
- new revenue stream
- New stablecoin
- New form of organization
So far, this article has completed the analysis of the paradigm shift formula. Recently, we just went through Luna’s super deleveraging, and a lot of people are very frustrated, but as long as we return to the paradigm-shift thinking, we find that this is still the most promising industry. We will re-experience the capital cycle, innovation cycle and talent cycle. Let’s expect new narratives, new models, new levers.