Crypto narratives 101

Humans are driven by the need to connect, and the most powerful way to build human connection is through storytelling. The sophisticated word used in global markets for storytelling is narrative(s). Narratives are stories that define social and market trends and drive interest towards particular subject matters. 

Narratives have been and will continue to be a crucial element for fueling market activity. The reason for this being that narratives are able to distill complex & abstract issues into simple-to-understand stories. Through stories, people's imaginations are captured; through stories, people's imaginations are kept.

The crypto story

Have you ever noticed that the entire digital asset ecosystem has been built on a story of decentralization, power diffusion & equal financial opportunity for all? This single narrative has given birth to a burgeoning trillion-dollar industry.

Beyond the macro narrative of defending the individuals’ economic sovereignty, crypto is jam-packed with a diverse collection of micro-narratives that spark interest in niche sections that overlap with global trends. By paying attention to the big picture, we can extrapolate patterns that will seep across industries.

Before we dive into the history of some narratives in the cryptoverse, it is important that we clarify something about narrative trends; they come & go. Few actually stand the test of time long enough to create a lasting impression on the human condition. Stories are always changing & what is exciting today might not be so tomorrow. The credibility of a person that preaches a narrative might be here today & gone tomorrow. Therefore, whenever a narrative creeps its way into the market’s collective consciousness and starts to gain momentum, it is best practice to keep a cool head and avoid being swept up into the hype. FOMO is a great way to lose your money. (check out our post on “Narrative trading in crypto” for more information on this).

A Brief History of Crypto Narratives

Cryptocurrency exists at the intersection of a multitude of informationally-intensive disciplines; computer science, finance, economics, psychology, sociology & everything in between. Combine this with a 24/7 and global market and you have fertile grounds for narratives. 

It comes as no surprise that with so many forms of knowledge interwoven with one another, new stories about potentially life-changing opportunities are constantly popping up. While this optimism has been a driver of innovation, it has also been a catalyst for many mistakes.

The raw amount of narratives in crypto is countless and reviewing them all would be too much. Let’s just look at two of the more popular ones in recent crypto history.

1) AI will change Everything

Since the introduction of the term Artificial Intelligence in 1956, it has been a source of obsession. Over the past decades, there have been new breakthroughs in the technolgy, but on November 30, 2022, the next “big breakthrough” in AI washed over mankind. ChatGPT gave the mass public its first LLM (large language model) that swept millions of people into a frenzy of “AI is here to take our jobs & pillage our everything”. 

Naturally, this irrationality spilled over into the crypto markets. People wanted to invest in AI, but either had no way of getting exposure in traditional markets or were unsatisfied with the limited options they had. So money flooded into all crypto AI projects that had something to do with artificial intelligence. Various blockchain projects that were already experimenting with AI went up between 1,000% to 4,000%. Then some other projects claiming to use AI shot up and soon after, projects that had a remote reference to AI in their whitepaper followed. Soon, economic gravity kicked in and late buyers lost their shirts.

2) DeFi will replace TradFi

The promise of crypto displacing traditional finance has been in the making since the advent of Bitcoin. Given the technological limitations of Bitcoin’s blockchain, the narrative has shifted to Bitcoin becoming digital gold and a new narrative emerged. 

As blockchains with smart contract functionality such as Ethereum came to the forefront, they could theoretically decentralize every element of finance. After the ICO mania of 2017 (great story back then), the actual capabilities of the tech combined with six years of innovation, created the now popular term DeFi (Decentralized Finance).

Over the summer of 2020, the term reached a fever pitch. People began to obsess over the collapse of traditional finance & the inevitability of a purely decentralized economy. Millions, if not billions of dollars, rushed into the space in an attempt to capture the potential upside of this revolution. What started with great, innovative DeFi protocols like Aave and Compound ended in food coins and 100,000% interest rates. Although again, many people lost their shirts, it was the preliminary spark that set off the 2021-2022 bull market.

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3) Liquid Staking Derivatives Finance

Staking has seen a surge in popularity in recent times, emerging as a lucrative avenue for token holders seeking to maximize their returns. Now, with Liquid Staking Derivatives Finance, an entirely new financial layer is being created based on staking with billions in addressable market value. Let's do a quick recap of the basics before we dive into this massive opportunity.

The prominence of staking has intensified with Ethereum's transition from Proof of Work to Proof of Stake in mid-2022. This transformation marked a significant shift in how new tokens are mined, moving away from expensive, energy-guzzling hardware to a system that relies solely on Ether, the token of Ethereum's blockchain. This transition has not only simplified the process but also made it more accessible to a broader audience. =

Expanding from the concept of Liquid Staking Derivatives, we reach the next phase in the evolution of decentralized finance - Liquid Staking Derivatives Finance, more commonly known as LSDfi. So, what exactly is LSDfi? In simple terms, LSDfi is the application of DeFi principles and mechanisms to the liquid staking derivatives market.

LSD-Fi can serve multiple functions depending on the specific use case or platform. It can enable users to earn staking yield while also participating in DeFi protocols. For instance, an investor can stake tokens, receive liquid staking derivatives in return, and then use those LSDs as collateral in DeFi protocols to earn additional yield.

4) Real World Assets

Acting as a bridge between the decentralized world of crypto and the legacy financial system, the term Real World Assets (RWAs) originates from within the crypto industry and refers to the tokenization of traditional financial instruments of value such as stocks, precious metals and credit. RWAs are a key building block for crypto’s long term vision of “the tokenization of everything”.

Since the arrival of smart contracts in the public domain, blockchain platforms have become a trusted source for the issuance, storage, and management of tokens. At its most basic, a token is a unit of account that asserts ownership over any abstract object and tokenization is the process of issuing digital assets on a distributed ledger. The marriage of decentralized systems with legacy finance provides the best of both worlds to create the most robust and efficient economic infrastructure in human history. Many of the world's premier financial institutions have been striding gallantly into RWA’s. Well-known enterprises such as Goldman Sachs, Siemens, Hamilton Lane, and Boston Consulting Group have already begun to execute their operations on-chain, going so far as actually building out their own platforms and protocols. Even governments have already dipped their portfolios into the distributed ledger ecosystem with Hong Kong issuing a $100 million USD bond on the Goldman Sachs platform.

Applying tokenization to RWAs means that traditional assets will be put on-chain via tokenized representations. Citigroup believes this innovation to be a $4 trillion and 1 billion users opportunity in the short term, and a $250 trillion+ opportunity over the next decades. Why? Because DeFi is a significantly more efficient infrastructure for finance than what we're currently working with.

Narratives everywhere

Developing a keen understanding of the role that narratives play in the bigger picture is an essential skill for anybody looking to get involved & staying involved in the crypto industry. Narratives give us insight into opportunities. They depict the big picture of what humanity is thinking about & where it is putting its attention. There is an incredible saying from American entrepreneur & philanthropist Tony Robbins, that highlights the power of narratives: “Where attention goes, energy flows”. Money is a form of energy and stories capture our attention.