I (your humble narrator) am the creator of Outliers, the community for exceptional young builders in crypto. I invest in the next generation of talent at Floodgate. Reach out to me on Twitter if you are building in crypto, I’d love to chat. Now let’s get after it!

Introduction

The roller coaster of crypto over the past couple years has been quite the thrill ride — mere months ago, cryptocurrencies were flourishing like tulips in 1612’s Amsterdam. But like their floral counterparts 400 years ago, the meteoric rise was accompanied by an equally dazzling crash. So as we gear up for the next era of crypto, we set out to build upon the remains of Terra, Celsius, FTX, and countless others.

Many people are now asking themselves: “What is the actual value of blockchain technology?” Sure, we can point to impressive numbers like BTC’s market cap of over $400B or Ethereum’s technological feat in moving to proof-of-stake — but what has crypto really achieved?

To be frank, I think Bitcoin is the only thing that’s come close to achieving true product-market fit. With its fixed supply, decentralized nature, and ease of transferability, Bitcoin seems to have carved out a concrete foothold as a long-term store of value (aka “digital gold”).

As for the rest… Defi is trying to figure out how to connect with the real world. NFTs have moved on from the jpg era and are now doing some soul searching. And DAOs are finally learning the hard-earned lessons that organizations and governments have been accruing for the past 400 years. Don’t be fooled by the recent price movements and exclamations that “Crypto winter is over!!!” We still have a long way to go.

Crypto… meet product-market fit

If crypto is going to propel us into a new and fantastic future, we have to earnestly reflect on the past few years and ask ourselves why we haven’t seen more adoption?

The answer is simple: Crypto has yet to see mass adoption because it lacks mass-appealing value.

A common red herring is to fixate on the fact that it's hard for the masses to onboard and participate in the crypto ecosystem. This statement isn’t wrong - the convoluted user-experience is a problem. But getting swept up in this issue is failing to see the forest for the trees.

If you could onboard 100M people tomorrow, what would you actually have them do? Buy some tokens and hope ‘stonks go up’? The principles of blockchain are, unfortunately, simply not enough to attract and engage the average consumer or business.

Here’s the thing: I’m a believer! I actually buy that systems built on composability, trustlessness, autonomy, and decentralization will ultimately lead to incredibly differentiated products and services. But right now crypto looks very much like a technology in search of a problem - that is to say, it’s looking for product-market fit...

So, if we can all agree crypto still has some mountains to climb to reach product-market fit, then we can start asking ourselves the important question instead:

What kinds of products or experiences can crypto provide that are — seriously — 10x better than anything else out there?

In my opinion, the answer to that question hinges on developments along two* key dimensions: products and infrastructure.

* [I actually think a third key dimension is regulation, but that’s a can of worms for another day…]

Products

For all my fellow mathletes out there, creating efficient infrastructure is necessary but not sufficient for crypto to achieve product-market fit. Thus far, finding actual products that can deliver persistent value outside of speculation that crypto will be valuable in the future has largely been left as an exercise to the reader. Can we connect this exciting new technology to the real world and deliver value to the masses? That is the billion (trillion???) dollar question.

I work with entrepreneurs on a daily basis who are exploring potential answers to this question. While there are unlimited possibilities for the future of crypto products, below I’ll dive into three areas I’ve found particularly compelling.

Distributed Ledger Technology meets the Real-World

At its core, finance is concerned with money, currency, and capital assets. At their core, blockchains are distributed ledger technologies - systems made for creating accounts, storing digital assets, and transferring balances between accounts. When put that way, it becomes clear why finance is such a natural fit for blockchains.

Finance has been managing money on digital ledgers for decades. It’s just been doing so through centralized databases - and rightfully so. Blockchains offer slower, more expensive, and decentralized ways to track accounts and balances. Sounds awesome, right? But blockchains also offer two things that we do not have in the financial world right now: standardization of data and communication (interoperability), and easy ways to build on top of standardized primitives (composability).

Take fixed income, for example. This market is incredibly fragmented. This leads to shallow liquidity pools, poor data quality, and heavy overhead costs for buy-side institutions. By putting assets on-chain in standardized data structures, these fragmented markets could be unified in DEXs (decentralized exchanges) with AMMs (automated market makers) that provide significantly improved liquidity and execution.

Up until this point, however, Defi has admirably leveraged interoperability and composability to build pyramid and Ponzi schemes on top of fundamentally worthless primitives. If Defi is going to survive and thrive, we are going to have to move to a world where the primitives mirror real-world assets and offer sustainable yields.

I believe it’s time for Defi to graduate from crypto casino and emerge to form the infrastructure of the banks, exchanges, and financial institutions of the future. We’re already seeing experimentation from large institutions like KKR and JPM who recognize the potential of this technology. I also expect to see an array of startups (e.g. Ondo, Blockhouse) emerge to service the future-looking players in the coming years.

Ultimately, I believe there is an immense opportunity to be captured by putting stable and valuable financial primitives on-chain. Just like packet switching replaced circuit switching in data transmission, I am confident blockchains will form the financial substrate of the future.

Digital Identity & Composable Data Platforms

Blockchains are uniquely positioned to enable user-owned digital identity. We saw a glimpse of that during the explosion of NFTs last year. But why is this exciting?

There are a few inflections that stand to make digital identity an important piece of our online lives moving forward. First is the impending explosion of AI-generated content. In a world where you can’t distinguish between the outputs of humans and machines, I believe a premium is going to be placed on understanding where information and content came from. Now, that’s not to say that we humans shouldn’t be using AI to augment our work. [I’m starting to think I’d have written this post a lot faster with some AI assistance…] But what we can do is provide an immutable and traceable signature that certifies that I (a human) claim ownership of this output.

Turns out there is a new technology (hint: it’s blockchains) that is quite good at achieving consensus and validating that data came from a certain source! So while Worldcoin was initially laughed off the stage for their Terminator-esque eye scanner, I believe proof-of-humanity and similar protocols will play an important role in our digital future.

The second trend is a bit more nuanced, but centers around a consumer's ability to own their own data. GDPR in Europe has pushed data ownership and privacy to the forefront, and we are starting to see movement on that dimension here in the US. I don’t believe that most consumers actually care about privacy. What I do believe is that they value amazing consumer experiences.

This is where blockchain has the potential to come in and stir the pot. If everyone’s digital data is housed in a standardized access-controlled container, dApps could now request to utilize data across all user-generated data streams. Right now, platforms and apps thrive on the monopolies they have on user data.

For example, if I want an app that alters my music based on my heart rate monitor and the location I’m running, I’d need to somehow integrate data from an AppleWatch, Spotify, and Strava. There is almost no economic incentive that would be strong enough to get these three companies to collaborate and share this data to enable this app. But if all of our data was held in one central place, we (the end user) could decide who has access to what.

Blockchains are the perfect vehicle to build these data platforms on. And if 10x consumer experiences are being built there, users will come. This is a burgeoning area of development, and platforms like Farcaster and Gather are making strides to enable this future.

Autonomous Worlds & Crypto Gaming

Autonomous worlds is a relatively new term that spun out of the fledgling crypto gaming space. The tl;dr is that from the simple underlying principles of blockchains, we can create fundamentally new digital experiences. For example, what if in-game economies were allowed to develop and flourish without third-party interference? What if you could interact in a game with intelligent NPCs that evolve with the players?

The thought going into this space is impressive, and infrastructure like MUD is making it more accessible. From the Dark Forest team to indie builders like Small Brain Games and 0xhank, developers are continually exploring new mechanisms for creating novel on-chain interactions. And as autonomous worlds continue to evolve, keep an eye out for AI being brought into the fold. Check out Leela vs. The World for a sneak peek of what’s on the horizon in the next evolution of this space.

Infrastructure

The reality today is that trying to build a 10x better product or experience on the blockchain is like bringing your fists to a sword fight. Our web2 counterparts have some serious advantages thanks to astronomically cheaper storage and computation costs, better developer infrastructure, and years of data aggregation. But here’s the good news - we’re on a path to level the playing field.

L2’s like Starkware and Optimism are chipping away at transaction costs. As I’m writing this, I’m waiting for my randomness to be contributed to the Dankshard summoning ceremony. Account abstraction, key recovery, the list goes on! All of these are key pieces of infrastructure that need to be developed for blockchain-based startups to reach parity with web2.

Hundreds of pages could be written on all of the exciting developments in infrastructure. Rather than give a poor overview of everything, I’m going to talk about a nascent development that particularly excites me: On-chain AI.

On-chain AI

A glaring weakness of decentralized applications is that they can’t perform simple ML on-chain…How is the latest dApp supposed to compete with a web2 counterpart that can pore over massive amounts of data, make billions of decisions based off that data, and serve up personalized and delightful experiences? Until now, there were only two options:

1.) Move the ML off-chain and lose all of the security guarantees that fundamentally differentiate blockchain-based applications in the first place, or

2.) Wish you could run ML on-chain, sigh, and deliver a significantly less functional product…

Fortunately, the times they are a-changin’.

Through some crazy mathematical gymnastics, ZK proofs now allow us to run models fully “on-chain”. That is, ML models can be “proven” via centralized hardware, with that proof being sent to and verified on-chain. In other words, a zero-knowledge proof that the correct model was run on a specific input can be generated and verified alongside the model output, with cryptographic soundness guarantees.

This is an incredibly complex and technical problem to solve, but the team over at Modulus Labs is pulling the sword from the stone and passing it around to all of the developers out there. And yes, I’ll admit I’m biased. I’ve been working with them since day 0. But that has only bolstered my excitement for the future of on-chain dApps using AI.

Overall, I believe progress towards a crypto infrastructure that can serve as the backbone of a new digital economy is marching inexorably forward. I’m excited to see what milestones and new developments emerge in the next crypto epoch.

Conclusion

We’re still a few clicks away from hitting product-market fit in crypto. At a high-level, valuable products and services need to drive cash flows into the space - we cannot survive on the speculative upside forever. The “killer app” of crypto still eludes us, but I believe we are on the precipice of finding it. There appears to be a path forward to innovate in the financial system, and there are boundless opportunities on the consumer front as well. Infrastructure is working its way towards parity with web2, which will enable builders in the space to do more with fewer resources. The smartest builders I know are still cranking away, regardless of which direction the markets are moving. I, for one, am pushing my chips all-in on crypto in 2023.

Thanks to Daniel, Ryan, Jongwon, Aidan, Small Brain Games, & Leeor for the thoughtful feedback on this article, and for making me feel like a PhD student again.