What I Learned From Building a "Failed" L1
Crypto is a crazy space to work in. I remember chatting with a recruiter a few months ago, and while BTC and crypto was nuking she said, "We must be crazy to work in this space."
I think this was back in November when market was in peak fear (and still is), and I couldn't help but burst out laughing. Like you know what? I think you're right lol.
I spent 4 years working at an L1, and given the pace of innovation in this space (only second to AI that I've seen), 4 years is a long time to be at one company.
I've learned many things while working at Kava, and I'm grateful for the experience. Today I'll share some of those things after competing in the L1 space in 2022, 2023, and 2024.
Lesson#1: It's extremely difficult to bootstrap an ecosystem from scratch
When building and L1 or L2, you're basically building network effects. It's extremely difficult to do this in crypto if you're not the first mover, or have a major edge.
In order for a blockchain ecosystem to "work" it needs many things, especially if we're talking a DeFi related blockchain.
First you need liquidity. As they say, liquidity is king. You need DEEP liquidity sloshing around the ecosystem to attract users. Deep liquidity provides the best spreads, executions, and opportunities for capital to play in. With deep liquidity, comes the builders, the users, the traders, and activity on your chain.
But in order to attract deep liquidity, you need deep and strong security. But how do you do this? You need many people/entities to run validators, which is kind of like a special set of users, depending on how high of a technical bar it takes to run one.
Then you need massive adoption of the token by retail investors to where the token has a significant marketcap. This is the only way to build a deeply secure decentralized chain for finance, otherwise, you can just have a centralized chain running on some private servers.
The reason is because, if the chain itself isn't massive in marketcap, and secured by billions of dollars of "stake" for Proof of Stake chains, which most smart contract networks are, why would whales come and bring massive pools of capital on your chain.
A problem we (and other) chains consistently run into is that whales and retail users are hesitant to taking bridging risk with significant amounts of capital, that in itself is a barrier. Add on top of the fact that if a chain of let's say $100M marketcap is only secured by 7 validators which happen to be the founder's friends, and $30m of not very liquid "stake," it doesn't take much to understand why whales won't be bridging $100m of capital over to the chain.
So in essence you're trying to bootstrap liquidity, capital, users, security, strong builders, attention, and adoption, all while trying to build the action integrations and technical developments that a successful chain needs. Extremely difficult.
Lesson #2: The competition is steep
This is pretty self explanatory so will keep this relatively short. When we were building the ecosystem, we tried our best to win and attract the best builders. At the same time we were competing with the big boys, Ethereum, Solana, Base, Arbitrum, BSC, Sui, plus like dozens more - you name it. All incredibly well capitalized, with incredibly bright and capable talent, and significant brand names. It is of my opinion that today, without some sort of significant technical edge that enables builders to fundamentally build something different on your chain, trying to run the "general purpose L1 playbook" is pretty much a non-starter today.
Lesson #3: The incentives in the wild west of crypto
The last thing I learned is something that's not directly related to chain or ecosystem building, but rather of the incentives of crypto overall in the background of an unclear regulatory climate.
Because token generation is sort of like "going IPO," but instead of a company being 10 years in, with significant revenue, users, and regulatory guidelines to follow, a token generation event (TGE) is like that, but instead it's a series A company, with little or no revenue, and when the hype is there, it's valued at the maximum most optimistic valuation.
The reason why crypto gets a bad rap so often, aside from the outright scams and rugpulls, is that when a founder launches a token, and is able to get liquidity for it, it's basically like having the ability to print your own money. The token becomes tradable on exchanges, and traders/retail investors buy into it, and the founding team has essentially traded a token it made out of thing air, for real cash.
With the ability to do this, the incentives are too great to focus on selling "the token." The token itself becomes the product. I've learned that in crypto there are really 2 products: the "technical" product itself, which is often the one that's marketed, with varying degrees of traction, and secondly and often more importantly for the vast majority of projects, and users too, frankly, is the token itself. The token price. The token is the product.
When founders have the incentive to just print tokens out of thin air, get them listed on exchanges, only ship marketing to retail investors to get them to buy the token, and voila, profit... this becomes too great an incentive to do anything else.
Hence, why the vast majority of crypto projects are just that. Founders who just ship marketing, over and over and over again, and a blaring noise, with little to no actual traction. The reason they do that is because the TOKEN IS THE PRODUCT, and they are looking to SELL THE TOKEN. The technical product is just a cover for the marketing hype in order to sell the token.
I was extremely disheartened when I found this out. Especially because of the initial values of self-sovereignty, economic freedom, and I admit, as well, gains, that drew me into this space.
However, I think the cat is out of the bag, as most alts are at bear-market, frigid-winter, all-time-lows. I think the market has caught on. It was a sight while it lasted.
With all that said, although over 90% of the projects in crypto are experiments at best, if not outright trash...
The small percentage of projects that are building for the right reasons, getting real adoption and traction, and building for real use cases, I am still incredibly bullish on.
The 1%-2% of real projects out there, like Bitcoin, Ethereum, and others, will legitimately reshape the fabric of our society I believe.
And although prices are in the bear market ranges now, this presents a gift. As I believe the market hasn't properly separated the signal from the noise when it comes to altcoins.
Not all crypto projects are created equal. The small percentage of projects that are building for the right reasons, and working to get adoption and traction, will potentially reshape the fabric of society and what capital and finance is and how it moves.
I remain optimistic on the future.
Cheers,
Tommy
