Original title: First Principles - Compounders, L1s, IR, Buybacks
Original author: 0x kyle__, member of DeFiance Capital
Original translation: ChatGPT
Editors note: The author believes that the biggest problem in the crypto space is not talent or capital, but the lack of first principles thinking, which has led the industry to fall into a cycle of short-termism, extraction culture, and low integrity. The author analyzes the reasons why compounders are difficult to emerge, and proposes the need to promote long-term thinking from the top and focus on creating revenue-generating products. At the same time, he criticizes the inefficiency of general Layer 1 blockchains, and recommends that they focus on specific areas and build their own ecosystems to give tokens value. In addition, he emphasizes that liquidity token projects should establish investor relations roles to enhance transparency, rather than relying solely on repurchases and destruction, and advocates that funds be used to expand products and consolidate long-term competitive advantages to break the current nihilistic dilemma and achieve sustainable growth.
The following is the original content (for easier reading and understanding, the original content has been reorganized):
The biggest problem in this field is neither talent nor capital. Simply put, it’s a lack of first principles thinking. It’s a culture that must change. The 1% needs to start pushing the field forward.
If you’ve been following my Twitter feed lately, you’ve noticed that I’ve been going on a wild rant about some extremely low hanging fruit that appear to be high leverage and seem extremely easy to pull off, but that no one seems to “get” or execute well on. Here are some of the points I’ve made:
The real question is: why don’t more chains use their grant programs to incubate their own dapps and build dapps that are clearly aligned with the chain, rather than hoping that those dapps don’t abandon the chain in two years?
The reason why the industry has the current price trend is largely because everyone has this idea: You have to sell because one day it will go to zero. The reason is that no one has really built a good product that people want to invest in continuously. Crypto needs compounders.
Marketing in crypto is not aligned with the product in most cases. If you are not a consumer facing product - say you are a yield platform, why would you even market to retail users. The best marketing is often a price increase. And the best at doing this are liquidity funds.
I will discuss each of these topics in this article, namely:
Compounders, Culture, and Short-termism
Universal L1 is dead and must change
Liquidity Tokens and Investor Relations
Buyback and destruction is the least bad, not the best
I titled this article “First Principles” because all of these ideas came to me as a simple thought exercise about how common sense could be used to change today’s industry.
This isnt profound. Insanity is doing the same thing over and over again and expecting different results.
We’ve gone through three cycles of doing the same thing over and over again — creating essentially nothingness, zero value accumulation, maximum exploitation of tokens and applications because for some stupid reason we decide to open up the casino in this frenetic fashion every four years, attracting capital from all over the world to gamble simultaneously.
Guess what? After three cycles and a decade, people finally realized that the dealers, the scammers, the people who manipulated the machines, the people who sold you overpriced food and drinks in the casinos, were taking all your money. The only thing you had to show for your hard work for months was the history of how you lost everything on-chain. A field built on the premise of Ill come in, make my money, and leave will not lead to the establishment of any long-term compounders.
This place used to be better, it used to be a place for legitimate financial innovation and cool tech. We used to be excited about new and interesting applications, new technologies, things that changed the future of France (finance).
But due to extreme short-termism, a culture of maximum extraction, and people with low integrity, we’ve gotten stuck in this self-defeating cycle of perpetual financial nihilism that collectively self-triggers when everyone thinks it’s a good idea to keep throwing money at random scammers’ tokens because “I’ll sell before he scams me.” (Seriously, I’ve seen people say they knew “SBF Token” was a scam but would sell for a “quick profit” before getting ripped off.)
You could say I have no building experience - thats true. But its a small field that hasnt been around for long; working in it for four years while working with some of the best and brightest funds has given me a deep understanding of what works and what doesnt.
Again: insanity is doing the same thing over and over again and expecting different results. As a space, we experience the same thing year after year — feeling this nihilism that it’s all worthless after the inevitable collapse in prices. I felt this way when NFTs crashed (OMG this is all a scam), people feel this way now after the recent memecoin fiasco, and people felt this way during the ICO era.
Changing the status quo is simple: we just have to start doing things differently.
Compounders, Culture, and Short-termism
Compounders are simply assets that only go up over a multi-year timeframe - think Amazon, Coca-Cola, Google, etc. Compounders are companies that have the potential for sustainable and long-term growth.
Why don’t we see compounders in crypto?
The answer is more nuanced than that, but basically - extreme short-termism and misaligned incentives. Indeed, there are a lot of problems with the structure of incentives, which is well covered in Cobies private capture, phantom pricing article. I wont go into that in depth, because the point of this article is, what can we, as individuals, do right now?
For investors, the answer is obvious, as Cobie points out here: You can opt out (and you probably should)
It’s true that people are already opting out: we’ve seen the decline of “CEX tokens” this cycle as retail participants chose not to buy these tokens; while individuals may not have the power to change this systemic problem at a systemic level, the good news is that financial markets are fairly efficient — people want to make money, and when the existing mechanism doesn’t make money, they don’t invest, making the entire process unprofitable, forcing the mechanism to change.
However, this is only the first step in the process - to truly build compounders, companies need to start instilling long-term thinking in the space. It’s not just that “private market capture” is bad, but the entire chain of thinking that got us to this point - like a self-fulfilling prophecy, founders seem to collectively think “I’ll make my money and leave” and no one is really interested in playing the long game - which means the chart always looks like a McDonald’s M.
Things have to change at the top: A company is only as good as its leaders. Most projects fail not because of a lack of developers, but because the top management decides to leave. The industry must start looking at high-integrity, high-motivation, long-term thinking founders as role models, rather than idealized short-term pump and dump founders.
It’s not news that the average founder in this space is of low quality. After all, this is a space that calls those who bond pumpfun tokens “developers” — the bar is really low. As long as you have a vision that goes beyond the first two months of token launch, you’re already ahead of the curve.
I also believe the market will start to financially incentivize this long-termism, and we’re already starting to see this. Despite the recent sell-off, Hyperliquid is still up 4x from its initial offering price, something few projects in this cycle can boast. It’s often easier to make a “hold for the long term” argument when you know the founders are aligned with the long-term growth of the product.
The natural conclusion of this is that high integrity, high drive founders will start to take up the majority of the market because frankly, by the time everyone is tired of scams, they just want to work for someone who has a vision and isn’t going to exit scam — and there are just too few people who do.
In addition to having a good leader, compounders are built on the assumption that the product is good. This problem is easier to solve than finding a good founder, in my opinion. The reason why there are so many empty products in the crypto space is that the people who create these empty products also have a make money and leave mentality - they therefore choose not to take on new problems, but instead just fork the hot stuff and try to make money from it.
However, it is also true that the industry does choose to reward such ethereal ideas - such as the AI agent craze in Q4 2024. In this case, we will see the usual McDonalds M-shaped pattern after the dust settles - so companies must also start focusing on building products that make money.
No income path = no long term believers/holders = no buyers for the asset as there is no future to bet on.
This is not an impossible task — businesses in crypto do make money. Jito has $900 million in annual revenue, Uniswap $700 million, Hyperliquid $500 million, Aave $488 million — and in a bear market, they continue to make money (just not as much).
Going forward, I believe that short-lived, narrative-driven speculative bubbles will get smaller and smaller. We’re already seeing this — games and NFTs were priced in the hundreds of billions in 2021, but this cycle, memes and AI agents peaked in the billions. This is a macro-level euthanasia roller coaster.
I believe everyone is free to invest in what they want. But I also believe people want a return on their investment - when the game is so clearly foreshadowed as this is a hot potato, I have to get out before it goes to zero, the roller coaster will get faster and faster, and the market will get smaller and smaller as people choose to quit, or lose all their money.
Income solves this problem - it lets you as an investor know that people are willing to pay for the product, and therefore there is some prospect of long-term growth. When something doesnt have an income path, its virtually uninvestable on a long-term basis. On the other hand, an income path leads to a growth path, attracting buyers who are willing to bet on the assets continued growth.
In summary, building a compounder requires:
Instilling long-term thinking at the top
Focus on building products that make money
Universal L1 is dead and must change
If you sort the Coingecko front page by market cap, you’ll see that blockchain accounts for more than half of it; with the exception of stablecoins, Layer 1 accounts for a large portion of the value in our industry.
However, the chart for the second-largest digital asset after Bitcoin looks like this:
If you bought Bitcoin in July 2023, you would be up 163% at current prices.
If you bought Ethereum in July 2023, you would be up 0% at current prices.
And that’s not even the worst of it. The 2021 everything bubble has spawned a wave of “Ethereum killers” — new blockchains designed to outperform Ethereum in some technical way — be it speed, development language, block space, etc. But despite the hype and the massive amounts of money being poured into them, the results haven’t lived up to expectations.
Today, four years into 2021, we are still facing the consequences of that wave — there are 752 smart contract platforms that have launched tokens on Coingecko, and likely many more that haven’t.
Unsurprisingly, most of them look like this — which makes Ethereum’s chart look pretty good in comparison:
So — despite four years of effort, billions of dollars in funding, and 700+ different blockchains, only a handful of L1s have any decent activity — and even those haven’t reached the “breakthrough levels of user adoption” that everyone expected four years ago.
Why? Because most of these projects were built with the wrong philosophy. As Luca Netz points out in his article What is Consumer Crypto, many of today’s blockchains follow a generic approach, with each blockchain dreaming that they will “host the internet economy.”
But this requires a massive effort that ultimately leads to fragmentation rather than penetration, as a product that tries to do everything usually fails to do anything well. It’s an effort that takes too much money and time — and frankly, many blockchains struggle to even answer a simple question: “Why should we choose you over blockchain number 60?”
The L1 space is another example of everyone following the same playbook but expecting different results - they compete for the same limited developer resources, trying to outdo each other in grants, hackathons, developer housing, and now we seem to be building phones (?)
Lets assume that an L1 succeeds. In every cycle, some L1s break through. But can this success last? The winner of this cycle is Solana. But heres a point that many of you wont like: What if Solana becomes the next Ethereum?
Last cycle, there was a group of people who believed so strongly in Ethereum’s success that they put most of their net worth into Ethereum. Ethereum is still the chain with the highest TVL and now even has an ETF — yet, the price is stagnant. This cycle, the same type of people are saying the same thing — Solana is the chain of the future, Solana ETF, etc.
If history is any indication, the real question is – does victory today guarantee relevance tomorrow?
My point is simple: instead of building a general purpose blockchain, it makes more sense for L1 to be built around a core focus. A blockchain doesn’t need to be everything to everyone. It just needs to be great in one specific area. I believe the future is blockchain agnostic — it just needs to be great, and the technical details won’t matter that much.
Today, builders are already showing signs of this — founders building D-apps are not primarily concerned with chain speed, but rather chain distribution and end-user consumption — is your chain used? Does it have the necessary distribution to gain traction?
44% of web traffic runs on WordPress, but its parent company, Automattic, is valued at only $7.5 billion. 4% of internet traffic runs on Shopify, but it’s valued at $120 billion — 16 times more than Automattic! I believe L1 has a similar end state, where value will accrue to applications built on the blockchain.
To this end, I think L1 should take the breakthrough step of building the ecosystem themselves. If we use cities as an analogy for blockchain (thanks to Haseeb for the 2022 article), we can see that cities started out because specific advantages made them viable economic and social centers, and then over time specialized in a dominant industry or function:
Silicon Valley → Technology
New York → Finance
Las Vegas → Entertainment and Hotels
Hong Kong and Singapore → Financial centers centered on trade
Shenzhen → Chinas hardware manufacturing and technological innovation center
Paris → Fashion, Art and Luxury
Seoul → K-pop, entertainment and beauty industries
The same is true for L1 - demand is driven by the attractions and activities they offer; therefore, teams must start focusing more on being the best in a certain vertical - curating the kind of attraction that draws people into their ecosystem, rather than building a variety of different exhibitions and hoping to attract users.
Once you have that kind of traction that draws people into the ecosystem, you can build cities around that traction. Again, Hyperliquid is an example of a team thats doing this really well and iterating on first principles. They built a native perpetual DEX order book, spot DEX, staking, oracles, multi-signatures - all of that was built in-house and then expanded into HyperEVM, which is a smart contract platform for people to build on.
Here’s a simple breakdown of why it works:
Focus on “building traction” first: By building the perpetual trading product first, Hyperliquid attracted traders and liquidity before expanding.
Control the stack: Owning critical infrastructure (oracles, staking) reduces vulnerabilities and creates moats.
Ecosystem synergies: HyperEVM now serves as a permissionless playground for developers, leveraging Hyperliquid’s existing user base and liquidity.
This “attraction first, cities second” model mirrors successful web2 platforms (e.g. Amazon started with books and then expanded into everything else). Solve an exceptionally good problem and then let the ecosystem expand organically from that core of value.
So I think blockchains should start putting together their own products, building their own traction, owning the stack; as the captain, you are the visionary - this allows you to align your blockchain with your larger, long-term vision for L1; and ensure that the project doesn’t just give up as soon as chain activity starts to drop because everything is built in-house;
Most importantly, this process brings moneyness to your token - if the blockchain is a city, the token is the currency/commodity that people trade; it drives value to the token through usage - people need to buy your token to do interesting things on the chain. It gives your currency value and gives people a reason to hold it.
Oh, but it’s important to remember — just because you specialize, doesn’t mean the market has demand for it. Another hard reality to swallow is that L1s have to work in the right way for the right opportunities. Blockchains have to build products that 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 develop in this space. It’s simple - liquidity token projects need to start setting up an Investor Relations (IR) role and quarterly reporting to allow investors - both retail and professional - to clearly see what the company is doing. This role is not new or revolutionary - but it is severely lacking in this space.
Despite this, very little is being done in this space in terms of IR. I have been told by BD heads at multiple projects that if you have some sort of “regular calls to pitch your liquidity token to funds” you are doing 99% more in this space than any other project.
Business development is cool in attracting builders and ecosystem funds, but the IR role of telling the public what the token is doing is better — it really is that simple. If you are a token that wants to attract buyers, you need to market yourself — and the way you do that is not by renting the biggest booth at conferences or advertising at airports, but by marketing yourself to buyers with capital.
By giving quarterly growth updates, you begin to show investors that the product is legitimate and can accrue value — thus allowing investors to speculate on the long-term prospects that the product may perform well in the future.
As for how you should go about it - a good list to start with is:
Report discusses quarterly expenses/revenues, protocol upgrades, numbers, but no MNPI – posted on blog/website
Monthly meetings with liquidity fund managers to discuss your product/market yourself
Host more AMAs
Buyback and Destruction Are Not Bad, But They Are Not the Best Either
The last thing I want to discuss is buybacks and burns in this space. My point is: if there is no other use for the money, I think buybacks and burns are a good use. In my opinion, crypto has not yet reached a scale where companies can rest on their laurels, and there is still a lot that can be done in terms of growth.
The first and most important use of revenue should always be to expand products, upgrade technology, and enter new markets. This is consistent with driving long-term growth and building competitive advantage; a good example of this is Jupiters acquisition spree, where they have been buying names with cash to acquire products and key talent in the field.
While I know some people like buybacks vs burns and would call for dividends to be paid, my view is that most crypto operates similarly to tech stocks in that the investor base is of a similar type: high return seeking investors who want asymmetric returns.
To this end, it doesn’t make a lot of sense for the company to return value directly to token holders via dividends — they can do that, but it would greatly benefit the product if they used their cash reserves to build a larger moat that serves them well in 5-10 years.
Crypto is now at the stage where it is starting to enter the mainstream — so there is no point in starting to slow momentum now; instead, cash should be invested to ensure the next winner leads over a longer time frame because despite all the price declines, the institutional setup for crypto has never been better — adoption of stablecoins, blockchain technology, tokenization, etc.
So the buyback and burn, while much better than taking the money and walking away, is still not the most efficient use of capital, given how much work remains to be done.
Conclusion
This bear market has begun to drive home the need to build revenue-generating products as a path to profitability, as well as the inevitable need for a legitimate investor relations role to showcase token performance.
There is still a lot of work to be done in this area. I remain optimistic about the future of crypto.
