Bulls and Bears

Nearly every bull market comes to an end with a flurry of hype for a trending project. The previous cycle was dominated by Cryptokitties, and this cycle is all about Bored Ape. So, when the Bored Ape dryness-fire broke out, it seemed that the bullish market could be coming to an end. But why does this market feature even exist; what connections can be found between the two seemingly unrelated events?

In order to find the truth, we need to look back at the entire blockchain industry's history, which contains the code that explains the industry's ups and downs, as well as the internal mechanism of market involution.

Investors interested in blockchain's long-term value may find some inspiration within it. In this article, we try to sort out the history of the blockchain industry based on the intergenerational innovation of the intrinsic mechanism of the blockchain, and share with you our view that the innovation of the next generation of blockchain will come from stochastic assets and PVM.

First Generation: The Contribution of Satoshi Nakamoto

Satoshi Nakamoto's innovation was a game changer in the cryptocurrency industry. He proposed an approach to decentralizing on-chain assets. Data, unlike ordinary objects or social relationships, is easily copied, as we all know. All encryption technologies can only solve the "loss of value" (theft) during information transmission, but not the "double spending" during information usage. Nakamoto accomplished this by abandoning the natural intuition of coin offerings, which are issued by designers, and transferring them to a decentralized network, which employs a consensus mechanism to control the environment in which assets are spent. This step of reverse thinking effectively resolves the 30-year-old issue of double spending in the crypto community. The miners on the Bitcoin network were actually engaged in a very specific non-cooperative game: the distribution of tokens based on HASH calculating and the consensus game based on the longest chain mechanism, which established the start of the cryptocurrency era. The white paper revealed the prototype of Bitcoin as a brand new asset, but once it went live, it became nothing more than a toy for programmers.

Properties of General Equilibrium

In order to become an asset, Bitcoin must also solve the problem of allowing its participants to come and go as they please, unaudited and publicly known of related information. This is because, unlike goods, the price of assets is determined in general equilibrium. The larger the pool of people from which to trade assets, the better. Ordinary goods, on the other hand, are priced using partial equilibria as long as the buyers and sellers agree. This characteristic naturally determines Bitcoin's openness and anti-censorship properties; otherwise, it cannot become a new class of assets by relying solely on a specific team to capture value or a small group of people to buy or sell. This general equilibrium property propelled bitcoin to global prominence at its inception. To determine their own behavior, the various traders in the Bitcoin ecosystem, including miners, investors, and speculators, must all consider each individual's specific information. Because Bitcoin is becoming more popular, the breadth and complexity of the equilibrium are expanding, which has a significant impact on its price volatility.

The Period Effect of Halving Production

The Bitcoin algorithm includes a quadrennial halving period, which means that miners' BTC output is halved every four years for the same level of computing power. This is a drastic shift that would be impossible to sustain in a traditional economy. It must adjust to this change as a general equilibrium of the Bitcoin distribution. It is reasonable to expect that the Bitcoin ecosystem, and possibly the entire blockchain ecosystem, will need to go through this process of equilibrium destruction and rebalancing in the halving period of four years. This process will not be continuous and stable, resulting in a vicious cycle of price fluctuations. This adjustment process has now become the industry's consensus expectation: the quadrennial cycle of bulls and bears in the crypto market, and the price of bitcoin has become the broad index of the blockchain sector.

The Tragedy of Bifurcation

Bitcoin's design is revolutionary and excellent, but no new technology can be perfect. Its throughput and scalability, for example, have been criticized. People are always looking for ways to improve things; thus, many people try to improve the Bitcoin protocol, such as larger blocks, faster speed, and so on. However, once the equilibrium is established, changing it is difficult. People who master computing try to achieve their goals by bifurcating, which causes BCH bifurcation to be vigorous. BCH's price soared as a result of large mining pools, reaching 40% of BTC's market capitalization at one point. However, the power of equilibrium eventually worked, and the BCH could not mobilize all of the participants in the BTC world, and the price eventually fell, and the market value fell to about 1% of that of BTC, effectively declaring the challenge a failure. Just to improve the original blockchain system in terms of technology and performance, while ignoring the difficulty of challenging the equilibrium, this is a social science law that is difficult to overturn.

Second Generation: The Rise of Ethereum

Obsessing over performance improvement is an obsession that causes industry confusion, but it has a large market. Ethereum is the catalyst that breaks this obsession and propels the industry forward. It is not an improvement to Bitcoin; rather, it is an extension of Bitcoin. Prior to Ethereum, there were some projects, such as BTS, that attempted to add some functionality to the blockchain, but their efforts were mostly non-systematic, or even just embedded in BTC. The success of Ethereum is based on the transformation of Bitcoin's scripting language into a Turing-complete virtual machine, which greatly expands the application range of blockchain while remaining true to the Nakamoto architecture.
In more abstract terms, Bitcoin is the equivalent of capitalizing on something as simple as a digital financial account with the intention of converting it into assets. Ethereum takes it a step further by restoring the programmable characteristics of digital information, transforming basic assets such as crypto into functional assets defined by variables and functions, of which ERC20 is a relatively successful example. ERC20 can be thought of as a function representation based on the address set and financial account balance information. Of course, smart contracts can realize more complex functional structures and nesting, opening the door to the possibility of an economic closed-loop on the chain.

Sub-Cycle 1: The Wave of ICOs

Even if Ethereum fully captures the context of industry development, it may be unable to determine the value of its applications quickly because everyone requires a process of exploring new things. ERC20 is finally gaining market share based on everything its white paper establishes. Since 2017, an increase in ICOs has fueled an industry bull market. This appears to be a very simple application, but it was discovered by Ethereum in its early days.
The ICO wave was a feast for the imagination, with all kinds of fantastic ideas floating around. From space to quantum physics, taxis, music, running and eating whatever you want. Some people want to work on the public chain or on various new application chains. However, these projects' tokens were first issued on Ethereum, making it easier to raise funds. Others are running applications directly on Ethereum and using smart contracts for ICOs. This wave demonstrates the power of smart contracts, which enable anyone to quickly create a token and raise funds all over the world. There is no doubt that the pursuit of innovation and wealth has resulted in a natural bull market, which, in tandem with the Bitcoin cycle, has provided everyone with a certain price increase, as well as some unrealistic illusions.

Bullish Illusion, Bearish Hope

The 2018 outbreak of on-chain games finally pushed the market to its highest point, reflecting the illusion of a bull market. Many people saw the potential of Ethereum beyond financing in a small game called Cryptokitties, and then FOMO3D and other similar projects repeatedly drove gas fees to new highs. People began to believe that Ethereum was far more imaginative than it had been in the early days, and project parties attempting to redo a so-called application chain began to try to transform their development on Ethereum as well. Many new users who were unfamiliar with Ethereum joined in. The bull market created the illusion of Dapps, the illusion that Ethereum has infinite potential and that anyone can participate and make their dreams come true. However, the majority of these applications are simply traditional internet applications embedded with blockchain tokens, but the rising price of coins eliminates the need for people to consider whether this combination is reasonable. For them, success is just around the corner, while the blockchain illusion fuels the market bubble.
When all bubbles are punctured by the truth, a bear market occurs. However, people are unwilling to accept it, believing that it is simply a deviation in the direction of development. So, in the bull market, all kinds of unwilling investors, media, and traditional business organizations began to invent some macro concepts in order to quickly establish a relationship with the traditional industry. STO was one such hope that was launched from the top down during the 2018 bear market. It has long led the discussion and has been very relevant to many traditional industries, and it appears that the institutions that have been abandoned by technology and blockchain now have a chance to enter the market and get a piece of the pie. The bear market appears to be full of expectations, according to the repeated discussion of investment institutions and traditional securities. The STO, whose sole purpose was to provide hope in a bear market, is no longer in existence.

Sub-Cycle 2: DeFi

The real brewing of the next round of market in the bearish market is not the link between on-chain and off-chain, nor the concept of "blockchain plus," but the closed loop of pure on-chain apps: DeFi, decentralized finance. Many people were skeptical of the decentralized finance project, which was launched during a bear market. UNISWAP, COMPOUND, and MAKERDAO were all part of the previous bullish market, but were overwhelmed by the abundance of "amazing" projects. Some of these "fantastic projects" have failed in bear markets, while others have been liquidated. DeFi gradually gained a voice in the bear market due to its sheer decentralization and Crypto native style. Mining based on on-chain contracts, from MakerDAO to Compound, set the tone for the bull market. The block-by-block algorithm, on the other hand, began with NEST Oracle, an oracle machine that grew out of a loan program. NEST Oracle is powered by on-chain mining, also known as liquidity mining, and has long ranked first in Dapprader trading volume in bearish markets. The explosion of DeFi is primarily due to the pursuit of an on-chain closed-loop, which will always be the mainstream direction of blockchain development: finding the possibility of fully decentralized applications, building the on-chain world, and mining the continuous value of data on the blockchain. Whatever the narrative, it is always this unwavering direction that sets the tone for a bull market. In turn, the projects inspired by Cryptokitties were never completed. Even the strongest gambling projects in the bear market are fading, and finding more potential gaming groups will have to be like a financial closed-loop chain. During the next bull market, they changed their name to something more closely related to their on-chain assets: GameFi.

One More Time: NFTs and Web3 Fantasy

You could argue that NFTs are not the same as the previous round of Cryptokitties. I don't completely deny it, but the parallels are striking, and I believe they are the common denominator at the end of a bull market. They are simple, easy to hype, and easy to exit the circle, causing a large number of people who are unfamiliar with the blockchain principle to participate in the mania. The truly profound thing, however, is not so much these superficial things as it is what value is captured on the chain by NFTS. If the core value is not on the blockchain, the blockchain becomes a simple signature recorder, with little room for development. If that type of visual attraction and pursuit on the chain cannot directly correspond to the data, it has a natural logic hole. But, as with the previous bull market, no one is concerned with such details. When the Boring Ape achieves a market value of nearly $10 billion in a single transaction, people can find value in his existence from all directions: trendy culture, a new model of community, a new paradigm of art, and so on. "I don't understand it, but I'm stunned," became a catchphrase. This type of bull market madness is super fantasy, and it can always irritate a lot of people's nerves before bursting.

Since entering the bear market, we've discovered numerous traditional Internet enterprises and blockchain combination points: Web3. No one has articulated a typical example of this, and no one has demonstrated how and why information interaction can survive on a blockchain with increasing marginal costs. Finally, understanding web3 is reduced to linking wallets. This is similar to top-down STO advocacy. Conventional forces can intervene (a group of Internet companies that can't find growth points get excited, just as a group of securities companies that can't find new business get excited), the policies above can be challenged, the customers below can understand, the institutions continue to advocate, some people who don't understand the reason join in the speculation, but it eventually fails. What a similarity!
Conclusion: The more fanatical, the simpler, the noisier, the further down the chain, and the truth is always in the chain! Anything that does not capture value on the chain is a bogus blockchain application designed to either circumvent rules and regulations or deceive users.

Third Generation: Innovation Starts at the Edge

Every genuine innovation was not the concept or direction advocated at the end of the previous bull market. This is because substantive innovation emerges from the ground up. Rather than the top-down conceptual formulation of institutions or information disseminators, these innovations have been developed by some entrepreneurial teams from the industry's edge to find a new paradigm and point to a real example. As previously stated, the mainstream development direction of blockchain is to explore the boundaries of the decentralized world, discover new opportunities for decentralized applications, and continuously enrich the endogenous value of on-chain data without the need for off-chain mapping or guarantee. Obviously, this mainstream direction contradicts WEB3, which is attempting to quickly surround more people who do not understand blockchain. When a bull market turns into a bear market, everyone looks at the world through the eyes of the previous one. Those who do not understand blockchain have departed during the several-year bear market, leaving behind developers who are committed to the concept of decentralization. Some of these creative teams emerge from the margins to create new paradigms that lead to the next generation explosion. This new generation must be an extension of Ethereum's functionality rather than an improvement of its performance, which appears difficult, as true generational revolutions are always difficult.

However, some projects, such as MakerDAO, Synthetic, and LUNA before them, are beginning to reach the next generation. In terms of the interaction between traders and contracts, they are far removed from most mainstream projects. For example, they do not need to match because they are all users directly interacting with contracts, and the only seller is the contracts, so no LP or capital pool is required. This model is distinct from AMM and is referred to as the universal market maker model OMM. While Luna's run and Uniswap's mining both shocked us, the failure of the former does not imply that the interaction model has failed, and the success of the latter does not imply that it will lead the next generation. We must learn from our failures and recognize the illusion of success; innovation is difficult. After learning from the failed FCOIN project, NEST Oracle's distribution mechanism for on-chain mining was greatly improved, and all subsequent liquidity mining has simply followed the same path.

Stochastic Asset, OMM (Omnipotent Market Maker), and PVM (Probabilistic Virtual Machine)

The creation of stochastic assets occurs when random variables or stochastic processes are capitalized rather than deterministic variables (data). This procedure can only be fully fulfilled in the context of blockchain technology. So, if you think about it, we can convert not only data balances into assets, but also addresses and balances as functions of the underlying vectors into assets. This is the great innovation of Bitcoin and Ethereum, but the main line's development does not stop there. We can take it a step further and include a piece of random data or even a stochastic process. How disruptive is that?

After random information and stochastic processes are tokenized, there is a brand new kind of asset: stochastic asset. Stochastic assets cannot use existing tokens as units of account. It must have an on-chain token that can be issued and burned at any time to ensure that the stochastic asset can be settled when it determines its value of the sample path and the mechanism to ensure this is the OMM mechanism (Omnipotent Market Maker). Everyone no longer needs to search for each other. There is only one universal counterparty that guarantees that all the stochastic assets can be settled. The system can converge asset prices under given constraints. We'll call this the systematic first constraint, or the issuance constraint of the stochastic assets, C(x)>=E(x). The token used for stochastic assets denomination has an interesting name: Universal Coin. Clearly, its risk-reward structure is entirely on-chain and is a brand new asset, unlike ETH and USDT.

After owning a stochastic asset, its natural information properties are not lost, so we can still program stochastic assets. In addition to what is done in the traditional smart contract virtual machine, a more important class of processing is distribution transformation, which is to adjust the distribution of stochastic assets. They tend to be expressed as some common function. In practice, this kind of function is relatively limited. We do not need to do too complicated a discussion, just need to analogy this kind of function to virtual machine instructions, and have a simple PVM model, distribution transformation of the expectation function is similar to EVM virtual machine GAS cost. This whole process can be illustrated with a simple example, especially with a common option: Under any price information flow conforming to GBM distribution, we can use a universal coin as the unit of account to express the "price coin" of price information, and then call a common function like Max[x1,x2] to transform it into an option. In this way, the option corresponds to a stochastic asset after a function call, whose cost is the option premium. It does not need to consider matchmaking and matching, and the risk hedging problem can be solved in one step. This kind of programming is close to the editor of some mathematical formula. Any risk hedging or asset synthesis, prop synthesis, and economic relationship you want only need to be expressed into mathematical equations, and the corresponding contract can be generated with one click, whether it is a transaction or transfer easily.

Range of Applications

Stochastic assets have a wide range of applications in real life; almost all financial derivatives are stochastic assets. Common financial services, such as lending and lending, or even trading, can also be understood in terms of stochastic assets. This structure can almost unify all DEFI, eliminating the need to develop them one at a time. Similarly, item composition relationships in different games have nearly the same intrinsic value (the added value of a game can be called a premium) as long as they have the same mathematical structure, so that different games can fully interact with each other without breaking their economies. It is possible to quickly design new things, such as new revenue streams based on random distribution, such as exponential assets, square assets, square assets, or game items, as well as economic relationships corresponding to these revenue streams. In summary, stochastic assets or PVM enable a broader range of applications involving uncertainty and composition, without the need for asset pools, LP, complex underlying development, or the operation of newly issued underlying tokens. This will significantly accelerate industry development, lower development costs, and achieve a closed economic loop quickly.

Differentiation for Developers

Developers can play a critical role in a decentralized ecosystem. If the developers of two projects essentially coincide (primarily functional similarity, not development language difference), the larger community will siphon the smaller community, illustrating the harsh reality that there is only one general equilibrium. Of course, many projects will look for differences in open methods and tools to increase developer engagement, but as long as the Turing complete virtual machine, everyone's function and goal are essentially the same, differentiation is difficult to form. We must seek out new features for developers outside of Ethereum and ensure that we distinguish ourselves from the Ethereum development community. Similarly to the distinction between the Ethereum and Bitcoin communities, both are part of the blockchain system and follow the Satoshi Nakamoto architecture. The Ethereum community is primarily concerned with contract development, whereas the Bitcoin community is concerned with underlying development. Between the two, Ethereum is capable of forming a cohesive developer community. If the Ethereum community is founded on the ground floor, it will almost certainly be absorbed by the Bitcoin community.
Developers in the new paradigm place a greater emphasis on random transformations. Because random transformations could not be implemented directly with ETH tokens, we were forced to develop a Universal coin, resulting in significant differentiation. The greater the number of developers, the more stable the system will be. Such auto augmentation properties will generate aggregation effects and thresholds automatically, allowing a new path to be taken under the current ETH regime.

Future Prospects

Finally, we can mention NEST Protocol, an innovative generational practitioner of stochastic assets. After creating a fully decentralized oracle, NEST Protocol ushers in a new generation of stochastic assets and PVM. As we all know, if you use a centralized virtual machine, token issuance will be completely controlled by a centralized organization, harkening back to the era of Internet tokens and going against industry trends. Decentralization will stall if the industry becomes entirely collateral. Only a completely decentralized oracle has a chance of producing a generational innovation: stochastic assets. This will become clearer as serious investment institutions become involved and development, particularly community operations, matures.

Each bull market is endogenous (innovation driven by the nature of the industry) rather than exogenous in terms of market development (conceptual speculation). We believe that stochastic assets will breed the genes and plant the seeds of the next bull market because their evolution and generation are very natural and logical. It is a matter of market convergence whether or not you use the concepts described in this paper. The essence of these concepts, however, does not change with a name change, just as Ethereum referred to itself as the world's computer before the public gave it a new name: the public chain, which led to two spectacular bull markets. We are convinced that the expansion of on-chain functions will always be the dominant direction of blockchain development, and we anticipate an explosion of stochastic assets in the next generation.