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"In order to be irreplaceable one must always be different." |
- Coco Chanel |
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Is Crypto Destined to be Minimally Differentiated? |
Hotelling's Law is mathematician Harald Hotelling's observation that, in business, there's a natural tendency for competitors to converge on a middle ground. |
It's why cars all look alike these days, why so many fast food places offer near-identical chicken sandwiches and why gas stations are so often right next to each other. |
Byrne Hobart illustrates Hotelling's Law with a neat thought experiment: Imagine two hot dog vendors, each positioned 25 feet away from opposite ends of a 100-foot stretch of beach — their placement is socially optimal because no beachgoer is ever more than a 25-foot walk to get a hot dog. |
If, however, one vendor moves his cart a few feet towards the middle, he'll remain the closest option for beachgoers on his side of the beach, but also become the closer option for some of those in the middle. |
Seeing this, the other hot dog vendor inevitably responds by moving even closer to the middle and the tit-for-tat continues until the two vendors are right next to each other — like gas stations. |
This is sub-optimal — most beachgoers now have a longer walk to get a hot dog — but it's the inescapable logic of Hotelling's Law. |
The vendors will probably end up offering the same hot dogs, too — acting rationally, the vendors will copy each other's successes until their offerings are nearly identical. |
This "principle of minimum differentiation" is so common that Hotelling declared it a law. |
Crypto — where everything is so easily copied — appears to be no exception. |
Imitation is the sincerest form of flattery |
Vendors offering blockchains have not yet met in the middle of the beach, but they might be headed in that direction. |
It may not seem that way, given the constant cacophony of new blockchains being launched, but let's take the example of the two big ones. |
When Ethereum implemented its fee-burn mechanism in 2021, it took a large step in Bitcoin's direction: Burning fees made ETH deflationary, which seemed to outdo Bitcoin on scarcity. |
The "ultrasound money" meme was the Ethereum community's attempt to steal some of Bitcoin's store-of-value customers. |
That made Ethereum a lot more like Bitcoin, and now Bitcoin is becoming a lot more like Ethereum: NFTs are clogging its blockspace, the ecosystem is being scaled by layer-2s and some think bitcoin could become the pristine collateral of DeFi. |
All of which is to say, Ethereum and Bitcoin are increasingly fighting for the same customers with a product offering that is increasingly less differentiated. |
This trend may be accelerating. |
The modular blockchain Celestia has been positioned as a way to helpfully scale Ethereum by offering "data availability." |
But there's very little money to be made in that — certainly not enough to justify TIA's $18 billion FDV. |
Celestia token holders seem instead to expect TIA to achieve a monetary premium by being adopted as money on rollups that use Celestia. |
This puts Celestia in direct competition with Ethereum: Celestia's "modular money" will compete with Ethereum's "ultrasound money," which in turn competes with Bitcoin's "digital gold" money. |
We can take this a step further as well. |
NFTs have become surprisingly popular on Bitcoin, where NFT metadata is stored directly on-chain (unlike most Ethereum NFTs, which are pointers to data held offchain). |
This means that Bitcoin is increasingly being used to store data, so you might argue that it's becoming something of a data availability layer — just like Celestia! |
There are exceptions, of course: Solana, for example, continues to have success going its own way. |
But with blockchains increasingly fighting to capture the same value, Solana may come to look like an exception that proves the rule. |
That, at least, is my interpretation of Jon Charbonneau's infographic that demonstrates the logic that's driving blockchains to "vertically integrate" into general-purpose chains: |
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To me, that looks like a crypto version of hot dog vendors gravitating to the middle of a beach — everything in crypto will gravitate towards becoming a general-purpose chain. |
If so, it seems logical that each chain will copy whatever is proving most successful elsewhere, making the chains increasingly undifferentiated. |
That is not the end state that markets seem to be pricing in! |
Newer chains like Sui, Near, Aptos and Celestia all trade at valuations, suggesting their token holders believe both that 1) they are differentiated and 2) differentiation matters. |
This may be a culture thing — crypto tribes are divided into camps by blockchain, so each camp has to believe that they are different and therefore irreplaceable. |
Those loyalties are what determine current valuations. |
In the long run, though, the value of most blockchains will presumably be a function of its usage. If crypto ever goes mainstream, it's hard to imagine users will care what blockchain they're using — especially if they all end up looking alike. |
Because if Hotelling's Law holds, the chains will all look a lot alike. |
― Byron Gilliam |
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This issue is brought to you by: |
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Top Stories | Fed holds interest rates, Powell says sticky inflation would delay future cuts — Read No bull: Bitcoin has been in a kangaroo market for nearly a whole year — Read SEC denies petition to change 'gag order' rule after 5 years — Read Tether made nearly $1B in monthly profit during Q4 — Read stUSDT 2023 year in review [Sponsored] — Read
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We're Watching |
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On today's episode of Empire Haseeb and Avichal return to Empire to discuss crypto in 2024. They debate whether we're entering a bull market and analyze key indicators like retail engagement, institutional flows, and blockchain development activity. |
Watch or listen to Empire on Youtube, Spotify or Apple. |
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We're Hosting |
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Regulatory Horizons: Unraveling the Future of Crypto Compliance |
Wondering how to navigate the ever-changing and oftentimes ambiguous crypto regulatory environment? Join us to hear from the experts on best practices when approaching compliance and how to stay ahead of the complicated legal requirements. We will also discuss how recent and ongoing court cases, enforcement actions and legislation can change the landscape in the US going forward. |
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Daily Insights |
 | Vance Spencer @pythianism |  |
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Vitalik throwing heaters. ETH swag turning back on. "While it's common knowledge that Ethereum can be used as a DA layer for rollups, few realise that Ethereum can also be used as a shared sequencer! My personal thesis is that, in a few years, the native Ethereum sequencer will… twitter.com/i/web/status/1… | | | Jan 31, 2024 | | |  | | | 195 Likes 25 Retweets 18 Replies |
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 | Nate Geraci @NateGeraci | |
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iShares Bitcoin Trust & Fidelity Wise Origin Bitcoin Fund now #1 & #2 in AUM out of *all* ETFs launched since beginning of 2023… That's over 600 ETFs. IBIT & FBTC did this in less than 3 weeks. | | | Jan 31, 2024 | | | | | | 276 Likes 42 Retweets 14 Replies |
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 | Jacquelyn Melinek @jacqmelinek | |
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The 5 biggest digital asset funding rounds for January 2024: 1.@HashKeyGroup $100M round at ~$1.2B valuation
2.@FreeChat_App $80M round at $800M valuation
3.@flowdesk $50M round, valuation not disclosed
4.@sygnumofficial $40M round at $900M valuation
5. @wavebl $37M round at… twitter.com/i/web/status/1… | | | Jan 31, 2024 | | | | | | 9 Likes 0 Retweets 2 Replies |
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