3 Waves of Crypto

When trying to learn how any modern system works, it’s often incredibly confusing to jump right into where things stand today. However, if we go back and look at how things began, why they began, and how things evolved from there… most things just seem to fall into a logical order.

When it comes to crypto, we have a handful of defining events and themes, that can be conveniently fit into 3 Waves. This framework was first popularized by Charles Hoskinson and Cardano in 2017. It’s used broadly now across the industry, and is one of the simplest ways I’ve heard to quickly categorize and understand the evolution of crypto. Below is my personal summary and explanation of the 3 Waves, but I’d encourage you to watch Charles’ original video explaining this, and the origins of Cardano as well.

The First Wave

Bitcoin: The Internet’s Own Money

Bitcoin was originally created in 2009, by the pseudonymous and now legendary creator (or creators) known as Satoshi Nakamoto. This was in response to the 2008 Global Financial Crisis, and in the very first block that was mined on the Bitcoin blockchain, Satoshi included a reference to the headline “Chancellor on brink of second bailout for banks." This was when banks around the world began the process of aggressively debasing the value of their currencies (at the expense of their citizens) to bail out the institutions that had almost destroyed the world economy. Satoshi was sending a clear message in response: the banks are stealing from you, your governments are stealing from you, and they are the same people that control the money that you’re beholden to. Here is a way out, a system that can be run outside of their control. Make no mistake, this creation was one of the most important innovations in human history. The first true separation of money and state.

Bitcoin was as much a moral statement as an engineering project.

Bitcoin was effectively a proof of concept of what a rules based, decentralized monetary system and store of value would look like. This fit the three roles of money perfectly by design: store of value, medium of exchange, and unit of account. A kind of “digital gold” with a finite supply (i.e. not inflationary), that was powered by the people who were using it, was unable to be taken down or controlled by any one person or entity, and even stand up to government censorship. Anyone could use it, store it, transport it, and make money supporting the network. As long as 51% of the mining power running the network was acting honestly, the network was honest. This “honesty” component had always been the most difficult with anything on the internet, but Satoshi’s greatest innovation was aligning economic incentives to honest activity with “mining”. This innovation is now called Nakamoto Consensus. This meant no one had to really trust each other, but simply trust that the miners running the network would predominantly do what was in their own best interests.

This worked phenomenally well. It gave people who were increasingly skeptical of the current financial system a way out. It gave people in developing nations with highly unstable currencies a way to preserve their wealth. It let people send remittances between countries for pennies, with transactions completing in just minutes. It gave people who were oppressed, refugees, and others without the ability to transport physical stores of value like gold the ability to cross borders with all their money secured with simply a mnemonic phrase, that could be written on a piece of paper or even just memorized. It also showed that a decentralized network like this could actually be built. Bitcoin was a harbinger of things to come, it was prometheus giving fire to humanity, and there was no going back.

However… by itself, it was really just sending money around. Moreover, just like any money, it required your belief in the system for it to be valuable, a pretty tough sell to most folks early on to buy into this new “weird internet money”. The objective value of what crypto could bring to the world wasn’t more widely discovered until Wave 2.

The Second Wave

Ethereum: The World Computer

Ethereum was conceived by a brilliant young programmer named Vitalik Buterin in 2013, and officially went live in 2015. It built on the idea of the decentralized network and monetary system proven by Bitcoin, but had the idea to greatly expand the functionality. Ethereum added more robust support for Smart Contracts (self-executing agreements that don’t need an intermediary), and provided a platform for developers to build on and deploy Decentralized Applications (Dapps). A popular metaphor used today that was popularized by the Winklevoss twins, is that if Bitcoin is digital gold, then Ethereum is digital oil. It’s fuel that powers the decentralized web. Ethereum, like Bitcoin before it, was again one of the most brilliant inventions in the history of humanity, and one that would have far reaching implications we are still only beginning to understand today.

The idea was to create a decentralized world computer that anyone could use.

This ushered in a massive new era for cryptocurrency, and was the driving force behind the massive crypto cycle and bubble of 2017. Ethereum enabled teams to raise funds globally (ICOs), build the foundations of Decentralized Finance (DeFi), launch Non-Fungible Tokens (NFTs), and more. Each of these use cases is in itself a colossal application of blockchain technology. Think of each of these use cases as a sector in the crypto world that is potentially as massive and transformative as something like “e-commerce” was on the internet. These are more than buzzwords, they are applications of technology with globally transformative applications, that will impact each and every one of us in the coming years. However, despite these innovative leaps, shortly after Ethereum started to gain real adoption with developers and users, several massive gaps began to emerge.

The first was scalability. Ethereum was so popular that the traffic on the network caused massive spikes in how expensive it was to interact with the network during peak times (i.e. high “gas fees”), and with a throughput of only 13 transactions per second, it was far too slow to support the hundreds of thousands of users on the platform.

The second was around interoperability. Sure, Ethereum could interact with all the other projects that were built on top of it, but what about everything else? Bitcoin already had a strong ecosystem that couldn’t easily interact with Ethereum, and additional independent blockchain networks were springing up constantly that had the same issue of being siloed.

The third was governance. While cryptocurrencies are decentralized in their operation, upgrades have to come from somewhere. In Bitcoin & Ethereum, the developers working to improve these systems would have to coordinate away from the blockchain itself (i.e. “off-chain”) to agree on what improvements to make, and then miners would all have to elect to implement those changes. If two groups disagreed, and one group implemented the changes, and the other didn’t, you would end up with two different (often competing) versions of the blockchain running in parallel (often called a “hard fork”). This is what happened with Bitcoin vs. Bitcoin Cash, Bitcoin Gold, Bitcoin Diamond, etc, and Ethereum vs Ethereum Classic. Disagreements caused communities to fracture. In addition to this, there was no easy way for members of each community to agree or vote on… just about anything. What changes should we make? How should we improve? How should we fund new projects in the ecosystem? What problems should we fix? How do we actually make this system sustainable? etc.

These glaring issues, mixed with overwhelming demand from developers and users for the underlying solutions, led to the genesis of a wave of solutions to bring things to the mainstream, Wave 3.

The Third Wave

Cardano, Polkadot, Solana, and more: Platforms to Run the World

While development on most of these platforms began around 2017, they didn’t really begin to have commercially ready products and true public functionality until around 2020-2021. They are all still in development and far from their final forms. However, they have already exploded in popularity and public usage since launching.

Each of these three platforms, and an ever-expanding ecosystem of other competing projects, brings something unique to the cryptocurrency space. Much of this comes from either different architectural choices, different specialized use cases, or different commercial strategies. At least for Cardano, Polkadot, and Solana, while they are “competitors” in a sense, they are each pursuing significantly different use cases and strategies, and there is a world where all three (and others) can be wildly successful in their own ways. Crypto communities have a strong bent towards tribalistic behavior, where “my favorite is going to beat your favorite”. It goes without saying, but this is a really silly way to invest, or think about any developing technology for that matter. This would be the equivalent of looking at early internet companies and saying “Google is going to beat all the other internet companies”, rather than seeing that there is a world big enough for Google, Amazon, Microsoft, Apple, and many more to be highly successful in their own niches.

I will give a more detailed overview of these projects and others in a separate section, but as a short primer now, let’s mention a few things. First, each system is designed to be highly scalable. They each learned from Ethereum’s shortcomings, and had from their genesis the idea of ultimately scaling to billions of users and hundreds of thousands (or millions) of transactions per second. Second, they all realize that they are not the only players in town. They are each aiming to be highly interoperable with other systems, so there will ultimately be one giant interoperable world, rather than the current world of largely-siloed projects. Third, most Wave 3 projects have some kind of “on-chain” governance. This enables the community to participate and vote in everything from protocol upgrades, community initiatives, Venture Capital-style funds to fund new developments, and much more. This makes these projects far more sustainable, more democratic, and greatly reduces the likelihood of community fragmenting hard fork-style events.

It should also be noted that Ethereum itself has not taken all the criticism lying down, and is in the process of a major upgrade, scheduled to be implemented in phases beginning in 2022. This “upgrade” is actually an entirely new system that the current Ethereum will actually plug into, so it is quite significant and will dominate the headlines more and more as it approaches. While the Ethereum 2.0 upgrade will certainly make Ethereum more competitive with these Wave 3 platforms from a performance perspective, it is unclear whether it will be enough to reclaim any kind of true “technical advantage”, and to my knowledge there is no current plan for on-chain governance in Eth2.0 as of October 2021. That may make Ethereum slower than other chains to implement new upgrades once Eth2.0 is in place. That said, the best tech is not always what wins, it is the tech that most people actually use that wins. Ethereum has also proven to have a highly resilient community (though their lead is slowly being chipped away by competing chains). So, it is premature to claim any kind of “Ethereum killer” narrative with these new projects purely based on technical specifications, even if long term that possibility remains. I’ll discuss this more in a separate section as well, as this is a very important topic to consider when allocating funds in your portfolio.