Legacy is Eating Crypto

Published 14.2.2024

Charles Hoskinson sent an important message about the state of the crypto industry and existential threats. He talked about Bitcoin ETFs, stablecoins, how much power regulated institutions have over blockchains, etc. Is crypto eating legacy (old financial system)? Or is it the other way around? Is legacy eating crypto? Does decentralization or speculation win? The topics that Charles outlined resonate with our views on the crypto industry. Let's think about the topic.

Who eats whom?

Cryptocurrencies, especially Bitcoin, were supposed to replace fiat currencies. But that doesn't happen.

Stablecoins occupy only 10% of the market capitalization of all cryptocurrencies. Still, roughly 70% of all transactions on blockchains involve stablecoins. USD-backed stablecoins USDT and USDC dominate.

The vast majority of people hold cryptocurrencies through about 10 regulated institutions. Ordinary people on centralized exchanges. Institutions use several custodians.

Roughly 500M people hold cryptocurrencies. Only 2% of cryptocurrency holders are estimated to use a hardware wallet (10M). Roughly only 5% of people hold assets in their wallets (25M).

While large centralized exchanges report an increase in the number of users by tens of millions every year, there are only about 45M Bitcoin addresses that hold BTC. Most people with their wallets hold BTC in multiple addresses. I estimate that there are only something between 4-10M self-custody holders. This corresponds to the number of HW wallets sold.

The result of an approved Bitcoin ETF is that several regulated institutions can hold a significant number of BTC coins in a short period. They reserved the right to decide which chain will be the ‘right’ one during the fork.

Charles gave an example. Institutions will hold BTC A and BTC B after the fork. They will decide which coins to keep and which to dump on the market. If they choose to hold BTC B, BTC A will start losing market value rapidly. How will miners react to this? Economic incentives will make them mine BTC B because they will get more rewards. It's that simple.

Exchanges also have a strong decision-making power regarding which BTC fork they will consider to be the right one.

In this way, institutions take power over infrastructure.

People don't seem interested in keeping control. People would not have to hold crypto assets on exchanges, thus weakening their position. However, there is no defense against institutional purchases of coins. On the contrary, people even applaud it.

Let's add that the institution holds a significant amount of stock in all the major mining companies. The two dominant Bitcoin pools produce more than 50% of the blocks. They prefer to work only with big miners from whom they require KYC.

BTC mining is a largely regulated business.

Most DeFi users prefer USD-backed stablecoins USDT and USDC over algorithmic ones. As a result, Tether and Circle companies are a risk to the DeFi sector. If these companies collapse and stablecoins lose their peg, many DeFi services could collapse. If regulators require KYC/AML for all users of these stablecoins, this may affect DeFi services.

In the case of an Ethereum fork, Tether and Circle companies can decide which chain is the 'right' one. After the fork, there will be stablecoins on both chain A and chain B, but one of them will keep the peg while the other will lose it. Neither the team nor the community has control over which chain to prefer. They will be forced to adapt for economic reasons.

Who eats whom?

Most transactions involve stablecoins. The vast majority of coins are held by roughly 10 regulated institutions. BTC mining is a regulated business. In the case of a Bitcoin fork, the institutions offering the ETFs will decide what is the one true Bitcoin. Issuers of USD-backed stablecoins will decide something similar in the case of an Ethereum fork.

We can state that both dominant projects were eaten by legacy.

Bitcoin is not a threat to banks, but an opportunity to earn from fees. Bitcoin ETF is a way to gain control over the infrastructure and the team. Some institutions have decided to subsidize developers, essentially buying their loyalty. Ethereum is not a threat to banking services as adoption is very low.

You can argue that it is too dark a scenario and that in the end, people will decide the right way. It's not so. People behave like sheep and are hungry for profit. They don't care about anything else. Honor and glory to those who prefer decentralization over their profit.

Crypto Doesn't Win Because People Don't Want To Win

Charles named the reasons for the current state of affairs. Numbers going up is the only thing people are interested in crypto. Everything else is secondary.

People see crypto as an investment. Most influencers are TA magicians promising high profits in the future. Many of them talk about the projects from which they get paid the most or have invested in them themselves. Crypto media and analytics companies mostly behave like influencers. Nobody cares about principles and Satoshi's vision. Money drives the media image of the crypto scene.

TPS, TVL, charts, airdrops, and farming are more important than decentralization and technological progress.

In anticipation of profit, people overlook problems. Blockchain projects have many problems that prevent adoption. These are decreasing decentralization, high and unpredictable fees, failing transactions, blockchain restarts, admin keys, numerous hacks in DeFi, drained wallets, reluctance to use self-custody wallets, scams of all kinds, etc.

The traditional financial world is eating crypto and most people are applauding it. Charles is right that market capitalization is the greatest proof of success for most people.

Why should people doubt the decentralization of Bitcoin when the highest market cap is clear proof of the best technology in existence? Why should people doubt the large number of hacks in the Ethereum ecosystem, Lido, and failed transactions when it has the highest TVL? Why doubt the decentralization and reboots of Solana when it has the highest TPS?

Why are people holding BTC on exchanges and not even learning from the fall of FTX? One of the reasons is high L1 fees and slow settlement when the Bitcoin network is clogged. This happens in a bull market (also due to the mania around Ordinals and BRC-20). People are not willing to pay tens of USD for a transaction whose settlement can take days. If the goal is to sell BTC in time, it is simply more profitable to leave the coins on the exchange.

This behavior harms not only the use of the Lightning Network but also DeFi in the case of SC platforms.

The crypto industry has not come up with a solution to this phenomenon. Many people expected that the crashes of exchanges would teach people to use self-custody, but this is not happening.

We must be able to name the problems and address them. Low scalability is one of these problems. The Bitcoin community expects people to get used to high fees and willingly pay them. It's time to admit it's a false narrative.

We would find many similar false narratives. If we've been waiting in vain for higher adoption for over a decade, something is probably wrong. Something needs to change.

People have chosen the path of profit and are not interested in decentralization, principles, and legacy efforts to control crypto. This behavior is logical, but it should not stop efforts to stick to principles and build decentralized technologies.

USD-backed or algorithmic stablecoins?

The preferences of stablecoins speak about how people understand decentralization. People prefer USD-backed stablecoins even though they require a regulated third party to hold USD in a bank account. USDC and USDT can only be minted if there is an underlying asset of the same value. This does not necessarily have to be only fiat currencies in a 1:1 ratio, but also other financial assets.

People prefer a solution that requires a third party, i.e. a regulated custodian, even though it is possible to create an algorithmic stablecoin that does without one.

An algorithmic stablecoin uses a volatile cryptocurrency as a backing asset and mints (and burns) a stablecoin against it at a certain safe ratio. This solution works completely decentralized and requires only a reliable Oracle service. There is no centralized entity in the process that could somehow cheat or go bankrupt.

The crypto industry is essentially about trying to replace middlemen with source code. I remember how people used to say 'Do not trust, verify'. What has changed that people want to trust Tether and Circle instead of a smart contract that can be audited and battle-tested?

In our view, Cardano needs USD-backed stablecoins for the next bull market. However, in the long term, Cardano must not remain dependent on them. People should prefer algorithmic stablecoins that will be verified over time. This may take several years. Therefore, we need a more centralized form in the initial phase.

DJED works well and survived the bear market. During a certain period, new tokens could not be minted, but this was in line with the expected behavior of the protocol.

Let's not expect people to start paying with volatile coins that they see as an investment. In practice, we see that people require much more stability to use crypto assets as a medium of exchange. Payment with a crypto asset that made you 10x in a bull market can only be seen as a profitable realization of profit. This is something other than a medium of exchange that you are willing to spend at any time.

The use of stablecoins clearly shows the direction we need to go. Human behavior is unambiguous. Let's respect the demand. Let's use this opportunity to increase adoption.

The Biggest Problem For Adoption

The biggest obstacle to the adoption of blockchain technology is people's mindset and expectations.

Unfortunately, I have no idea how to change it.

In a bull market, everyone will be cheering and enthusiastically taking profits. Speculation on Ethereum ETF approval will trigger demand for ETH. Everyone will be shopping like crazy. As soon as the market value of Bitcoin becomes so large that the growth slows down significantly, institutions will start speculating on other assets. Institutions will not hold something that does not grow when they can pump something similar that will grow.

It is naive to think that institutions will pump one asset and not notice the other. Greed is endless. The joy of growing wealth is understandable.

It is necessary to stop seeing crypto as just speculation and start seeing the benefits of decentralization. Most users do not necessarily hold volatile coins. They just need to use stablecoins and DeFi, which should provide them with a stable economic environment with the benefits of decentralization.

What is important is education and the effort to find places where decentralization makes sense. Such places may increase thanks to the effort to weaken the position of dominant entities, whether they are IT giants, institutions, or even states.

Coming to crypto for speculation is fair and logical, but people have to stay for decentralization and principles. Speculators must become users and advocates.

The killer apps of crypto are stablecoins and DeFi.

Algorithmic stablecoins should eventually displace USD-backed ones. DeFi must mature and be as similar as possible to banking services from the users' point of view. The only difference must be decentralization. Regarding fees, reliability, security, and mainly financial stability, it must be the same.

Blockchain can give the world more than just HODL coins. This industry can give the world the trust layer of the internet. Alternative banking services are only one of the possible uses.


Cardano should stay the course and not succumb to false narratives. It makes no sense to catch up with other projects in something because Cardano is built on the right principles. We have to stick to the principles even though we will see Cardano ETF one day. No crypto asset, including Cardano, stands a chance of becoming immune to speculators. It's alright. Let's accept it and keep building. Let's look for ways to keep the infrastructure decentralized under all circumstances.


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