The Lack of Bold Bets in Crypto: Challenges and Opportunities in Solana's Ecosystem

In the rapidly evolving world of cryptocurrency and blockchain technology, innovation is key to driving adoption and creating real-world value. However, the crypto space faces a unique set of challenges when it comes to fostering bold ideas and groundbreaking projects. In this week's episode of the Lightspeed podcast, hosts Jack and Mert dive deep into these issues, exploring the state of SocialFi, the lack of bold bets in crypto, and what it means for the industry to truly succeed.

The State of SocialFi: A Promise Unfulfilled?

SocialFi, the intersection of social media and decentralized finance, has been a hot topic in the crypto space for the past year. However, recent events have cast doubt on its viability as a sustainable use case. The discussion kicks off with an analysis of the recent shutdown of Friend.tech, a once-popular SocialFi platform that gained significant traction in 2023.

Mert, one of the podcast hosts, offers a nuanced perspective on the potential of SocialFi:

"I think the fundamental idea behind social fi in general is very interesting because a few reasons. One of them is that social networks are roughly the strongest networks on the internet that I'm aware of. So for example, it's super easy or super difficult to overtake something like Twitter or TikTok or Instagram, because these social networks keep getting better and more useful, the more people join them, like that's a network effect."

This observation highlights the unique opportunity that blockchain technology presents in disrupting established social media platforms. By leveraging crypto's inherent virality and community-driven nature, SocialFi projects have the potential to bootstrap new social networks at an unprecedented pace.

However, the failure of Friend.tech serves as a cautionary tale. Mert acknowledges that while the execution may have been flawed, the concept itself still holds promise:

"I don't think Friend.tech executed correctly. So for example, the bonding curve was very predatory. And then the gating mechanism is basically like an OnlyFans thing where it's a creator chat, but that's that's just one instantiation of that concept."

This highlights a crucial point in the development of SocialFi projects: the need for sustainable and user-friendly economic models that don't prioritize short-term gains over long-term value creation.

The Challenge of Bold Bets in Crypto

One of the most pressing issues facing the crypto industry is the apparent lack of truly innovative and bold ideas. Mert argues that this problem stems from the highly social nature of the crypto space:

"One of the biggest problems I see in the space is the lack of bold bets. And it's partly, in my view, because crypto, it's so socially driven. Imagine if somebody released Friend.tech v2 tomorrow and they just named something different, it would get destroyed on Twitter, right?"

This social pressure creates a challenging environment for founders and developers who want to iterate on existing ideas or tackle problems from new angles. The fear of immediate backlash from the crypto community can stifle innovation and lead to a cycle of copycat projects and incremental improvements rather than revolutionary concepts.

The Double-Edged Sword of Crypto's Social Nature

While the social aspect of crypto has been instrumental in driving adoption and creating passionate communities, it also presents unique challenges. The hive mind mentality that often develops within crypto circles can lead to a dangerous consensus-driven approach to innovation:

"As a result, what happens is these people kind of develop like a hive mind. And what that means is there's a lot of social consensus, meaning that, you know, let's say you, okay, so imagine this. Imagine somebody released Friend.tech v3 tomorrow and they just named something different. It would get destroyed on Twitter, right?"

This phenomenon extends beyond retail investors to include venture capitalists and other key players in the ecosystem. The tendency to follow the crowd rather than backing truly novel ideas can create a self-reinforcing cycle that stifles innovation:

"In fact, I would say VCs are maybe even more social. Like a VC won't even invest unless, like most VCs won't invest unless you have a lead investor that already, let's say has a, takes burden on doing the diligence and, you know, saying, I'm going to put my money here and put a lot of it."

Solana's Role in Fostering Innovation

Despite these challenges, Solana's ecosystem presents unique opportunities for bold ideas to flourish. The blockchain's high speed and low transaction costs make it an ideal platform for experimenting with new concepts without incurring prohibitive expenses:

"I felt like this is one of the benefits of having a fast and cheap chain. Well, I guess, particularly a cheap blockchain because it's not expensive to try bold things or as expensive. You can like try something really crazy and you're not going to bankrupt your family for generations if the idea doesn't work out."

This advantage positions Solana as a fertile ground for innovative projects, particularly in areas like DePIN (Decentralized Physical Infrastructure Networks) and next-generation SocialFi applications.

The Promise of DePIN on Solana

Decentralized Physical Infrastructure Networks (DePIN) represent one of the most exciting frontiers in blockchain technology. These projects aim to leverage crypto incentives to build real-world infrastructure and services. Mert expresses particular enthusiasm for this sector:

"I think it's one of them for sure. And I've tuned about this multiple times for years now about how I think it's the most exciting sector in crypto because it's in, like, we named high map or in helium as examples, like, 15 minutes ago as well about bold ideas because it's-- one of the-- because it allows hard tech founders. So, things are like hard-- hardware capex to bootstrap networks that they couldn't have done otherwise."

Solana's technical capabilities make it an ideal platform for DePIN projects. The blockchain's ability to handle high transaction volumes at low costs enables these projects to operate at scale without prohibitive fees eating into their economics.

Helium: A Case Study in DePIN Success

The discussion turns to Helium, a prominent DePIN project that recently migrated to the Solana blockchain. Helium's innovative approach to building a decentralized wireless network serves as a prime example of how crypto incentives can be used to solve real-world problems:

"Helium has a real business-- I mean, especially now with Helium Mobile, that's a real business that solves a problem. It's the cheapest cell phone plan you can get in the US if you combine the fact that you can get paid with token incentives. I use it for my own cell phone. And on multiple months, I've been basically paid to have a cell phone plan, which is crazy because I sell the Helium tokens."

This example illustrates the potential for DePIN projects to create tangible value for users while leveraging blockchain technology to build decentralized infrastructure at scale.

The Future of Proof of Stake Systems

The conversation also delves into the mechanics of Proof of Stake (PoS) systems, with a particular focus on validator economics and the challenges facing smaller validators in the Solana ecosystem. Mert offers insights into how a properly functioning PoS system should operate:

"I would say a lot of people have a relatively mistaken worldview of how a proof of stake system is supposed to work. Some of the comments lead me to believe that they actually view it more like socialism, where you should just equate stake out to smaller people so that they get bigger and then take from the bigger to get to the smaller. And that's just not how it works."

Instead, Mert argues for a more market-driven approach where validators compete to provide value to token holders:

"Well, I think a lot of the reason why people stakes with me in Helios is because not only do we run a developer shop for Solana and other products on top of Solana, but because I've been advocating for Solana in trying to help clear up all sorts of misconceptions for years now without rest. And so I think based on what people have told me, they appreciate that."

This perspective highlights the importance of validators contributing to the ecosystem beyond simply running nodes, emphasizing the need for a holistic approach to network participation.

Addressing MEV and Sandwich Attacks

The podcast also touches on the controversial topic of Maximal Extractable Value (MEV) and sandwich attacks, which have become a significant concern in the DeFi space. The discussion reveals differing opinions on how to address these issues, with Mert taking a strong stance against incentivizing harmful practices:

"Certainly, the MEV being in protocol and, like, not all forms of MEV are bad. Like, you can do arbitrage between a centralized exchange, a decentralized exchange, like, maybe price is better as a result or something like that. Atomic arbitrage, like, these things for price discovery, generally aren't, you know, they're not, like, good or bad, they just kind of are, they don't really affect users too much."

However, Mert expresses concern about stake pools that delegate to validators known for sandwiching users:

"With a stake pool, it's entirely different, right? Because if a stake pool is delegating to people, sandwiching people, they're incentivizing sandwiching, okay? I mean, you'll see it's holistic this all the time. And we're also acting as a curious, and I think Gito will add it too. The way to fix this, one of the ways to fix this, not the only way, is if you have a stake pool, you're not delegated to people who are actively sandwiching retail, right?"

This discussion highlights the ongoing challenges in aligning validator incentives with the best interests of the network and its users.

The Importance of Incentive Design in Crypto

Throughout the podcast, a recurring theme emerges: the critical importance of proper incentive design in crypto systems. Whether discussing SocialFi, DePIN projects, or validator economics, the hosts emphasize that the success of these initiatives hinges on creating sustainable economic models that align the interests of all participants.

Mert succinctly captures this idea:

"Incentives make the system. And so, the incentives are actually to reward the sandwiches in this case. That actually makes the problem worse. So, you know, if you're not going to make it better, like, don't make it worse. I think that'd be a good starting point."

This insight underscores the need for careful consideration of economic models and incentive structures when designing crypto projects, particularly those aiming to solve real-world problems or disrupt existing industries.

The Role of Regulation and Government Interaction

An interesting tangent in the discussion explores the regulatory landscape for crypto projects, particularly those operating in sensitive areas like telecommunications. The hosts express curiosity about how projects like Helium navigate the complex regulatory environment in the United States:

"I'm also just-- I'm really curious, speaking of Helium, how they're able to operate the way they do. It's a crypto project that runs nationwide cell coverage plan in the US. Crypto companies have a horrible time operating in the United States. But I don't know. I don't think we're ever going to get to see kind of what the conversations they had with the government were like. But I'm very fascinated with that what that did look like."

This observation highlights the ongoing challenges faced by crypto projects as they seek to operate within existing regulatory frameworks while pushing the boundaries of innovation.

Conclusion: The Path Forward for Crypto Innovation

As the podcast draws to a close, the hosts reflect on the current state of innovation in the crypto space and the potential paths forward. While acknowledging the challenges, they remain optimistic about the future, particularly in areas like DePIN and next-generation SocialFi applications.

Mert emphasizes the importance of perseverance and a long-term vision:

"I think my position on this is I have a vision that I think things can get better than the way they are. And so it's worth taking that shot. If it fails, then it just fails. But at least I tried."

This sentiment encapsulates the spirit of innovation that continues to drive the crypto industry forward, despite the obstacles and setbacks along the way. As the Solana ecosystem continues to evolve and mature, it stands poised to play a pivotal role in fostering the next wave of bold ideas and transformative projects in the blockchain space.

The conversation serves as a call to action for developers, founders, and investors in the Solana ecosystem to push beyond the boundaries of conventional thinking and embrace truly innovative ideas. By leveraging Solana's technical advantages and fostering a culture of experimentation, the community can work towards realizing the full potential of blockchain technology to create meaningful, real-world impact.

Facts + Figures

• Friend.tech, a popular SocialFi platform, shut down roughly a year after going viral in August 2022.
• The founders of Friend.tech earned tens of millions in fees before renouncing control of the smart contract.
• Solana's Breakpoint conference has sold more tickets than all past events combined, with over 20,000 attendees expected.
• Helium, a prominent DePIN project, recently migrated to the Solana blockchain.
• Helium Mobile offers one of the cheapest cell phone plans in the US, with users potentially earning more in token incentives than they pay for the service.
• The podcast host claims to have been "paid" to have a cell phone plan through Helium's token incentives.
• Solana's low transaction costs make it an ideal platform for experimenting with new and potentially risky ideas.
• The crypto industry faces challenges in fostering bold ideas due to social pressure and fear of community backlash.
• Venture capitalists in the crypto space are described as being particularly susceptible to social influence in their investment decisions.
• DePIN (Decentralized Physical Infrastructure Networks) is highlighted as one of the most exciting and promising sectors in crypto.
• The podcast host mentions working on a new tool to help configure validator sets that exclude those known for sandwich attacks.
• Marinade, a liquid staking protocol on Solana, has implemented a stake auction marketplace that has drawn criticism for potentially incentivizing harmful MEV practices.
• The regulatory landscape for crypto projects operating in sensitive areas like telecommunications remains complex and largely opaque.

Questions Answered

What is SocialFi and why is it important in the crypto space?

SocialFi refers to the intersection of social media and decentralized finance in the crypto world. It's important because it represents a unique opportunity to disrupt established social media platforms using blockchain technology. SocialFi projects have the potential to bootstrap new social networks at an unprecedented pace by leveraging crypto's inherent virality and community-driven nature. However, as seen with the failure of Friend.tech, these projects need to develop sustainable and user-friendly economic models that prioritize long-term value creation over short-term gains.

Why is there a lack of bold bets in the crypto industry?

The lack of bold bets in the crypto industry stems from its highly social nature and the fear of community backlash. Crypto projects are often subject to intense scrutiny on social media platforms like Twitter, where innovative ideas that resemble past failures can be quickly dismissed or attacked. This social pressure creates a challenging environment for founders and developers who want to iterate on existing ideas or tackle problems from new angles. The fear of immediate backlash from the crypto community can stifle innovation and lead to a cycle of copycat projects and incremental improvements rather than revolutionary concepts.

How does Solana's architecture support innovation in crypto?

Solana's architecture supports innovation in crypto through its high speed and low transaction costs. This makes it an ideal platform for experimenting with new concepts without incurring prohibitive expenses. Developers can try out bold ideas on Solana without risking significant financial losses if the project doesn't work out. This advantage positions Solana as a fertile ground for innovative projects, particularly in areas like DePIN (Decentralized Physical Infrastructure Networks) and next-generation SocialFi applications. The blockchain's ability to handle high transaction volumes at low costs also enables projects to operate at scale without prohibitive fees eating into their economics.

What are DePIN projects and why are they considered promising?

DePIN stands for Decentralized Physical Infrastructure Networks. These projects aim to leverage crypto incentives to build real-world infrastructure and services. They are considered promising because they allow hard tech founders to bootstrap networks that would be difficult or impossible to build otherwise. DePIN projects have the potential to solve real-world problems by creating decentralized alternatives to traditional infrastructure. Helium, for example, has built a decentralized wireless network that offers competitive cell phone plans. The success of projects like Helium demonstrates the potential for DePIN initiatives to create tangible value for users while leveraging blockchain technology to build decentralized infrastructure at scale.

How should a Proof of Stake (PoS) system work according to the podcast?

According to the podcast, a properly functioning Proof of Stake (PoS) system should operate on market principles rather than a top-down, socialistic approach. Validators should compete to provide value to token holders beyond simply running nodes. This could involve contributing to the ecosystem through development, advocacy, or other forms of community engagement. The system should not artificially prop up smaller validators at the expense of larger ones, but rather create an environment where validators can differentiate themselves and attract stake based on their overall contribution to the network. This approach encourages a more holistic and competitive ecosystem that benefits both validators and token holders.

What is MEV and how does it impact the Solana ecosystem?

MEV stands for Maximal Extractable Value, which refers to the profit a miner or validator can make by reordering, inserting, or censoring transactions in a block. In the context of Solana, MEV has become a concern, particularly in the form of sandwich attacks. These attacks involve a validator front-running and back-running a user's trade to profit from price movements. The podcast discusses how some stake pools may be inadvertently incentivizing harmful MEV practices by delegating to validators known for sandwiching users. This highlights the ongoing challenge of aligning validator incentives with the best interests of the network and its users, and the need for careful consideration of economic models in the design of DeFi protocols.

How are crypto projects like Helium navigating regulatory challenges?

The podcast touches on the intriguing case of Helium, a crypto project that operates a nationwide cell coverage plan in the United States. The hosts express curiosity about how Helium manages to operate in such a regulated industry, given the general difficulties crypto companies face in the US. While the exact details of Helium's regulatory strategy are not public, the discussion highlights the complex landscape that innovative crypto projects must navigate when interfacing with traditional regulated industries. This serves as an example of the ongoing challenges faced by crypto projects as they seek to operate within existing regulatory frameworks while pushing the boundaries of innovation.

What is the importance of incentive design in crypto systems?

Incentive design is crucial in crypto systems because it shapes the behavior of all participants in the network. The podcast emphasizes that the success of crypto initiatives hinges on creating sustainable economic models that align the interests of all stakeholders. Proper incentive design can encourage beneficial behaviors and discourage harmful ones, such as certain forms of MEV. The hosts argue that when designing crypto projects, particularly those aiming to solve real-world problems or disrupt existing industries, careful consideration must be given to the economic models and incentive structures to ensure long-term sustainability and alignment with the project's goals.

What is the outlook for innovation in the Solana ecosystem?

The outlook for innovation in the Solana ecosystem remains positive, despite the challenges discussed in the podcast. Solana's technical advantages, particularly its low transaction costs and high throughput, position it as an ideal platform for experimenting with bold ideas. The hosts express optimism about the potential for continued innovation, especially in areas like DePIN and next-generation SocialFi applications. They emphasize the importance of perseverance and a long-term vision in driving meaningful innovation. The Solana community is encouraged to push beyond conventional thinking and embrace truly innovative ideas, leveraging the blockchain's capabilities to create projects with real-world impact.