Seeking Alpha in the Cryptomarket: an EOS investment thesis (P1)

Looking at the top 20 coins of the cryptocurrency market it should be obvious that many, perhaps most, of these coins will have rotated out by the end of 2018. A fair number are completely redundant, either as forks or as clones, the latter of which I define as blockchains with minimal technological differences/capabilities ("minimal" meaning not enough to matter in the grand scheme of the market). The list below (current as of 1/20/18) is not the top talent of a crypto market worth 5 or 10 trillion.

1. Bitcoin - Technologically outdated. Lack of hackability and network effect ensure value. Possibility of pulling a Hail Mary with lightning network to deal with its scalability issues.
2. Ethereum - Technologically impressive smart contract platform. Good leadership. Large but scattered ecosystem. Hacks and contentious hard forks. Only a small number of dapps with serous daily active users. Lack of scalability (cryptokitties killed the network for a solid week).
3. Ripple – A permissioned blockchain focused on getting banks to use it. Unclear how that could generate enough demand for even the current price.
4. Bitcoin cash – Bitcoin clone but can handle more transactions at the cost of more centralization.
5. Cardano – Ethereum clone but without the brand, network effect, and currently years behind in development without a working consensus mechanism or virtual machine.
6. Litecoin - Bitcoin clone without the bitcoin brand.
7. NEM – Dash competitor. Hodgepodge of features.
8. NEO – Ethereum clone. Stuck in China.
9. Stellar – Ripple clone.
10. EOS – To be discussed.
11. IOTA - Technologically impressive as a DAG tangle. Unclear whether it can work in the wild. Some problems with codebase and team. A solution awaiting a problem (IoT).
12. Dash – NEM competitor. Hodgepodge of features.
13. Monero – Technologically impressive in terms of its privacy. Scales worse than bitcoin.
14. Tron – A copy/paste whitepaper with a seven-year development plan and little code.
15. Bitcoin Gold – Another bitcoin clone.
16. ICON – Interoperability chain to connect all these redundancies together.
17. Ethereum Classic – Ethereum clone with no development.
18. QTUM – Ethereum clone in Asia but not in China.
19. Lisk – A clone of Ark (further down the list).
20. Raiblocks – IOTA clone.

Notice anything? The majority are redundant. There are few serious competitors to the king (bitcoin) or the queen (ethereum) of the market, since in order to replace the top you need to be an order of magnitude better. Occam’s razor and the lindy effect nearly guarantee that at the end of 2018 ethereum and bitcoin will be the #1 and #2 coins, although in an undetermined order. Since the market as a whole is still less than 10% the total market for the commodity of gold alone, I believe both investments will offer significant returns (possibly even another 10x) in 2018 alone. However, these are the beta returns of the cryptomarkets. As the total market cap grows, the kinds of returns we’ve seen will necessarily decrease, especially for the larger cap coins.

If you want to do as well (or more likely a bit worse) than the market cap as a whole, invest solely in bitcoin and ethereum. But what if you want to “seek alpha” in the crypto markets? One way is to gamble on smaller cap coins becoming the hit of the week. That is trading, not investing, and maybe closer to a roulette wheel than anything else. Ideally, you want all your investments to also function as long-term holds. That way, if the price drops, you are comfortable holding through even if the market moves against your plan. As the dot com boomed showed, only a small number of high quality projects survived. Therefore, the best possible alpha investment strategy does not involve trading and coin-hopping, but rather consists of answering this question: what will be the #3 coin?

“Ethereum 2.0”

In 2017 ethereum rose to become the queen of cryptocurrencies. She established herself as a store of value alongside bitcoin, given ether’s primary use as the currency and platform for ICOs (if BTC is a bank, then ETH is an investment bank). She can do everything BTC can in terms of trustless storage and transfer but better and faster. While BTC is hard capped at 21 million, ETH has a more complex inflation/deflation method, but it is unlikely there will ever be much more than 100 million ETH. Ethereum has the best development of any large cap coin and is constantly evolving.

There’s no reason to think that the hype and technological promise around ethereum’s potential will go away. While there are other hyped technologies (DAGs in particular) they don’t offer the complete revolution of business structure, investment, finances, and applications that something like ethereum does, since they lack smart contracts and flexible programmability. Ethereum really does offer the potential for an entirely new internet based around a smart blockchain. However, ethereum is simply not ready for mainstream adoption. At the same time, most of its competitors are not either. Something like Cardano should be compared to Ethereum after a few years of development, and therefore looks actually technologically worse than what is planned for ethereum’s evolution.

So despite its success, the narrative of 2018 will be all about whether something is the "new ethereum." Ethereum has three big problems that basically guarantee this narrative:

1. Scaling. As admitted by Vitalik himself, all the serious scaling plans of ethereum are 2-5 years out, and are, at this time, purely theoretical. One can experience this just by using the ethereum platform on traffic-heavy days. Generously the upper bound for ETH is around 30 tps, at least two orders of magnitude behind what is needed for any sort of commercial use.
2. Secure smart contracts and bug fixes. Several times a year something doesn’t work as intended to in some dapp’s code and a few hundred million dollars are vaporized forever. This leads to issues of governance and hard forks. Since code can never be perfect, even if formally verified, this impacts ETH’s usability as people are afraid to take risks with complex contracts, and afraid to develop on-chain.
3. Usability. Ethereum is difficult to use, both for developers and daily users. Programming in solidity is difficult, and despite offering a VM, ethereum offers no corresponding operating system, meaning that developers have to do everything from scratch. This is very similar to the early days of computers prior to operating systems. For a user, even just making wallets and sending simple transactions is difficult and requires technical knowledge and great care. Dapps run at very different speeds depending on what is going on in the network. Additionally, the ETH you use to run programs on the ethereum VM is dust at the time, but due to ethereum’s new use as a store of value that dust slowly grows to serious amounts in USD. This economic model disincentivizes the use of ethereum’s VM and therefore its main purpose.

Since the solutions to any of these problems are assuredly more than one year away, the most sensible strategy is to look for ethereum’s biggest competitor in 2018 as the probable candidate for the #3 slot. In Part 2, I will explore why EOS is the #1 candidate for the #3 slot, mainly because it offers order of magnitude improvements for the issues ethereum currently struggles with. In Part 3, I will examine EOS’s novel economic model that rewards holders.

Keats