After each high-profile crypto meltdown, there have been renewed calls for greater oversight of the space. The idea here is that if we regulated crypto players like traditional financial institutions, they would start behaving like ones. But a regulatory framework that is purpose-built for the technology would not change the underlying incentives for reckless and fraudulent. For the crypto industry to have a positive impact on society, we need to first overhaul how it measures progress — and success.
The events of 2022 have called into question whether crypto will (or should) survive. Before FTX collapsed in November, there was the meltdown of stablecoin Terra and its companion coin LUNA, as well as the related implosions of crypto lender Celsius, crypto broker Voyager Digital, and hedge fund Three Arrows Capital, to name a few of the most dramatic failures. At year-end, there were questions about FTX’s onetime rival Binance, which has been confronted with large-scale customer withdrawals and criminal investigations over its compliance practices. Only 12 months ago, many of these companies were lauded as examples of how vision, bold thinking, and audacity could build multi-billion dollar empires overnight. Now, they offer very different lessons.
After each high-profile crypto meltdown, there have been renewed calls for greater oversight of the space. The idea is that if we regulated crypto players like traditional financial institutions, they would start behaving like ones. But a regulatory framework that is purpose-built for the technology would only tackle part of the problem. It would definitively improve consumer protection and market integrity. It would not, however, change the underlying incentives in the space and stop some of the reckless and fraudulent behavior it has attracted to date. For the crypto industry to have a positive impact on society, we need to first overhaul how it measures progress — and success.
From inception, crypto participants have obsessed about the price, market capitalization, and trading volume of competing coins. These metrics have distorted the incentives of well-meaning crypto entrepreneurs, and made it easier for bad actors to blend in, attract capital, and generate hype around their scams. For crypto to truly go mainstream, the industry needs to stop blindly trusting these metrics of convenience and pay more attention to dimensions that closely track progress against actual consumer and business needs.
It all started in the early 2010s with the first alternative coins (or “altcoins”) that were introduced to compete with Bitcoin, and with an abundance of what looked to be objective, market-driven metrics. Because cryptocurrencies rely on public ledgers, a wealth of metrics including price and market capitalization were readily accessible from inception. The resulting sense of transparency, and the deceiving similarity between cryptocurrencies and public stocks, legitimized these metrics well beyond their usefulness. Moreover, since crypto markets lack many of the protections that have been introduced over decades of trial and error in traditional finance, it is far too easy for bad actors to game and exploit these metrics.
The result of this is an environment where it is possible to launch a new crypto token and quickly appear — at least on paper — to have created a network worth billions of dollars. In truth, these skyrocketing valuations are manufactured by limiting the supply of coins available for trading, and quickly come crashing down when the hype machine that sustains them slows. But when faced with the option, it is very hard for entrepreneurs and investors to resist the temptation to use these now standard metrics as evidence of positive momentum. It is human nature to believe that the price of your token, no matter how inflated it might be, accurately reflects the potential of what you are building.
By giving nascent crypto ventures an aura of scale and competitive moat, these metrics also make it easier to attract developers, secure partners and raise more capital — creating a vicious cycle where founders have no alternative but to “fake it till they make it.” It is as if the founders of today’s technology giants had their stocks traded in real-time from the moment they announced a beta product rather than when they IPO-ed. Amid the investment frenzy, uncertainty, and hype, it is easy to get distracted by numbers — however untethered they might be from reality.
This premature financialization of the crypto innovation process has a warping effect. The incentives it creates dictate the types of problems that founders prioritize, how the market rewards their actions, and the long-term sustainability of what they build. Entrepreneurs’ attention drifts away from more challenging, uncertain dimensions of technical advancement, and crypto tokens and their prices essentially become the “product.” As a result, real progress stagnates.
We’ve seen where this way of doing business and innovation leads. Pump-and-dump schemes, exit scams, and good old-fashioned grift hide well and thrive among legitimate projects when a project’s market capitalization and that “number go up” — a meme that has become somewhat of a religious predicament within parts of crypto — are all that matter.
Ironically, in a setting where everything can be easily measured, there is a dire need for better metrics. After all, measurement is a way of assigning value — it reflects the guiding philosophy behind organizations, markets, and systems. To stop being led astray, crypto entrepreneurs and investors need to rethink how they measure progress.
Consider the profound ways that metrics affect innovation.
Every company has to identify key metrics to align teams around, quantify progress with, and ultimately compete on. Examples range from transistor density at Intel following Moore’s prediction to the race for megapixels in digital cameras, progression-free survival in oncology, the net promoter score in customer loyalty, and more. By channeling attention to a small number of dimensions, metrics force firms to ruthlessly prioritize resources and commit to making progress in a specific direction.
This is particularly valuable when dealing with unstructured problems that have a great deal of uncertainty surrounding the best path forward — exactly the types of problems that are abundant in nascent industries such as crypto.
Once established, however, metrics can last well beyond their practical utility: While James Watt developed horsepower at a time when a comparison between steam engines to horse-drawn transportation was important, the metric was ported to trains, boats, and car engines. Centuries later, while it is uninformative for electric vehicles relative to alternative metrics, it is still an undisputed industry standard.
The same type of metrics inertia is stifling crypto and has caused severe harm as attention, talent and dollars have chased a handful of convenient, but flawed metrics. While coin prices and value flowing through a network might become reliable indicators of quality when crypto markets mature, today — whether intentionally or not — they are far too easy to game. Extreme examples of this are the Terra stablecoin and the FTT token by FTX, which both created an illusion of value through aggressive marketing and subsidized growth, only to later crash and burn into a death spiral when their flawed economics came under stress. In what are surprisingly transparent versions of a Ponzi scheme, investors blindly trust market capitalization metrics as hard proof of actual value.
Unfortunately, honest entrepreneurs cannot fully escape the tyranny of these metrics either, whether it’s because their venture capitalists (VCs) have pushed them to include a token and drive its price up through incentive design — something that helps VCs show progress with their own investors — or because they believe that the only way to compete with others is to promise developers and early adopters the same unrealistic financial returns.
It doesn’t need to end this way. Crypto is transformative because it allows two parties to directly transact without relinquishing control to an intermediary: Alice can send value to Bob, enter into a financial contract with him, or transfer ownership of a digital asset or piece of art with little friction and costs. Crucially, while they may still use intermediaries to streamline these tasks, Alice and Bob have more control and bargaining power. Like the internet, crypto networks are open networks, and that openness brings to consumers and businesses more choice, lower prices, and novel products and services.
So how can crypto deliver these benefits? Entrepreneurs and investors need to reject current metrics and develop new ones. These new metrics need to be closely aligned with the impact a crypto application hopes to have on the world. Ironically, this is exactly how inventors and founders have always been creating value: recognize a problem worth solving for your customers and bet your startup’s existence on addressing it. By obsessing about the problem to be solved, rather than about early crypto prices and volatility, entrepreneurs can go back to identifying metrics that track progress towards a solution.
For example, founders that want their crypto networks to replace traditional payment rails should benchmark their growth against the same metrics payment incumbents have used for decades. They should also directly measure the savings they bring to consumers and businesses as they rebuild basic financial services using crypto. Similarly, Web3 entrepreneurs focused on bringing more choice and competition to the creator economy should measure the economic value they disburse to creators and compare that to the incumbents. If it is true that crypto can truly remove frictions and give creators more power, these new metrics will quickly showcase the benefits the technology is delivering to society.
The payoff of going back to basics is substantial. Metrics can turn the complex problems crypto hopes to tackle into tractable ones that entrepreneurs, managers and engineers can optimize on, while providing investors, consumers and even regulators a much better assessment of the nascent space. It is only by crossing the divide between the digital records on a blockchain and their impact in the real world that crypto will make a difference, and building better crypto metrics is a prerequisite in unlocking that potential.