Escape velocity

Product-market fit can be nebulous. It’s an art and a science. The idea of getting to product-market fit has tantalized countless founders. Some say it’s the only thing that matters1. Others have mused that, “you know it when you see it.” Qualitative measures have mostly prevailed over quantifiable frameworks because of the situation-specific nature of the concept. Product-market fit, qualitatively, means arm’s-length, organic, and sustainable demand, at scale – it’s indisputable escape velocity.

Technology exists to solve problems. Yet software as a technology does not intrinsically produce value. It enables products to be built as solutions applied to problems. This piece is written through the lens of use cases for which crypto solves an end-user – consumer or business – problem and thus creates value.

Crypto as a technology and institutional design has matured considerably since its origin around 15 years ago. But it’s still nascent. The current industry phase is characterized by intense experimentation. So far, five use cases have emerged with product-market fit.

  1. Bitcoin as digital gold. Bitcoin primarily serves as preservation of purchasing power over time with a speculative overlay and fiat/dollar asset diversification. It’s notoriously challenging to estimate the number of Bitcoin holders worldwide. Let’s use a reasonably conservative estimate of about 100 million people or close to 2% of the world’s internet population2. There’s also around $90B worth of Bitcoin held by Bitcoin ETFs, signaling real demand from institutional investors3. This fact makes Bitcoin particularly compelling: it’s held across a wide spectrum of individuals, companies, institutional investors, and governments.

    Collateral asset status and Bitcoin-denominated product growth is a first-order effect of this dynamic. My sense is that we’ll see Bitcoin, despite its volatility, increasingly used as a collateral asset in crypto-native and non-crypto use cases. Bitcoin (re)staking has grown around 17x in 2024, with approximately $6.5B in TVL4. Want to take out a mortgage to buy a home? Lend against your Bitcoin. Life insurance denominated in Bitcoin is another example of a product category that could be well-positioned for growth.

  2. Stablecoins as (programmable) digital money. A stablecoin is perhaps best explained as a wrapped US dollar on blockchain rails. Sending $50 or $10B to a recipient across the globe in seconds, in a fully transparent fashion for all parties, at the cost of less than 50 cents is compelling. The first half of 2024 saw stablecoin volume of about $2.5T5. Tether, the leading stablecoin issuer, reported a net profit of $5.2B in the first half of 2024. Stripe announced that it is acquiring Bridge6, likely the most significant acquisition in the history of crypto.

    Stablecoins and Bitcoin have differing adoption patterns. Stablecoins are used as a medium of exchange, a unit of account, and, to a lesser extent, a long-term store of value. Bitcoin, in contrast, has not yet reached product-market fit as a medium of exchange (mostly due to volatility and transaction fees).

  3. Speculation and trading of a novel financial asset for gain, fun, and liberation from reality. The human species is enamored with trading for gain. This starts early; just look at young school kids trading cards on the playground7. The rise of Coinbase, Uniswap, and Binance illustrates this point. Yet trading novel financial assets is not the full story. Many wager with time as input for speculative gain: complete a certain task and potentially get rewarded with value in the form of a token in the future. Hamster Kombat is an excellent example of this dynamic8. These speculative games, featuring capital or time as input, commonly transcend purely financial motivations and are deeply interwoven with internet culture. There’s entertainment value, as well as an element of what the philosopher Albert Borgmann would denote “liberation from reality,” each satisfying two distinctly different human desires9.

    Some would argue that speculation bootstrapped the crypto industry. Indeed, this is the pattern that tends to recur around technological revolutions: speculative bubbles can be a necessary input to seeding new technology paradigms10.

  4. Internet-native (permissionless) capital formation. Crypto has proven an effective means to raise capital in an internet-native fashion. While most jurisdictions consider this fundraising method to be outside of current legal frameworks, initial coin offerings (or “ICOs”) have raised tens of billions of dollars since Mastercoin ran the first experiment in 2013. Many of these ICOs were fraudulent and outright scams. But some were not, such as Ethereum’s crowd sale in 2014; all you needed to participate was an internet connection and some Bitcoin.

    The concept of blockchain-based capital formation has evolved in response to regulatory pressure. A relatively recent phenomenon is the node sale. Instead of receiving an ERC-20 token representing a piece of the network, a node sale stipulates that the buyer, in exchange for capital such as wETH, will receive the right to participate as a node in the network. This right is typically represented as a non-fungible token via the ERC-721 standard. The node provides work to the network, assumes risk, and in return generates a potential cashflow stream denominated in the native token.

    Blockchains afford digital property rights. This lowers transaction costs for fundraising in a novel way. It’s a new model for entrepreneurs or builders of public goods to fund innovation, as well as a new avenue for risk-seeking capital to access investment opportunities. The idea of disintermediating gatekeepers and making the aggregated, internet-connected population the addressable market for funding is a powerful lever for permissionless innovation.

  5. Information markets as continuous predictors of future events. Just in the past few months, Polymarket ushered in information markets as the fifth use case with product-market fit. Prediction or information markets enable two things: 1) open access to real-time prediction of, or information signals for, discrete events; and 2) direct financial exposure to and hedging of real-world events. (The hedging feature does not have product-market fit at this time.) The quality of information signal follows from the sophistication and scale of trading in the underlying event market.

    Trading yields a public good. This is because information markets have emergent properties. Incentives and information aggregation are at the heart of why they work. The incentive to capitalize on a potential information edge leads to superior information aggregation, which in turn provides the public with more accurate, real-time information and novel tools to hedge exposure to specific events – e.g., presidential elections. Important to note is that market composition matters. Highly sophisticated actors will only participate in the information market if it directionally increases their opportunity cost on a risk-adjusted, portfolio basis. This necessitates two conditions: a significant pool of liquidity and less sophisticated (retail) market participants to trade against. About 85% of accounts on Polymarket lose money11, which seems to corroborate this theory. There’s a segment of participants that subsidizes the truth-seeking process of the information market.

    Polymarket was the superior forecasting service in the 2024 US presidential election. Its odds were consistently more accurate than non-crypto information markets such as Kalshi and PredictIt, and vastly superior to traditional methods such as polling. Polymarket’s 2024 US presidential election market volume exceeded $3.5B, and more than 200,000 users placed trades on the platform in October and November of this year12. Polymarket is simply a beautiful manifestation of the power of markets.

    It’s instructive to situate Polymarket in a historical context. Wagering on election outcomes was commonplace in the US prior to the Second World War. There were significant and well-organized betting markets for presidential elections between 1868 and 1940, with daily volumes exceeding trading in stocks and bonds for brief periods of time. (And these betting markets generally outperformed the less sophisticated polling methods at the time.) In fact, betting on presidential elections in some form dates back to the election of President Washington in 178913. However, Polymarket is the first time this type of betting activity for societally relevant issues has translated into a global and digital public good – superior real-time information signals for and direct hedging of events with global impact, available to anyone with an internet connection1415.

These five use cases all demonstrate indisputable escape velocity. There are other use cases which are close to finding product-market fit. More on that in a future essay.

  1. https://pmarchive.com/guide_to_startups_part4.html ↩︎
  2. https://river.com/learn/how-many-people-use-bitcoin/ ↩︎
  3. https://www.theblock.co/data/crypto-markets/bitcoin-etf ↩︎
  4. https://defillama.com/chain/Bitcoin ↩︎
  5. https://castleisland.vc/wp-content/uploads/2024/09/stablecoins_the_emerging_market_story_091224.pdf ↩︎
  6. https://twitter.com/patrickc/status/1848393059559502177 ↩︎
  7. The propensity to gamble is particularly noteworthy for gen Z. Both surveys and anecdotal evidence corroborate the strong desire to bet for financial gain https://rpc.cfainstitute.org/en/research/reports/2023/gen-z-investing ↩︎
  8. https://www.wired.com/story/telegram-game-hamster-kombat-massive/ ↩︎
  9. https://luminary.fm/episode/albert-borgmann-on-the-philosophy-of-technology/ ↩︎
  10. https://en.wikipedia.org/wiki/Technological_Revolutions_and_Financial_Capital ↩︎
  11. https://dune.com/queries/4082887/6875103 ↩︎
  12. https://dune.com/rchen8/polymarket ↩︎
  13. This paper offers an excellent historical overview of betting markets for US presidential elections https://pubs.aeaweb.org/doi/pdfplus/10.1257/0895330041371277 ↩︎
  14. US residents are prohibited from trading on Polymarket but can access real-time market information ↩︎
  15. Since the Second World War, only the wealthy elites could directly hedge political exposure by direct campaign donations and hiring of lobbyists; information markets again democratize access to legal political hedging for the masses. ↩︎
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