Arthur Hayes: Narrative Matters More Than Technology, The Era of Altcoins Has Arrived
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Arthur Hayes: Narrative Matters More Than Technology, The Era of Altcoins Has Arrived
A project must be truly revolutionary to meet expectations.
Navigating Web3 tides with focused insightsAuthor: Arthur Hayes
Translation: Deng Tong, Jinse Finance
We are all speculators. Every moment of our existence in this universe is filled with uncertainty. As we attempt to navigate unpredictable reality, our brains constantly construct probabilistic maps of our environment. Our actions are not based on facts, but on perceived probabilities of various outcomes.
A simple example applicable to my own life is the risk of triggering an avalanche while skiing. The most enjoyable powder runs in the backcountry lie on slopes between 35° and 40°. This is also the perfect gradient for avalanches. Before heading out, my guide assesses the likelihood of an avalanche based on observed snowfall and weather conditions. My guide also relies on recent observations from other guides who have skied the same area. If the risk is too high, we don’t ski.
A more common example is choosing between taking an elevator or using the stairs. The former is faster than the latter. However, elevators are mechanical devices that occasionally fail, potentially causing serious injury or death. You weigh the expected value (probability × outcome) of time and energy saved by taking the elevator up 30 floors against walking, based on your belief about the likelihood of injury or death—even if you're not consciously aware of it—because the alternative involves less risk but takes longer and is more exhausting.
You gamble with your life every second of every day. That’s not a bad thing; it's simply the nature of being human in a world where we cannot perfectly predict the future. How terrible existence would be if we knew exactly how the future would unfold. I prefer our imperfection.
The story you tell yourself about certain behaviors informs your perception of their risks. I call this a narrative. For social creatures like humans, narratives are primarily created through the "wisdom" of the group. For better or worse, the most influential narratives are those everyone believes.
Narratives are also shaped by objective facts. In most cases, facts are discrete events indicating that certain behaviors carry risk. It is a fact that avalanches are more common on 40° slopes. It is a fact that people have been injured or killed while riding elevators.
Casual chatter and objective facts combine to create narratives. Although the facts may be clear, as individuals, it's challenging to grasp the exact ratio of deaths inside elevators relative to total elevator rides. Similarly, it's difficult to know the number of skiers who died in avalanches on 40° slopes compared to the total number of descents made on similar gradients. When we can't verify accurate actuarial data, we rely on others.
Here's how it works.
Avalanches:
I know this type of avalanche is more common. But my guide has extensive experience and training in determining which slopes are prone to avalanches, and he believes this particular route is safe. Safe doesn't mean an avalanche won't happen; it means the probability is low enough to be acceptable. Therefore, due to my trust in his training system—one evolved from the collective experience of thousands of mountain guides—I will follow him down this slope.
Elevator:
I know taking an elevator is more dangerous than using the stairs. But everyone else is taking the elevator. If everyone else is doing it, then it must be safe. Surely, everyone can't be wrong at the same time. Moreover, building codes created by trained engineers exist, and this elevator has passed safety certifications. Thus, trusting in the expertise of engineers I've never met and in the wisdom of the crowd, I feel safe riding the elevator.
How we assign probabilities depends not on facts or technology themselves, but on our perception of those facts and the quality of the technology. These perceptions are based on what others say about the facts or the technology—people whom we believe, due to their training and experience, know more than we do.
Cryptocurrencies:
To connect this to cryptocurrencies, consider the following. Suppose a new project claims to solve a known problem using new technology. The problem they claim to solve is widely recognized, and tokens of other projects attempting to address it are highly valued. You believe the project’s engineers are smart and talented enough to succeed. You believe this because other engineers who launched successful crypto projects are advising them. You also have confidence in the team because they graduated from prestigious technical universities and worked at successful tech companies. Because the narrative is strong (story + technology), you invest. But digging deeper into your thought process—which matters more: the narrative or the technology?
The narrative. Narrative matters more than technology. Your perceived probability of success is based on others’ views of the problem and others’ assessments of the team’s technical capabilities. Rarely do you have the ability to evaluate the technology at a fundamental level. That’s why you trust those you perceive as more informed to judge whether the technology is likely to solve the problem.
While your technical skills are usually insufficient to properly evaluate a project, you can easily gauge the strength of a narrative. A good narrative is one increasingly told among people. Ideally, it's told positively—for example, “In this cycle, all retail traders will shift from CEXs to DEXs.” But even if the narrative is negative—“Retail traders can never leave CEXs for DEXs”—the idea of volume shifting from CEXs to DEXs still spreads. I don’t care whether people believe the narrative; I don’t care. I just want them to voice either its positive or negative variation. Because making money long yields higher returns than shorting, optimism will dominate pessimism over cycles. That’s how human brains are wired.
What is my job?
Although my official title is Chief Investment Officer at Maelstrom, I should probably change it to Chief Narrator. I craft narratives. The better and cleaner the narrative, the faster it spreads. The greater its reach, the more the token associated with that narrative appreciates.
Technology doesn’t matter!
The financial professionals at Maelstrom all hold finance degrees from the University of Pennsylvania's Wharton School. I didn’t plan it that way; it just happened. While we understand potential applications of cryptography and blockchain technology, we are not cryptographers, distributed systems experts, or deeply knowledgeable in computer science. When we trade, we outsource technical due diligence to others who possess these skills.
These others might be leading venture capital firms or qualified angel investors participating in pre-sale token rounds. Some could be respected technical advisors to the project. Without such validators, we might still feel comfortable with the technology if the founders previously launched successful projects—where “successful” means apps widely adopted in past crypto cycles.
Our job is to identify which project is most likely to succeed vertically. Success depends on widely spreading macro and micro narratives. You make the most money when a token attached to a narrative shifts from being seen as “never” to “possible.”
I’d rather invest in a token with a perceived success probability of 0.01% whose narrative is going viral, than one with a 50% perceived chance but whose narrative has already become common knowledge. If the probability rises from 0.01% to 1% because the narrative rapidly infects many minds, my money increases 100-fold. But the only way to achieve a 100x return on a token perceived at 50% success is if the actual outcome is so extraordinary—regardless of any form related to the project—that growth comes from observed results, not rising expectations of future success.
Macro narratives describe observed trends and how a project will leverage them. More than a trend, it's a narrative—we take a small move and extrapolate its impact far into an uncertain future. Macro narrative: “Retail derivatives volume is shifting from CEXs to DEXs.” BitPerp is building a perpetual swap DEX. BitPerp’s token will rise because its macro narrative is currently unknown but has viral potential to infect many minds.
Micro narratives explain why this specific project will outperform all competitors within a given macro narrative. Micro narrative: “BitPerp is advised by Arthur Hayes, who helped invent perpetual contracts.” When others hear Arthur is involved, they assume the project receives brilliant guidance that gives it an edge over rivals.
This blog typically focuses on macro narratives. Most often, I tell stories about stealing from central bankers and politicians who destroy the value of time and human labor by printing fiat currency. I tell stories about how Bitcoin and the crypto ecosystem serve as the antidote to this organized theft of human dignity. But since I run a trading book, I also discuss micro narratives around crypto trends and how the prices of my chosen coins and tokens will rise as more people believe and spread the story.
I don’t often dive deep into specific tokens beyond Bitcoin and Ethereum, but now is the bull market, folks. I’ve laid the foundation for major forces driving crypto adoption—now it’s time to promote my portfolio.
Results
Do results—meaning growth in volume, total value locked, unique wallet counts, etc.—matter? Yes, they matter, but their importance to token price varies depending on which phase of the hype cycle you're investing in.
When investing in a narrative/trend you believe will shift from “never” to “possible,” the project’s actual appeal is low. The market has low expectations because it sees the token tied to a trend unlikely to grow. Thus, even mediocre results appear groundbreaking due to extremely low expectations.
When investing in a narrative/trend you believe will go from “maybe” to “definitely,” project quality becomes critical. Market expectations are high because people believe in a bright future. Results that once seemed exciting now appear average. Merely impressive results aren’t enough; more is needed. At this stage, a project must be truly revolutionary to meet expectations.
Altcoin Narrative Time
The purpose of this article and mental exercise is to help readers understand the conceptual framework guiding Maelstrom. Over the coming months, most of my writing will focus on specific tokens we hold and their macro and micro narratives. These tokens have launched or will soon launch publicly, so I aim to widely disseminate these narratives. I don’t care whether you buy or sell any mentioned tokens. What matters to me is that I present such a provocative narrative and supporting arguments that you’ll discuss it—positively or negatively—with others.
I’ll know I’ve succeeded when I read things like this on social media:
“Did you read Arthur’s latest article? Man, that guy is such a lunatic. Pendle can never surpass Binance to become the largest derivatives platform in crypto. I don’t even know what an interest rate swap is—surely no other DeFi degens in crypto land do either.”
Or:
“Did you read Arthur’s latest article? None of us are holding enough Ethena. Tether is definitely doomed. Ethena will surely become the top dollar-pegged stablecoin.”
Below are the general lines of macro and micro narratives I intend to push in the coming months:
Retail derivatives volume will shift from centralized exchanges (CEXs) to decentralized exchanges (DEXs).
Related projects: dYdX, GMX, and possibly another contender.
The rollout of ETH staking will trigger a surge in DeFi interest rate swap volumes.
Related project: Pendle.
There exists a method to leverage low-market-cap junk coins worth tens of billions of dollars to boost dual-token derivative volume on DEXs.
Related project: Krav.
On-chain liquidity for DEXs will be supplied by middleware that displaces current market-making firms.
Related project: Elixir.
As DEXs become primary venues for price discovery, on-chain oracles providing settlement and clearing prices will grow increasingly important.
Related project: Flare.
Why Tether and any stablecoin relying on TradFi banks to custody fiat face growing pressure, and how we can create fiat-pegged stablecoins without depending on TradFi.
Related project: Ethena.
How to solve cross-chain bridging of assets without building bridges.
Related project: Axelar.
Conclusion
Currently, attention is focused on the staggering amount of Bitcoin being accumulated by U.S.-listed spot ETFs. Combined with the global fiat currency debasement party, this will drive Bitcoin to unimaginable heights in fiat terms. The upcoming U.S. Ethereum ETF listings will similarly lift Ethereum’s price. I hold both Bitcoin and Ethereum. I may buy a bit more, but overall, my focus is shifting toward altcoins.
Which tokens can I buy that will outperform Bitcoin, followed by Ethereum? That’s Maelstrom’s minimum hurdle rate. We achieve this by deeply understanding certain projects and telling compelling narratives.
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Arthur Hayes
