Dragonfly Partners Long Article: Reject Cynicism, Embrace Exponential Thinking

Author: Haseeb Qureshi, Managing Partner at Dragonfly

Compiled by: Azuma, Odaily Planet Daily

Editor's note: The industry is currently at a freezing point of confidence about the future. Is the bubble too big? Are the valuations too high? Are the things I hold in my hand valuable? Questions like these are constantly undermining the market's confidence.

On November 28, Haseeb Qureshi, a prominent bald partner at Dragonfly, wrote a heartfelt long article today. In the article, Haseeb summarized the prevailing sentiment in the community as “financial cynicism” (a fundamental skepticism or even distrust towards the financial system, market participants, asset prices, policy motivations, etc.); he also pointed out that the industry's focus is shifting from Silicon Valley to Wall Street, which reflects an overemphasis on linear thinking and a neglect of exponential thinking; Haseeb believes that ETH or SOL should not be mechanically valued using the price-to-earnings ratio and asserts that exponential growth will ultimately lead cryptocurrencies to “devour everything.”

The following is the original content by Haseeb, compiled by Odaily Planet Daily.

I used to tell entrepreneurs that after you launch a new product, the market's reaction will not be hatred, but indifference. Generally, no one will care about your new chain.

But now I can't say that anymore. Monad just launched this week, and I've never seen a newly released blockchain face so much hatred. I have been a professional investor in the cryptocurrency space for over 7 years, and before 2023, almost all newly launched chains received either a warm welcome or were completely ignored.

But now, new chains will be accompanied by huge boos right from their inception. Projects like Monad, Tempo, and MegaETH — even before their mainnet launch — are frequently attacked, which is indeed a completely new phenomenon.

I have been trying to analyze: why is this situation occurring now? What kind of market psychology does this reflect?

“Medicine” is more deadly than “Disease”

Just a heads up, this might be the most “vague” blockchain valuation article you've ever read. I don't have any fancy metrics or charts to show you. Instead, I will counter the current mainstream sentiment in cryptocurrency, which I have been almost consistently opposed to over the past few years.

In 2024, I feel that what I am opposing is financial nihilism. Financial nihilism believes that all assets are meaningless and ultimately just memes, and everything we build is essentially worthless. Fortunately, this atmosphere is no longer dominating the market. We have moved beyond this myth.

But the current mainstream sentiment, which I would like to call “financial cynicism”, is that many people think that perhaps these tokens do have some value, not entirely just memes, but they are severely overvalued, with the actual value possibly only one-fifth to one-tenth of the current trading price… and Wall Street will eventually discover this, so you better pray that Wall Street doesn't expose our bluff, otherwise once they take action, everything will be ruined.

Now you will see that many bullish analysts are trying to construct optimistic Layer 1 valuation models, pushing up P/E ratios, gross margins, and DCF to counteract this market sentiment.

At the end of last year, Solana proudly adopted REV (Real Economic Value) as a metric that can ultimately prove its valuation is reasonable. They proudly announced: We, and only we, no longer need to bluff to Wall Street!

Of course, almost immediately after REV was officially adopted, its value plummeted sharply - but interestingly, SOL performed better than REV itself.

I'm not saying that REV has any problems. REV is a very clever indicator. But the focus of this article is not on indicator selection.

Afterward, Hyperliquid officially launched, which is a decentralized exchange with real income, a buyback mechanism, and a price-to-earnings ratio. The community began to shout: “See, I told you! Finally, there is a token that has real profits and can be measured by the price-to-earnings ratio. Hyperliquid will swallow everything, because clearly Ethereum and Solana can't make real money at all; we can stop pretending they have value.”

Hyperliquid, Pump, and Sky are indeed great tokens that emphasize buybacks, but the market has always allowed investment in exchange stocks or tokens; you can buy assets like COIN and BNB at any time. We also hold HYPE, and I believe it is an excellent product.

But the reasons people initially invested in ETH and SOL are not here. Layer 1 does not have the profit margins of exchanges, and that's not why people hold them — if people wanted that kind of profit model, they could have just bought COIN directly.

So if I am not criticizing the financial metrics of blockchain, you might think this article is condemning the various sins of the “token industrial complex.”

Clearly, everyone has lost money on tokens over the past year — including VCs. This year, altcoins have performed poorly. So another half of the current mainstream sentiment in the community is debating who we should blame? Who has become greedy? Are VCs greedy? Is Wintermute greedy? Is Binance greedy? Are miners greedy? Are founders greedy?

Of course, the answer is the same as before. Everyone is greedy—venture capitalists, Wintermute, miners, Binance, KOLs, they are all greedy, and you are greedy too. But that doesn't matter. Because any normally functioning market never requires participants to act against their own interests. If our judgment on cryptocurrency is correct, then despite everyone's greed, investments can still yield returns. Trying to interpret the market downturn by analyzing “who is greedier” is about as effective as organizing witch hunts—I can assure you, people didn't just start becoming greedy at this point.

So this is not the topic to be discussed in this article.

Many people want me to write articles analyzing how much MON should be worth and how much MEGA should be worth. I have no interest in such articles and do not intend to advise you to buy any specific assets. In fact, if you are not optimistic about these projects, perhaps you shouldn't buy any tokens at all.

Will there be new challenger blockchains that emerge victorious? Who knows. But if there is indeed a significant chance, the market will price based on that probability. If Ethereum is worth $300 billion and Solana is worth $80 billion, then a project with a 1% - 5% chance of becoming the next Ethereum or Solana will be valued according to that probability.

The community reacted with great surprise, but this is no different from the valuation logic of biotechnology companies. A drug with less than a 10% chance of curing Alzheimer's can still be valued in the billions by the market—even if it has a 90% chance of failing to pass phase III clinical trials and becoming worthless. This is the logic of probability calculation—evidence shows that the market is very good at making such calculations; assets with binary outcomes are priced based on probability, not on business revenue, let alone on moral standards. This is the valuation philosophy of the 'shut up and calculate' camp.

To be honest, I don't think this is an interesting topic worth writing about - arguing whether the odds are 5% or 10% is meaningless; for any token's valuation, the market itself is the best judge, not article analysis.

So what I am going to write next is: The crypto community seems to no longer believe that public chains have value.

I don't think it's because they don't believe that the new chain can gain market share. After all, we just saw Solana rise from the “ruins” less than two years ago and quickly capture market share. It's not easy, but it is certainly possible.

The problem is more that people are starting to believe: even if a new chain wins, there is no “prize” worth winning. If ETH is just a meme, and if it never generates real income, then even if you win, you won't be worth 300 billion dollars. The competition itself is not worth participating in, because these valuations are fake and will collapse before you “claim your prize.”

It’s outdated to remain optimistic about public chain valuations. This doesn’t mean that there are no optimists at all—clearly, there are optimistic individuals in the market. Where there are sellers, there must be buyers; despite many people’s tendency to be pessimistic about Layer 1, there are still many willing to buy SOL at $140 and ETH at $3000.

But now there seems to be a widespread “awareness” — the smartest people have stopped buying tokens for smart contract blockchains. The smart ones know the game is about to end, if not now, then soon. The only ones left buying these things are the “retail investors” — Uber drivers, Tom Lee, and KOLs shouting about trillion-dollar market caps, maybe even the U.S. Treasury, but certainly not the “smart money.”

This is all nonsense. I don't believe it, and you shouldn't believe it either.

So I think I must write a “Declaration of the Smart” to explain why universal public chains are valuable. This article is not about Monad or MegaETH; it is actually defending ETH and SOL, because if you believe that ETH and SOL are valuable, then everything else is a downstream logic.

As a VC, it's usually not my job to defend the valuations of ETH and SOL, but QTMD, if no one else is willing to do it, then I'll write about it.

Feel the growth of the index

My partner Feng Bo, as a VC, has personally experienced the explosion of the Chinese internet. I have heard too many comparisons of “cryptocurrency is like the internet”—so many that I am almost no longer moved by them. But when I hear him tell that story, it always reminds me of how expensive the cost of making the wrong judgment in such matters can be.

One story he often tells is: in the early 2000s, all the early e-commerce VCs (which was a very small circle at the time) gathered together for coffee, and they debated a question: how big could the e-commerce market actually become?

Will it mainly be used for electronic products (maybe only tech enthusiasts will use computers)? Can it be suitable for women (maybe they rely too much on touch)? Is it applicable to the food industry (are perishable goods unmanageable)? These are all very important questions for early VCs when deciding what to invest in and how much to invest.

And the answer, of course, is: Each and every one of them was completely wrong. E-commerce ultimately sells everything, and the target users are the whole world. But at that time, no one truly believed this. Even if someone did, they would never dare to say it out loud.

You just need to wait long enough for exponential growth to tell you the answer itself. Even among believers, very few believe that e-commerce would become so huge. And those few who truly believe almost all became billionaires because they did not sell. Other VCs (including Feng Bo himself) sold too early.

In the cryptocurrency field, I believe that exponential growth has become out of fashion. But I believe in the exponential growth of cryptocurrency. Because I have experienced it firsthand.

When I entered the crypto industry, nobody used these things at all. It was small, broken, and terrible. The on-chain TVL was only a few million. We invested in the first generation of DeFi - MakerDAO, Compound, 1inch, when they were still research projects. I remember when I used to play on EtherDelta, a DEX trading a few million dollars a day was considered a huge success, but the experience was terrible. And now, we can see daily trading volumes on-chain reaching tens of billions of dollars.

I remember back in the day thinking that Tether issuing up to 1 billion dollars was already “too crazy”; The New York Times even wrote that it was a Ponzi scheme on the verge of collapse, and now the issuance scale of stablecoins has exceeded 300 billion dollars and is even under the regulation of the Federal Reserve.

I believe in exponential growth because I have experienced it. I have witnessed it time and again.

But you might argue—well, maybe stablecoins are growing exponentially, maybe DeFi is growing exponentially, but this value will not be captured by ETH or SOL. Value does not flow to the chain itself.

My answer to this is: you still don't believe in exponential growth enough.

Because the answer to exponential growth never changes: these are fundamentally unimportant. The scale of the future will far exceed today. When this field grows to an enormous size, you will reap the rewards of scale effects.

Please take a look at the chart below.

This is Amazon's income statement from 1995 to 2019, a total of 24 years. The red represents revenue, and the gray represents profit. Do you see that small gray line at the end curling up? That was the moment when Amazon truly started to become profitable, 22 years after its founding.

It was only in its 22nd year that Amazon's net income finally broke away from 0. In every previous year, there were people writing columns, criticizing, and shorting, claiming that Amazon was a Ponzi scheme that would never make a profit.

Ethereum just turned 10 years old, and below is the performance of Amazon stock in its first 10 years.

Ten years of sideways movement. Along the way, Amazon has been surrounded by doubters and skeptics - “Is e-commerce just a charity funded by VCs?”; “They are only selling low-priced, low-quality trinkets to people who only love cheap goods, what future does that hold?”; “How could they possibly make real profits like Walmart or GE?”

If you were fixated on debating Amazon's price-to-earnings ratio at that time, you completely missed the point. That was just a linear growth mindset, but e-commerce has never been a linear trend — thus, all those who argued about the price-to-earnings ratio over the past 22 years have been thoroughly disproven by reality. No matter what price you bought in at or when you entered, your level of optimism was far from sufficient.

This is the characteristic of exponential growth. For truly exponential technologies, no matter how large you think they can grow, they will always surpass your imagination.

This is the core understanding that Silicon Valley has always grasped better than Wall Street. Silicon Valley grows in the soil of exponential growth, while Wall Street is soaked in linear thinking. In the past few years, the focus of the crypto industry has shifted from Silicon Valley to Wall Street. You can clearly feel this.

Indeed, the growth of cryptocurrency is not as smooth as that of e-commerce. It is more erratic, sometimes stagnant and sometimes dynamic. This is because cryptocurrency is related to “money” and is closely tied to macro forces, which makes it subject to more intense regulatory pull than e-commerce. Cryptocurrency hits at the core of the nation — currency — thus putting far greater pressure on governments than e-commerce.

But exponential growth is still inevitable. This is a rough argument. But if cryptocurrency is exponential, then this rough argument is correct.

Zoom Out Perspective

Financial assets crave freedom, crave openness, crave interconnection. Cryptographic technology transforms financial assets into a file format, making sending dollars or stocks as simple as sending a PDF. It makes interconnection of everything possible — creating a financial network that operates around the clock, connects globally, and is completely open.

This will definitely win. Openness always wins.

If the internet has taught me one thing, it is this. There will be giants who resist, governments that will intimidate and apply pressure, but in the end, they will all yield to the speed of adoption, creativity, and efficiency brought by this technology. This is what the internet has done to all traditional industries. Blockchain will allow the same trend to consume the entire financial and monetary system.

That's right—given enough time—all will be consumed.

An old saying goes: People tend to overestimate what will happen in the next two years and underestimate what will happen in the next ten years.

If you believe in exponential growth, and if you look far enough into the future, then all valuations are still at low levels. It is worth pondering: every day, holders persist longer than sellers and skeptics. The time horizon of big capital is much longer than short-term traders in the crypto market would like you to believe. Historical experience teaches big capital not to fight against significant technological trends. Do you remember the grand narrative that initially made you buy ETH or SOL? Big capital still believes in that story and has never wavered.

So, what am I actually arguing for?

I argue that applying the price-to-earnings ratio to smart contract chains (the so-called “revenue valuation paradigm” today) is a betrayal of exponential growth. This means you categorize this industry into the realm of linear growth; it means you believe that 30 million DAUs on-chain and less than 1% M2 penetration rate is its ceiling; it means you think cryptocurrencies are just a marginal aspect of the world, that they have not emerged victorious, nor are they destined to do so.

More importantly, I am calling on everyone to become believers. Not just believers, but long-term believers.

I assert that this exponential transformation will surpass all the waves you have experienced in your lifetime. This is your “e-commerce era.”

When you are in your twilight years, you will tell the younger generation, “When the great changes happened, I was there.” Not everyone believes this could come true — the entire social order will be reshaped, and all currency financial systems will be completely overturned by the decentralized computer programs we collectively own.

But this did happen, it changed the world. And you, were once a part of it.

Disclosure of Interests: The above article is solely the personal opinion. Dragonfly is an investment institution for numerous tokens such as MON, MEGA, ETH, SOL, HYPE, SKY, etc. Dragonfly firmly believes in the theory of exponential growth. This article does not constitute investment advice but provides another dimension of thought.