Welcome to This Week In Cardano

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This Week In Cardano

Your Daily Newsletter covering all major events happening in the Cardano Ecosystem

Hi Cardano Community,

Welcome to This Week In Cardano - your daily Newsletter covering the major updates in the Cardano Ecosystem!

This is what we have for you today:

• 🔥 The Unforeseen Opportunity for Cardano in the Fed's Shrinking Balance Sheet

• 💎 Gem of the Week

• 🧑‍💻 Cardano Job Board

The Unforeseen Opportunity for Cardano in the Fed's Shrinking Balance Sheet

The financial world is on the brink of a seismic shift as the US Federal Reserve (Fed) undertakes an ambitious mission to reduce its balance sheet to zero within the next few years.

This move is expected to have far-reaching consequences, particularly for emerging blockchain technology and its associated startups.

The future of the entire blockchain ecosystem hangs in the balance, and the next few years will be crucial in determining whether these startups will sink or swim.

Join us as we delve into the potential implications for crypto assets and blockchain-based ventures.

What is the balance sheet, and why does it exist?

The Federal Reserve employs various tools to regulate the financial system, including manipulating the flow and cost of capital.

Typically, the preferred methods of achieving these objectives are through interest rates and money operations. However, in certain circumstances, the Fed turns to its balance sheet to boost liquidity. This strategy involves printing currency and utilizing the funds to purchase bonds on the secondary market such as car loans, college loans, credit card debt, and mortgages.

The Fed's decision to shrink the balance sheet

The Federal Reserve has decided to shrink its balance sheet due to the economy's stronger footing, characterized by record-low unemployment levels and moderate to strong growth over the past three years.

Since mid-2021, the US economy has shown rapid recovery, with the demand for workers exceeding supply.

In light of these developments, the Fed believes it is time to transition back to traditional monetary policy and phase out unorthodox tools such as the balance sheet.

The Fed intends to complete the process of shrinking the balance sheet within three years, a rate three to four times faster than the rate at which it was built up.

Consequences of the Fed's balance sheet shrinkage

The Federal Reserve's decision to shrink its balance sheet is expected to have a more significant impact on borrowing costs than the recent interest rate hikes.

• Shrinking the balance sheet reduces the money supply and credit availability in the financial system, which can drive interest rates higher. 

• The reduced cost of capital may limit funding for some businesses, resulting in only the most viable businesses, such as those with healthier business models, receiving funding.

• Conversely, emerging technologies that do not seem to work out in terms of cost-benefit analysis may not receive funding. This could significantly impact the crypto assets and blockchain-based businesses as their market value and funding are largely based on their potential future value rather than their current profit-generating capabilities.

But last week, there was an interesting take by Chamath Palihapatiya on the potential effects of higher rates on the future of the next generation of tech startups

These are the main takeaways from the article.

High-Interest-Rate Environments Produced the Most Successful Cohort of Startups:

The 70s and 80s produced 27 companies worth more than $5.4 trillion in cumulative market cap, demonstrating the positive impact of high-interest-rate environments on startups.

1. Low-Interest-Rate Environments Can Spread Capital and Talent Too Thinly:

Low-interest-rate environments can lead to competition thriving, talent getting diluted, and the probability of success for any company going down due to the spread of capital and talent across a broader set of companies.

2. Low-Interest-Rate Environments Can Promote Unsustainable Growth Models:

Low-interest-rate environments can lead to companies being given the wrong incentive to grow at any cost, which promotes unsustainable growth models and can negatively impact long-term success.

3. Higher Interest Rates Concentrate Capital and Talent More Intentionally:

Higher interest rates concentrate capital and talent more intentionally in ventures that create value, shake out competition, and force sustainable growth models, allowing for greater long-term success.

4. Early Margins of Companies Founded During High Rates Are Higher Than Those Founded During Low Rates:

Leading companies founded during high-interest-rate environments, like Microsoft, Google, and Meta, had significantly higher early margins than those founded during low-interest-rate environments, like Uber, Snapchat, and Block.

5. Inflation and Economic Downturn Could Benefit Startups:

If inflation turns out to be stickier than expected and the 2020s are marked by higher rates and an economic downturn, it could ironically prove beneficial for startups that can embrace regime change, build sustainable business models, and capitalize on an era that sees competition diminish and talent become available.

If we can overlap this take on the future of crypto assets and blockchain-based startups, we could provide insight into the future direction of the blockchain industry.

However, it's essential first to assess the current state of the crypto markets and blockchain-based businesses.

The current state of blockchain-based businesses

The crypto market and blockchain-based startups experienced a surge of investment during their early stages due to the low or zero-interest-rate environment.

This resulted in a substantial flow of capital into various projects, even those without a clear business case or revenue potential, primarily fueled by hype.

Many of the projects with weak fundamentals either went bankrupt or sustained the lifeline with hype-driven but unsustainable models, damaging the reputation of blockchain-based solutions.

This underscores the importance of identifying fundamental requirements for blockchain-based solutions that can ensure their long-term success.

So what are the fundamental requirements for blockchain-based businesses to be successful?

• Scalability

It is imperative to ensure that the platform on which a company is built can scale effectively.

Scalability is a key requirement for the success of blockchain-based businesses. At present, no blockchain platforms offer the same scalability level as Web 2.0 without compromising the fundamental values of a public blockchain, such as decentralization and security.

• Cost-effectiveness of DApps

The absence of scalability in Dapps results in significantly higher costs than Web 2.0 solutions, directly impacting the adoption and profitability of blockchain-based businesses. This forces them to rely on hype-driven marketing to sustain funding or artificially inflate their token value to continue existing.

• Sustainable business models instead of ponzinomics

Due to the absence of cost-effectiveness and profitability in blockchain-based solutions, the asset value is primarily based on hype rather than fundamentals.

Consequently, crypto assets are highly volatile like any other hype-driven asset. In a high-interest-rate environment where the cost of capital is high, these assets would become less valuable, resulting in the potential loss of value of 99.99% of crypto tokens. This scenario would collapse the current funding model of blockchain-based startups, forcing only those with real customers, adoption, profitability, and sustainable business models to survive.

This will result in the mass extinction of blockchain-based startups, meaning 99% of the crypto assets will go to zero, and 99% of crypto projects and startups will fail in the next 3-5 years.

So there are two possible outcomes in the current high-interest rate environment.

In any case, no bull market is waiting for you in 2025.

Scenario 1

In the next 5-10 years, only those blockchain-based businesses with a sustainable business model backing them will be here.

In that case, blockchains like Cardano may host some of the biggest businesses we have seen.

Scenario 2

If they can't offer any business advantage over web2 solutions, the whole blockchain hype may collapse and will cease to exist in the next 5 -10 years.

One of the two is going to happen.

Conclusion:

To put it plainly, the blockchain-based businesses that will survive in the upcoming high-interest rate environment are the ones with a sustainable business model. Any business without a sustainable model will inevitably fail.

So, stay informed about the latest macroeconomic environment updates, the crypto ecosystem, and Cardano by subscribing to our newsletter.

Interested in sponsoring this Newsletter?

💎 Gem of the Day 🧵

🧑‍💻 Cardano Job Board

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Then this eBook is for you👇

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.’