The State of the Market: Liquidity Dilution and Bunch of Copycats

The cryptocurrency market remains firmly under Bitcoin’s dominance, with its dominance showing no signs of decline. This is largely due to three key factors: Bitcoin's unique position as a store of value, the approval of Bitcoin ETFs, and the dilution of liquidity across a sprawling altcoin market. Ethereum, while technically stronger than ever with the implementation of Layer 2 rollups and significant fee reductions, has struggled to gain similar momentum even after the ETF approval. Meanwhile, altcoins fare even worse as their sheer number continues to dilute the market daily, turning the idea of an "altseason" into a distant joke for stuck investors.

The flood of altcoins and protocols has fragmented market liquidity. Most projects are offering variations of the same concepts—whether it’s Layer 1, Layer 2, decentralized exchanges, lending, or restaking protocols. With tight macroeconomic conditions, liquidity remains scarce and spread thin across countless copycat projects. The rise of modular frameworks and quick-launch stacks only worsens this issue, filling the market with subpar offerings. Point-based reward systems attract liquidity to these mediocre protocols, diminishing the value of existing tokens and motivation to create innovations.

Root of the Problem: Crypto Identity Crisis and Lack of Use Cases

Many argue that Web3 is in its "Internet adoption moment," similar to Web2 three decades ago. However, during the early days of the Internet, developers were focused on building products for the masses. Today’s blockchain builders seem trapped in a loop, churning out endless developer tools or Ponzi schemes for degens, rather than creating products with real-world impact. As long as this mindset persists, crypto will remain niche, and liquidity will stagnate. Without a clear shift toward building use cases that truly matter in people's daily lives, crypto risks becoming a solution in search of a problem.

Blockchain offers immense potential—voting systems, supply chain management, healthcare, decentralized identity, and tokenized real-world assets. While these ideas sound revolutionary, they often hit roadblocks when it comes to real-world execution. Most of these use cases fade due to various challenges. To develop solutions with real market fit, developers need to step outside the “crypto-first” mindset. We need to focus on building the right solutions, not just crypto solutions. Without this, blockchain risks falling into constant platformization, catering only to a narrow group of users.

Case Studies of Thriving Products 

Okay, now let’s examine how to build a successful crypto project by looking at three unique case studies. We’ll explore an application that offers real-world utility, an appchain that focuses on solving a specific problem, and a general-purpose blockchain that sets itself apart in a crowded market. Each of these examples highlights how finding the right niche and focusing on actual user needs can lead to lasting success in the crypto space.

Fewer Chains – More Unique Applications

The blockchain space is overflowing with scalable chains, many of which lack users and even considered ghost chains. So, scalability is no longer the concern at all — the lack of unique applications driving demand is the concern. Instead of creating more chains, the real challenge lies in developing applications that genuinely solve real-world problems and capture a wider audience.

Polymarket Case Study: Prediction Markets Done Right

Polymarket is a great example of how to take an existing concept, enhance it with crypto, and open it to a broader audience. Prediction markets have been around for centuries, letting people bet on the outcomes of events, but Polymarket pushed the idea to a new level. It allows users to buy and sell shares that represent the likelihood of a future event, with the price of each share fluctuating based on how likely that event is to happen, ranging from $0 to $1. When predictions are backed by real money, in theory, it leads to more thoughtful and truthful participation. 

For instance, if a candidate's share is priced at 51.7 cents, the market believes there’s a 52% chance of that candidate winning. When you buy shares, you’re betting on that outcome. After the election, the winning candidate's shares will be worth $1, while other shares become worthless. The more likely an event, the higher the price of shares, the less likely, the cheaper they become. 

Polymarket gained significant attention during the 2024 U.S. presidential pre-election campaigns, although it has been active since 2020. In August, its trading volume reached $472 million, with over 63,000 active users. While these numbers may seem modest in absolute terms, they are substantial for this niche. Media outlets even began posting Polymarket's probabilities alongside traditional poll data. Polymarket’s pricing reflects collective wisdom, often surpassing traditional media forecasts. This is what real success looks like.

App-Specific Chains Over General Purpose

If you're set on creating a new chain, the smartest move is to focus on a specific niche and build an app-specific chain, not a general-purpose one. It doesn’t really matter which blockchain stack you use, as long as you solve a real problem with your AppChain. By concentrating on a targeted solution, you can carve out a space where your product stands out and excels.

Hyperliquid Case Study: A Perpetual Futures DEX Done Right

Hyperliquid, a decentralized perpetual futures and spot exchange built on an order book, perfectly illustrates how an app-specific chain can dominate its niche. Early decentralized exchanges (DEXs) used basic AMM models, lacking limit orders, order books, or the advanced trading tools available on centralized exchanges (CEXs). DEXs were slower and less functional, struggling to compete—but it was only a matter of time before a true CEX competitor emerged.

Hyperliquid wasn’t the first order book-based DEX—platforms like GMX and dYdX came earlier—but it’s the most successful. Its success lies not in pioneering the concept, but in perfecting the product. Today, Hyperliquid offers a user experience, functionality, and speed that far surpasses its competitors. Everything, from the interface to the trading process, feels smooth and intuitive, providing users with an experience on par with centralized platforms. 

By the numbers, Hyperliquid stands as the largest and most popular appchain in its category. In terms of total value locked (TVL), it outpaces many general-purpose blockchains, ranking 10th on DefiLlama with nearly $670 million in TVL. With over 173,000 users and organic growth in trading volume, Hyperliquid shows that focusing on a single, specific use case and perfecting the product can outperform even major players in the general-purpose blockchain space, like Aptos and TON.

Think Five Times Before Building a General-Purpose Chain

If you're set on building a general-purpose chain, think again—then think a few more times. If you're still convinced, you'd better have a rock-solid thesis for launching a new Layer 1, or even a new general-purpose Ethereum rollup. There are only a handful of general-purpose blockchains with a realistic chance of success in the next few years. Your project needs a clear, unique value proposition like Solana's or an unmatched market fit like the TON chain. And on top of that, you'll need substantial VC backing to bring it to life.

TON Case Study: A General-Purpose Chain with Unmatched Market Fit

TON is indeed a general-purpose chain, but in many ways, it's also app-specific—namely, it's Telegram-specific. By leveraging Telegram's vast user base, TON has built a unique bridge between traditional users and the Web3 world. While most Layer 1 blockchains struggle to engage non-crypto audiences, TON's integration with Telegram positions it as one of the few general-purpose chains with a clear market fit, alongside Ethereum and Solana.

TON’s success largely comes from Telegram Mini Apps. These apps open within Telegram and offer a smooth interface for users to interact with decentralized applications (dApps) without needing to understand blockchain. Notcoin, the first successful example, created a simple yet addictive gameplay loop—tap to level up and earn rewards. This ease of use, combined with the anticipation of an airdrop, attracted over 40 million users, making Notcoin’s token, NOT, one of the most widely held on the TON network, with over 10 million holders.

In terms of on-chain performance, TON’s metrics are impressive. As of early September 2024, the network's Total Value Locked (TVL) stands at $335 million, peaking at $776 million in July. Daily transactions consistently exceed 3 million, with a high of nearly 9 million in May. The number of active wallets has skyrocketed to 13 million, with over 330,000 daily active wallets and 4.4 million monthly active wallets, signaling robust and sustained growth.

Tips on Developing a Truly Unique Crypto Protocol

The three cases described above are unique, and it's tough to distill their success into a step-by-step guide. However, here are some key tips to help you focus on the right priorities.

• Identify a Real-World Problem: The most critical factor is having a deep understanding of both the crypto space and the world beyond it. This broader perspective will help you identify real problems that blockchain can solve, rather than recycling overdone ideas.

• Create a Specific App with Appchain Potential: Start small. Instead of aiming to revolutionize the crypto industry from the outset, focus on building a well-defined application that could evolve into an appchain as it matures.

• Target Non-Crypto Audiences: The number of true cypherpunks and degens will always remain a small fraction of the population. Build for real users beyond the crypto-native community. Research potential audiences outside of crypto who could genuinely benefit from your solution.

• Make It User-Friendly: Focus on shaping good quality UX-design. Keep it simple and relatable to appeal to users who don't care about the underlying technology but want practical solutions.

• Grow Organically First: Avoid over-reliance on point-based marketing campaigns. Your protocol should gain traction because it’s useful, not because of airdrop incentives. You can always introduce reward programs later, but launching with them will mostly attract drophunters, making it difficult to evaluate early results.

• Launch Timing is Critical: Wait for the right market conditions before launching. A bull market isn’t always the best time, despite easier access to funding. It’s better to stress-test your protocol when the market is quieter, allowing you to handle challenges with fewer users and lower expectations.

Output

The crypto space has made remarkable strides in the past few years. Yet despite this, the market remains crowded with repetitive protocols that offer little real-world value while draining precious liquidity. So, how do you stand out in this landscape? The answer lies in focusing on originality and utility.

As we explored through case studies like Polymarket, Hyperliquid, and TON, building a successful project involves targeting specific niches, solving real-world problems, and avoiding the temptation to create yet another generic blockchain. By identifying genuine problems, targeting non-crypto users, prioritizing user-friendly design, and launching with strategic timing, you can create a truly unique crypto protocol that not only survives but thrives in this competitive space.