Before my time at Delphi, I worked at a centralized exchange. My title was “Research & Venture Associate.” A pretty boujee-sounding title, I know, but it was really just a euphemism for “shitcoin connoisseur.” My main responsibility was finding and listing hot memecoins before our competitors. It was truly a first-class education in trench warfare, and I had a lot of fun mining for gems amid the mud.
When I arrived on the job, I thought everything seemed straightforward. All I had to do was figure out what coins were capturing mindshare and list them. Boom. Done. Easy money. But what I soon learned was there are other considerations for listing a token outside of “this thing could 100x.” The biggest being liquidity. If we list a new token — let’s call it $META cuz that’s my current favorite — and our customers show up and say “we want some META,” we as the exchange need to make sure that we have enough META on the books to satisfy demand.
In practice, this meant sourcing liquidity from market makers and managing our ‘inventory’ — a fancy way to say: make sure you have enough supply to satisfy demand. I was taught to think about liquidity as a dynamic market force. Anyone, at any given time, can either take or add liquidity into the system. However, not all liquidity is created equal.
In the context of centralized exchanges, there are three trader personas — sharks, whales, and minnows.
- Sharks: sophisticated, oftentimes institutional trading desks that run market-making or HFT strategies
- Whales: individual traders with large size
- Minnows: retail traders with small size
In the ocean, each of these populations need each other to survive. If the minnow population were to collapse, many sharks would die. So each species relies on the others. This is also true with centralized exchanges. To create a dynamic marketplace, you want the holy grail of sharks, whales, and minnows all swimming in the same waters. But this is hard to pull off. You end up dealing with the chicken and egg problem. Every exchange starts from zero — zero retail and zero institutions. Onboarding the first retail customers is hard because there’s not much liquidity on the books. And onboarding institutions is equally hard because there’s no retail.
Everyone has different ways to solve this chicken or egg problem, but we were always told to prioritize retail. In a perfect world, if you could pick between — having a ton of retail activity and having a ton of institutional flow, you would pick retail every time. That’s because institutions will always follow retail — they know they can make money off them, but retail might not always follow institutions. So our strategy was to onboard retail by listing tokens they want to trade and catering to their needs.
The same is true with Layer 1 blockchains.
These chains are conceptually similar to exchanges. They too are venues for speculation. And like exchanges, they rely on having a vibrant two-sided marketplace of buyers and sellers. The gold standard for L1s right now is Solana. Among all the L1s, Solana has the most retail activity by far. You can see this by looking at metrics like DEX volume or hot wallet users. Solana’s success is primarily a retail story. It onboarded retail first, and then was able to bring onboard the market makers and HFT shops. They are simply far more minnows for the sharks to eat on Solana than other chains like Cosmos or Polkadot.
The problem with all the new chain launches we’ve seen recently is they do not have any minnows. Or at least not enough to attract the sharks/whales into their shallow waters. While Berachain has a social following, it’s not clear if there is a dedicated base of users ready to speculate on their chain. This makes the cold start problem really tricky. If you can’t onboard minnows, then you won’t be able to get any sharks. The result is a stagnant, illiquid ecosystem with a downonly token.
The one outlier that’s worth considering is Hyperliquid. It’s an example of a new chain that was able to onboard a critical mass of minnows (retail users). Once they got a core base of power users, the chain/exchange becomes attractive for traders with larger size (whales) and sophisticated players (sharks). How exactly Hyperliquid was able to pull this off is beyond the scope of this riff, but at the highest level, we can say that they built a product people like. They solved core problems for users and offered a better trading experience than their competitors.
Most of the new chain launches we’ve seen in recent months and the others that plan to come over this year are totally undifferentiated and do not have a loyal group of retail users. For this reason, I expect these new chains to struggle. On the spectrum of Hyperliquid to Berachain, I expect their tokens to perform more like BERA than HYPE. Going forward, we should watch closely to see if other chains can emulate Solana/Hyperliquid’s playbook of onboarding minnows and then working their way up the food chain to whales and sharks. But until then, I would tread carefully with these new chain launches.