The fast-growing coin changes every cycle - the rules of the game for finding the final winner among platform blockchains

In the Netflix drama "Squid Game," the fifth game is decided by probability. On a bridge suspended in midair, players who fail to make 20 correct choices in a row, each with a one-in-two chance, fall to their deaths. It is designed so that no one can succeed alone, but so that a few players with later numbers can barely survive by standing on the sacrifice of the participants ahead of them.

Look back from the middle of the bridge and success consists of only one possible path. The tendency to believe that one had predicted the past correctly is called hindsight bias. In investing, hindsight bias is fatal. When an easily accessible investment rises sharply, people do not think they lacked the insight and missed a great opportunity; instead they blame the external factors that supposedly blocked the right choice at the time. Because they award themselves generous marks for their own judgment, when a seemingly similar opportunity appears before them they make irreversible choices, trying to make up for the past as well.

Blockchain investing driven by hindsight bias

The same is true of blockchain investing. When a bull market arrives, the market fills up with products that leap faster and higher than empirically proven names such as Bitcoin or Ethereum, capturing the eyes of new investors. This supports the claim that hindsight bias is at work and is manifesting itself as a collective phenomenon.

There is not yet a coin that rises against Bitcoin when Bitcoin is falling. Ethereum is no exception. But in bull markets, the countless coins that were overshadowed by Bitcoin during the downturn compete to show off their growth potential. If the claim of growth potential surpassing Bitcoin's were true, and if that truth had been the engine of growth because it sufficiently persuaded investors, then it ought to hold up to some degree even when Bitcoin falls. The phenomenon is easily explained on the premise that investors are investing on instinct, without having grasped the nature of this industry.

When Bitcoin rises sharply and the mood changes, hesitant investors begin to take an optimistic view of the market. But they judge that Bitcoin has already risen enough. In searching for an alternative with a higher return, they do not admit that their reason for not choosing Bitcoin in the past was a misjudgment. Once they become convinced that the coin they have chosen - for whatever reason - will follow Bitcoin's path, they block out information that gets in the way of that choice. This is confirmation bias. They fail to recognize that the very reason they did not invest in Bitcoin years ago was their own confirmation bias, which gathered only the information that supported the judgment that "Bitcoin is nothing but a scam." At the level of the market as a whole, this manifests itself in the emergence of new coins that make Bitcoin's returns look shabby.

The problem is that the coin with tremendous growth potential - the one that grows explosively - changes every time. When a bull market begins, people of a similar disposition go looking for a new name that does not appear to have risen enough yet. And with hindsight bias and confirmation bias operating in a chain, they do at least succeed in creating a new star. "If you can only pick, in advance, the beauty that others will pick," you can earn large returns in a short time. But it is not common for those who long lacked the eye to spot proven names such as Bitcoin to suddenly be fitted with a million-dollar sense for a winner.

A blockchain community that has succeeded spectacularly in a short period is always full of fierce conviction. This, too, is rational. To attract new investors they must insist that they have already been validated, like Bitcoin or Ethereum. But the more new investors believe that very claim, the more they must go looking for yet another alternative. Precisely because it has already succeeded, it loses its appeal, just as Bitcoin did. They are also the sort who trust their own eye for finding the pearl in the mud that will rise a hundredfold at a stroke. As a result, a coin that succeeds in a short time cannot sustain that success. It is left in the awkward position of being neither an already-proven old coin nor a new coin whose potential has yet to be discovered.

It is with an understanding of this most powerful fact - that the instincts of new investors shake the market every cycle - that we need to look at the "blockchain version-up" competition being waged over Ethereum's position. The representative blockchains that have gathered investors under the banner of "Blockchain 3.0" are Cardano and Solana. Their recent growth has been nothing short of astonishing. They are growing by finding the opening left by an Ethereum hobbled by expensive fees, and by playing up attributes of being faster, cheaper, and more stable.

Before predicting whether Cardano and Solana will withstand the next bear market and hold their current positions, it is worth first asking whether the rules of a game contested on speed and fees are even appropriate. I once took part as a speaker at the "Bitcoin Conference" held at KINTEX in Korea in 2014, and Vitalik Buterin also came to Korea for the first time in order to attend that conference.

He said that in order to be widely used as a smart contract platform, a coin must not be one whose price rises the way Bitcoin's does. Before Ethereum had even come into the world, he was already foreseeing the paradox between the price of the native coin and fees. The fact that Ether was originally designed to be produced without limit likely reflected the very thought that a rising price would be a problem. Yet in seven years Ethereum has changed its foundations in the direction of conferring scarcity. This symbolically illustrates the dilemma that smart contract platforms - blockchains - come to face.

When a platform blockchain achieves technically low fees, it runs into two difficulties. First, it also lowers the cost of a denial-of-service attack. The reason fees are imposed on transactions in the first place is to counter attempts to eat up the system's resources with malicious programs such as logic bombs. If fees are low, the cost the attacker must pay is low as well. In fact, Solana - which boasted the highest speed and the cheapest per-transaction fees - suffered a DDoS attack in September, and its main nodes were disabled for 17 hours.

Second, the use value of the native coin used to pay fees declines. The current market is a bet on a rosy future, so this problem is not reflected in prices. But if blockchains are actually used across many industries, it becomes a real problem. Unlike PoW coins, which are produced by condensing electricity, PoS coins hold up use value rather than production cost as the essence of price. Accordingly, as fees fall, so does the use value of the native coin.

Could the endless race toward lower transaction fees endanger PoS blockchains? Run a thought experiment and the answer to this question comes out, for now, as "yes." A great many assets are placed on top of smart contracts. If they were not, there would be no point in being a platform. Because of cheap fees, the total value of the native coin can fall below the total value of the assets riding on the platform. In PoS, holders of the native coin refrain from attacking the system even when they have the power to do so, because they expect the value of the native coin to collapse if the system is hacked.

But if the value of the assets is higher, then by cooperating in reversing an enormous contract involving some asset, they can obtain more in bribes than they would lose from the collapse of the native coin. That is, the case in which the gain from distorting the system exceeds the loss - a result that can be derived arithmetically, in accordance with the Coase theorem, whenever the total value of the assets is higher than that of the native coin.

The rules of the game: humility, coolness, and patience

A blockchain platform grows by rotating along the path indicated by a "self-fulfilling prophecy." The hope that it will succeed draws investors; those investors push the price up; the resources thus increased are poured into strengthening the system and elevating its value. Trusting such a system, various assets come aboard, and the platform's total value actually increases. But if the competition for cheap fees departs from some point of equilibrium, this virtuous circle may begin to rotate in the opposite direction. Which is also to say that we still do not know the rules of the game that will decide the final winner among platform blockchains.

New investors must discard hindsight bias and confirmation bias, and must step back and turn down the volume on the voices of insiders trying to bring a self-fulfilling prophecy to pass. That is: humility about one's own intellectual capacity, coolness toward the shouts of investors who have already succeeded, and patience toward time, the final judge that separates jade from stone. Only by clinging to the virtues of humility, coolness, and patience can one escape the "Squid Game," in which a single momentary choice sends you plunging into the abyss.

Oh Tae-min, author of "Bitcoin Was Strong" and "The Genealogy of Bitcoin Wisdom"