When altcoins lose consensus, excess returns may be hidden in the overlooked "ruins of innovation."

Written by: Squid

Compiled by: AididiaoJP, Foresight News

Part 1: What is the current market sentiment?

"What excites you most about crypto?"

"What areas are you investing in?"

I always ask these questions to venture capitalists and hedge fund peers when attending conferences. They typically have the most macro insights into where the industry is heading. But at last December's Breakpoint conference, the answers were not encouraging.

Most responses focused on consensus narratives:

Such as "stablecoins," "perpetual contracts," "prediction markets," "real-world assets (RWA)," "digital banking."

Some answers revealed deeper skepticism:

Like "nothing exciting," "non-crypto businesses using blockchain infrastructure," "taking a break and waiting for now."

Overall, bets seem to lean more towards industry "maturation" rather than "innovation." Underlying these conversations is a pervasive sense of nihilism.

This sentiment is rarely stated explicitly, but most can feel it. It stems from endless scams, projects with low float and high valuations going public, exchange listing hype, and KOL marketing games. This sentiment reflects the current state of the industry but cannot predict the future; one could even argue that the future likely won't be a continuation of today.

Betting on mature narratives or areas with clear product-market fit (PMF) is essentially a subconscious "risk-averse behavior," rooted in this nihilism. Participants want to avoid the worst aspects of the industry and, in an environment of generally weak token performance, are unwilling to take risks on innovation.

I believe that by 2026, none of these directions will be good choices for liquid trading:

The problem is that market efficiency remains low, and this inefficiency still supports the prices of many altcoins. Industry maturation means prices will revert to fundamental value—in fact, this would cause most tokens to decline in the medium to short term. Unless you're shorting, it's hard to find fundamental-based investment opportunities.

Trend continuation trading in areas with existing PMF, while directionally sound, is difficult to execute in liquid markets due to the persistent "adverse selection" problem. Most of the time, if you buy tokens in consensus narratives, you're either buying low-quality copycats or entering at absurdly high valuations.

For example: You say you're bullish on prediction markets in 2025? Which token did you actually buy?

Part 2: Where is the real value in crypto?

Industry maturation means moving towards fundamental pricing. But this exposes a core problem: the fundamentals are too small to support current valuations and difficult to drive the market.

So, what is driving token prices? The chart below provides a rough breakdown of crypto market capitalization by asset class, adjusted to illustrate the point more clearly:

Two main adjustments were made:

• Applied a 75% discount to the entire Layer 1 category
• Applied a 50% discount to the entire Application category

This reflects a view that a significant portion of these two major asset classes lacks fundamentals sufficient to support their current valuations.

After adjustments, two points stand out:

1. The market size cannot support grand narratives

Despite the attention on the application layer, the actual market size remains small. Last year's total on-chain fee revenue was about $10 billion, and not all of that accrues to token holders. In a global context, this figure is negligible. One could even argue that the total valuation of the entire on-chain application ecosystem, pre-adjustment, is less than that of a single food delivery company like DoorDash.

2. Even after declines, speculative premiums still dominate altcoin valuations

Looking deeper:

Fundamentals

Fundamentals determine the price floor. For most tokens, this floor is far below current prices. Even at current valuation levels, the market cap of the vast majority of tokens is driven by speculative premiums—the value people assign based on the expectation of selling at a higher price in the future. This premium is highly correlated with overall market volatility and naturally decays over time. The more mature the narrative, the smaller the speculative space.

This situation is difficult to change in the short term. Therefore, as speculative premiums fade, most existing altcoins will underperform Bitcoin. The faster the industry matures, the sooner this underperformance will arrive.

Layer 1

Layer 1 remains an important category, but the rules of the game have changed. The winner-take-all general-purpose blockchains have likely already emerged. Marginal performance improvements are unlikely to disrupt network effects already established in liquidity, developer ecosystems, etc. New general-purpose blockchains will not receive the premiums they did in past cycles. Application-specific chains will gradually be valued as "Applications."

Revenue & Applications

"Focusing on revenue" is the right direction, but it's often misunderstood in crypto. People discuss revenue multiples, but there are very few crypto businesses with durable moats. Much revenue comes from incentives, and cash flows have historically been fragile. Even with strong businesses and stable cash flows, it's often unclear whether tokens can effectively capture this value. A low valuation multiple does not necessarily mean it's a good investment.

The application layer still holds the greatest long-term potential, but solving real problems takes time. From a liquidity investment perspective, there are huge opportunities here, but the timeline may be longer than the market generally expects.

"We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run." — Amara's Law

The core conclusion remains unchanged: No matter how attractive the revenue narrative, no matter how much capital bets on industry maturation, speculation remains the primary driver of market cap. It will take time for fundamentals to expand to a sufficient scale. Until then, valuations will be set by expectations, not cash flows.

Part 3: Trading directions worth watching in 2026

In a single asset or market, speculative premiums decay over time. This is an old story in crypto—AI agents, early DeFi, NFTs have all gone through such cycles.

Speculation always flows towards areas where valuation is not yet defined, narratives are still forming, and market size is undefined (unlimited imagination).

In one sentence: Bet on innovation.

Assets most likely to absorb speculative premiums in 2026 typically have the following characteristics:

• Can create entirely new assets or markets on-chain
• Have a viable path to obtaining "monetary premium"
• Are difficult to value due to novelty or unclear cash flow accrual (this is also why the monetary premium narrative is important)
• Have some form of barrier: technical, cognitive, or access barrier (hard to arbitrage + better distribution)
• Align with larger global trends—market size has no upper limit

These conditions delay the arrival of market efficiency, prolong the window of mispricing, and thus leave room for speculation.

Specific narratives and projects worth watching

1. uPOW (Useful Proof of Work)

uPOW shifts mining output from pure inflation to output with practical utility, turning "mining for distribution" into "mining to add value to assets." This direction has been discussed for a long time, and the underlying technology is now approaching feasibility. uPOW projects are novel, difficult to value, represent a new class of productive assets, and have the potential to gain monetary premium. Currently focusing on two:

@nockchain: Early-stage project, needs time to develop, fits the theme, and benefits from zero-knowledge proof and privacy narratives.

@ambient_xyz: In private pre-mining stage, expected to launch this year. Highly cyberpunk, using POW to provide compute for evergreen large language models.

2. Ownership Tokens

The era of "vibe coding" is here. Small teams developing short-cycle, niche MVPs will become the norm, and some will grow into real companies. Lightweight fundraising processes and the growth-enabling effects of tokens will continue to have value. The core issue with these tokens is the claim on business value, but various mechanisms are being explored to solve this. Opportunities exist both in the tokens themselves and in launch platforms. Watching two:

• @MetaDAOProject: Recommended multiple times, the clear leader in this space
• @StreetFDN: Earlier stage, positioned to serve offline startups

3. Distributed Training & Compute Markets

Distributed training remains one of the most promising areas in AI x Crypto, with launch progress slower than expected. Leading teams have begun testing, hoping for a full launch this year. Beyond the project tokens themselves, they are more likely to spawn secondary applications and token ecosystems built on top. The real liquidity opportunities might be there, although project tokens could also rise. Leading teams:

• @NousResearch
• @primeintellect
• @pluralis

4. Social Metaverse

Digital social spaces continue to evolve. Product-market fit remains elusive, but experimentation continues. Expect continued trial and error in this area this year. The winner may not have emerged yet, currently watching:

• @zora: Shows strong resilience, huge potential for synergy between creators and content tokens
• @trendsdotfun: Solana ecosystem project, reaching Asia-Pacific markets, not yet widely noticed
• @tryfumo: Included because it proves—execution itself is a moat
• @ShagaLabs: Metaverse data direction—expect more similar projects

5. Solana: @solana ($SOL)

General-purpose blockchains have matured. As network effects strengthen, marginal technical improvements matter less than existing liquidity, developer ecosystems, and distribution channels. The winner is likely already decided.

Solana has a strong core ecosystem, a rare long-term vision for builders and capital, and a reliable roadmap for continuous expansion. The next wave of speculation will happen on existing infrastructure. Whatever the specific narrative, Solana is structurally positioned to capture a large amount of such activity.

Areas I think have less opportunity: Bots, memecoins.

Summary

Nihilism is not insight; it's a lagging emotional reaction to price action, a symptom of industry problems, not a prophecy of the future.

When sentiment is low, capital retreats to "mature trades" and consensus narratives to avoid risk. But in crypto, as in other industries, risk aversion does not generate alpha.

The industry is structurally still in a "pre-fundamental" stage, with price discovery dominated by speculative capital, not cash flow. The shift away from this will be slower than people think.

Speculative bubbles always follow innovation. Believe in innovation, try new applications, spend time with builders, bet on innovation.