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**Introduction**
The recent occurrences within the market have been truly astounding, to say the least. Over the course of the past weeks, a remarkable surge of memecoins has taken place, with one particular coin embodying the iconic meme character, Pepe The Frog, achieving FDV of $1.8 billion at ATH. The public sentiment surrounding this phenomenon is deeply divided.
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On one hand, there are individuals who have amassed generational wealth through a single trade, an unprecedented windfall in their entire trading history. On the other hand, genuine innovators and pioneers within the industry express profound dissatisfaction, as the industry’s attention is once again fixated on memes that lack substance, dubious enterprises pursued by pure greed, and the like, rather than recognizing the contributions of diligent builders.

**Inception**

The narrative of memecoins is fundamentally a saga of speculation driven by societal factors. The saga of speculation goes back to the 17th-century, when Tulip Mania occurred in the Netherlands. Tulips, once a status symbol in the Netherlands, has had a significant rise in price and the subsequent market crash — all within a few months.

Fast forward to the digital age, Dogecoin, launched in 2013 (a few years before Ethereum), is probably the most well known meme asset. We all remember when its valuation spiked to $50 billion in 2021, fueled by endorsements from Elon Musk and Reddit’s community. Currently, it maintains a market cap of around $10 billion with significant daily trading volume despite questionable fundamentals. The most recent memecoin season began in April 2023 and saw Pepe leading the wave. Like its predecessors, Pepe exploited internet culture and humor, igniting renewed enthusiasm among investors. Interestingly, the meme Pepe has been a part of the internet culture for a dozen years but has only now taken its role in the memecoin narrative. The recurring popularity of such memecoins underscores the intricate interplay of various psychological and economic factors. We invite you to delve deeper into this fascinating phenomenon with us on this journey.

**A Note On Memetics**

In the beginning, it’s important to establish why memes like Pepe, Doge, and Shiba are so powerful in the first place. The word “meme” itself comes from the field of memetics, which is the study of information and culture. Some divisions of the social sciences consider it to be a pseudo-science while others consider it critical to understanding how societies and subcultures create and propagate everything from family narratives through to vicious propaganda. From the lens of memetics, it’s easy to see why these meme tokens propagate so quickly relative to projects or applications with more merit. Memes like Pepe and Doge share certain characteristics, namely:

They are easy to understand and contain no abstract concepts (at least at a surface level)
The memes themselves evoke a level of emotional mirroring or interaction; viewers can relate with the persona of the character in question
They carry a high degree of appropriation potential and can be adapted to fit any narrative or message, for better or worse
They typically carry a high-degree of cultural currency and can identify and individual as existing within an “in” group; this group could be as simple as those that understand a joke or as complex as an entire token ecosystem
At the end of the day, such cultural mixture creates a fundamental layer that is significantly more powerful than even the most cutting-edge, profitable, and well designed protocol token.

**Game Theory Of Memes**

As emphasized in the introduction to our 2023 thesis, the market this year can be encapsulated by the phrase: “In the belly of the bear.” With the market activities being relatively quiet, retail investors have increasingly focused on the social dimensions of the markets, particularly memes, which have catalyzed a localized bullrun. Despite the lack of underlying financial fundamentals, the rise of meme-themed cryptocurrencies can still be interpreted through the lens of various economic theories.

First of all, the notion of “irrational exuberance,” popularized by economist Robert Shiller, may be applied to the ascent of memecoins. This refers to investor enthusiasm driving the price of an asset rather than its fundamental analysis, often leading to price bubbles where asset prices surge significantly above their intrinsic value. This negates the concept of market efficiency, where prices reflect available rational information. Instead, memecoins seem to exemplify irrational exuberance, with price hikes propelled more by internet hype (mainly Twitter) and FOMO than any inherent value.
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The intrinsic value of memecoins isn’t the subject of debate, yet this concept is clearly enacted by numerous users seeking the next 100–1000x memecoin on Twitter, having missed out on _____ (insert the memecoin of choice). The high engagement rate under such posts substantiates this claim, as only industry titans like Vitalik Buterin can compete with such view count.

Another interesting game theory concept worth exploring that drives the value of memecoins is Network Effects. This principle suggests that the value of a product or service amplifies with its usage. Frequently associated with the rise of social networking sites, the principle suggests that as more people use a product or a memecoin in our case, they discuss it, triggering a cascade of purchases, therefore augmenting its value. The theory of network effects, championed by Theodore Vail, proposes that reaching a critical mass — the point at which the product becomes self-sustaining — can be vital for widespread adoption. Adapting this to our practical example — it is difficult to find the point where the meme narrative is self-sustaining.
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Memecoins are often assessed by their market capitalization. The tipping point is frequently argued to be above $100M, anything below is “ngmi”. Judging by this metric, the only memecoins here for the long haul are the aforementioned $PEPE and $TURBO — the memecoin that effectively amalgamates two of the most talked-about technologies in recent months, AI and blockchain. This memecoin was actually created with the support of Chat GPT.
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However, judging by the current market cap, it appears that $PEPE is the only one that is “gmi”. Its current market cap is around $700M, placing it 64th on the list as of 15th of May. Interesting to see whether it will remain there over the next few months. Our prediction is that $PEPE is here to stay, just like $DOGE and $SHIBA, coins with questionable value but significant market capitalization and daily volume.

The Classical Prisoner’s Dilemma and the asymmetry of information often precipitate the abrupt end of what is colloquially known as the meme season. The Prisoner’s Dilemma, a concept in game theory, demonstrates a situation where two individuals might not cooperate, even if it serves their best interests. This concept can be extrapolated to the behavior of memecoin investors. Consider two investors, Investor A and Investor B, both investing in a memecoin. Their choices are binary — to hold or to sell. If both hold, they could potentially augment the coin’s value due to a scarcity in supply, benefiting both. However, if one sells while the other holds, the seller could potentially profit at the expense of the holder. If both sell, the coin’s value could plummet, resulting in losses for both investors. The dilemma is that while holding is in the best interest of both investors, fear of the other selling could prompt both to sell, leading to a suboptimal outcome. In addition, as all transactions are on chain, users can easily track the transactions of each other.

To give you a brief example, the wallet ending with 609f48e33c, received 2340B of Pepe on the 22nd of April, a few days after launch. This wallet was marked as a “whale wallet” by the other Pepe investors. Users were afraid to be the exit liquidity and each instance of selling from this address invariably instigated a series of subsequent sales, despite the fact that they were better off holding the asset together.
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This lack of trust and cooperation is a prevalent issue in the memecoin market, where value is predominantly driven by speculation and investor behavior rather than intrinsic value. Moreover, retail users are often cognizant of information asymmetry, a situation where insiders (in this case developers) possess more information about the coin than others. While information asymmetry can exert both positive and negative impacts on the price, a sale in a “whale wallet” is never a positive sign for an average user. Consequently, this is the principal reason why the majority of meme cryptocurrencies reach specific market capitalizations — $1 million, $10 million, $100 million, before subtly going down. Once the whales initiate a sell-off, the remaining stakeholders inevitably follow suit.

**Industry Impact**

The surge in the market for memecoins has influenced the entire industry. Many users were questioning the insanely high gas fees that were on Ethereum as well as other chains. At some point, the spillover effect impacted various other chains including Arbitrum, where the fees went up by a factor of 10.
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While memecoin trading is significant, a notable portion of increase in gas fees came from Maximal Extractable Value (MEV) bot operators using sandwich attacks for considerable gains. In this tactic, an attacker profits by sandwiching a victim’s transaction between two of their own, manipulating the price. This involves buying the victim’s token at a below-market rate and selling it within the same block for profit.

The notorious anonymous MEV bot, jaredfromsubway.eth, spent around $1.2M daily on gas fees trading various memecoins, accounting for 7% of all Ethereum gas fees at one point. The bot reportedly made over $500K daily profit via sandwich attacks.

Such techniques raise a clear concept built on top of information asymmetry — skill asymmetry. Many retail traders who are entering the memecoin mania to find the next 1000x coin are not familiar with the blockchain stack and users such as jaredfromsubway.eth are able to benefit from their lack of knowledge, losing a significant portion of their assets.

**Conclusion**

In the end, one should only enter this game if he is fully aware of his actions and is able to input a certain amount of actions that he is willing to lose. Despite often seeing a wallet that made substantial gains well above the market average, these are first and foremost outliers, and the vast majority of retail users entering the industry via such craze will lose their “investments”.

It’s worth noting that each such cycle catalyzes a wave of innovation. Amid the meme frenzy, for instance, Yearn Finance introduced a tool that enables selling multiple tokens in a single transaction, thereby optimizing gas costs, a tool that many of the retail users were hoping for:
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Moreover, while FOMO may motivate the initial influx of users into the meme market, it’s likely that a portion of those will remain in crypto, exploring its diverse use cases and protocols. Memecoin craze is an inherent aspect of the industry. We don’t perceive it as either negative or positive, but we recognize that meme cycles are likely to recur periodically. Just be careful and do not be the exit liquidity next time it is around.

*Note — NFA — DYOR. (Not Financial Advice, Do Your Own Research.)
It’s important to note that while game theory can provide insights into the dynamics behind the boom of memecoins, investing in such assets carries significant risks. The speculative nature, lack of value, and potential for scams make them highly unpredictable and potentially harmful to investors. It’s advisable to exercise caution and conduct thorough research before considering any investment in crypto and especially a market driven by the meme narrative.*

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