ff3 is a movement that believes in the power of Web3, and the potential it holds for the next generation of founders, startups, and investors.
“We can’t control the market. We can’t control sentiment. But we can build.” - Seb Audet, CEO & co-founder of Zapper
For any crypto investor or NFT holder, the last several months can’t have been easy. Most digital currencies have seen a steady decline since last summer; some have seen a sharp collapse. Many people will be sitting there thinking—what happened?
We’re asking a different question—what’s changed?
Tremendous value (around $200 billion at this stage) has been shaved off the market, and yet we remain confident in Web3 as the long term future of the internet. So instead of counting our losses, we’re taking stock of the market downturn, and considering what we and founders can learn from crypto’s latest speedbump.
Read on to find out:
What kind of Web3 projects may start to disappear
Where we think investors’ (institutional & retail) money will go instead
What more regulation means for Web3
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The honeymoon may be over
There’s no getting away from the truth that now is a very turbulent time for the cryptoasset market, and what that means for the future of Web3. We’ve seen crashes before—but none quite like this. For all those who thought their money could only go in one direction, this should act as a wake up call. And all those who declared themselves ‘diamond hands’ (investors with a high tolerance for high volatility) should maybe consider if they were ‘paper hands’ (you can guess what that means) all along.
As painful as it is, this is a much needed market correction that was always bound to happen. We probably all knew it was coming but didn’t really want to think about it or prepare for that eventuality.
We’ve probably seen an end, for now, to sky high valuations in the DeFi world. Lofty valuations were based on incoming users to the blockchain, and now those assumptions have to be challenged.
This may accelerate a move towards regulation and consolidation
The difference with this crash and previous crashes is that, this time around, far more people were hurt. Institutional money and wider retail investing in cryptoassets has swelled massively in the past 18 months, meaning more people than ever are both financially and emotionally invested in crypto.
In response, this will trigger demand for regulation. While many DeFi purists might decry this change—given this may have been the very thing they were escaping in the first place—this is hugely important for the wider Web3 movement. NFTs and cryptocurrencies remain the entry point to Web3 for most people: their regulation will ensure more and more people feel safe to get involved. In the long term, regulation is vital for a truly scaled and sustainable market. This will also be backed by more accurate, data-driven NFT valuations which will increase people’s confidence in the long term value of what they are buying.
This is also likely to drive consolidation within the market, with a number of big traditional finance players likely to move into the market and acquire Web3 platforms. This may bring some stability to the market, but if Web3 is really about empowering individuals and moving away from broken economics, we should be wary about getting into bed with TradFi and adapting to their outdated business models.
The downturn isn’t specific to Web3
It’s worth acknowledging that the market collapse hasn’t only hit Web3 companies. Across the board, businesses have seen their valuations spiral: tech companies in particular have been hit hardest. Apple, Amazon, and Nvidia all slumped by over 5 percent; in general, the tech-heavy Nasdaq fell by 4.7%.
Some have also pointed out parallels to previous financial crashes—particularly 2008 (see below). Last time, the entire TradFi system needed bailing out: this time, nothing broke, but rather given the high risk nature of cryptoassets, many investors looked to take this risk off the table.
We may be seeing the end of speculation
A lot of the criticism of Web3 so far, even pre-crash, has been directed at the more hype-fuelled projects. That’s partly because that’s where there’s the most money to be made…and lost.
The speculation aspect of Web3, which so far has dominated discourse, may be bursting. We could be seeing the death of memecoins, cryptocurrencies like Dogecoin and Shiba Inu which are based on internet humour designed to create or cash in on hype. It may also spell the death of shilling, the practice where someone actively and maliciously promotes a cryptocurrency to inflate its value and lure new investors towards it.
This may force founders to change strategy. If you were planning on funding your business through an NFT launch or coin offering, you may struggle to engage retail investors looking to speculate: instead, you may need to raise private capital. You also may need to consider what your draw is beyond financial returns.
There’s a strong lesson here for founders. Don’t just build a business off the back of hype, purely because people are talking about it at the time, or worse, because they can make a quick buck off it. Trends pass, real utility lasts a lot longer. Which brings us to our next point…
….Instead, buyers & investors will focus on projects with utility
The Dot Com Bubble at the time was believed to spell the end of hyped ‘internet companies’ and their ridiculous valuations. But what actually happened was the death of companies cashing in on the hype; the riches, instead, went to those companies with real utility.
The same thing will happen now in Web3. The projects that will thrive are those with strong fundamentals—long term vision, utility, and a focus on solving a user problem. These founders may find it much easier to fundraise now: funding which may have sought short term wins will instead look for longer term yield. Focus on solid technology, good adoption rates of networks, and decentralised applications (dApps) being built off these technologies. That’s where investors will put their money.
These founders may also find it much easier to hire now. Talent won’t be as drawn to hype-fuelled projects, and instead will look to join companies who are adding real value.
So it’s really worth paying attention to what fails and what succeeds: that will show you where the long term value of Web3 lies.
We’ve been here before. Don’t panic
It may seem gloomy at the moment, but anyone who’s been in the game long enough will recognise that we’ve been here before.
The underlying infrastructure that has been built since the last crypto winter remains strong, and provides the perfect foundation for the next generation of solutions and dApps.
It’s also a great experience for founders—both those who have survived and those who have seen their business fail. Have you really been a founder unless you’ve experienced a market downturn? For those that do survive, it's an affirmation that you’ve got the fundamentals right and that there’s a real demand for your business. For those that fail, take stock of what happened, and use it as an impetus to get it right the next time and prove commentators wrong.
Let’s also remember this: we are still very early. Web3 has somewhere between 7 million to 50 million users: a16z’s State of Crypto Report analogises that, by user volume, we’re in about the equivalent of 1995 for the commercial internet. It took the internet another 10 years (2005) to reach one billion.
It’s still clear that we are moving towards mainstream adoption of Web3, with more relevant use cases emerging each day. This is combined with the challenges to onboard more people into this space, either through products that solve real and relevant problems that can’t be solved in Web2, or even making simple updates such as designing better user experiences or using less Web3 jargon. So let’s use this time to deeply consider the problems that Web3 can solve, and redouble our efforts to create those solutions.
📚 Recommend reads
State of Crypto Report 2022 (a16z)
Designing Token Economies (Not Boring by Packy McCormick)
The growing, lightly controversial industry teaching kids crypto (Vox)
Mad Realities and the Rise of User-Owned Content (Digital Native by Rex Woodbury)
That’s all folks - thanks for reading! We’re building an exciting new Web3 community, and we want everyone to be a part. So if you enjoyed reading, please give this post a share.
We’ll have to agree to disagree. Thank you for stimulating this debate! Looking forward to reading future such posts and commenting where I feel strong agreement / disagreement.
I've got conflicting thoughts on this article. "We've seen crashes before but nothing like this." Really? Were you here in 2018? Even in 2021, Ether fell by a greater %ge than this. I think crypto is holding up pretty well considering the macro market - and it's often holding up on specific days, with smaller falls than the S&P or NQ100. Let's remember that Netflix is down 75%, Amazon 50%...
I'm with you the conclusion. It's still really early. We need to remember the fundamental offering from crypto and Web3 and look past the froth. This is about solving the double-spend problem and bringing about self-sovereign identity. Everything else stems from that - it's early days but those fundamentals are a revolution for the internet.