Web3 has been a pretty hot investment area for the past 18 months, but we’ve seen a significant slowdown of late. As an investor looking at the industry, how do you assess the main benefits and main risks?
Starting with risk, it’s pretty obvious that there has been a downturn in the markets – mainly due to some other macro trends that have also impacted the broader equity markets. However, since it relates directly to Web3, one of the main risks we see is that there are currently around two and a half million daily active wallets running through Web3 and being used to buy things like crypto and NFTs.
But the reality of the situation is that when we make these investments, we need to see a credible indication that the number of wallets is significantly higher, around five or ten times higher. And that’s one of the biggest risks for me. What will be the “aha moment” for the next 50 to 100 million mainstream Web3 users?
The other is that the ratio of speculators to actual people interested in cryptocurrencies is spiraling out of control and creating some volatility in the crypto market that is not good in the longer term.
But in terms of benefits, blockchain is like another layer of technology. When we invest in an enterprise software company or consumer tech application, we do not describe the company as being based on Amazon Web Services or PHP. We describe the actual functional benefit.
When I look at new crypto investments, it’s all about understanding what the true utility blockchain enables. It is used to enable a new economic ownership model that benefits users in a way that has not happened in a Web2 world.
Do you think there is a reckoning in the reviews of Web3 companies? Were they overrated and now reality is returning?
In 2021, the general tech market was fairly overvalued, but orders of magnitude more so in the blockchain space. OpenSea was probably the most visible example – it was valued at $13 billion in its latest round, but its NFT trading volume has fallen by more than 90 percent.
The good news is that many of these companies have raised significant amounts of capital and have now reduced spending to focus on unit economics and truly responsible growth. But these companies will still have a lot of work to do to grow into their valuations.
I think the current economic environment has caused a bit of a reset in the venture community. I see entrepreneurs who mention a particular rating and then maybe two weeks later come back with a deal that’s half that rating. And these are fundamentally solid companies, it’s just that I think there’s been a fresh start on the entrepreneurial side that has lagged behind since the stock markets and crypto prices fell.
It’s hard not to draw comparisons to the later stages of the dot-com bubble.
Yes, absolutely, but I want to reference one metric, which is the amount of code being written for blockchain-based companies. What we’ve actually been tracking is the amount of code that developers are pushing each week. And while it’s certainly down about 20 percent since the beginning of this year, it hasn’t plummeted at the rate of the price of many of these cryptocurrencies.
What that means to me is that the market is being purged of speculators and we are seeing a smaller drop in the number of builders who are actually releasing new utility-based applications and are less interested in getting rich quick.
Last week we saw the Biden administration release a framework to regulate crypto. Do you think what they are proposing will be a positive thing for the industry?
In the US in particular, there has been a small battle over who will regulate the crypto markets. This happened between two federal agencies: the CFTC, which handles commodities, and the SEC, which handles stocks and other securities.
Many people agree that bitcoin is a commodity, but recently the SEC chairman basically said he thinks Ethereum could potentially be a security.
If true, it seems like a huge deal.
It’s a huge thing. And the reality, from my point of view, is that crypto regulation is very welcome in bringing stability, trust and credibility to mainstream consumers.
Even if that means treating ether like a security?
It depends. I think there are several tests that the SEC and CFTC need to perform when evaluating individual tokens and crypto-based assets. For the SEC, I think they believe that many personal crypto assets are securities, and that ultimately ties into an expectation of profit.
And if there are many speculators out there versus consumers who actually get some benefit from the usefulness of crypto assets, then in many cases this could be valid and should be regulated as a security.
This is a delicate balance, and what we’re seeing with many Web3 companies is that they’re trying to remove some of the speculator noise. There just needs to be a slightly more nuanced, detailed approach with specific guidance from the SEC and CFTC on what constitutes a security.
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