🐻 3 hard truths about Web3
May the best builders survive
Hey Builders (or whoever is still here 👀),
I’ve been in between holidays and just getting back into the swing of things. But it’s also given me a lot of time to reflect on the current state of the market and where we could be headed.
While the $62 million Curve attack and $BALD coin rug left a sour taste in our mouths, we are also seeing new bullish narratives emerge. The SEC will likely approve a Bitcoin ETF and PayPal launched their own stablecoin ($PYUSD).
We may be in the longest crypto bear market, but wider adoption is just boiling under the surface 👀. For it to erupt however, the ecosystem needs to mature and come face-to-face with some uncomfortable truths. Let’s talk about what those are.
📣The big story. The Web 3.0 bubble is bursting. Some uncomfortable truths about the state of web3 and what’s next for the industry.
🐻Other news to bear in mind. Bitcoin ETFs are likely to be approved by the SEC, PayPal launches their own stablecoin and the Fed tightens up their supervision on crypto-related activities within banks.
The Web 3.0 Bubble is Bursting
Crypto news outlets and Twitter are often filled with FUD about Binance, the SEC or the current meme coin of the month. It can make it hard to see everything else going on. So you may or may not have noticed that a number of web3 companies have shut down.
Nifty’s, a platform for Web3 creators that worked with several major entertainment franchises shuts down.
Wyre winds down after nearly a decade in operation due to the harsh market conditions.
AlgoFi, the largest DeFi protocol on Algorand sunsets their trading platform.
Prime Trust custodian was forced to shut down by the State due to its insolvency.
Cardinal Labs, a Solana-based protocol struggles to find product market fit after receiving a $4.4 million funding and shuts down.
This is much different from just two years ago. Now, NFT trading volumes and crypto VC funding is down over 90%+ from their peak levels.
According to Bloomberg, NFT monthly trading volumes are down 95% from the $17B January 2022 peak.
And creator royalities are down 98% from peak to only $4.3M in July.
In the history of asset markets, I don’t think we’ve ever witnessed such a catastrophic destruction of demand.
— Beanie (@beaniemaxi)
Aug 5, 2023
VC funding in crypto is down 94% from the 2021 peak 🩸
An illustration of:
• Where we are in the market cycle
• Tough macro-economic conditions
• A harsh regulatory environment
Worth noting that global VC investment is also down bad, albeit not as dramatically
— Paddy the Pirate (@StPaddyPirate)
Aug 3, 2023
So to no surprise, web3 projects are struggling to survive and thrive. Whether it’s poor tokenomics, bad protocol management, inadequate security/risk management, or all of the above, seeing them go, honestly, is not a bad thing 🤷♀️.
The same thing happened in the early 2000s dot-com crash when a number of internet companies with poor business models and metrics came crashing down. It proved that lofty valuations and business profits based on speculation can’t survive in the long run. But apparently, we didn’t learn from that mistake.
Think we actually may have seen an analogous fall back in the early 80s when video games (arcade + console games) crashed
Revenue plummeted like 97% from $3.2B to $100M between 1983~85 because of - get this - too many cash grabs hitting the market all at once (e.g. way too many… twitter.com/i/web/status/1…
— matthew (@niftytime)
Aug 6, 2023
DeFi gets a wake-up call 🔔
Aside from the struggle to survive, DeFi, one of the top web3 use cases also experienced an identity crisis. Curve Finance, one of the biggest DEXes fell victim to an exploit that led to a $62 million loss. This was only made worse when discovered that Curve’s founder, Michael Ergorov took out roughly $110 million in loans backed by $CRV on various DeFi lending protocols.
The exploit placed all of his positions in danger of liquidation, which would potentially trigger a contagion of bad debt across DeFi and collapse the whole ecosystem.
Curve Finance, a key pillar of the DeFi ecosystem, was recently hacked for ~$62m.
The founder Michael Egorov is at risk of liquidation on a $100m+ position.
It could trigger a substantial DeFi implosion.
🧵: EVERYTHING you need to know about the $CRV situation (MEGA THREAD).👇
— Miles Deutscher (@milesdeutscher)
Aug 1, 2023
There are a couple of reasons why this was such a big deal:
Curve has been a nearly perfect DeFi protocol with no issues since it launched 3 years ago. We thought they were solid, but there is apparently no place to hide.
DeFi is not all that decentralized. Ergorov owned $168 million $CRV, which is 38% of the total supply. The fact that one person had so much power to crash the market is not very “decentralized”, but I suppose, it’s the nature of the game.
Ergorov ended up getting bailed out by a number of big crypto players and wealthy anonymous traders to prevent the liquidation. Sounds a lot like how the US government bails out the too-big-to-fail banks…
Curve Founder sold 106M CRV so far in OTC "handshake" deals, in exchange for $42.4M.
— Sandra (@sandraaleow)
Aug 4, 2023
Is DeFi all that different from tradfi? How decentralized is it? Is it really that transparent and secure? These are all great questions that we will have to answer.
Some may see these setbacks as a sign that web3 is dead. But I happen to think that this is prime time.
The web3 industry is undergoing a major stress test that started with the collapse of Luna and FTX. While many won’t survive, the few with strong fundamentals and institutional-grade security and risk management will come out on top. Just like how Amazon, Ebay and IBM survived the dot-com crash, we may start to see web3 FAANGs emerge from this extended bear.
Important to internalize. Blue chip DeFi (or anything) was a meme last cycle. Nobody was generating sustainable cash flow and tbh the industry was a shitshow. Launch a successful protocol and 15 VC funded forks would come in with tokens and vampire attack you.
This cycle is… twitter.com/i/web/status/1…
— Vance Spencer (@pythianism)
Jul 28, 2023
I’m personally loving this era of the bear market. True builders are doubling down and focusing on solving real problems without speculative distractions. Useless projects with little to no value are closing down.
The market is maturing, which means having to grow up and accept some potentially hard truths:
Risk management and security need to be a priority. There’s a reason why it’s a whole big industry in web2/tradfi. It’s time for web3 to take it more seriously and put more resources into it. This starts with recruiting more talented web2 and tradfi folks.
The ideal state is likely something between CeFi and DeFi. There is a constant push and pull between centralized and decentralized protocols, but we will likely land somewhere in between. This means continuing to iterate until we find common ground.
Perceived value ≠ true value. The reality is that a majority of people don’t want the responsibility or care for a fully decentralized solution. We need to build products that meet users where they are.
Do you agree with these? Are there any other uncomfortable truths or learning lessons you would add? Let us know by replying to this email!
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🐻 Other news to bear in mind
📈 Multiple Bitcoin ETFs may be approved at once. The ball is in the SEC court to give the thumbs up to several organizations like ARK, Blackrock and Bitwise to launch a Bitcoin ETF.
💸 PayPal launches their own stablecoin, $PYUSD. Fully-backed and regulated, PayPal users will be able to transfer, send, swap and pay with $PYUSD.
🚨 The Feds expand their oversight on banks’ crypto activities. The new Fed program will give the organization more power to supervise and control crypto-related activities within banks.