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#82 Ripping the band-aid - the ugly side of crypto
Your weekly dose of context
The week wasn’t pretty. Crypto’s most notorious sins have taken the spotlight thanks to the trial against Sam Bankman-Fried. So we thought it might be a good moment to rip the band-aid and speak openly about crypto’s most important ailments.
If you’re reading this newsletter, you’re probably one of those who remain at least a bit hopeful about the future of crypto. We know we are, and we believe that acknowledging the ugly news is the responsible way of making progress. So we’ve written a whole issue about the baddest of the bad news happening in crypto, with a silver lining. If you make it to the end of the newsletter, you’ll see what things we’re excited about and why we are certain that sometime in the future, we’ll be once again overwhelmed by positive developments.
Until then, here are the band-aids. Come rip them off.
1. FTX | Sam Bankman-Fried’s trial
The case for fraud against SBF has officially commenced, and it's unfolding as spectacularly as one could have anticipated. However, it's crucial to remember that even though this legal event has taken center stage in the world of cryptocurrency, it doesn't speak about the industry. SBF, in his own admission, wasn't initially genuinely interested in crypto but in making money, allegedly, to do good. Crypto was just the best tool the world put in front of him.
Don’t take me wrong. I find the case as entertaining as the next guy. I’ve read everything I’ve come across about the parents, Alameda CEO Caroline Ellison, the Bahamian fortress, I even spent a good couple of hours looking at the assets SBF shared in his astonishingly sloppy Excel recollection of assets. But that’s probably one of the only two things I will still care about: whether victims can be made whole, worthy projects can survive the damage (i’m looking at Solana), and unworthy tokens get their well-deserved closure
The second concern is the reputational impact on crypto. The ecosystem is not entirely innocent of embracing the fraudster and his fraud, and I believe we’re still paying for it. Money was lost, investors were scared off and regulators were alerted. But getting rid of bad apples is never a bad idea.
2. Jobs | The latest layoffs
Lately, some big shots in the crypto world are making cuts. Chainlink has allegedly fired about 150 salespeople – probably not the most vital gig in a bear market. And then there's Yuga Labs, the company behind Bored Ape Yacht Club and a whole portfolio of top-tier crypto intellectual property, doing some serious "restructuring". Yuga hasn’t given a number of job cuts, but they speak about the need to rethink their priorities. Their plan now is to Zuckerberg their bets and focus on their metaverse, Otherside.
These are the last chapters in an ongoing trend of job losses in crypto. They started with the weeding out of companies that had gone on a hiring spree during the bull market. Now we're in a different phase – let's call it the "existential crisis" phase – where projects are taking a long, hard look in the mirror and asking themselves who they really are. And how they’re going to make real money.
3. Venture Capital | Running out of powder
Venture Capital is used to fuel a great deal of activity in crypto. It was the favorite gateway for some investors into a world that would otherwise be too foreign and hostile.
The latest data says that this source of liquidity has slowed down, too. The State of Crypto Fundraising by Messari paints the picture of receding interest in crypto. Venture Capital, more accustomed to risk, used to be a little less sensitive to regulatory uncertainty. But the macro conditions are hurting their portfolios, and the new kid on the block, AI, has taken the sector by storm.
Venture funds entering crypto are at their lowest since 2020. Half of the investments were devoted to seed rounds, where the potential rewards are asymmetric, instead of more advanced stages, where the projects that are showing strength need money to continue growing.
Infrastructure (base layers, rollups, etcetera) and DeFi protocols were the two leading categories on the receiving end of the funds, while other areas, such as gaming, languish. If there’s one category in crypto that’s less risky and more mature, that’s infra. If there are two, it’s infra and DeFi. Again, VCs, like every other investor, are playing safe.
4. Talent | Fewer devs
The number of active developers in crypto is also taking a hit. According to data sourced from the State of Crypto Index, compiled by prominent Web 3 VC firms Andreessen Horowitz (a16z) and Electric Capital, this decline marks a significant shift from the heights seen in 2020.
The State of Crypto Index reveals that the crypto development community has nearly halved from its peak last year. In January 2022, approximately 36,500 active developers were involved in cryptocurrency projects. However, as of September 2023, this number has dwindled to just 19,630 active developers.
This data may not provide a complete picture as it only takes into account developers contributing to public GitHub repositories. Many applications and services operate within private repositories, thus escaping this count. Nonetheless, contributions to public repos form the backbone of the crypto frontier, where the principles of knowledge sharing, transparency, and decentralization are pushing the boundaries.
With a scarcity of business opportunities and a decrease in venture capital investments, developers have been less incentivized to participate actively. Additionally, the lingering uncertainty surrounding the legal responsibilities of developers in the crypto space may have further dampened enthusiasm. This ongoing legal ambiguity underscores the need for regulatory clarity in the industry, a development that could potentially revive developer interest and participation.
For more detailed insights, you can refer to the State of Crypto Index directly at https://a16zcrypto.com/stateofcrypto/.
5. Security | Hack Summer
Last week, we saw two reports come out about hacks in crypto.
Reports came from security specialist organizations Certik and Immunefi. Their data differs slightly, as their definition of terms methodology does too, but trust us: the numbers are not good. The year 2023, the last quarter, Q3, and the last full month, September, have been particularly awful. You can check for yourself if you want
There are many ways to read this information. One is that crypto continues to be this hostile land where a medieval sense of the survival of the fittest still applies. It's not a good look if you want to attract institutional investors. And if you add that North Korean state-sponsored hackers, the Lazarus Group, account for around one-third of the funds stolen, you can understand why US regulators really need crypto to step up it’s security game.
6. Trends | The Silver Lining
Here comes the good part. We’re giving the finishing touches to our Quarterly Ecosystem Highlights report, which outlines the key industry trends every three months. The core takeaway from the last quarter is that no positive or negative event has been able to overcome the anesthetic effects of the macro environment and regulatory uncertainty. PayPal launches a stablecoin? Nothing moves. Mixin gets hacked for over $200M. Nothing moves. Crypto has remained unfazed in spite of massive events that would have excited investors in the past.
But if you look past the tedious price action, you will come across some very exciting trends that are fine-tuning the industry for its next bull run.
Infrastructure is taking huge leaps to become more scalable and affordable through the ongoing developments in the L2 infrastructure. Many protocols have acknowledged that yields outside of crypto are more interesting than inside, and they are building robust bridges between DeFi and traditional finance to bring to crypto the positive consequences of the high rates context. This trend, known as Real World Assets, is building the foundations of the tokenization of assets, a business opportunity that even BlackRock CEO considers pivotal in the future of finance, where assets like treasury bills are turned into a blockchain form and generate revenue for crypto-native protocols and users.
And just as interest rates are the most reliable and secure yield-generating side of TradFi these days, staking is slowly becoming the crypto-native equivalent. Since Ethereum’s transition from Proof of Work to Proof of Stake, ETH staking has become a source of revenue and an inspiration for developers, who have created yiel-bearing stablecoins or yield strategy protocols for DeFi investors.