Bankless - a16z Crypto CTO: State of Crypto 2023

Episode Date: April 19, 2023

Today, we're talking about the State of Crypto with Eddy Lazzarin, the CTO of a16z Crypto. The 2023 a16z Crypto Report was published last week and discussed a number of topics, including developer activity, transaction volume, users, and so much more. What are the best insights as we look forward to the rest of the year? ------ 📣 SAFE (Gnosis) | Non-Technical Hackathon Sign-up!! https://bankless.cc/AA  ------ BANKLESS SPONSOR TOOLS:  ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://bankless.cc/kraken  🧠 AMBIRE | SMART CONTRACT WALLET https://bankless.cc/Ambire  👻 PHANTOM | FRIENDLY MULTICHAIN WALLET https://bankless.cc/phantom-waitlist  🦊METAMASK LEARN | HELPFUL WEB3 RESOURCE https://bankless.cc/MetaMask  ------ Resources: 2023 State of Crypto Report https://a16zcrypto.com/content/article/state-of-crypto-report-2023/  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures 

Bankless Nation, we've got a special episode for you today. We're talking about the state of crypto in the year of our Lord, 2023. That's right now. How are we doing in crypto? David, a report came out last week. That was absolutely fantastic. This is a report from A16Z. What are we covering today?

The A16Z crypto report for 2023. These reports come out as snapshots for the state of the industry, the state of the ecosystem. Where are we in crypto's development? in 2023. I remember Ryan, one of these reports, not too dissimilar from the report that we are going through today, came out in 2019 and talked about similar metrics, developer activity, transaction volume, users. And it was one of the things that I remember way back when in 2019 or 2018 that allowed me to have conviction in what was a dark time in the world of crypto. It was a bear market. It was a challenging bear market. And sometimes these reports are really

useful to remind us about the secular bull market that almost all metrics are about crypto. They're up into the right, no matter what you want to look at. And this is a way. And it's also important to remind ourselves who this audience is, who this audience for this report is. It's actually not for the crypto industry. It's for everyone else, I'd say. This is a way to view the industry from the outside in using some very fundamental

metrics to tell the rest of the world, hey, I know. at 2022, it was a bad look for crypto. But if you look under the hood and look below the narratives and all of the hate that crypto has, the metrics are up into the right. And so that is what we are going to into today. Yeah, totally. We've got a guest who's helped write this that we're going to introduce in just a minute before we do. Got to tell them about our friends and sponsors over at NOSIS safe. David, what does NOSIS safe want bankless listeners to know? First, I'll drop a meme where they actually would like to let you know that they want you to drop Nosis. It's now just safe.

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This is one of those core primitives that is so important. wallet infrastructure for sure and of course the safe is the we use I'm not going to call it nosa safe we use safe at bankless all the time it is our your trusted wallet for everything that we do at at bankless it's our on-chain presence at bankless over at bankless.eath so this is this is really important David let's talk about the guest who are we are about to bring on so who are we about to bring on and what's the significance of this episode Eddie Lazarin, the CTO over at A16Z, is multidisciplinary. And we'll get into it a little bit about his background when we bring him on to the show in just a little bit.

But psychology major, which gets me going, philosophy major, master's in computer science. And so I think he's going to be able to help us express some of the things that are going on in the crypto world that we're about to see in some of these charts, that like I said, are going up into the right in ways that the rest of the world can understand. But these are also going to be charts that you are probably familiar with. like I said, transaction count, NFT buyers, stablecoin volume, developer activity. All of these things are going to allow us to get a snapshot in time of crypto in 2023. And also, this is the second report of this kind that A16C has created, which only alludes to the fact that there might be a third for 2024. And so we're going to pick Eddie's brain about what might be in that 2024 report

when it gets made in one year's time. Absolutely. This is going to be an episode about the state of crypto right now and then what we can look forward to in 2024 and what some of the big opportunities might be. Guys, we're going to get right to the episode. But before we do, we want to thank the sponsors who made this possible, including our number one recommended crypto exchange, the bridge from fiat to crypto, Cracken. Check him out. Cracken has been a leader in the crypto industry for the last 12 years. Dedicated to accelerating the global adoption of crypto, Cracken puts an emphasis on security, transparency, and client support, which is why over 9 million clients have come to love Cracken's products.

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overseeing the engineering research and security teams over A16C, and like Ryan and I, Eddie's interest span across many disciplines with a bachelor's in philosophy, neuroscience, and psychology, along with a master's in computer science. Wow. It must have taken you a while, Eddie. Maybe we're going to go see what all that very background can do while we unpack the world of A660-203 crypto report. Eddie, welcome to the show. Thank you. Yeah, so how long did that background take you? I took a lot of classes every semester. It took me four and a half years, actually.

An overachiever. Yeah. No, no, no, just very anxious to take classes. He's a lot of fun. So, Eddie, like I alluded to in the beginning, anytime we get one of these ecosystem reports out, they're just really valuable to give us a snapshot where we are in time.

Crypto often is so frequently tunnel-visioned into the week-by-week meta, right? Like last week, it was Chappelleau week. This week it's Gary Gensler getting roasted week. But we never actually really have the opportunity to zoom all the way back out and really see the health and vitality or lack of vitality of the ecosystem as a whole. And so like I said, in 2018, there was one of these. In 2019, there's one of these. So I want to ask you, just before we go into the more granular details of this report, what about this 2023 report is unique?

How is this one flavored? What's the flavor of 2023? Yeah, well, crypto is a very social media phenomenon, right? And that's what leads to that extremely short cadence meta, right? I don't know that social, I don't know that crypto could have happened without social media in the same way. So that is intrinsic to its character. But in 2023 specifically, it's a unique time, right? Crypto was huge the last 18 months.

The biggest it's ever been by basically all measures. We saw a huge variety of products, new applications and experiments, and a huge number of upgrades. And now we're in a unique time because the macro is a little weird. The regulatory climate's a little bit weird. We're in the denouement, right, of the previous highs. And that just puts it in a new type of setting. Some people might say crypto's over. it's dead if they just look at the prices. But the whole point of the report, the whole thesis,

is that there are financial cycles and there are product cycles. And although financial cycles are volatile, connected with the macro, unpredictable, you know, a whole phenomenon of themselves, product cycles are a little bit more predictable. They're not totally predictable, but you can watch them unfold and you can see the specific milestones as technological progress compounds. That's what we invest in as long-term tech investors. And so the purpose of the report is to remind us in this climate, all these crazy things have happened last year, where is the tech actually and are there public indicators that we can look at, like open data sets that we can look at that help us put them into their

context, their technological context as part of the product cycle. Beautiful, beautiful. And one thing I actually haven't mentioned yet is the, there's actually an output of this report, a product, maybe, if you will, of this report, which A16 and Z is calling the state of crypto index. And so we're going to go through a handful of different measures of the crypto industry. Like I said, I talked about some before, like active developers, number of contracts deployed, number of NFT buyers, stablecoin volume. And what's interesting and unique about this report is that A16 and Z has

attempted to create an index of what seems to be like industry vitality. So, So that is at the end of this conversation because we are going to walk through all the components of that conversation. But first, before we get there, just like at a high level, what does it take to produce a report like this? Like, what's the process like? How do you collect the data? What are the various sources? I'm assuming this is a big lift. Can you just like walk us through the back end of like what it takes to produce a report?

Yeah, it is a pretty big lift. So we've done a lot more legwork this year than we did last year. And we hope to do a lot more legwork next year than we did this year. maybe I'll put it in its highest frame is that we're a little bit lucky in crypto. Maybe not lucky. It's part of the ethos, right? But there's a lot of public open source data sets. That is unique in crypto, whether it's things that are on chain or whether it's open source code

or whether it's the reliance on social media where we can kind of more or less look and check the metrics. The key indicators in crypto are open. So that makes it much, much easier. On the other hand, what makes it harder is that crypto's complex. And despite the fact that the data is public, it takes a little bit of teasing and unraveling. You know, you kind of have to get in there into the nodes and figure it out. A lot of data came from, you know, variety of sources.

Nonsense, GitHub, Twitter, Dune, you know, a bunch of dashboards that were familiar with out there. A bunch of new sources like our academic data, that's kind of a cool one of our, one of our innovation indicators is academic publications. We had to build that out from scratch. So a variety of sources, the vast majority of which are public. All right. So let's go ahead and break open the first slide here. And the first slide already got me really, really excited because anytime somebody uses the words chaos and order, I get pretty, pretty peaked. And this first slide is apparent chaos has underlying order. And I think this is the most zoomed-out slide that we could really start with, which I really appreciate. So there's price, interest, new ideas, start us and projects going all the way back to 2011. And all of these

arrows, of course, go up and to the right. And so Eddie, Eddie, why was this such an early slide in the report? Why did this come early? Yeah, that's a great, that's a great question. This slide is showing a couple things. The first is that although there are financial cycles, like I mentioned earlier, and there are product cycles, which we're going to get into, I hope. Even the financial cycles and the sort of the most hypey metrics and indicators that we can track, if you zoom out on a wide enough time horizon, they're a little bit more orderly than things may seem. And that's because they are slightly, each of these ones, if you go into each of them, like the price, the interest, even the ideas to some extent and maybe slightly less

the startups. Each of these things are side effects of the financial cycle. So you're going to notice volatility. This post we wrote a couple years ago feels like yesterday, but also ages now, called the price innovation cycle you can go find, where we talk specifically about the relationship between these things, right? The price leads to interest, price changes, price volatility, you know, price going up, leads to interest.

interest leads to new ideas, new ideas lead to new projects, and then projects develop the products of the future that end up in a long enough time horizon catalyzing the price, right? Exactly. Yeah. This exact pattern. And I think, you know, if we kind of internalize this and choose some indicators of each of those facets, each of those dimensions of the space, you go back to the apparent chaos, Chaos has underlying order slides.

Like, if you use certain metrics for proxies for each of these things, then you can see they all move in some kind of step. And I think if you zoom in a little bit more, you can't do that here, but like, you know, if you were to kind of zoom in, you'd see that there is a little bit of a leading indicator property of price. There is a little bit of a leading indicator property in interest with relating to new ideas and so on and so forth. It's not an ultra-scientific analysis, but this pattern has been true in tech in general.

And it's particularly true in crypto where I think there is a more volatile financial cycle, which we can talk about some of the reasons why. But it's a general property of technological change and technological revolutions. Eddie, I want to ask you about the product cycle versus the financial cycle, the price cycle, right? But before we get there, just really quick on what's it? in front of us. So we obviously were measuring price here. And you guys are also saying the market has undergone four cycles. These are like boom bust cycles, right? And that pattern persists across each of these metrics. And certainly anybody who's been in crypto and like zoomed out on

the charts has seen that reflected. Those cycles reflected in the price total crypto market cap over time, which is how you guys are measuring it. We peaked at like three trillion in this latest cycle. I suppose was that the fourth cycle then? And now we're entering the fifth. Is that right, Eddie? It was definitely the fourth. Whether we're entering the fifth, I have to, I must know comment. You're not ready to say yet, but let's talk about that maybe in a little bit. Anyway, we have price, and that has had boom-bust four different cycles, at least.

Then we have a measure of interest, which you guys are measuring by social media activity. Is this like all social media platforms, like Instagram and Twitter? Although using like crypto-specific, like crypto-unique words, like, Ethereum would be one example where, like, people don't really use the word Ethereum in, like, non-Etherium context, right? Right. Whereas, like, token, is a word that's used in a lot of different cases, so we wouldn't count that word. It's just less precise. Okay, okay.

So you have a measure of interest. And then new ideas, that is developer activity, which I think people, you're analyzing GitHub's, you're seeing how many developers are contributing. It's that kind of a metric. And then we have a measure for funding activity. and is that the raw amount of like dollars value that is flowing to crypto startups in both private markets and kind of like more public token markets? Is that correct? It's the number of rounds, funding rounds.

Number of rounds. Okay, that's interesting. So like, you know, some startup raises a series A that would be one here. Uh-huh. Okay. Oh, one unit, not any amount of like dollar value, just one unit of, oh my gosh, wow. Why do you do that? Why is it just like kind of one unit? Why not dollar amount? Well, the dollar amount further magnifies the price issue, right?

Right. As if there's capital markets have their own pricing. So you would kind of intermingle the price characteristic. It would be redundant. It would be a little bit redundant. You want a nice clean metric of funding activity, which is just kind of the number of rounds that are happening. Yeah. Although, to be fair, I think if you were.

do it with price, it would look more or less the same. Like the total amount of power. Which is, that's what we're seeing across all of these different metrics is kind of these cycles that sort of mirror one another. And what we're seeing also is a compound annual growth rate, a cagger for price of 75% compound annual growth rate for price from inception up till now. Social media activity has been 63%. Developer activity has been 84% compound annual growth rate.

And startups and projects, like the funding activity that we're just talking about, has been 62% compound annual growth rate. So all similar numbers across these various metrics. That has to be no coincidence. Good question. Who knows? I mean, we certainly didn't select them that way. Yeah, I mean, I'd have to speculate. Well, let me ask you this.

So we've got the finance cycles, which people are most familiar with. And then we got product cycles, which you're making a distinction. That's what this report is really uncovering. In my mind, you tell me if this makes sense to you, Eddie. It's like sometimes when we talk about crypto investors, people are like laser focused on, oh, that means somebody who is buying an asset, right? Something that's affecting price. But there are also other types of investors in crypto, aren't there?

So if I am a user choosing to invest my time on a crypto, on D5 for, example, or in an NFT, for example, that is like a time investment from a user. It is another type of investment, investment of attention or time or something like this. And also, similarly, developers, when they are choosing where to spend their career, isn't that the most precious investment that they can actually make? Like, what tech stack am I going to dedicate my career in? Where am I going to extend all of my energy and all of my skills? Developers and users are types of investors too. And so what we're seeing is such as like different types of investors that are non-financial investments is kind of like time, attention, human resource type of investments.

Is that how A16Z and this report sort of looks at them is just these are also other investors? That more broad, you know, the generous interpretation of investing, I'll go with it, right? Like I believe that when developers decide that they want to do a thing, whether it's just because it's fun and exciting or whether it's because they think that their career, you know, could be built on this. That to me is a really strong sign. Right. And that's what, like, you go to Chris's thesis many years ago about how what what the nerds are doing on the weekend, right, is what regular people are going to do on the weekday, you know, in the future, right? I believe that because I think when people have time and attention to dedicate, it ends up. up attracting to the powerful things, to the exciting things, to the new things. So I definitely

take that as a strong indicator. I'd say that developer activity, if you look at it as like a supply chain or something like that, we metaphorize it as a supply chain, developer interest and developer activity is upstream of all the exciting things. That's why it's a preoccupation for the space. And it's incredibly important for us, right? We track that. We're always listening to what entrepreneurs say they're excited by, what they want to be building on, what tools they want to be using, which ecosystems they're attracted to.

That's an incredibly key indicator. We use it scientifically, like, well, pseudoscience, or whatever, scientifically, like in this kind of context, we also use it anecdotally, just what we're hearing, developers are interested in, and engineers are interested in,

because they're the ones we're going to produce the applications that end up being used by, you know, far, far, far more people. Developers are like the talent inflows into these networks, aren't that? Absolutely. It's sort of like we're talking right before we started the stream, Eddie, about different

cities in the U.S. that seem to be attracting kind of, you know, crypto talent. New York City versus, you know, the Bay Area, San Francisco. And these are all sort of networks that individual people choose to live in for some set of reasons, right? Whether it's economic opportunity or they just like the scene and the community, they're really investing. The city you choose to live in or the area you choose to live in is really one of the important investments that you're making. And this is very similar to how, you know, what a tech

stack developer decides to spend their time. And it's like picking the city that they're going to live in. Totally agree. And we could spend some time unpacking the city metaphor, which I think that there's a lot too, actually. That is actually how I think about crypto ecosystems, cities, nations, like organic groups. And there's a difference, right? There's a difference between a city and like a strip mall, you know, or a city and like a, you know, Disney World, right? There's a huge difference. And that's because, and cities are where the serious economic activity happens. And that's because people can control the space.

They can come in and really own something. And they can build on top of it on top of a solid foundation, a foundation that they can fundamentally control. That property, that is the property that I think makes crypto distinct as a place. platform as a computing platform. Like that's specifically that property. So if if you extend that metaphor all the way through, then if you want to track the health of the city, you want to track the health of the nation, how many people are coming in and settling new territory? How many people are investing in terms of their time and building the infrastructure and the businesses and the

interconnects, all the types of things that are necessary for real economic activity? How many people are doing that? When I see the developers' metrics, that's what I feel like I'm interpreting. Yeah, and I want to get your perspective as to why developers tend to be so sticky in this industry. There's just one slide, slide 35 on this report. Bull markets attract new developers who tend to stick around. And this is a measure of active developers in the Web 3 space. If we go back all the way to 2016, it looks like we had somewhere around 6 or 7,000 of them.

and according to this slide, according to this report, it peaked all the way up to almost 40,000 at the height in 2022. It's come down to just below 30,000 where we are today. But developers tend to be pretty sticky in crypto. Now, I don't actually know, Eddie, how this compares to other industries. I don't know if developers are more mercenary in other industries, but what you were talking about just now, that, like, you know, Ethereum, NFTs, tokens, non-sovereign state money, like gives developers,

more ownership over the things that they're tinkering with, which is my initial reflex as to the answer to the question why developers are so sticky in this industry, if they actually are? But I'm wondering if you have a perspective on there. Are developers as sticky as I'm saying they are? Yeah, it's a great question. I'd love to compare it with other spaces.

I know that speaking very generally, before I say specific things about crypto, engineers do love their programming language. They do love their tools. They do love their, you know, their specializations. And that in itself creates incredible stickiness. That's why programming languages, for example, have some of the greatest network effects in all of tech, even though they aren't directly monetized, usually. They're an incredibly, incredibly sticky type of thing. And developers are excited almost by, you know, just seeing that a specific programming language is used in a new context.

Is it like a crypto tribe, but for languages? Is that a way to think about it? Well, yeah, I think there is that. And I'll say just, you know, in my day to day, I talk to a lot of software engineers who are working in crypto. And something I've got to say is pretty unique is that software engineers in crypto, by and large, the vast, vast, vast majority. I'm actually, I don't even know why I'm hedging because I'm just hedging because I'm cautious like that. But they get it. Like they're crypto native, right? They're diehard.

Like, they're there for the mission. They understand the reach. That is a unique property that I did not really encounter in my career before getting into crypto. Interesting. There's another slide here that I had up here. Verified smart contracts are at an all-time high indicating a robust pipeline of product launches. And this is a graph of verified smart contracts, which was around maybe the 2000 mark in the 2019-20-era and then has just been on a linear up trend

all the way up to breaking $30,000 this year. So what does this tell you? What story does this weave for you? Yeah, I take this to be distinct from just smart contract deployments. Smart contract deployments, you can do all the time. It's part of the development process. When you're verifying them, it means something slightly different.

It means you intend other people to look at it. You want other people to look at this code. right, for some reason or other. That is an additional barrier to cross, right? The minimum barrier is you can actually rearrange some of the metrics in this like a funnel almost, right, for developers. The minimum is just you start a repo on GitHub. All that means is that you have a GitHub account or something like that.

You come in, you see an interesting thing, you start it. A level further is you download, you know, Web3JS or ethers, right? Because that means you're actually experimenting. actually you want to start tooling around with something. Another level beyond that, I'm skipping a couple steps, but is deploying a smart contract and having it verified. That means you actually build something, and that means you wanted some other people to read the code and to be able to use it.

And in the best case, remix and recombine it in a production system. So I see these as like gradually narrowing levels of commitment, evidence that people are actually trying things. So Eddie, I'm wondering if we could go to our city metaphor here. And we are like the mayor or the economic development office of some city. And we're taking a look at these numbers here. And the two numbers that we just saw, one is the amount of developers in the space. This is almost, if you're using a city metaphor, this is almost like the number of entrepreneurs that are in our city.

And we can kind of track the increase in our city network of the number of entrepreneurs over time. And then the number of verified smart contracts, maybe that's like the number of new businesses that have just opened for office. It's kind of that type of metric here. And that's really what we're tracking. And so if we want the GDP of our city to actually increase, what we're seeing is kind of the ingredients for GDP explosion or at least sustainable growth when we see more entrepreneurs than ever inside of our city and more businesses than ever being open. These are all very healthy signs for our city network. How does that analogy land to you? Yeah, I think that's exactly right.

Of course, they're not exact analogs, but that's the exact idea, right? Is that you're never going to see economic growth from the city without seeing these indicators first. And these indicators change a different cadence. They develop it a different cadence. Financial markets can move very, very, very quickly. Someone just needs to move a little bit of capital around. That's all there is to it. But it is not that quick, unless you're trying to game the metric, of course.

Like, it's possible to game specific metrics. It's always a thing to look at. But you have to each of the steps to get down this funnel are more complex. They're more complex and they're indicative, in my opinion, of goal-behavior, goal-seeking behavior. These are people who want to build stuff. They want to build products. Yeah, I think another point I'd make is this is at a time, of course, we are in a crypto-bear market. And as David was mentioning earlier in, you know, in 2019, we saw similar metrics from these.

I think many put out by A16Z at that time when everyone around us was telling us crypto was dead, right? Some of the settlers in these crypto networks, the investors in the crypto networks were saying, this doesn't look dead. If you look at the number of developers who are here in the space and the number of new businesses, new verified smart contracts that are being open, this feels very much alive. If you're just looking at one metric, and that is price, and you're seeing, you know, 90% off all-time highs, that can be a very deceiving metric. Yeah. So, look, when I, when I joined the crypto team in 2019, it was pretty, you know, pretty dead around then.

People that I knew were asking me, like, well, I thought, I thought Bitcoin ended. I thought Bitcoin's over, right? Like, because they had heard that it had, like, crashed. Right. You know, crash, like a price crash. crash. And then they had understood that as like a software crash. Like it had kind of, you know, like the network had stopped. And I was hearing that on the one side. And the other side, as I was getting like deeper and deeper into crypto and spending more time, more and more,

I've been crypto for a long time, but I was spending, you know, 80% of my time thinking about it. And I'm hearing about uniswap. I'm hearing about compound. I'm hearing about Maker, right? You guys remember that time period. I was like, I'm hearing about the crazy stuff I've ever heard in crypto at the same time that people are asking me if this thing's over. And it just became very clear to me in that moment that the price is one thing and the product is another thing. That prices are spectacular. They're easy to look at. They are, you know, a clear, easy to comprehend number. Price down bad, price up good, right? It's like monkey brain stuff. When, of course, the reality underneath the surface is more convoluted, more complex, more nuanced.

but probably more signal than the noise. I want to jump back to a similar theme from our very, very first slide that we talked about with these macro trends. So this is this slide that I want to show next is actually just the slide below this one. But I think this brings us back into a price conversation where like, I really like the price is spectacular. That spectacular word is great for that particular metaphor. This next slide is great products get built regardless of financial upswing.

and downswings. And so I think that really carries us next, what you were saying, where, man, Maker Dow was a really just a magical moment. I just minted money. Meanwhile, like you said, I had one of that same experience where, like, someone, I said I work in the crypto industry, and they're like, oh, Bitcoin, is that the thing that's failing right now? And so, like, can you walk us through the importance of this slide? Because I think much of these logos that we're seeing on the screen here, which are logos of companies that were founded from 1999, all the way up to where we are today. This slide is to say, like, hey, innovation happens no matter where we are and the price.

Price doesn't matter. Can you walk us through the importance of this slide? Yeah, look at like, I'm sure you guys remember, 2009, one of the most brutal economic market, macroeconomic markets we've ever been in. Who doesn't know all those companies? Who doesn't follow all those companies, right? For the podcast listener out here, around the 2009 era, we got Square, WhatsApp, Uber, Instagram, Stripe, also Bitcoin, Airbnb, Snapchat shortly thereafter, Zoom shortly thereafter.

Yeah, lots of stuff. Yeah, lots of stuff. And that's because even though some may have thought it was crazy to start startups in that time period, the reason why each of those companies was founded at that time was because the technology was finally ready. That is the underlying story, right? We see a bunch of like photo-based applications around that time period, video-based applications, you know, modern web stack applications, mobile specific applications.

That was like the dawn of iPhone and the mobile computing platform, right? The reason they were founded at that time, and not earlier and not later, is because they were founded as soon as the technology was ready. It had nothing to do with a financial cycle. Eddie, are you saying that

it's actually the best time to invest, not financial advice, of course, is when everyone else thinks the thing is dead, but you see underlying life in the product and the technology seems ready? I could never give financial advice in any such. That's not my style.

That has never happened on this show. It would be a first. Yeah, but I'd say to be greedy when people are fearful, right? I want to jump forward to this slide, slide 23 for the people who might be following along. The world's biggest brands are exploring Web 3 beginning with NFTs. And then I'll also jump backwards this slide. NFT creators have earned more than

1.9 billion in royalty revenues. And that also reminds me of one of the first slides that we actually talked about, which goes back to the interest in social media activity. Well, Eddie, you said you probably weren't looking at the word token in Twitter. I bet you were looking at the word or phrase NFT on Twitter because where else are you going to find that word NFT? So kind of walk us through this story, the NFT story and also the brand story, as the word NFT has probably lost its spectacularness to mainstream. Yeah, David, NFTs are dead. Didn't you know?

NFTs are dead. Yeah, that's what I heard. So, Eddie, walk us through this part of the story. Yeah, well, we'll get to it, but there's another slide in here that's great. I don't know if it's in your excerpts, but the NFT buyer's slide, right? It's a kind of cool one. It's a little further down. I think taking the NFT buyer's slide and the royalty slide in both context is really, really useful.

NFT buyers definitely down, but down a lot less than I think one would expect. It's definitely down a lot less than I expected when we were. Are we, is this saying, this chart is saying after respect to the number of NFT buyers. So this is a chart of the number of NFT buyers, and we hit something close to like 1.4 million. total NFT buyers at the high in 2022. Is that what that's saying? Monthly active addresses purchasing NFTs. That's actually higher than I thought. So we had 1.4 million people buy an NFT inside of one month in 2022. Strictly and 1.4 million unique addresses, which of course can be a little difficult to map onto users, but like approximating.

It's difficult, but it's approximate because you have, you know, some users with many addresses, of course, but then you have some addresses that sort of account for many users. if somebody's using a multi-sig as kind of their, you know, NFT storehouse. But that was 1.4 million, which is larger than I thought. And now we are actually like, what is this? 700. Just below a million.

Below a million. Call it below a million. That's not down so bad. Yeah, it's not as down as much as I think. But of course, you know, your original question is framed in terms of the royalties. The royalties are way down. So I'd say, what's happening with NFTs? Well, NFTs are in the earliest state, right?

In fact, this may be an interesting segue to something else. They'll try to remember, but the NFTs are really simple right now. And NFTs are really simple. Transfer-based royalties are the first time we've tried some kind of economic model to link secondary sales to the authors of those collections. There's going to be a lot of experimentation, a lot of contention around what the best royalty models are. The evidence right now is that the take rates, are shrinking for NFT-based royalties.

And, of course, I'm putting aside, like, marketplace competition between, like, you know, OpenC and Blur and others. So the royalty slide, I think, shows, like, there was a huge burst of NFT creator royalties. They're down a bit, but I expect a lot of experimentation to figure out the best way to link communities interested in collections and the creators of those collections. like that's kind of like what I would say about this slide. In terms of the brands, it's always interesting to me. I never really, never really know exactly what to think. I have talked with some of these myself and without naming names, like some have definitely impressed me

with their crypto-nativeness. Some not as much, but in general, like brands tend to follow the heat and some can successfully capitalize on it in ways it's impressive. I'd say that in general, I think of the brands as sort of a lagging indicator of development in the space, but they are an indicator that there's excitement, that there's potential product market fit. It's not something to rest your laurels on, right? You should, it means that we've started to reach some product market fit in some aspects of the products.

Right. If they are following us, that's great. And we need to continue to lead or else they will stop following us. Absolutely. Absolutely. It just, it means that they, there's something that they get. There's something that they like. There's something that they want. Right. Otherwise, they wouldn't do all this work. It doesn't mean that it's done. It means that we need to understand what that is and continue to build the infrastructure to make it more accessible. Right. We are not passing on the baton of responsibility onto Starbucks and Reddit. that still remains in the hands of the developers, but it's a good signal that we are at least leading them in their right direction, at least hopefully. Yep. So I want to go back up to one of the earlier slides here,

and I'll collect a bunch of them. There are some Ethereum-focused slides here. Blockchain extending roll-ups are scaling Ethereum. You go back to the middle of 2021. We basically had 0% of Ethereum, layer 1 blocks-based that were consumed by layer 2s. Now we are up to 7% one quarter into 2023, along with an increasingly exponential, you know, only so much data, but an increasingly exponential rate of a blockchain block space. And then there's another slide here.

Blockchain transactions exploded as scaling technologies reduce transaction fees. And so this is a chart of total unique transactions going what it looks like basically a floor of zero by comparison. in 2020, up to over a billion transactions. And then now also simultaneously, Ethereum now consumes 0.001% of the energy that consumes versus YouTube consuming energy annually. And so all of these slides came pretty close together in the report, Eddie. And so I want to actually ask you about, like, again, this report, I'm assuming is made for the crypto outsiders.

So they come in and they see a slide about scaling and energy consumption. Talk about this angle of the report and what is really meant to do. Yeah, so a bunch of things. One is evidence that it's actually scaling, right? Ethereum is actually scaling and paving the way for other types of blockchain solutions to scale. That is an incredible, incredibly important thing. So we could actually spend a long time talking about this. So I'm going to try to keep it really short.

But I think scaling is like a perfect kind of, like, a perfect kind of, like midwit diagram to me, right? Like the, the left side, they're like, blockchain's too slow. Need more transactions. Need more block space, right? The midwits might argue, like, no, what's the point? It's never going to reach centralized scale or like, you know, there's no applications or something like that.

And whereas I think the top says, like, we need more block space. Like things need to scale. And the reason for that is that we could touch. any area in this report, any area in this entire report. And I could tell you at least a few ideas that I've heard from entrepreneurs or engineers in the space, or they've wanted to expand or deepen or make more complex a specific area, but they have not even endeavored to because they just know that it wouldn't be economically feasible to do so. But pick an area, we can go into it, but we need scalability in order for there to be wasteful experimentation and playful experimentation,

goofy product ideas, complicated stuff, crazy weird stuff. We need that. And in order to, the best evidence that we're getting there, that we're setting the stage for whole new waves of experimental applications is showing that there's more throughput and that it's actually happening. There's more block space, more high quality block space. It's unfolding before us. That would be kind of the way that I'd sum it all together.

Eddie, I remember talking to Chris Dixon about the 2022 report. And this was just when layer to cheap block space was becoming, like starting, just starting. It was a year ago around this time. And his comment was, this is crypto's broadband moment. And what I'm sort of seeing on screen here is like it looks like, as David was saying, number of transactions in the, you know, I don't know how many this is right at the very bottom, but it almost looks like it rounds down to zero. It's very small.

And then it just sort of takes off the number of successful transactions across all track blockchains in 2021 and 2022. And now even Ethereum block space, sort of the premium block space is getting even cheaper with layer two. Is this crypto's broadband moments? I'm you guys investing through like other internet phases, of course, where like the internet literally had a broadband moment. where before a certain class of applications wasn't possible. YouTube wasn't possible. Uber wasn't

possible. So many things were not possible when we were on dial-up modems. And then suddenly, as broadband infrastructure became widely available, people had fast connections in their homes, all sorts of new consumer applications became available. And then we went mobile. Now they were available where we're kind of wherever you were in the world. Is that what's happening in crypto? Does that analogy hold? Yeah, that's the analogy that I use. I think that's exactly right, right? And I'd say that I think optimistic roll-ups have been a little slower to unfold than I expected,

but I'd say that zero-knowledge systems have developed faster than I expected. I could give all kinds of qualifications for why it's kind of unfolded exactly the way it's unfolding now. but I think it's a critical prerequisite. I think a lot of people are excited about rolling their own L2s. A lot of people are thinking about the interoperability solutions between them. We're going to get even more scaling with 4844 as it comes down the pike. I think I do think of it that way. I think of it like a broadband moment.

But it's also important to situate all the other types of things that we need. We need a little bit of broadband. We also need React. Right? That's an interesting one, right? We need like developer frameworks. We need, you know, we need whatever the crypto native equivalent is of like forgot my password, obviously. Like there's one.

We need more sophisticated smart contract wallets, account abstraction, that type of thing. Things improve the user experience. I could list off a bunch of things that I think we need. And it feels like we're at that precipice. It's always a little bit hard to predict exactly, but the basic prerequisite building blocks are, I think, are clear. When it comes to the idea of having cheap block space that developers can not be worried about the cost so that they can innovate on and experiment with new things, I think that pretty well brings us to a topic of conversation that I want to have, which is gaming, because I would imagine that gaming would produce ample demand for block space. But then there's also a few other things in its report as well.

There's the sad topics, the charts that go down and to the right, which are titled, the United States is losing its leading crypto. And so that seems to be a theme of the week this week. And then there's also the conversation of the index, the state of crypto index, which is kind of the culmination of all these things. So all of these topics and more coming right after we talk to some of these fantastic sponsors that make the show possible. Learning about crypto is hard. Until now, introducing MetaMask Learn, an open educational platform about crypto, Web3, self-custody, wallet management, and all the other topics needed to onboard people into this crazy world of crypto. Metamask Learn is an interactive platform with each lesson offering a simulation for the task at hand, giving you actual practical experience for navigating Web3.

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with automatic warnings for malicious transactions or fishing websites. Phantom has already saved over 20,000 users from getting scammed or hacked. So get on the Phantom waitlist and be one of the first to access the multi-chain beta. There's a link in the show notes, or you can go to phantom. Dot app slash waitlist to get access in late February. Bankless station, we are back with Eddie, who's going to walk us through the rest of this very long report. Actually, no, we are still just crashing the surface. I'm just kidding.

There are many, many more slides that we are not able to go through. So if you want to get the rest of this report, it is available in the show notes. It is also available at A16Z Crypto.com slash state of crypto. And we're going to start where we left off with games. And so, Eddie, I've slowly been transitioning towards Web3 gaming, crypto gaming, not really, not just a narrative, also a real product. Sometimes I think I'm always kind of skeptical about things. It's like, oh, like Web3 gaming, that's a great narrative.

I'll wait for the game to show up. I'm starting to see some games show up. And so I want to just throw this to you as like Web3 gaming, narrative that crypto people are rotating into or actually real demand for block space. Great. Yeah. I'll be really candid. I think it's a little bit of both. There is a narrative component.

The best things are both. Right. Yeah. There's nuance. Here's the part that's narrative is that really good games take a long time to build. and they're just not going to pop up in like, you know, a year after the story becomes clear. That's just not how it's going to work. I've been working very closely with some great games projects, both in our portfolio and not.

And it's just clear to me it takes a really long time, like multiple years at a minimum. That's just how game development works. That makes it tough. The positive is that I genuinely believe, as a. big gamer myself, that gaming is exactly the right space to adopt the most interesting parts of crypto the fastest, because you get, if you do things right, and I don't just mean making some assets, speculative assets as part of a game. That's not really exciting, to be honest to me. I'm not a huge fan. But if you instead design the game so that it is composable, so that it is

remixable so that like mods can be permissionlessly integrated with the game without interfering with its underlying game logic. Or if you can make, make it so that people can extend and modify the client without interfering, without making it cheating, without like violating the principles of the game. These are really, really, really interesting areas. Composable games, places where people can interconnect different types of game logic. I don't mean like item from one world to another. I feel like that's like a little more narrative than it is reality. I mean something more like, you know, I can make a mod on the game and it's a multiplayer game and other people can play in the mod in the same shared world without me having to set up my own server,

right? The mod just changes the game at that moment. And it's not cheating and it's not giving me a weird edge because the mod had to adhere to rules that are verified in consensus. Right. I know that that was kind of a lot, but I think it's a whole. whole new type of multiplayer that will be possible. But again, I say it's going to be a while. It's going to be a couple of years. We have a lot to develop, like scaling stuff, ways that, you know, game development tools are like game developers need frameworks. They need things to

make things like performant, make graphics work, make it easy for game designers to develop, you know, compelling game experiences, all that type of thing. So I'll kind of leave it at that. I hope this not too much. I think the gamer and you are definitely coming out because I think a lot of what you're talking about is like fully on-chain games on like ZK EVMs that I think are, is like some of the coolest nerd shit that I can really think of that can come out of the crypto world. And we've been talking about it for years. And I'm like, I think the best thing that came out that was close to this was like the

Dark Forest prototype. But I would imagine that. Yeah, exactly. And the thing is a bunch of very cool projects got spun out of Dark Forest and we're inspired. by Dark Forest, which is, it's been a while now, like two years since Dark Force came out, and they're still trying to figure out how to make it work. It's not because it's impossible. It's just that it's very, very difficult.

So I'd say, although I'm in the long run, extremely bullish and excited about the types of fully on-chain game experiences we can make, I wouldn't hold my breath, and it's not going to just come around the horizon. I was going to say the same thing. I'm not sure I would want to hold my breath for that. And so I'll throw back to the question to you. This slide about the state of 2020. in crypto, Web3 games are a huge opportunity to welcome new users to crypto.

Where are we on that, assuming that this is a curve that hopefully goes up, if we make that implicitly bullish assumption, where are we on that curve? We're still got to be really early, right? Yeah, I think we are, but what we're going to see is different game projects dipping their toes deeper and deeper into the waters, right? The fully hardcore, on-chain game, everything, blah, blah, blah, that's a while out because that's as far as I've seen the maximal articulation of that vision, right? There's a whole spectrum of articulations that get us closer and closer and closer. We're going to see a gradual waves of

projects that are getting closer. Let's see. Like, you know, there's already some obvious benefits that are, there's kind of business reasons why it's clear they're not happening, but take as an example, like skin marketplaces, right? Like for CSGO skins and stuff like that. like in the Valve's marketplace. I think it's pretty plain and pretty clear that if these were fully on-chain, just for trading the skins, there would be a lot of benefits to the users

and to major skin traders and collectors. More liquid markets, more competitive pricing, safer systems, less fraud. I think it would be a huge improvement. But of course, because like Valve's game store and skin trading store is centralized, it's really up to them to include it or up to a competitor to try to leapfrog then and to create a new system that has that property as an example. So there's obvious ways that

crypto can help right now. It's just a little bit complicated to see from a business angle how it would take place. But I think many will try. So I'm excited to see it. I'm not a little surprised we haven't seen it yet, Eddie. I mean, honestly, it's like the open marketplaces with skins that are tradable. Instead, what we actually have in the gaming communities, at least the loud vocal gaming communities, is we hate NFTs. Like, we hate for NFTs out of my game. Yeah.

Well, it's funny you say that because I know a portfolio company of ours did a survey not that long ago that really tried to get at this question and figure out, do gamers really just hate NFTs? And the thing that gamers hate is needless financialization. And I'm like, I'm one of them, like pay to win. sucks. You know, the Diablo

two, Diablo three auction house failed, right? Okay, we can go down to

like some specific examples. But underneath the hood, if you get into really like what their concerns are,

their survey showed that kind of an equal portion love and hate NFTs and it's less than 10%. What you're really seeing is a very loud minority that hates them.

Ah, of course. Surprising. It's not totally, I forgot, I forgot, I've never seen that phenomenon. Yeah. So that's like that's a that's that's a thing. It's a loud minority. In reality, look, if it's done properly, like, uh, I just can't, I can't see why you wouldn't want it as a gamer. Like, if people don't want counterstrike skins,

they don't need them, right? But the ones who are really into that and really into trading them, they would benefit from a more secure, safer system that gives them more direct ownership over the asset, even though it's obviously, and what you're saying is what's slowing us down, right? now is centralization of gaming platforms that are sort of not allowing right now this innovation to leak into their closed ecosystem. Yeah. So it's meant to be an example of a thing that is technically possible now that you could probably do now with a little bit of effort.

So we don't need to scale radically to be able to support it in its sort of MVP form. But it depends on incumbents accepting it insofar as it's included into the incumbent systems. But what's more likely is probably competitors that come about and have an interesting distribution model for games, let people, you know, let developers build these features in and use them as part of a native platform. It's probably just going to be an innovator as opposed to an incumbent. Yeah, those pesky incumbents. I want to go to the last part of this PDF, this report, which is, like I said, the one part that the charts go down into the right, speaking of pesky incumbents. And this one is titled, the U.S. is losing its lead in Web 3. And there are two charts here.

Percent of crypto developers in the United States started at 40% in 2018, ending at below 30% here in 2022. And then top crypto website percent of traffic from the United States, starting about 22, 23% in 2018. And now we're down to just above 15%. So, Eddie, what's the story here? Yeah, we definitely need to go a level deeper. but the story is clear that the U.S., although there's been general growth over the last couple years, over this time horizon, right, if you take this sort of X-axis, there's been a lot of growth in crypto developers, but there's proportionately much more growth overseas. I don't know that that's a typical pattern in tech, right? And it's an unfortunate change of trajectory, I think. I'd have to do a lot more. We'd have to do a lot more, research and collect a lot more data to figure out exactly what's happening, right?

Are like, are developers leaving? Are they stopping working in the U.S.? It has just as the outside the U.S. simply accelerated while in U.S. is decelerating, right? It's a little, there's a couple different ways that you could see, you know, different paths that could explain this type of chart. But either way, I think it's really clear that we need much clearer regulation about around crypto in the U.S.

Because I get questions from a lot of engineers asking, like, should I move somewhere else? Like, am I taking risk by being in the U.S.? Like, should I start my company somewhere else? To be clear, that comes up a lot. So this is the simple fact of the matter is, as the slide presents, the U.S. is losing its lead in Web3. That's what the data is showing, percentage of crypto developers down, percentage of top crypto websites down. But it's almost up to interpretation.

as to why that's happening. There are some, you know, I guess ideas we might have around that. One, on the positive side, it might just mean the rest of the world is really like hitting the pedal of the metal. And look, this technology has always been about like unbanked or bank the unbanked, right? And so maybe worldwide, it's kind of saturating. But at the same time, what you are hearing and I think what we feel, being in the U.S., particularly at this point in time of the last six months, is this increasing

pressure on crypto, basically messages from some of our, not all, some of our regulators, some not all of our lawmakers, certainly, now it seems like the executive office of the president right now, that like crypto entrepreneurs aren't exactly welcome in the United States. And I want you to contrast that because I know Eddie A16C has been investing in technology for many years in many cycles. And, you know, crypto is just kind of one flavor of the internet and of like software eating the world, which is sort of how I think about the A16-Z thesis. Is this a first?

Has the U.S. ever been actively aggressive and like pushing technology outside of its borders? Because I don't recall this in Web 1. In fact, it was like the opposite. And I also don't recall this in Web 2. Okay, so what's different now? What's happening here? We, this is material for a whole other episode.

I think a lot of things have changed without going into like too many dark areas, right? Tech is not where it used to be. In the 90s, tech was this cute sort of toy. It was interesting. Things were kind of unfolding, but a lot of people weren't even sure whether to take it seriously,

take the internet seriously as a competitive product. I don't need to remind you guys about the like Paul Krugman fax machine like newspaper cut out, right? That's how people thought about it, right? It's kind of hard to regulate a thing to the teeth when you think, think of it as a toy that nerds work on in their garage.

More recently, it's become clear that tech isn't profoundly transformative, disintermediating force, right, for some forces, for some, for some groups. Take journalists. It changes power structures, is what you're saying. That's exactly right. And I'm talking about Web 2, right? I'm talking about Web 2. I'm not actually talking about Web 3.

Yeah, like social networks have totally transformed how the press works, how politics works. I think politicians, when they see grandiose claims about transformative technologies, their default position now is unfortunately skepticism. Now, I'd like to see that change because my genuine belief is that technological strength has been a part of what has improved quality of life so much for socialism. so many across the world over recent decades. And it's been an integral piece of the United States lead, economic lead. So I think it's a huge mistake to think of it as a mere risk.

I think it only serves to benefit us or in net will benefit us significantly. So I wish they'd treat it with a little bit more nuance. I'm still hopeful, right? It's not like the story's over, right? We're kind of at the beginning of the political stage of the story. but that's certainly what it feels like. And of course, I'm speaking for myself. Right.

Yeah, I guess it's one thing that Web 2 kind of had it easy, where they could just waltz into it because no one knew about the revolutionary potential of tech. And now we have Web 3, which is like, okay, we've seen this once before. And now this one's about money. And there's already Wall Street finances integrated into the incentive structure,

which presents additional friction. But I will say that this sad part that we are having in this episode, is actually only coming from our, the three guests on this show, the three people on the show, our U.S. centric bias. So like the rest of the world is like, yeah, there's a silver line. There's a silver lining. Look like crypto is always supposed to be global technology, right? That's been kind of the promise from the beginning. So note, I haven't said that crypto is going to end or be over, right? I just don't think that. Instead, the shape of its development and the locations of its

development will may shift, depending on what people do. I mean, I can't help, though, but be sad for the United States. Be sad for America. Because you're right, this is what this is, this is not crypto's loss. This is the U.S. is our loss. This is Americans lost. Yeah, the narrative, Eddie, that you just painted. I think that kind of rings true to me. Like in the 90s, the existing power structures were not afraid of technology. They didn't think it was like anything that would change the existing structures. Now we've seen multiple. generations of the internet and tech. And now the power structures are taking it much more seriously.

And they are much more threatened by it because they see how quickly things can completely change. That might account for the posture we've seen on Web 3 in crypto. I think that's exactly right. And I think I'll just throw this out because I'm very confident about this, that it's going to be even worse for AI. so. Oh, cool.

So we can, crypto can use AI as a heat yield? Like, go look over there. Gary Gensler, go look at AI. We're fine. Gary Gensler did bring up AI in his hearing today. Oh,

really? Which was crazy. Yeah, but I know we don't want to touch. Invoke that name right now. Yeah, we don't want to invoke it too much. I want to actually kind of move on to the conclusion,

the what I'm calling the product of this whole entire report, which is this index, the state of crypto index. And so this is something. new. Like I said, we've seen a lot of these reports before, but we've not seen an index of this. Can you explain this part of this report? Real time. Real time data, right? Yeah. What is this? Not real time. We're going to update it monthly. We're going to update it monthly. It's not real time. But maybe real time at some point. Yeah, the way, the way I think about this, if you scroll down just a little

bit, so we get all three charts here. Yeah. Like, perfect, perfect. The, we talked about some of these metrics, but not all. So I'll just kind of zoom out and give it in its biggest framing. If there is a product cycle, then we should be able to see indicators of development in that product cycle, right? And for whatever's happening in a product cycle, there is innovation. You can think of it as a supply side, like the things that are coming online that are going to show future adoption that are prerequisites for future adoption. And then we can see that adoption itself. And you can call that the demand side. and each of these sides have different metrics.

And if you aggregate them, which is exactly what we're doing at the bottom here, right with this red graph and this blue graph, if you aggregate them, I think it's pretty clear that the innovation cycle is different from the adoption cycle. The adoption cycle is more volatile. It comes and goes, like consumers come and go, financial metrics drive, like short-term excitement. But if you look at the innovation side, it is much steadier, much, much smoother. And if you click that index parameters, that's plus there on the right-hand side.

Yeah, if you click that, you'll see all of the metrics inside of the index, right? And you can see, like, in the innovation side, we have, like, active developers, interested developers, contract deployments, library downloads, academic publications, and they all have weights. And the purpose of these weights is that we're not trying to create, like, a totalizing, objective, you know, index that's like, this is like exactly like the exact number you need to track in the space. The point is that we've assigned these indicators our own weights. This is how we think it makes sense to think of them. Like, for example, you know, I think academic publications are probably a little bit stronger than like job search interest as an indicator of innovation

in the space, right? So we weigh them like three times heavier. But you can change that. If you disagree if you think job search is like the most important thing you can you know what I do disagree I want to change it to a 10 yeah yeah exactly and yeah yeah exactly then you'll then you'll see like the shape of the graphs will change and you know we'll aggregate them dustly yeah so you should click out so there you go exactly exactly so the way to think about the index is just the key indicators for ongoing innovation and the key indicators for ongoing adoption we're very interested to hear how people think about the weights, how people think about the metrics,

what other metrics based on ideally public data sets, but we'll entertain other things. Like, what other metrics do people want to add? Would love to hear it. And just to say also specifically that the way to think about the number, the number is the cumulative net growth for each of these numbers.

So like a 200 would mean that it like tripled, right? Cumulative net growth for the full set of indicators that were active at that time. Not all of those indicators have been around forever. Obviously, NFTs are newer. You know, dex has happened at one point, right? Stable coins happened at one point. So we have to kind of choose a threshold, like a beginning threshold. But we're going to add new indicators as they become obvious and we'll update these hopefully according to people's

feedback. Beautiful. That sounds like this looks like a very hard thing to build, but also something that becomes more precise and more useful over time as you can put more date into it. Yeah, I hope so. And like if I had the, if I could ask people to take away one thing, it's that there's more to crypto than the price. Like the fact that crypto has a price is both its superpower and a detriment to it, right? It's a superpower because we can see capital moving around in real time. That's incredible, right? We can program money. That's incredible, right? That's like an insane, insanely powerful thing. On the other hand, it means that, as I said earlier, the price becomes the most spectacular thing to track.

And there's a lot more going on underneath the hood that if there weren't live prices, we probably wouldn't be distracted by it. We would be more preoccupied with instead the metrics that actually show how things are unfolding. We would make a lot less Ponzi's, probably. Probably. So, Eddie, if you were to summarize the health of crypto right now

from a product perspective, so ignore price, we could see that, this podcast, Everyone knows what that looks like, but from a product perspective, what is it? Like, what's our health? I can, I can just imagine all the Twitter troll threads right now just like laying into me, but it's stronger than ever, right? It's stronger than ever. Is this comparable to like 2019 then where the product was maybe stronger than the, you know, the price seemed or? I don't know.

There wasn't a lot of health in 2019. That was it kind of a desert. It's always hard to do an analog And in fact, I think that the shape of the space has changed, right? You guys have seen this where as it's expanded And as the application layer has advanced And as the infrastructure layer has advanced, It's just a very multi-dimensional space now.

Like it's NFT world's doing their thing. We've got like creator economy stuff. We've got games world. We've got like just new decentralized social networks. I don't know if this resonates with you guys, But, you know, I have an index just as my gut index, right? Of how everything feels, right? And so, but what I've said to people is, like, this bare market doesn't feel bad to me at all compared to some previous where I was like, oh, do we have product market fit, guys?

Are we sure that this crypto thing is actually like going to work and we're actually building products that people are going to want to use? I don't feel that way this time. This time I feel with very strong certainty that we are going to recover. I don't know the total size of the recovery and how big this thing could grow. That's still an unknown. But in some of the previous bear markets, like 2019, I mean, Defi might not have had any product market fit or any traction. And then like what is the use of Ethereum?

There was no such thing as kind of like actual NFTs that anyone cared about. Yeah. One way that I'd sum that up, Brian. is that back then it was unclear what we needed next. Yes. There was a lot of doubt in the space. Now there are so many different efforts happening. And all I can point at each of them and say like, they need this, they need this, they need this.

100%. Each of these things need to unfold. That's just not the feeling I have then. And there's so many different efforts that, look, some of them are going to succeed faster, some of them are going to succeed slower. Some of them require more regulatory clarity. Some of them just need scalability. some of the, whatever, right? But the point is, the, the complexity of the space has gone way up

in a positive way. The chaos has gone up. That's what you want to see from a city. A healthy city is burbling with chaos and excitement, right? And like activity and hustle and bustle. That's what I feel like it's like in crypto product world. The bear market kids have it so easy these days, right? In our times. It's definitely not the same. It's definitely not the same. The listeners are going to hate you for that one. They're like, man, this feels pretty hard, right? It's not that bad, guys. I promise.

Eddie, thank you so much for walking us through all of this. It's pretty clear. You're pretty smart guy. So what's going to be in the 2024 report, huh? That's a tough one. That's tough to prognosticate. Hopefully radical U.S. superiority in all dimensions of Krypton. I don't know.

I don't know. Yeah, there's a couple areas I can point at, right, that I think are going to be really interesting. I can't wait to see where that percentage of L1 block space graph goes. That's going to be super, super, super, super interesting. I think that could go way higher than 7%, right? Just the percentage of block space actually consumed. Some people joke around, like, or half jokingly, that L1 could be totally congested with all the activity on L2, right? that it might be hard to even use.

Do you dare give us a number of layer two block space demand of layer one block space? For next year, a year from now, I'm going to say, I'll say 20%. 20%, or more. 7 to 20%. All right. Yeah, I think for L2, L2 being consumed on L1. Yeah, right. It's a, let's see.

So that's one. I think that that'll tell a lot of the. story. I also hope, I really hope to see radical improvements in UX, like, end-user experience. I mean, wallet experiences. I even hope that here's like a little, like, rim shot, like, I hope we don't even really talk about wallets as wallets anymore. I don't, I think the metaphor is not a good metaphor. They're really an application that for signing, right? It's for signing. It's really an identity system, like a wallet, right? It manages your public-private key pairs. wallet sticks along with like the coin metaphor

I think that it's more of an identity metaphor it's the wallet is the thing that has your IDs right it's not the thing that has your cash I think that we'll see a lot more there I know like like passport better is that a little better although that has very states heavy yeah it does

right yeah but it's it's that's an interesting one and one that we we talked about this a lot in in this episode, but we didn't quite use this framing, and we do introduce this framing in the report, is that there is a computer and a casino in crypto, right? And the casino is a consequence of the fact that you get economics, and you get explicit economics and free transmissibility or transferability. I think, I hope that we will see a little bit of distance from the casino and a little bit more leaning into the computer. And that means interesting programming models.

models, programming frameworks, better infrastructure, better UX, things like that. That's one of the more concise illustrations of what crypto is that I've heard before, a casino and a computer. That's pretty good. I feel like bear years are computer years, but like bull years are always, like, they always devolved into casino years. 22 is a total casino year. When you say that, what you're saying, which is right, is that the financial cycle

dictates the narrative. Yeah. That's what you're saying. It does in late stages of the bull cycle. It totally does, though. Does it? Can we change that? Or is that just always going to be the case?

It will probably always be a part of crypto. But as there are more explicit applications that are used end-to-end by the mainstream, it will fall away a little bit. Kind of like how in the 90s people thought of computers as a nerd thing. now who thinks of a computer as a nerd thing, right? You have to kind of reframe it to make it a nerd thing again. Like by default, like a phone, which is a computer, is an entertainment device and a tool and a work device

and all these other things. So I think crypto will go the same way where it's not explicitly in people's mind framed as a merely financial object. Eddie, this has been fantastic. So this is the state of crypto, 2023. Guys, we'll include some links in the show notes. You've got to come back again where we can get some of your thoughts and some other topics.

I think we're just scratching the surface today, but this has been a lot of fun. We appreciate it. I'd love to. I love to. And it was a lot of fun. Thank you. Risk and disclaimers, of course. Got to let you know.

Crypto is risky, if you didn't already know, at least on the financial side. But we're talking about the product cycle today. That's not as risky. I've got to tell you, though, you could definitely lose what you put in. We are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.