The Breakdown - 5 Key Takeaways From a16z's State of Crypto Report

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, May 21st, and that means it's time for the weekly recap. Now, before we get into the weekly recap, if you are enjoying the breakdown, please go subscribe to it. rating, give it a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.com slash breakdown pod. Also a disclosure, as always, in addition to them being a sponsor of the show, I also work with

Starting point is 00:00:49 FTX. Finally, if you have not registered yet, I highly recommend you go sign up for consensus, CoinDesk's premier crypto festival. It's happening in Austin, Texas, between June 9th and June 12th, and the thing that makes it different is it's got such a wide array of topics from within this crypto ecosystem. If you are interested in the sort of big picture power shift side of crypto that we talk about so much here, you won't want to miss speakers like Congressman Patrick McHenry or Senator Kirstenzyllibrand.

Starting point is 00:01:21 If you are interested in going, use code breakdown to get 15% off your pass at coin desk.com slash consensus 2020. All right, so today we're doing two main things on the weekly recap. First, we're going to go back and look at some of the post-mortems from funds involved with Terra Luna that have finally started to trickle out. And second, we're going to do a key takeaway discussion from the A16Z State of Crypto report from earlier this week. To Terra and Luna first.

Starting point is 00:01:51 One of the big questions on everyone's minds after the implosion of UST and Luna was how, it would impact funds in the space. Much of that focus was on Mike Novagratz, the head of galaxy, who famously got a Luna tattoo. Earlier this week, he finally put pen to paper to give his point of view. There is no good news in what happened in markets or to the Terra ecosystem, he writes. In Luna and UST alone, $40 billion of market value was destroyed in a very short amount of time. Both large and small investors saw profits and wealth vanish. The collapse dented confidence in crypto and defy. Whenever money is lost in such an abrupt fashion, people want answers. So what are Novogratz's answers? Well, first, he does pin some of it as the global macro backdrop, which he says

Starting point is 00:02:37 has been, quote, brutal for all risk assets this year. He points out that it's not just crypto, but growth stocks with negative cash flow down as much as 50 to 70%. This is driven, he says, by central bankers, quote, in the early stages of unwinding a massive liquidity bubble, fueled by unprecedented fiscal and monetary policy injections into economies across the globe, including in the U.S. that had propped up all risk assets, including crypto. The free money forever ethos of the last decade has left us staring in the face of the biggest bout of inflation since the 70s. Many assets that had meteoric rises in the period since COVID have suffered meaningful and correlated corrections, end quote. He goes on to explain that this larger backdrop of crashing prices, in the case of Luna,

Starting point is 00:03:20 helped support and drive a run on the bank. And unfortunately, he says it's not likely to get better quickly. At a high level, he writes, it's important to understand that volatility is likely continue, and the macro situation is going to remain challenging. There is no cavalry coming to drive a V-shaped recovery. The Fed can't save the market until inflation falls. So liquidity is important. Being realistic is important. But he continues, crypto is not going away. The amount of human capital moving into the space isn't slowing down. The focus on building decentralized infrastructure that allows value and ownership to flow as freely as information on the internet isn't slowing down. The GDP of the metaverse is heading one way. Our community is resilient,

Starting point is 00:04:00 has a shared belief in a new way of doing things, and the assurance that this is the very early innings. When all of a said and done, Novogratz has decided to leave his tattoo, saying that it will be a, quote, constant reminder that venture investing requires humility. What about Delphi Digital? They also wrote a long blog post explaining their take on things. First, they wanted to give some context around how big a part of their portfolio Luna actually was, saying even at Luna's peak price this year, Luna and other Terra assets made up only about 13% of net asset value across Delphi Ventures. On a deal count basis, less than 5% of Ventures total number of deals were in companies or protocols related to the Terra ecosystem. Still, they admit that they just missed a lot of this.

Starting point is 00:04:43 They write, we always knew something like this was possible, and we tried to stress the risk to a system like this in our research in public commentary. But the fact is, we miscalculated the risk of a death spiral event coming to fruition. We've taken some heat for this over the last week, and we deserve it. The criticism is fair, and we accept it. To the vocal critics of Terra's algorithmic design, you were right and we were wrong. And indeed, this is where a lot of the conversation is turning is whether this sort of idea of an algorithmic stable coin can ever be realized, or whether there is something fundamentally flawed in the assumptions that go into it. There are some for whom it's obviously and transparently flawed,

Starting point is 00:05:19 but then there are also many others who understand why it seems like such an appealing thing to try to seek out. It is the lure of a truly decentralized, permissionless, untamperable stablecoin. It just may be that the economics don't work how they need to work for that to actually work in practice. Finally, the last fund that we'll report on is hashed, who were deeply involved with the Luna ecosystem. CoinDesk published research this week that suggests from on-chain data that hash lost about $3.5 billion worth of value as part of the crash. This is a story that will continue to play out.

Starting point is 00:05:55 I don't think that we've heard the last of the impact to funds in terms of redemptions, in terms of questioning judgment, in terms of all these little things that really change the shape in the face of an industry. I certainly don't think we've heard the last of it when it comes to regulation. Looking for ways to step up your crypto game? Then go with Nexo. For starters, you get free crypto for each purchase or swap. How about earning guaranteed yields?

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Starting point is 00:07:58 This is a really comprehensive research report, and of course it's going to focus on what A16Z thinks is interesting about this industry. But I always think that these broad reports represent a good chance to get a sense of how some big part of the industry thinks. In this case, we're talking about the venture side, who have a strong longitudinal belief in Web 3. And so with that context, they actually presented five key takeaways of their report, which I'll sum up here. The first is that we're in the middle of what they call the fourth price innovation cycle. Quote, whereas prices are often a lagging indicator of performance in some

Starting point is 00:08:34 industries, in crypto, they are a leading indicator. Prices are a hook. The numbers drive interest, which drives ideas and activity, which in turn drives innovation. We call this feedback loop the price innovation cycle, and it has been the engine that has propelled the industry through multiple distinct waves since Bitcoin's inception in 2009. This has always been part of the thing in crypto and something that's really hard sometimes for outsiders to understand or appreciate. There is a real come for the money, stay for the revolution type of vibe around here, and it just is a part of it. I think in a lot of ways it matters less that the average person who comes to the industry walks in the door because number go up and more how well we do it channeling them to be

Starting point is 00:09:13 able to find the things that make the space interesting and can actually take advantage of their insights, experience, resources, et cetera, to build something real. Key takeaway number two, Web3 is much, much better for creators than Web 2. This, I think, is one of the most interesting sections of the report. Here's how they sum up what Web 3 actually is, and I think this is relevant, given that there's such a force in helping to find this. Quote, the first era of the modern Internet, roughly 1990 to 2005, was about open protocols that were decentralized and community governed. Most of the value accrued to the edges of the network,

Starting point is 00:09:47 users and builders. The second era of the internet, roughly 2005 to 2020, was about siloed centralized services. Most of the value accrued to a handful of large tech companies. We are now beginning the third era of the internet, what many call Web3, which combines the decentralized community governed ethos of the first era with the advanced modern functionality of the second era. This will unlock a new wave of creativity and entrepreneurship. Now, interestingly, usually people define Web 1 and Web 2, less in terms of value accrual, although that's a part of it, and more in terms of what people could actually do, and what business models that prompted. Web 2 was revolutionary and transformational from Web 1, because instead of one-to-many websites that were just basically

Starting point is 00:10:28 the publishers of a new era, all of a sudden users could create content themselves. This transformed business models, how people think about their jobs, how information is distributed, in both good and challenging ways. But the value accrual part does matter. They're right to identify that because the platforms that hosted all of this new user-generated content ended up deriving a huge portion of the value of that content. It has in turn created some of the most powerful companies in the history of the planet, with consequences that we're dealing with now. A-16 goes on. Web3 gives people property rights the ability to own a piece of the internet. Web3 aligns network participants to work together towards a common goal, the growth of the network.

Starting point is 00:11:07 Web3 empowers a collective-owned future over a corporate and government-owned future. So how do they justify this idea, though, outside of just conceptual, that Web3 is better for creators than Web2? Here are some early numbers. They write, the take rate of Web2 giants are extortionate. Web3 platforms offer fairer economic terms. Compare Medas nearly 100% take rates across Facebook and Instagram to NFT Marketplace OpenC's 2.5%. As U.S. Congressman Richie Torres noted in a recent op-ex, you know something is profoundly wrong with our economy when big tech has a higher take rate than the mafia. A16 goes on, the numbers are telling even though it's still early. In 2021, primary sales of Ethereum-based NFTs plus the royalties paid to creators from secondary sales on OpenC yielded a total of $3.9 billion. That's quadruple the $1 billion, less than 1% of revenues,

Starting point is 00:11:59 that meta has earmarked for creators through 2022. The numbers are even more extraordinary, considering how many more Web 2 versus Web 3 users there are. We counted 22,000, 400 Web3 creators based on the number of NFT collections compared to the nearly 3 billion users posting content on meta platforms. While in absolute terms, Spotify and YouTube paid out more to creators, 7 billion and 15 billion respectively, the per capita disparity is striking. According to our analysis, Web3 paid out 174,000 per creator, while meta paid out 10 cents per user, Spotify paid out 636 per artist, and YouTube paid out 247 per channel. Web3 is tiny but mighty. Now, I think it's completely reasonable to have some grains of salt with those numbers.

Starting point is 00:12:43 First, it'd be really interesting to know, not just what the median but the mean is in terms of payout per creator and how much it's slanted towards the extremely successful. There's also a real question of how more people coming into the space as creators puts downward pressure on those numbers, which is inevitable in a natural process. Still, I think that those numbers, the fact that OpenC paid out about four times what meta is going to pay out this year, is a pretty important. pretty profound number. Next key takeaway from this report is crypto is having a real world impact. This is their section about underserved and underbanked. I think the way that I might change this,

Starting point is 00:13:20 because I agree with this as something that's very important about this space, is not so much that it's having a real world impact, although that's starting. It's more that it's building towards a real world impact. And I think that's in a couple ways. First, you're seeing the early embers of possibilities in things like the play to earn space, how sustainable it is, whether there's a real there there outside of a couple of one-offs is an open question and a fair one. But something happened last year where people were making living wages playing this game, and that's at least worth spending more time on. The second piece is that it's important to understand that a lot of what's happening in crypto right now is about stress testing new systems and making the infrastructure

Starting point is 00:13:59 ready for adoption. More equitably accessible services aren't built overnight, and there are risks as well for unbanked and underbanked users to use protocols and platforms that aren't ready for prime time. So I share A16Z's optimism about this. I just think we need to reframe a little bit about where we are. Their fourth key takeaway is Ethereum is the clear leader but faces competition and is basically about developer interest in Ethereum versus other layer one's smart contract platforms. And this is sort of just a general overarching argument. I don't think there's anything particularly new or different in it. For whatever it's worth, their conclusion is there's room for a lot of innovation, and we believe that there will be multiple winners.

Starting point is 00:14:37 Finally, their fifth key takeaway is, yes, it's still early. They write, well, it's hard to know the exact number of Web3 users we can reason about the scale of the movement. We estimate there are somewhere between 7 million and 50 million active Ethereum users today, based on various on-chain metrics, analogizing to the early commercial internet that puts us somewhere circa 1995 in terms of development. The internet reached 1 billion users in 2005. Incidentally, right around the time Web2 started taking shape amid the founding of future giants such as Facebook and YouTube. Although it's very hard to estimate if the trend line continues as depicted, Web3 could reach 1 billion users by 2031. In other words,

Starting point is 00:15:14 you're still early. Much remains to be done. Let's keep building. I think even if you come to wildly different conclusions than they would, this report offers such a breadth of information and raw data that it's worth checking out. For now, I want to say thanks again to my sponsors, nexus.io, near NFTX, and thanks to you guys for listening. Tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas.

Starting point is 00:15:52 This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web 3, and the Metaverse, and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators. Don't miss speakers like Kathy Wood, SBF, CZ, P, punk 6529 and Joe Lubin to name just a few. Use code breakdown to get 15% off your pass at coin desk.com slash consensus 2022.

The Breakdown - 5 Key Takeaways From a16z's State of Crypto Report

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