Renowned venture capital firm Andreessen Horowitz (a16z) has released its first State of Crypto report, which includes cyclical information relevant to the current downturn, according to a draft provided to CoinDesk. Other key findings relate to the benefits of Web 3 and Ethereum's continued dominance in the blockchain.
A16z has become one of the most recognizable names in crypto investing. Last summer, a16z raised $2.2 billion for its third dedicated crypto fund, a record-breaking vehicle until Paradigm launched in November with $2.5 billion.
The State of Crypto report builds on a16z blog post about the May 2020 "price innovation cycle" as digital assets climbed out of the 2018 crypto winter. Later, Bitcoin (BTC) hit a new record high in December 2020.
A16z said the crypto market is driven by a cycle in which strong digital asset prices attract talent into the space, developers innovate during a downturn, and the resulting projects and startups drive optimism once the winter is over. The initial thesis of the price innovation cycle in 2020 has come true, and a16z began work on the State of Crypto Report.
"We thought that now that there are all these new and interesting focus areas in the crypto economy that there's data for, it might make sense that there's completely public information that you can gather yourself," said Eddy Lazzarin, head of protocol design and engineering for the a16z crypto team, in an interview with CoinDesk.
Web 3 early innings
Web 3, a broad term used to define the next phase of the Internet that means something different to everyone you ask, was a focus of the report. To identify data for a field, at least a general definition is needed.
"I think at a high level, Web 3 for us is the term for the movement, while crypto is the underlying technology that enables it," Lazzarin explained.
A16z compared take rates, the fees a marketplace charges a third party for a transaction, between Web 2 and Web 3. Meta had nearly 100% take rates across Facebook and Instagram, compared to a take rate of 2.5% for non-fungible token (NFT) marketplace OpenSea.
A16z conducted a new data analysis to compare the payouts of Ethereum-based NFT creators with Web 2 creators. Last year, primary sales and royalty payments from Ethereum-based NFTs totaled $3.9 billion, four times the $1 billion Meta has set aside for creators through 2022, representing about 1% of the tech giant's revenue.
While Web 2 currently has far greater user numbers, the upstart is winning in payouts. Overall, Web 3 paid out $174,000 per creator, compared to $0.10 per user on Meta, $636 per artist on Spotify, and $2.47 per channel on YouTube.
On the blockchain front, a16z noted that Ethereum remains the dominant force in Web 3, largely due to its early adoption and large developer community. However, a16z believes there may be multiple winners in this space.
Ethereum's popularity has resulted in users paying more than $15 million in fees each day to use the blockchain. The well-known scalability issues that cause congestion and high fees have created a growing demand for Layer 2 interoperability solutions such as bridges and rollups that connect to the Ethereum mainnet to reduce transaction fees and traffic.
Using a range of on-chain metrics, a16z estimates a wide range of 7 to 50 million active Ethereum users. The company estimates Web 3 could potentially reach 1 billion users by 2031, meaning we are currently in the early days.
"Using the early commercial Internet as an analogy, that would mean we are somewhere in 1995 in terms of development time," a16z crypto members Lazzarin, Chris Dixon, Daren Matsuoka and Robert Hackett wrote in a blog post.
"The Internet reached one billion users in 2005 - incidentally, right around the time Web 2 was taking shape with the creation of future giants like Facebook and YouTube.