Venture capital firm Andreessen Horowitz released what it hopes is the first of many "State of Crypto" reports on Tuesday. The summary covers the world of Web 3 - a term the firm uses to describe its vision for the future of the Internet and also its regulatory ambitions.
It's a positive report. In 56 pages, a16z (the 16 refers to the number of letters separating the A in Andreessen and the Z in Horowitz) presents the thesis that the revolution is just beginning. And that even if the cryptocurrency encounters a bear market.
Web 3 is a term that has been in use for years, but has been criticized recently for lack of clarity. Gavin Wood, one of the co-founders of the Ethereum blockchain, reportedly coined the term to describe a crypto-based web.
For a16z, the term encompasses everything from NFTs (non-fungible tokens), DAOs (decentralized autonomous organizations) and crypto gaming to actual blockchains like Ethereum and Solana and their scaling tools.
A16z has a complicated relationship with the crypto industry. One of the first venture firms to enter the sector, the company more than doubled its investments during the recent bull run. Last year, it launched a $2.2 billion crypto fund and invested in both well-known and unknown projects. It holds tokens and is big and blockchain agnostic.
Some see venture capital as a lifeline for cryptocurrencies, especially as markets turn south. However, other diehard crypto natives see the presence of institutions like Andreese Horowitz as antithetical to cryptocurrency's subversive goals. Web 3 may be open to all, but that may not mean much if you're the exit liquidity of a16z.
In some ways, there is little new in a16z's report. It does present updated data, such as how many Ethereum users there are and how many DAO governance votes have been cast, but it largely stays in the realm of old familiar "narratives."
Crypto is good, the firm says, because it is an alternative financial system to the current status quo of banking that excludes 1.7 billion people worldwide. The firm highlights this point in an overview of the report, summarizing that "cryptocurrencies are having a real impact."
Web 3 is an inflection point, says a16z, a "natural continuation of the Web's evolution from write-only sites to read-and-write sites. In other words, the primitive "World Wide Web" allowed people to read information online, Web 2.0 allowed people to create content, and Web 3 allows people to "own a piece of the Internet," the report says.
Digital assets may be volatile, the companies say, but that's a positive. "Underlying crypto markets is a logic where prices are "leading indicators" of technology adoption," they say.
"Prices are a hook. Numbers drive interest, which in turn drives ideas and activity, which in turn drives innovation," writes a16z. This process, called the "price-innovation cycle," was first described in 2020.
The profit motive
You can't blame a capitalist company for saying this. Although a16z claims to invest in building a better world, it is fair to say that the company is primarily concerned with profit.
And in many ways, the data presented shows that cryptocurrencies can be a good investment. DeFi, or decentralized finance, would "represent the 31st largest U.S. bank by total assets under management" after just two years, according to a16z.
NFTs offer similar potential for cryptocurrencies, driving innovation around crowdfunding models, royalties, and intellectual property issues. The same is true for the gaming industry or the metaverse. "We are just starting to see the potential," writes a16z.
However, the "State of Crypto" report "should not be taken as investment, legal, tax or other advice," a16z shares. The "views are "purely for "informational purposes."
So who is this report for?
A16z is lobbying lawmakers and regulators to propose so-called lenient rules for the crypto market. However, the report does not address these efforts or the tricky regulatory issues that surround cryptocurrencies.
The report also does not mention bitcoin, the first cryptocurrency, and thus does not address the entire digital asset industry. Although many investors still consider Bitcoin a good buy, it is not a sure way to make a profit - even though some Bitcoin supporters believe that all assets will lose value to the highly competitive, highly memetic currency.
The main innovation of Web 3 is that anyone can invest in certain aspects of the system. Crypto markets, accessible 24/7 to anyone with an internet connection, are fundamentally different from the private funding rounds that a16z led in Web 2 giants like Facebook over a decade ago.
There are signs of sustained growth in the industry. A16z cites CoinMarketCap, GitHub, Pitchbook, Twitter and others to show that there are millions of developers and "active users" on various blockchains. (Notably, Solana appears to have three times as many active addresses, 15 million, as Ethereum layer 1, so the numbers should be taken with a grain of salt.)
"Although it is very difficult to estimate, if the trend lines continue as shown, web3 could reach 1 billion users by 2031," the venture firm writes. I don't know what cryptocurrency would look like with 1 billion users. It's not unreasonable to say that these systems, as currently designed, will be very expensive and could collapse under that strain.
Of course, no one knows where the industry will go. This is especially true since rising interest rates and inflation could pull capital out of the riskiest markets. As a factual report, the report is an interesting, if expected, insight into the "state of cryptocurrency." But it is definitely not investment advice.