2022 will be remembered by many as the year of the big crypto collapse. But in reality if we compare cryptocurrencies to other asset classes, overall this was not such a negative year for the performance of the whole industry. Since June 30 2022 The Bloomberg Galaxy Crypto Index is actually performing better than S&P500, Gold and U.S Treasuries. 

From Pantera Capital Newsletter. 

Most cryptocurrencies have fallen, but I would consider this more of a clean up of poorly made tokens and a collapse of greedy “Wall Street” type of fund managers than a catastrophic year for the crypto industry. 

People have lost a lot of money and it is very unfortunate, and between these regulatory headwinds, the complexity of the technology, even if I am very bullish on the technology, I am also trying to be realistic about mainstream adoption and how far we are for it. Probably still 10 to 20 years. 

The last to fall was a very big one FTX. FTX which went from a $32 billion valuation down to ZERO in a matter of days was a shocking event for many crypto fans. Most retail investors considered the FTX founder to be a hero, but he was in fact a fake. 

Overall this year we had many other big bankruptcies and investment firms implosions including Terraform Labs (mostly known for their high yield interest offering on TerraUSD stablecoins along with an associated token called Luna). 

With Terra labs, multiple other funds including Voyager Digital, Celsius Network, hedge fund Three Arrows Capital, and recently BlockFi ended up falling apart. 

Before moving into a more detailed analysis of Web3 trends, I would like to share that as many will share in the upcoming weeks, one of the biggest factor of success and potential threat for the industry is regulation, and I will not touch on it as it is a very complex topic and it could required a stand alone article with depth comments, about concern and with analysis of what could or could not happens. I also, however, believe that regulators and government are often afraid of what they do not understand, and I hope for a better and clear promotion of collaboration between the industry leaders and regulators. 

Crypto Heroes are often fake 

I think that the media is too often focusing and creating the wrong crypto heroes. Sam Bankman-Fried promises, or Tim Draper guesting on the price of Bitcoin are fun to watch, but the reality is that there are many more influential crypto individuals who were not celebrated by the media. Some are people like Stani Kulechov, Founder and CEO @ Aave, or Robert Leshner, the CEO of Compound Labs who are the real pioneers of DeFi. 

If there is something we learnt this year is that most of the companies that have filed for bankruptcy, and at least one of their founders appears to be on the lam. The common denominator of many of these collapses is that people overreact; people create heroes too quickly, and then immediately blame them if they fail. 

What is also interesting to me is that Do Kwon, the South Korean co-founder of Terraform Labs and Sam Bankman-Fried are both investigated, and operated in an evident fraudulent way. The crypto industry is now blamed, but the reality is that both of these founders overpromised, lied and operated in a criminal way. 

As the industry starts recognizing these patterns, most meme coins will disappear and overtime the bar to get founded and established as a leader will increase. 

Only for the savvy crypto folks: 

DeFi (Decentralised Finance) actually worked great. In this cycle new and real digital gold applications created by new emerging players survived and will strive. 

Those who truly built on the chain like  Aave, Compound, Uniswap, MakerDAO – are all functioning flawlessly 24×7 still after all the crashes.  Keep in mind, ALL of DeFi is only valued at $20 billion. Traditional, centralized finance is worth $3 trillion

FOMO is over

If we look back at 2022, I believe the all tech segment, including institutional and retail investors have often suffered from [fear of missing out] and FOMO-based deals making behaviour. 

Moving forward, we will continue to see investors being more conservative, focus on actual fundamentals and being more disciplined on valuations. 

I think what we are experiencing is very similar to what happened a few years back with the initial coin offerings (ICO) craziness. Investors over reacted to the opportunity, lost money, many companies failed, a lot of people lost money, but Ethereum, which was one of the biggest ever ICO today remains the second-largest digital currency, active and extremely lively. 

Crypto winter is not Web3 winter 

We are still too often associating the world Crypto (typically used for Cryptocurrencies) to the whole blockchain segment. Crypto is perhaps an application of blockchain and I think we will experience a continued excitement for Web3 and a clear separation between “crypto” currencies and financial trends from other blockchain applications. 

Note: Web3 coined by Polkadot founder and Ethereum co-founder Gavin Wood in 2014, referring to a “decentralized online ecosystem based on blockchain”. Today many Venture Capitalists and technologists use the term to talk about the vision for the future of the internet.

In the next cycle we will experience a consolidation of financial crypto applications, including the entrance of a number of traditional finance institutions in the space (see Fidelity, JP Morgan, among others) and a significant differentiation between “crypto finance” application and other Web3 applications.

The price of Bitcoin would not matter too much any longer as many other fundamentals indicators will emerge. For example some Venture Capital firms already track developers activities, wallets installations and user focus metrics.

Web2 integration with Web3

When Bitcoin was launched, a lot of the hope and excitement for crypto currencies was around the opportunity to replace the national central banks. Very similarly, today we are experiencing a big migration of developers from web2 to web3 based on a big excitement about the opportunity to replace/improve the current internet system. 

What’s wrong with the current web?

Is dominated by a handful of powerful players such as Amazon, Microsoft, Google, Meta, etc.. 

Web3 is a vision for a truly decentralized and a more democratic version of the current internet. A vision where the web, the services that we use are not hosted by a single service provider company; a vision where protocols which are sort of purely algorithmic govern the decision not CEOs of large corporations. Where data is owned by individuals, and transactions are made peer to peer and withouts intermediaries. 

Ultimately, I expect to see more integration between Web2 services and Web3 emerging applications rather than a total switch to a new internet. 

As both stacks get closer the number of crypto users will keep increasing, and on top of the current emerging applications, DeFi, NFTs, DAOs, we will see the emergence of new applications and tools. 

Web3 Developers & tools are the winners 

Realistically, we are very early on the installation of Web3, but we are going to see a very big establishment and emergences of Web3 developer tools. 

From Web3 libraries to develop decentralized applications (dApps), Smart contracts tools to write, compile, test and deploy the contracts, Web3 Data providers (Nodes) down to a deep integration and consolidation of wallets.

I think it is important to keep in mind that the ongoing “crypto winter” could last very long this time because of its correlation to the financial market and given macroeconomic factors, but developers activities, open sources progress and infrastructure updates will continue at an accelerated phase in the next few years. 

Not everyone holds the same amount of optimism about Bitcoin’s price, but if you look at the underline technology the speed of innovation is ridiculously high.

Reference: https://www.alchemy.com/blog/web3-developer-report-q3-2022

Technical info at https://www.quicknode.com/guides/web3-sdks/the-web3-developer-stack 

Other interesting challenges and things to watch this year:

• Will Ethereum surpass Bitcoin in market value?
• L1 vs L2 war
• Twitter adding crypto payments 

If you are building a Web3 startup want to chat about Go To Market, Fundraising and more do not hesitate to comment below or get in touch with me on Twitter.