The crypto sector has taken a hit financially and reputationally based on a confusion about what crypto is rather than because of anything fundamentally flawed about the technology itself.
Fallout from the collapse of FTX has been widespread and there could be more contagion to come. But while emotions are running high as people count their losses, it should be noted that the ultimate demise of the FTX exchange was due to human failure, rather than a failure of crypto. That this was a crypto exchange is largely irrelevant.
FTX was just another financial intermediary. It was a custodian of people’s assets that was susceptible to the same mismanagement and poor human judgement as any other traditional finance (tradfi) institution. If a tradfi institution of this magnitude had collapsed, undoubtedly there would have been significantly greater contagion across other institutions and investors than what has occurred following the FTX downfall.
It’s easy to forget that crypto was a response to the last financial crisis, an effort to bring resilience to the financial sector. The collapse of FTX has shown that the fundamentals of crypto still pass muster, and a decentralised financial system provides resilience to withstand significant shocks such as is currently playing out. Crypto’s underlying technology, blockchain and decentralized currencies– including the likes of Bitcoin or Ethereum – performed as intended and better than any tradfi institution could have done in a similar scenario.
Now comes the opportunity to build better infrastructure that protects us from human behaviour.
The crypto sector has taken a hit financially and reputationally based on a confusion about what crypto is rather than because of anything fundamentally flawed about the technology itself. Regardless of the confusion, this seminal event provides an opportunity for entrepreneurs and the industry to build the infrastructure and products required to better utilise the tech.
For every generation there comes a time when talent and technology collide to solve big pain points. When this happens, the next wave of world-class companies are built from scratch. When the tech bubble burst in 2000, from the ashes rose today’s leading Web2 companies. The pattern is again repeating with Web3. Consumers and businesses are migrating more of their lives into the digital environment and crypto technologies solve an increasing number of the emerging and existing pain points from this great migration.
The sell offs in Bitcoin, Ethereum and other cryptocurrencies has paused the mania and impatience and given founders a generational opportunity to evolve Web3 infrastructure without the distraction of ponzi’d or fraudulent competitors.
Just as the world awakened to the benefits of email over faxes and mobile phones over land lines in the 1990s, 2023 will be the year when the broader world wakes up to the significance of Web3, to its unvarnished advantages and ability to solve pain points like payments and marketplace economics better, faster, cheaper and easier than the current infrastructure supports. At King River Capital we are poised for this, and ready to fund founders with the smarts to play in this next iteration of the tech evolution.
Web 3 tokenomics and technologies will wipe Web2 from the field
A defining characteristic of Web3 companies and something that King River places significant emphasis on isn’t technological at all. It is really a financial innovation and is called ‘Web3 tokenomics’. Tokenomics is still in a nascent phase but at the most basic level it changes the way value is distributed by a project or an organisation, where they share future value or future cash flows of the company with an ecosystem of participants and in so doing change their behaviours, their spending, their allegiance to a product or service. It develops a new kind of ‘hive mind’ and builds communities, loyalty and ultimately an army of evangelists. By issuing tokens that have a right to future revenue as well as utility within an app, Web3 organisations create more value than just fractional ownership, rewarding users for their contributions to the ecosystem almost like quasi-employees. Using this innovation Web3 businesses are building valuable communities of connected people and profoundly altering the economics of customer acquisition (something that may even come to threaten the advertising ‘rivers of gold’ flowing to Google and Meta ads).
A number of our investee companies are deploying tokenomics to build these communities, with examples being Immutable, the leading NFT platform, Layer Zero, one of the largest cross-chain messaging protocols, and Aztec, the leading layer 2 privacy protocol.
Infrastructure companies are only now developing user-friendly, scalable and secure products like crypto wallets, fiat on and off ramps, privacy layers, identity solutions and decentralized storage . And defi companies, rather than focusing just on ‘crypto natives’ are finally building out the code to allow off-chain financial transactions like working capital lending and B2B payments to migrate on-chain at scale.
2023 will also be the year that Web2 marketplaces are disrupted by Web3. Companies such as Engi.network, Teleport.xyz, PollenMobile.io are early examples of what is to come. They are showing that when a business shares their future equity value and cash flows with their marketplace participants, they can disrupt and displace their Web2 incumbents. The once innovative Web2 companies like Uber, Doordash, Thumbtack, eBay, and Etsy will be challenged by these Web3 innovators to the point that they might disappear altogether. Though a Web3 startup has yet to enter the market, an early victim of broken Web2 marketplace economics is Deliveroo, who couldn’t make their economics work and last month retreated from Australia with thousands of riders and restaurants left reeling.
Above all of these emerging sectors, the big opportunity Web3 companies will be working to address during the bear market months will be making the tech easy to use for anyone, accessible and seamless. Few people know how their email or smartphone works, and they don’t need to. The current Web3 experience is still highly technical and in the mode of “beta in production” or launching partly built apps with caveat emptor and letting their users find the bugs for them. This new focus on seamless and simple UI is the seismic shift that will bring Web3 to the mainstream.
Tomorrow’s leading Web3 companies will be the ones developing user interfaces and functionality that provide users with the huge benefits of crypto and Web3 technology without them even knowing they’re using products built on crypto rails.
Zeb Rice is a Partner at King River Capital