A16z addresses the downturn in the inaugural State of Crypto Report

Andreessen Horowitz (a16z), a well-known venture capital firm, has released its inaugural State of Crypto document. This report includes cyclical data relevant to the current downturn according to draft materials supplied to CoinDesk. Other key takeaways were related to Web 3 benefits and Ethereum’s continued blockchain dominance.

A16z is a prominent name in crypto investing. Last summer, a16z raised $2.2 billion for its third dedicated crypto fund, a record-setting vehicle until Paradigm’s $2.5 billion launches in November.

The State of Crypto report is based on an a16z blog post on the “price-innovation cycle” from May 2020 the 2018 crypto winter was over, and digital assets started to rise again. In December 2020, bitcoin (BTC), reached a new record.

A16z stated that the cryptocurrency market is driven by a cycle in which strong digital asset prices attract talent to the space, developers innovate during a downturn, and the resulting projects or startups drive optimism once winter has passed. A16z started work on the State of Crypto report in 2020 to confirm this initial price-innovation cycle thesis.

“We thought it might make sense now that there’s all of these new and interesting focus areas in crypto that there’s data for, that there’s totally public information that you can go out and scrounge for yourself,” Eddy Lazzarin, head of protocol design and engineering for the a16z crypto team, told CoinDesk in an interview.

Web 3 Early Innings

Web 3, a broad term used to describe the next phase on the internet that means something to everyone, was the main focus of the report. A general definition is required for crunching data in a given area.

“I think at the high level for us, Web 3 is the term for the movement whereas crypto is the underlying tech that makes it possible,” Lazzarin explained.

A16z looked at the take rates of third-party transactions, which is the fee charged by a marketplace on transactions made from Web 2. Compared to Web 3, A16z found that Web 3 had lower take rates. Meta saw nearly 100% of its transactions on Facebook and Instagram, compared to OpenSea’s 2.5% take rate for nonfungible tokens (NFT).

A16z performed new data analysis to determine the payouts to Ethereum-based NFT creators compared with Web 2 creators. Last year, primary sales and royalty payments of Ethereum-based NFTs totaled $3.9 billion, four times the $1 billion that Meta reserved for creators through 2022, which represented about 1% of the tech giant’s revenue.

Web 2 has a much larger user base, but Web 3 is a more lucrative rival in terms of payouts. Web 3 paid $174,000 per creator, compared to $0.10 per user for Meta and $636 per artist on Spotify. Web 3 also paid $2.47 per YouTube channel.

A16z has found that Ethereum continues to be the dominant player in Web 3 due to its early launch, large developer community, and strong blockchain ecosystem. A16z believes there could be many winners in this space.

Ethereum’s popularity has led to users paying more than $15 million in fees each day to use the blockchain. Due to well-known issues with scaling, such as traffic jams and high fees that can lead to traffic jams, there is a growing demand for layer 2 interoperability options like bridges or rollups. These solutions connect to the Ethereum mainnet and reduce transaction fees.

A16z calculates a wide range of active Ethereum users, between 7 million to 50 million, using a number on-chain metrics. Web 3 could possibly reach 1 Billion users by 2031, according to the firm. We are still in the early innings.

“Analogizing to the early commercial Internet, that puts us somewhere around the year 1995 in terms of its development timeline,” wrote a16z crypto members Lazzarin, Chris Dixon, Daren Matsuoka and Robert Hackett in a blog post.

“The internet reached 1 billion users by 2005 – incidentally, right around the time Web 2 started taking shape amid the founding of future giants such as Facebook and YouTube.”

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