Down bad

Welcome back to Chain Reaction.

Last week, we talked about layoffs and the Winklevoss rock gods. This week, we’re looking at a new layer of crypto doom and gloom.

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crash redux

We’ve talked crypto crashes a couple times already in the short life of this newsletter but the sell off this week has spooked crypto insiders in a very different way. Things are happening so quickly right now that even seasoned crypto investors seem to be feeling uneasy about this one.

While crypto winters have come before, they’ve never aligned with warning signs of a broader prolonged recession. Things have already plunged so quickly at the signal of a recession that insiders fear a lengthy bear market could hit crypto far more brutally than expected — tearing tokens to lows far below the highs of the 2017 bull run.

This means rough things for tokens, but also more brutal realities for the entire ecosystem.

This week, we saw the interconnectedness of major institutions as crypto lending protocol Celsius stuttered and brought down Ethereum prices with it as investors feared a price collapse brought on by reportedly over-leveraged players like 3 Arrows Capital. Despite the decentralization ethos of crypto, the potential for cascading failures seems every bit as possible for the crypto world as it does for traditional finance markets.

If things do fail harder and faster than before, the question is how quickly young startups and crypto communities can adjust to shifting fortunes. Few companies have to deal with the stressed of both crypto and public markets like Coinbase which laid off more than 1,100 people this week, but plenty of startups raised mega-rounds in 2021 to theoretically future-proof their companies. For DAOs and protocols with treasuries sitting in ETH, many have seen their budgets for community efforts and stretch projects decimated, threatening their survival.

Without the promise of riches or with reduced interest in blockchain-based exclusivity, where will consumer demand go? Will governance communities grow more self-motivated and more concerned about short-term goals when their groups have gone from being filled with millionaires to seeing their profits disappear into thin air? How much worse will things get?

the latest pod

Somebody call 911. Crypto lending protocol Celsius isn’t fire burning, but it did freeze all customer withdrawals this past weekend, citing concerns about its own liquidity amid “extreme market conditions.” Since then, the firm, which claimed to have 1.7 million users before the pause, has seen its own token plummet (and then recover, and plummet again), and sent the already-struggling crypto markets into a tailspin. We talked through what went wrong on the Celsius network and how it’s surprisingly intertwined with the rest of crypto.

Regulators are seizing this moment in the downturn, while web3 is already looking pretty shady and investors are pissed about losing money, to crack down on certain firms in the space. From BlockFi to Binance.US, some of the biggest names in crypto are facing lawsuits and/or fines for their practices. 

The tech billionaire bros are still alright, though, for better or for worse. Block’s Jack Dorsey announced this week that he’s ready to cancel web3 and move on to his vision of the internet, which he’s calling “web5.” Elon Musk weighed in with a particularly creative proposal too, which we discussed in this week’s episode. 

Our guest, Aaron Levie, built a successful SaaS business in Box, and now he’s on a mission to beef – respectfully – with web3 stans all over Twitter. Levie explained to us how he manages to walk the fine line of being a crypto critic without landing in the bulls’ bad books. 

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follow the money

Where startup money is moving in the crypto world:

1. Indonesian fintech platform Flip raised a $55 million Series B extension led by Tencent with participation from Block (formerly known as Square) and existing backer Insight Partners.
2. NFT infrastructure startup NFTPort raised a $26 million Series A round led by Atomico.
3. ScienceMagic.Studios, a digital asset-focused brand studio, bagged $10.3 million in pre-seed investment from investors including Liberty City Ventures, Digital Currency Group and Coinbase Ventures.
4. A co-founder of Words With Friends raised $46 million in a Series A round led by Paradigm for their web3 gaming startup, The WildCard Alliance.
5. Molecule, a platform where DAOs can back medical research projects, secured $13 million in seed funding led by Northpond Ventures.
6. Metaverse play-and-earn company Atmos Labs brought in $11 million in a seed round led by Sfermion.
7. Creator-focused web3 sitebuilder Tellie nabbed $10 million in Series A funding from investors including Malibu Point Capital, Galaxy Digital and Dapper Labs.
8. Crypto payment platform Nume raised $2 million in a pre-seed round led by Sequoia India.
9. Dutch fintech Bits of Stock, which offers crypto rewards, raised €4.2 million in its seed round from Keen Venture Partners, Yellow Accelerator and others.
10. Decentralized trading infrastructure startup Orderly Network raised $20 million in Series A funding from investors including ​​Three Arrows Capital, Pantera Capital and Dragonfly Capital.

the week in web3

Crypto markets were down pretty bad last week (though admittedly, it’s only been downhill since then). But temperatures were up in Austin, Texas, as 20,000 people in the crypto community came together to discuss how to navigate their industry looking like it might go up in flames. Anita had the chance to attend the conference, so she’s back with some thoughts from the field: 

I have a lot of friends and acquaintances who aren’t nearly as deep in crypto as I am, and one question I’ve heard over and over again these past few weeks is whether this downturn in the digital asset markets is the death knell for web3. In other worlds, now that the music has stopped, is the party actually over?

I shared my two cents/two Satoshis on the matter on Los Angeles public radio this week (check it out), but I want to use this space to highlight some thoughts I have after hearing from folks in the industry at Consensus. In short, I don’t think this is the end of crypto by any means, but it’s certainly going to be a tough time for the space. 

On a panel about how to invest in web3 in a turbulent market, Arca’s Chief Investment Officer Jeff Dorman made an interesting point about what makes web3 so different from most other sectors, at least as they’re defined by the financial markets. 

“I don’t even think digital assets [are] an asset class. I think it’s a technology that is now wrapping all asset classes,” Dorman said. In tradfi, investors can specialize based on products (e.g. debt, equity, derivatives) or sectors (e.g., industrials, retail, real estate). But in web3, those categories haven’t been clearly defined, because blockchain technology has been used in so many different ways, from file storage, to selling digital art, to tracking peer-to-peer money transfers.  

That’s part of why I think we can’t group “crypto” or “web3” or “blockchain technology” in the same bucket – even those three terms all have slightly different meanings. Perhaps that’s also why the vibe at Consensus felt puzzlingly positive despite the market turmoil. Each project is so different, and each builder has conviction in why their own use case for the blockchain makes sense and isn’t like all those other projects that are losing value or seem like scams. At a time of so much uncertainty, the most important thing reporters and analysts can do is look at this industry with nuance, and evaluate each project case-by-case. It’s going to be a wild ride, but I believe at least some parts of web3 are here to stay, and I see it as my job not only to shed light on what applications of this technology are working and not working but also to try and make sense of why.

TC+ analysis

Here’s some of this week’s crypto analysis you can read on our subscription service TC+ (written by TC’s Jacquelyn Melinek): 

As Celsius accelerates the crypto sell-off, who pays the price?
This week, the global crypto market capitalization fell below $1 trillion for the first time since January 2021 after one of the largest centralized crypto lenders, Celsius, landed in hot water after it paused all withdrawals, swaps and transfers for users. The driver behind its freeze isn’t completely clear, yet, but it resulted in another bank-run scenario similar to what we saw last month with the UST and LUNA situation – and it’s causing another drop in the crypto market. 

Hedge funds plan to buy more crypto amid a down market and potential regulatory clarity
What seemed like a rare sector is now gaining popularity as the number of specialized crypto hedge funds has grown to over 300 globally, according to PwC’s Global Crypto Hedge Fund report. These funds are on “the search for alpha” to beat the benchmarks and are willing to try something new and different, John Garvey, global financial services leader principal at PwC, said to TechCrunch. Even though markets are highly volatile, two-thirds of all hedge funds surveyed that are currently investing in the space plan to deploy more capital into the market by the end of 2022, it said.

As DAOs continue to blossom, here’s how to keep yours from wilting
This past year has been one big growth spurt for DAOs (decentralized autonomous organizations) but not everyone in the space is convinced that they’re being formed properly or in a way that ensures success. But what happens when the hype fades? People stop voting, treasuries can wither and abandoned, dead communities turn into “DAO graveyards.” To prevent that from happening, some say there needs to be a restructuring of the way DAOs are formed.

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Lucas and Anita