Bouncing Back: Three Web3 Problems to Solve in 2023
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By Hunter Watkin, VC Investor at Rampersand and Host of Abstraction Podcast
History suggests, along with many VCs, that “a bear market is the best time to build”. But does that apply to Web3 in Australia, right now? My answer: only if we can address three pressing issues with great urgency.
In the midst of a haemorrhaging bear market for crypto I have completed the first season of my podcast Abstraction, a real-time tear down of what’s actually happening in an industry with very few public cheerleaders left (in many cases for good reason).
What I learned is there are some incredible opportunities ahead and some remarkable entrepreneurs, builders and investors, but it’s going to take a joint effort to solve some major gaps if we are going to see success.
Below I bring to light three very fixable problems, how we can make it the best time to build for Web3 startups, and why my belief in blockchain-based tech remains.
1. A lack of Token Design Strategy Guidance and Leadership
As a refresher, token design defines (in writing, and then eventually with code) a crypto token’s supply, utility, its attributes and what contributes to its overall value.
It’s complex.
Last year, I saw hundreds of pie charts broken into dozens of pieces with pages of justification for micro-allocations of funds to various purposes and entities. I sometimes wonder whether these ‘Use of Funds’ / ‘Tokenomics’ slides in white papers and pitch pecks are deliberately complex so that the reader just assumes it has been thought about with rigour. Detail without strong reasoning is unhelpful, and there are some notably frightening features of token plans that heighten the risk I see as an investor looking to support founders for the long-term.
Tokens often have prescribed timelines for how long they will be ‘locked up’ and then released to certain entities (which essentially tells investors when they can sell a stake in a commercial project). If there is one thing that’s crystal clear about early stage projects, trying to predict and prescribe when certain capital-related events (ie allowing people to sell tokens) should happen and how ownership should be allocated from the outset can be really dangerous.
Commercialisation timelines and milestones hardly ever track to a startup’s forecasts, and an ability to periodically assess progress, resourcing and capital needs is really important for both founders and investors. Poor tokenomics strategies that don’t cater for this can completely skewer the longevity and potential of a token-financed venture.
Sure, if it’s a rapid get rich quick scheme, it might work, but I don’t see these opportunities emerging and succeeding in droves after what we’ve experienced over the last 12 months. My ‘boomer’ view is that capital requirements need to be able to be adjusted as the needs and objectives of the business evolve, but this flexibility has been fairly absent in the lion’s share of Web3 project decks and white papers that I have seen.
Another issue is the opacity around which tokens associated with a given project actually hold value. I’ve learned of a graveyard of founders, project contributors and investors that have been misled or have misunderstood what they are investing in and how value accrues. There simply must be better guidance and controls with regard to whether a token is for ‘governance’ or ‘utility’, and how value accrues to each.
It’s great to see leading Australian Web3 companies hiring exceptional minds to solve for sustaining tokenomics strategies that balance clarity and reliability with flexibility for long term value. Collin Li is one of these minds. But of course, it would probably conflict with his employment contract for him to freely share what he is learning in the role. 😀
I know of two young Web3 brains (that formerly worked with a promising Web3 company based in Australia) who are advising companies on whether equity or token financing is right for founders, but for now, they are focused on serving their customers rather than the general public.
We need local token strategy guidance and leadership for Web3 founders. I don’t believe it requires working on successful Web3 projects to be able to provide, but it does require research that extends beyond our shores. For now, I try to learn from several thought leaders in the US that are sharing insights on how to think about tokenomics, Robin from Liquifi (Cake Equity 😉 for Crypto) is probably my pick for the moment.
2. Unavailability of Standard Legal Documentation for Founders
This follows on nicely from the problem of token design and strategy.
Right now, it costs a fortune to get decent advice on how to think about the novel legal risks that come with token-based financing. From running my eyes over some of the legal advice that founders have received from lawyers in recent times, many are receiving fairly, shall we say, ‘general’, advice.
It’s good to see that teams at Piper Alderman, HSF, KWM and Cadena Legal seem to be investing heavily in specific practice groups for crypto companies.
I am sure those teams are getting some grief internally from colleagues, but they are taking an important and I think worthwhile risk on their career to explore the intimidating world of crypto. If I had pursued a career in the law, crypto would be an area I’d be showing a lot of respect. It will grow as an area of commerce, and there is just a lack of quality advisors, with those bearing an insight costing a justifiably handsome fee. Naht great for startups.
One of the promising features of this potential future internet is that a lot of the commercial and legal risks that might be faced today will be abstracted away by battle-hardened code (which hopefully reduces the cost of risk mitigation). A local startup called Jubi is building for this future by providing standard legal agreement templates powered by smart contracts for founders.
In the meantime, the release of templated legal docs such as SAFTs (Simple Agreements for Future Tokens), Token Warrants and Token Side Letters would be super helpful for founders.
3. It’s a Boys Club
There is a cultural issue that is barring progress in the space. Crypto is a Boys Club.
Let me caveat what I am about to say by acknowledging that people working in and having an impact in Web3 spans far beyond writing code. However, code is pretty important in a world that purportedly lives and dies by the sophistication and reliability of permissionless, smart contract powered technology.
Unfortunately, the amount of women that are Australian-based developers and building DeFi projects or any kind of blockchain-based application is very low. I am not claiming to have mapped an entire ecosystem, but through conversations with swathes of industry leaders (men and women), I’ve been able to meet very few women with experience building tech that interacts with blockchains.
History tells us that innovation dominated by homogenous groups leaves a lot to be desired.
Looking Ahead
To close, here’s three reasons why I am relatively optimistic about Web3 in ‘23.
The financially ruinous events that occurred in 2022 did not in most parts expose flaws in blockchain-based tech.
No one that’s read this far needs me to rehash the events of 2022. My reflection is simple, the consequences of each key incident (ie Terra-Luna, Celsius, and FTX) ensued from three common features: misleading conduct, bad governance and an absence of regulation. Three common causes of commercial wrongdoing in any emerging industry, and that still occurs where it can in today’s entrenched financial systems. Crypto was introduced to overcome these things, it just happens that it’s presently very easy to exploit.
There will be less crap, and more durability.
I am seeing far fewer opportunities in Web3 compared to this time last year. But those that we are seeing at Rampersand are much, much better. The copy cat culture and quick money making schemes appear to have washed away, with those looking to build enduring, industry-defining tech remaining.
We’ve got some of the most inspiring minds, experienced and emerging, focused on driving and supporting the next wave of Web3 innovation right here in Australia:
- Joni is absolutely amazing when it comes to agitating for legal recognition and protection of startups through DAO regulation and sharing her learnings on regulatory progress around the world
- Some of the smartest people I’ve met Matt, Wan Ying and David are taking jobs at crypto-focused funds like Apollo to spend their lives researching and investing in the space
- Zhuoxun and his Australian co-founders of Magic Eden are poised to improve the tooling and ways creators can be compensated for their work globally
- Clem has an incredibly rare but valuable bank of experience on the dos and don’ts of launching a crypto token, and a bright future as a Web3 builder
- Daniel and Shane are making the use of crypto simpler, safer and materially better than the way we engage with today’s financial systems and intermediaries
- And I can absolutely guarantee that my investor peers Abhi and Jessy are heads down exploring use cases and opportunities with founders
You can listen to these guests on the first season of Abstraction (on Spotify and Apple Podcasts).
If you’re building in Web3, think you can help solve these problems, or are a founder looking for help in these areas, reach out. I am motivated to make an impact here, as a friend or perhaps even an investor: hunter@rampersand.com
