The bull case for the web3 bear market
The Times They Are A-Changin’
A lot has happened since December 2021, when the Next Big Thing in 2022 was inevitably meant to be web3. The combined effects of Covid-19, the war in Ukraine, the increasing inflation, and the brutal correction of the stock markets put a very definitive end to the mostly non-stop growth of the past 13 years.
While individual tech stocks dropped 60–80%, crypto assets — even in the TOP 10 — lost more than 90% of their value. One might add, crypto tripled its market cap in a year reaching $3 trillion at its peak, while the same growth took 3 years for an index like NASDAQ.
Bear vs BUIDL market
Even though crypto folks are prone to wishful thinking, previous cycles might support the current narrative that we are in a BUIDL market (borrowed from the mistyped term HODL).
As the ICO boom and bust cycle ended and destroyed approximately $0.5 trillion in value, the following 2-year-long bear (or BUIDL?) cycle gave birth to both new Layer-1 (Solana, Avalanche, etc) and Layer-2 solutions(Polygon, Immutable, etc) that now provide the backbone for many DeFi and NFT applications.
Today we see the cycle repeat but the effects are magnified. $2 trillion got washed away in 6 months but the environment is in a very different shape than it was in 2018.
Crypto Funds are managing more than $30B AUM while traditional VCs, such as DayOne Capital are trying their wings in the intersection of web2 and web3. We are proud (and lucky) shareholders in Animoca Brands through our initial investment in GAMEE a web3 gaming company and we are involved in building the metaverse via our investment in Party Space. Due to the newly minted web3 funds and the abundance of capital available for web3 startups, no matter how bearish the industry looks, talent and capital are ready to build through this cycle.
From primitives to real-world use cases
In 2018 while debating the commonly accepted fact of the last bear market that crypto is in an infrastructure phase Nick Grossman and Dani Grant emphasized that apps beget better infrastructure, not the other way around. Building on this notion they introduced the App-Infrastructure cycle.
They couldn’t have guessed it back then, but the last item on their list the ERC721 standard made the NFT rush of last year possible which either started or accelerated (depending who you are asking) the recent bull run and onboarded millions of people to web3 via OpenSea and Metamask.
Although the funding environment seems to be ready to support basically any thesis with follow-on investments it doesn’t mean that everyone will come out from this correction unharmed. Many unsustainable protocols and straight-out ponzi schemes have been funded either by retail or professional investors in the past few years. Most will be washed out this cycle the same way as it happened in the last correction.
In sync with the App-Infrastructure cycle and to counter the market correction, we will see more focus on bringing sustainable revenue for protocols, and use cases to onboard a variety of new users that have never interacted on-chain before.
In the case of the latter web2 dominated industries such as e-commerce and gaming will drive the adoption and revenue, thanks to the now well-known and understood infrastructure piece, the non-fungible token.
Think like tokengated commerce or the thousand P2E games under development.
While gaming and e-commerce might help us find our ways back to previous highs, “the killer app” of this cycle will be focused on onboarding institutions to DeFi and web3 in general. This wave might be accelerated (or slowed) by regulations, but the general building blocks are ready on the infrastructure side (Soulbond NFTs , Wallets, ENS domains, etc.) and many applications are under development to ease the transition. (like transferring our identity, helping to carry our data on and off chain or even doing KYC.)
Adidas understood the implications of tokengating and decentralized identity first, but as soon as these application pieces come together, many more brands and institutions are going to enter the space.
And again, the cycle won’t stop. As the maturity allows, we are going to see more and more web3 native B2B software to replace their web2 counterparts (DAO toolings are great early examples of this).
Conclusions
The current App-Infrastructure cycle will bring more efficient protocols, previously impossible use cases (tokengating), and will transfer ideas from web2 where incentives could be better aligned in web3 (gaming). Regulations are coming and with the increased participation from traditional institutions web3 will easily be able to surpass the $3 trillion market capitalization. Thorughout all this we’ll see many web3 native softwares to support this growth.
It might be an overly optimistic view, but this future is much more exciting and challenging, than capitulating to the recent market trends while joining the pessimists who always sound smart in bear markets (same is true for optimists in a bull market though).
Questioning all merits of a new industry in the midst of a heavy correction that sucked in many of the most talented developers, designers, marketers and investors resembles much like the early 2000s.
To paraphrase a classic, it’s time to BUIDL.
