The Crypto Correction In Context: Re-Evaluating The Adoption Cycle

We find ourselves in the middle of a deeper market correction than most anyone expected. Sure we’ve seen these big pullbacks before, but this time the circumstances are different.

This cycle saw the creation of novel business models for content creators and gamers. DeFi, in particular, made real strides on a novel open source financial system, and while experimental and fraught with risk, the DeFi economy grew to $275B in size at its peak to-date. $275B is an insignificant percentage of global finance, but it was also a degree of scale that appeared to legitimize the DeFi economy. So we find ourselves surprised that we’re still looking at another 70%-90% correction, mirroring the pullbacks we had in 2015 and 2018 despite having much more to show versus the previous cycles.

Unsurprisingly, the “crypto is dead” takes have returned *despite there being an active national TV campaign lampooning the historical shortsightedness of “crypto is dead” takes*. Coinfund’s Jake Brukhman compiled the newest round of “Crypto is dead” takes here.

Do The Critics Understand?

I don’t think most people appreciate that those who argue that crypto “doesn’t have any use cases” or that it’s all “worthless ponzi schemes”, almost universally don’t understand enough to have an informed opinion. I know this well because my day job has me explaining DeFi to TradFi folks regularly. There is very little real understanding of the promise and potential for crypto. There are a lot of folks out there who believe they have an informed opinion on crypto but really don’t understand what they’re talking about.

This is partially due to mismanaged expectations and a lack of education. We could chalk most of these takes up to a lack of education, but every technology shift has been a target for critics disturbed by a change to the status quo and we expect this will continue.

On the TradFi and Fintech side, there is still little knowledge or awareness about what DeFi is. Conversations almost always start with the very basics, and most of the time these investors are shocked when I show them how smart contracts work for the first time.

Based on a handful of discussions with CEOs of Fintech unicorns about the potential for smart contract-based competition, none had even considered that competition could come via a web3-native competitor or knew what advantages a web3 architecture might provide. But most had a Coinbase account and thought they had a baseline understanding of crypto.

There are plenty of public examples of how people change their tune once they do learn enough to have an informed opinion. Shark Tank’s Kevin O’Leary famously called it “crypto-crap” and “worthless” before catching DeFi religion. After O’Leary was properly exposed to DeFi, he did a full 180 and started his own DeFi company and now says he will HODL through the bear.

Where Are We In The Adoption Cycle?

So if crypto remains in its early stages, can we put some better context around this? Raoul Pal of Global Macro Investor and Real Vision has been noting the similarities in the adoption rate of crypto versus the web. His signature chart on crypto adoption shows crypto penetration currently in the hundreds of millions.

But we’re noticing a key distinction in how we could or maybe should define adoption.

As noted, most don’t understand much about crypto beyond that it is a buzzy asset class or maybe that Bitcoin is supposed to be a hedge against inflation. They have never interacted with a smart contract, and thus have no idea what smart contracts can do, and understanding smart contracts is the key to understanding the potential uses for blockchains.

There are only ~30M Metamask wallets in use, a decent proxy for those who have been exposed to smart contracts. In June, Open Sea active users dropped to 280K while Uniswap active users dropped to 350K, and in DeFi many funds and users have multiple wallets. The realm of true expertise in DeFi and more advanced applications of smart contracts and the blockchain remains well less than 1% of that 30M upper bound.

For the purposes of measuring adoption, it might be more accurate to separate those who “have exposure” to crypto via a custodial or centralized account versus those who have “used” crypto via executing smart contracts.

By that metric, visible on the revised chart showing Metamask adoption below, we’re even earlier in the adoption cycle. This shows that we’re closer to 1994 or 1995 on the web adoption scale, but with an even sharper growth rate at 38X over the last year.

So What’s Next?

That Billion user threshold is when breakout consumer applications become more realistic. Whereas Pal has been projecting we hit that milestone in 2024, it still suggests we’re in the infrastructure building phase today. This is something we see clearly in that we are still refining the core DeFi primitives, which need to be hardened and made anti-fragile in order to support the full web3 economy that will be built on top of it.

Does the revised adoption methodology change the projection? We’ll have to see if the growth curve remains constant, but it remains possible we’re still on track for 2024. But if we’re comparatively at 1994 or 1995 levels of adoption, then it’s worth revisiting what that time looked like in the NASDAQ. Even though the web had not hit the mainstream yet, a long party in the technology industry was just getting started.

The promise of web3 hasn’t changed, even if the price and perception have. Time to get back to building, and building without the noise will benefit us all.