All indicators are flashing red with signals of inflation and slowing growth, with the S&P 500 in the US falling 20%, Europe recording its worst quarter since the pandemic and Asian markets unable to escape the pressure. Overall, crypto markets have seen the biggest decline: up to 70% since all-time highs reached in November 2021, when the cryptocurrency industry had a market capitalization. US$3 trillion.
Despite this slowdown, investment sentiment in blockchain and cryptocurrencies remains strong, signaling a record high US$9.2 billion in venture capital funding during the first quarter of 2022. In the second quarter, Andreessen Horowitz launched ‘Crypto Funds 4‘, a $4.5 billion fund dedicated to seed and venture capital investments in the development of crypto projects.
Additionally, a specific subset of Web3 – decentralized finance (DeFi) – withstood the winter crypto stress test. While centralized finance (CeFi) has taken a major hit, both reputational and fiscal, DeFi has emerged thriving. Lending protocols such as Aave and Compound automatically liquidated over-leveraged positions. Cryptocurrency exchange Uniswap, along with many others, continued to trade successfully. As stablecoins fell out of favor, MakerDAO maintained its peg to the dollar through verifiable overcollateralization.
Defy the Fear Index
The CNN Fear and Greed Index, a compilation of fear indicators that measure stock market movements, has gone from fear to extreme fear over the past month and is now neutral. Morale is low and such volatility makes investors reluctant to bet larger capital. However, thanks to its cyclical nature, we have learned that all is not lost in a market downturn, and based on experience, we can confidently say that these are the times when unicorns are built.
Some of the world’s modern behemoths were created during a market downturn, think Whatsapp and Instagram – and so is the wonderful world of Web3. The last crypto winter produced Solana, Uniswap, and Compound, whose founders had initial ideas during the 2017 bull market, but persevered and built the products through a prolonged downturn. Uniswap’s Hayden Adams started building the proof of concept in October and November 2017, then launched the protocol in November 2018, during a bear market. The argument that frothy markets are more unfavorable to startup creators has merit, as they can be up against lofty but well-funded ideas.
While venture capitalists can understandably be more conservative with their current investments, market downturns can be an extremely positive financial opportunity with more realistic valuations front and center and the chance to see what the next wave of builders will create. . This is also a time to focus not only on bringing capital to a project, but also supporting entrepreneurs by providing value beyond bringing capital.
A global collaborative effort
Of the seventeen market downturns since World War II, the average duration was just under 12 months. This time, it could be up to 24 months before we see any relief from economic pressure. Tech startups and the engineering talent behind them have a key role to play in driving value during this time. And of course, making sure you don’t run out of money during this time.
The pandemic has driven many positive changes in workforce collaboration technology, enabling globally distributed employees to collaborate with each other on decentralized projects and build products faster. Compartmentalizing issues and involving a developer in the troubleshooting phase will greatly improve the quality of the product. Iterating on the product can quickly increase traction and strengthen the case for investment. Interactive workshops or hackathons, such as those led by the cosmos communityare effective tools for engaging engineering talent in this way.
In light of market conditions, expanding talent and network should be profitable, but can be difficult. Founders must use profitable resources such as Braintrust, DeveloperDAO and Encode.club. The Y Combinator starter library has excellent quality, freely available materials. Rapid capital raising methods, such as approaching VC friends, close relatives, and peers, can be a strategy for ensuring financial health. However, cost cutting where possible will also need to be implemented in order to maintain enough leads for at least 24 months.
Web3 founders should also deploy the benefits of blockchain, alternative fundraising strategies, like issuing non-fungible tokens (NFTs) to a fanbase, are relatively untested but can potentially add value. While NFTs have been used to date by intellectual property owners to raise capital, Web3 projects are increasingly exploring raising capital by issuing NFTs as membership-like tokens that offer benefits to investors. Garage is one such project that is experimenting with creating gated communities where NFTs offer bespoke benefits to investors in terms of access to its community and unique real-world experiences in Formula 1. The combination of l Symbolic fairness with decentralized governance gives Web3 projects access to highly efficient systems. forms of capital, in the form of digital tokens, while remaining aligned with shared ethics and growing community. For example, NFTs generated on $23 billion in trading volume Last year.
Decentralized Autonomous Organizations (DAOs) deploy an equally efficient method of capital, allowing the concentration of resources that would otherwise be distributed. Compound and MakerDAO are prime examples, with treasuries allocating funds transparently through a token-weighted voting system. These continued to function flawlessly during the biggest fallout in crypto history. It must be understood, however, that like the collapse of Lehman Brothers in 2008, where legacy finance failed, this was a failure of overleveraged CeFi institutions.
The blue sky result
As a founder, you either win or you learn. Success will be measured by lessons learned during the crypto winter of 2022. Warren Buffet once said, “Be afraid when others are greedy. Perhaps this best highlights the opportunity in the present. To build. Send. To succeed.
No matter what the product or service is, finding the right support and building a support network is essential. When market sentiment is inflating prices, it’s easy to lose touch with business fundamentals. Lest it sound cliché, this slowdown brings us back to basics.
Finding the right partner who can provide the necessary advice and expertise as well as additional community engagement can lead to lucrative opportunities. In times like these, founders need to take advantage of the accessible and cost-effective technologies available and, most importantly, focus on their long-term vision. After that, there is only one thing left to do: persevere.
About the Author:
Viktor Fischer is managing partner of the Rockaway Blockchain Fund, a venture capital firm that backs key founders of Web3.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.