The crypto dream is not dead. We hope the delusions are

by Arthur · October 20, 2022

Six months into the crypto meltdown that has wiped $2 trillion off the market, people are still talking about the chances of a recovery — a “crypto sheep” after another “winter.” What is surprising is that the correction has not been enough to inject more realism into the discussion. What the carnage actually reveals is that most blockchain-enabled crypto businesses need to be rethought and rebuilt from the ground up.

Hopefully, our world of speculators will one day be replaced by pragmatists, who can see blockchain for what it is: a powerful new technology, but not the new internet.

Blockchain has the potential to help shape the future and drive progress and growth – just not in the way it’s typically used today. What we have seen is an industry that often talks about “freedom” and “autonomy” but just as often tries to use that language to mislead the public. We have met many founders who want to make money, rather than those who are willing to commit to the long, multi-year effort to build real value. We have seen people using a technology that is chasing applications, rather than those that are trying to solve a real and pressing problem.

As the industry rebuilds, we will hopefully see more genuinely mission-driven blockchain entrepreneurs. In the meantime, it is important to sift the dreams from the delusions.

The problem began when people started talking about the potential of crypto to replace the world’s sovereign currencies, destroy the banks and completely remove the need for corporate governance via distributed autonomous organizations. The industry was soon flush with money dependent on the success of cryptocurrencies – with many players creating conflicts of interest and artificially increasing the value of businesses by buying up tokens.

“Community” became one of the most used terms in crypto, but too often it is a buzzword to push bad investments. We love real communities – but a pyramid scheme is not the same as a network effect. Too many crypto-entrepreneurs have been encouraged to talk up, hype and generally “pump and dump” various currencies. Violent speculation became the greatest affliction.

The current environment is based on token issuers getting rich on day one – the equivalent of a startup founder selling a piece of their company and pocketing it before anything has been built. If you move in crypto circles, you may well have met those who cashed out and are now loitering in smug cliques at conferences.

To make matters worse, regulators have been slow to act, which is partly why crypto has been so attractive. The sad result is that many people have been ruined by crypto crash and no one has been there to protect them.

The good news is that regulation is coming. Companies using blockchain technology must focus on creating long-term value with the assumption that the usual laws and rules of finance will apply – from “Know Your Customer” to “Anti-Money Laundering”. Anything that smells probably is.

Similarly, crypto-companies cannot bypass the climate consequences of how their tokens are maintained with massive amounts of computing power. Any company that relies on some kind of blockchain cannot avoid talking about the environmental impact and building a responsible business model that takes it into account.

The Ethereum blockchain’s recent transition from a “proof-of-work” process for validating transactions to a “proof-of-stake” – which reduces energy consumption by 99.9% – is a step in the right direction, and shows how crypto companies are able to reform.

The blockchain may still have a bright future. Many of us at Index were – and continue to be – fascinated by the technology. We see its possibilities as a medium of exchange (being able to transfer ownership between two people without a trusted third party) and a store of value. There is potential in things like open identity verified by cryptography, secure transfer of digital assets, the possibility of a verified and transparent overview of transactions and solutions of institutional quality.

In that spirit, we have and will continue to make investments in blockchain companies – we stay away from startups that make all their money through short-term trading, gambling or taking advantage of investors’ gullibility. Instead, we will support companies that build the rails for crypto, as well as those that leverage the technology to create better products and services.

It may take a while for more businesses to emerge in these areas, but they will likely share a few commonalities. They will offer products and services to a broad set of businesses and consumers, not just crypto-natives; they will provide a clear benefit to users, and solve a real pain point; and they will use blockchain across all sectors, rather than creating a separate sector.

Fundamentally, we are agnostic when it comes to the choice of technology behind a business. What we care about is what someone does with that infrastructure. When some of crypto’s most exciting use cases are established, no one will care whether they are blockchain-powered or not. In our view, cryptography is simply an interesting type of technology that can make certain things better – not something that is going to fundamentally change the mechanics of our economy and society.

Let’s hope that the current crypto crisis will have a beneficial effect in removing the many businesses that lack the necessary vision and conviction. There is no doubt that hugely important and influential companies will be built on the back of the blockchain. They just don’t want to look like most of the businesses kicking around today.

In the meantime, we want to cheer on the truly revolutionary founders who want to take this technology and build something amazing with it.

Danny Rimer is a partner at Index Ventures, a venture capital firm with offices and investments in the US, Europe and Israel.

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