Views from Messari Mainnet, Part II
Decentralizing the Web, Onboarding the Next Billion with Play to Earn and Recentralizing DeFi
This week’s blog continues to investigate the crypto investment themes we identified at Messari’s Mainnet conference in September. Last week we focused on the regulatory environment and explained how our conviction on multi-chain ecosystems was supported in New York City. This week we cover:
3. The Decentralized Web (DWeb) is here
4. The rise of crypto gaming and play-to-earn
5. Institutions will recentralize DeFi
3. The Decentralized Web (DWeb) is here
The Mainnet conference focused on the future of crypto, and one of the most talked about areas for innovation was the possibility of a fully-decentralized, permissionless and censorship-resistant internet, dubbed Web3 or DWeb, to distinguish it from a “Web 2” internet increasingly controlled by platforms such as Facebook, Google, Apple and Amazon.
Web 2 continued on the original Web 1 ideal of universal access, providing everything from data storage, communication tools, search and network access for free, or for very low cost. Of course, there is no such thing as a free lunch, and the cost of access was privacy. Advertising paid for the internet, and, absent the odd desperate attempt at control by the European Union and many toothless and ill-informed US government inquiries, your personal information continues to be the costs of accessing what are becoming more and more essential services, rather than the fun diversions of the original Web 1.
One of the key presentations at the conference was the Future of Web3 with Messari CEO Ryan Selkis moderating Ethereum founder Vitalik Buterin, Z Cash’s Zooko and Filecoin’s Marta Belcher.
Source: Messari
The three were touting a joint venture between the Ethereum Foundation, Filecoin, and Z Cash’s parent, Electric Coin Company, utilizing the latter’s ZK proofs to create an auditable blockchain without revealing users’ addresses. Hartmann Capital is a big believer in privacy as a key use case – for DeFi, NFTs and of course Web 3 – and we invest in a wide variety of solutions, including private smart contract platforms (e.g. Secret Network).
For Vitalik, Web 3 needs to go way beyond centralized platforms to focus on becoming stewards of our data. While “privacy sounds like a feature”, he pointed out, it’s actually about “data hygiene”.
Data leakage is a problem… and can cause harm… Non-private centralized systems have data leaking all over the place.. And get hacked all the time.
After all, cybercrime is expected to rise over 70% over the next 5 years, to $5 trillion. Vitalik concluded that “improving data hygiene can reduce these risks and increase safety”.
The centralization of power among a select few giant platforms has several other drawbacks besides the lack of privacy (and transparency). In fact, we were reminded of the systemic weaknesses inherent in extreme centralization on Monday, when Facebook and its other platforms, Instagram and WhatsApp went down for several hours.
Source: New York Times
During the outage, crypto commentators saw an opportunity to further the decentralized Web (DWeb, or Web3) agenda:
Indeed, blockchains used in Web3 are specifically designed to survive any one network or server farm outage.
While Facebook’s network outage focused on the technological weaknesses of centralized platforms, the reported hack of user information, since shown to be a hoax, as well as this week’s Facebook whistleblower testimony focused on the other drawbacks of centralized internet platforms.
Facebook’s defence was even more damning than the whistleblower’s accusations. A spokesperson revealed that there are challenges in balancing the demands of over 1 billion users, and that compromises needed to be made. Based on recent court victories, it appears that Apple can choose who they include in their App store. But should we be trusting one man (Zuck) or one organization (Facebook or Apple) to moderate our global discussions?
Do we really need tech monopolies to live our online lives, and should we have to give up our privacy and other rights? Crypto devs believe not.
For many, the decentralized web cannot arrive fast enough. The DWeb offers:
network resiliency - no centralized points of failure
data privacy (and ownership), and
censorship resistance.
Whereas the DeFi ecosystem is set up mainly to service crypto-native trading, shorting and leverage (DEXs, money markets and yield farms), the DWeb has the potential to onboard every internet user over the coming years as the decentralized offering improves and bests Web 2’s current monopolies.
A total addressable market (TAM) that counts all current internet has attracted some of the best minds in crypto, and solutions are arriving much quicker than expected. At Mainnet we heard from loads of Web3 pioneers: Audius, Filecoin, Arweave, Graph, Livepeer, Oasis, Streamr, Ocean and Celo.
Source: Messari.
All of these crypto native firms are focused on slowly eroding the Web 2 monopolies.
One of the best panels was entitled “Decentralizing AWS: How Web3 Will Unbundle Data Monopolies”. “How”? More like “when”!
In the past some were questioning whether we need a decentralized Web at all. Between the scandals, failures and monopolistic behavior by the BigTechs and oppressive governments and the increasing sophistication, the DWeb should have both the demand (users who control their own destinies) and the supply (robust decentralized replacements for all Web 2 services) to thrive over the next decade. And perhaps completely replace the Googles, Facebooks and Apples?
One panel’s title revealed crypto’s quest for total domination of the Web: “Building for 6 Billion: What Mobile-First Web3 Looks Like”
4. The rise of crypto gaming and play-to-earn
The DWeb offers permissionless and censorship resistant access to digital games and the possession of gaming items. In fact, without the ability to truly own game rewards, the new play to earn movement would already have sputtered, as it did with earlier iterations.
Axie Infinity’s play-to-earn (P2E) model, where players can earn assets that can be exchanged outside of the game for real money, is so successful that copycats are following as fast as they can build.
Axie looks to surpass the most popular centralized gaming platforms in market capitalization. According to Ryan Watkins of Messari, it’s in the top 5 by valuation:
Besides supporting families all over the world, Axie’s P2E is making crypto cool for non-crypto natives.
While many of the crypto gatherings we attended outside of Mainnet consisted of a few beers/cocktails, with or without a presentation, Axie’s primary sponsor, Delphi Digital threw a real bash in honor of P2E’s newest success story, Yield Guild Games. YGG sponsors players who want to try their luck earning on Axie Infinity, but will expand to new P2E games as they arrive, such as Vulcan Forged and Terra’s Star Atlas. They also announced on the back of a new funding round for P2E funder Merit Circle, who have implemented P2E scholarship programs in the Philippines, Venezuela, Africa, and Nigeria.
Source: The Cut
British electronic music duo Disclosure entertained the decidedly upscale crowd. They were brought on board for the event after, according to the Cut, Delphi “bought their NFT a couple months ago for $140,000...and now we’re best friends.”
Drinks were named after Axie Infinity tokens such as “Smooth Love Potion”, and other crypto-themes. The party article reveals what Delphi thinks is cool: play to earn, whether Axie or YYG, where they invested very early.
Is this level of celebration hubristic? It does harken back to the final days of the dotcom boom, but we believe P2E is just beginning. For now, given that so far only one true success story in P2E has performed beyond anyone’s wildest imagination, the competitors will be coming thick and fast. Hartmann Capital has already invested in some of the challengers.
It takes time to develop a game – Axie itself took years – so there will be a lag. Yet just last week on Bankless, a16z’s Arianna Simpson predicted this gaming revolution would arrive in months, not years. And TAM is “everyone”, so billions of potential users. At one Mainnet panel, Axie’s founder Sky Mavis’s Jeff Zirlin and Yield Guild Games’ Beryl Li believed that P2E would 10x the number of users in crypto, in short order.
On stage, other panelists, including Blackpool – an on-chain fund of gaming assets – and Sorare, offered even more color on the rise of P2E. Sorare, a fantasy European soccer game, announced at Mainnet week that the Paris-based protocol had raised EUR 580 million, valuing the company at over EUR 3.6 billion. Sorare’s success has benefitted Blackpool, a fund of P2E assets and players.
Axie, too, raised more funds. Axie’s founders Sky Mavis announced a series B round of $152 million led by a16z. Zirlin of Sky Mavis also had his own panel at Mainnet, proud of the long and hard fight Axie had to go from almost no users on Ethereum (523 DAUs in January 2020) to where they are now on their own Ronin chain: 6,000 - 12,000 users daily. The AXS price speaks for itself.
Source: Coingecko
P2E is not just good for decentralized gaming and gamers, it is also likely to stimulate development in the DeFi “mullet”. Axie players, who are often unbanked, need to monetize their winnings that are denominated in fungible and non-fungible crypto assets. For now, fiat offramps do the job in many of these countries.
If, as and when fintech/DeFI collaborations are perfected, perhaps assets earned in game will stay in the crypto world, existing only when needed for real world payments. Terra’s CHAI does this already for Koreans. It’s possible that Crypto could leapfrog TradFi and service the unbanked, the same way that Cell Phones leapfrogged landlines in many developing countries.
6. Institutions will re-centralize DeFi
While Web3 decentralizes, markets that service crypto traders appear headed in the opposite direction. Much of day 3 at Mainnet was spent discussing the institutional landscape. Now “institutional” in this case could mean either (1) how DeFi will absorb or at least alter TradFi markets or (2) how investing in crypto assets – from layer 1 blockchain tokens such as Bitcoin to individual NFTs representing digital art – will scale as as increasing amount of money is dedicated to it.
Several panels addressed the issues:
Blending of DeFi and Fintech
The Future of DeFi
How CeDeFi [recentralization] Became a Thing
The key issues raised were:
Will institutional funds be attracted to DeFi’s decentralized yields?
(If so) how will onboarding mainstream finance occur?
As NFTs become more popular (read: better performing), how will crypto funds allocate?
The outperformance of the metaverse and gaming protocols over the last quarter worried institutional allocators. Though these large players are worried about how to invest in scarce assets such as games and collectibles, and profit from the rise of the latest Axie Infinity or a new NFT drop, we view the diversity of crypto as a feature and not a bug. Even though we, ourselves, are investors, we don’t feel the need to financialize all of the fun out of the non-financial ecosystems in crypto, such as art and games.
In any event, the most relevant main conclusions on the Mainnet panels were that (1) traditional investors, retail or institutional, and savers will arrive en masse without centralized onboarding and management. At the very least AML/KYC concerns behoove centralized approaches. Compound’s David Leshner and Aave’s Sani Kunechov both defended their permissioned institutional DeFi lending protocols. In and out of the conference, onboarding non-crypto natives is expected to require centralized fintech solutions, at least at first.
For now, centralized custodians, fintechs and centralized exchanges serve as on-ramps for crypto, and have the responsibility to KYC where needed, provide AML protections and are responsible for following the regulations where they operate. Onboarding more retail and institutional clients will require actions to be more seamless and less complicated. The current bridging experience, for example, is anxiety-inducing even for OGs. As one Twitter-famous crypto-native observed, accessing crypto in a decentralized way is fraught with problems:
Our parents are unlikely to use Metmask or a Ledger. Even though centralization is anathema to many crypto natives, it may be the pill that needs to be taken in the medium run to scale crypto to the mainstream.
Overall, Mainnet was an extremely positive experience. We left NYC confident that the future of crypto is in great hands.