What Zuckerberg’s money can’t buy

Welcome back to Chain Reaction.

Last week, we looked at Solana’s smartphone and the post-Apple tech industry. This week, we’re looking at a web3 without Big Tech.

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no trillionaires allowed

Unlike other moonshot tech categories, it’s become increasingly clear that there isn’t a huge whitespace open for Big Tech in defining the future for crypto.

This week, Meta announced it will be shutting down its Novi crypto payments wallets in September. This pilot, which was only available in a couple geographies, was pretty much the last hurrah of the company’s broadly ambitious Diem stablecoin plans and leaves the company without a clear path forward for a crypto play that expands beyond its current networks.

This failure was no surprise, Meta has been a punching bag for regulators over the years and that has played out most aggressively in the gutting of their crypto ambitions — something that eventually led to the selloff of its Diem assets and the exodus of its top talent. Meta isn’t alone, plenty of tech’s biggest $1T+ market cap companies (or at least those that were up there a few months ago) have not made a blockchain play despite ideal positioning. For some companies, this might be ideological, but for others it’s clear that the regulatory risks are too present for them to endanger their other revenue streams.

Comparing crypto to another moonshot like AR/VR, it’s clear the government generally has no idea how to regulate internet-native social networking companies while they have a pretty solid idea of what they’re doing when it comes to throwing financial instruments and vehicles into the right buckets. Not having this diversified tech market support means that the lows might continue to sink pretty dang low for crypto hopes pinned on web3 ambitions. AR/VR has been in a dry spell for years but Meta has been spending the industry through the drought without a clear focus on present revenues, this isn’t an investment that GAFAM is going to be dropping in web3 anytime soon.

While most in the crypto industry aren’t going to cry over Meta’s lack of inclusion in the core toolkit of crypto, relying on the good fortunes of financial firms that are entirely bought into crypto alone is why the current flavor of crypto consolidation appears so chaotic. This is likely going to be a very restless year or more for the crypto industry and the deep war chests of the top tech companies won’t make life for them any easier.

the latest pod

Last week while I was away, you got to hear from our talented colleague Jacquie Melinek. Well, she’s back! Big shoutout to Jacquie, who subbed in while Lucas was out sick this week to help me unpack some incredibly juicy but complicated topics, including how all roads in the DeFi downturn seem to lead back to the same hedge fund.

Joining us as this week’s guest was one of the most memorable founders I’ve met – Tux Pacific of crypto custodial startup Entropy. Pacific is a trans, anarchist cryptographer who raised $25 million in seed funding from a16z and other VCs last month. They joined us to chat about what it’s like to raise venture capital as an anti-capitalist and what they think is wrong with how digital currencies are typically stored.

Subscribe to Chain Reaction on Apple, Spotify or your alternative podcast platform of choice to keep up with us every week.

follow the money

Where startup money is moving in the crypto world:

1. Echo3D raised $5.5 million for cloud storage and AR/VR streaming in a round led by Qualcomm Ventures.
2. Web3 scaling protocol AltLayer closed a $7.2 million seed round with Polychain as lead investor.
3. Crypto gaming firm Cauldron raised $6.6 million led by Cherry Ventures to build the “Pixar of web3.”
4. Binance Labs led a $3 million seed investment in Magic Square, a crypto app store.
5. DeFi platform Increment Labs scored $1 million in seed funding led by Dapper Labs.
6. Crypto tax platform KoinX brought in $1.5 million from angel investors including Polygon’s Sandeep Nailwal.
7. Gaming-focused layer two blockchain Oasys raised $20 million in funding from a private token sale to investors including Republic Capital and Crypto.com.
8. DimensionX, a play-to-earn gaming firm, nabbed $3 million in a funding round led by Coatue.
9. Klang Games nabbed $41 million led by Animoca Brands and Kingsway Capital for its Seed virtual world.
10. Singaporean metaverse startup Enjinstarter raked in $5 million from True Global Ventures.

this week in web3

It’s Anita here again, back from a week out of office, during which I had some time to reflect on the weird cognitive dissonance that seems to be unfolding across web3. Valuations are looking miserable, crypto lenders are declaring bankruptcy on a near-daily basis and the overall industry is now worth just one-third of what it was at its peak last year. But, as Washington Post columnist Sebastian Mallaby points out, the same financial fate has befallen plenty of other technologies that still went on to transform the world thereafter.

Clearly, the jury is still out on what exactly this downturn means for crypto, but one thing is clear to me when I look back at this industry’s recent, rapid rise and fall. We actually haven’t “seen this before,” as so many investors and ecosystem participants will have you believe. Two major things have changed from past crypto downturns, and both stem from crypto going from a niche hobby for eccentric people to a mainstream, normal dinner table topic.

First of all, crypto companies are much more interconnected now than they ever were before, resembling traditional finance in 2008. Sam Bankman-Fried is the new Jamie Dimon, bailing other companies out left and right. Crypto lender Celsius halting withdrawals last month may well have been the industry’s Lehman Brothers moment. I can’t say I’m entirely surprised the crypto markets sobered up a bit, but there are a shocking number of parallels between tradfi’s best-known crisis and crypto’s current calamities. Even if the underlying technology is here to stay, it’s still a defining disaster for the industry – let’s not forget, mortgage-backed securities and CLOs are very much still around despite the carnage of 2008.

The second big difference I see between this crypto downturn and past such instances is that crypto just isn’t that quirky anymore. Its journey to the mainstream has brought a heavy dose of groupthink, evident from the trite, jargon-like phrases we now hear repeated over and over again. 

They say we’ve “seen this before,” the crash is a “black swan event,” but not to worry, “it’s still early days.” Crypto will eventually reach “mass adoption” and “onboard the next billion users,” as long as founders keep at it because “the best time to build is during a downturn.” 

I’m not saying I’m a crypto OG. In fact, I only started following it very closely during those dreary lockdown days, when plenty of people were doing the same. But I often recall being much younger, listening with curiosity and wonder to a relative of mine who has a distaste for authority and an affinity for math explain to me why blockchain could change the world. It makes me feel a bit nostalgic for when crypto was a space filled with contrarians, outcasts and truly independent thinkers. To me, that’s the most interesting thing about this space, so I say: let’s keep crypto weird.

TC+ analysis

Here’s some of this week’s crypto analysis you can read on our subscription service TC+ (written by TC’s Jacquelyn Melinek): 

Crypto losses hit $670M in Q2, up 52% from year-ago period
The second quarter of 2022 was one for the books amid a tumultuous period of what I like to call market madness, and the evidence keeps stacking up for the crypto markets. Q2 was full of massive crypto “losses” across the web3 ecosystem, some 97% of which were the result of hacks, according to a new report. 

Crypto trading volume drops in India as additional taxes hit investors
India’s government on July 1 implemented a 1% tax deducted at the source (TDS) on every cryptocurrency trade over 10,000 Indian rupees, or about $127. The law has only been in place a few days, but there’s already been a chilling effect on Indian digital asset marketplaces. The increasing taxation could also serve as a further roadblock for citizens looking to trade crypto as the potential for financial gains dwindles.

FTX policy exec says its ‘priorities have not changed’ amid market madness
As the crypto markets continue to trend downward, the world’s second-largest crypto exchange, FTX, remains undeterred. “Our priorities have not changed,” Mark Wetjen, head of policy and regulatory strategy at FTX, told TechCrunch. “Markets will do what they do, but the reality is that the digital asset marketplace and digital asset ecosystem, we believe, is here to stay.”

The SEC rejected bitcoin spot ETFs again. Now what?
The U.S. Securities and Exchange Commission rejected Bitwise Asset Management and Grayscale Investments’ applications for bitcoin spot ETFs. Shortly thereafter, Grayscale — one of the largest digital asset managers, with around $20 billion in assets under management — filed a lawsuit against the SEC. But not everyone is convinced the lawsuit will go in their favor…

Valkyrie CEO says suing US SEC for a spot bitcoin ETF ‘isn’t likely to succeed’
“The SEC rejecting both Bitwise and Grayscale’s GBTC spot bitcoin ETF applications is not at all surprising because it follows the same precedent that other asset managers have endured,” Leah Wald, CEO of Valkyrie Investments, said in a Twitter thread. “Suing the SEC isn’t likely to succeed.” The SEC made clear in its response that it views the underlying holdings of futures versus spot as fundamentally different, in particular because the former trades on a regulated market whereas the latter is traded on unregulated markets, Ryan Shea, crypto economist at Trakx, said to TechCrunch.

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Have a great weekend!

Lucas & Anita