May 2022

Zooming out on Web3

We find ourselves in the market cycle where there is great fear, and rightly so. We have witnessed a greater than 50% correction in the overall market cap of Digital Assets from the November 2021 highs of US$ 3tn+. While this has happened before in this asset class, most people in the market today are probably experiencing such a pullback for the first time. It is very easy at this point to fall prey to FUD (Fear, Uncertainty, Doubt) and take knee-jerk short-term reactions.

What is happening in the macro-environment?

Even before the recent correction, accelerated by the collapse of UST/LUNA (more on that later), the asset markets worldwide were jittery. This was due to a combination of macro factors such as high inflation and fed rate hikes, supply chain disruptions, war, and fears of an impending recession.

The Fed and other central banks have clearly decided to tackle inflation aggressively – shown by rate hikes in the US, UK, Australia, India, etc. The combined rate hikes across the globe will have a significant impact on the global economy, potentially signalling an end to cheap and easy money, and giving rise to value investors.

While rate hikes have been impending (the markets had predicted multiple hikes this year from the Fed), a higher rate environment can have a debilitating impact on the economy’s growth. So the markets are eager to see if a) the rate hikes bring down inflation and/or b) they can prevent a recession.

At this moment, it is too early to say which one of these scenarios plays out. Over the coming weeks and months, we will actively monitor various economic indicators such as inflation, unemployment rate, M2, etc.

What happened in the digital asset markets?

Even though we love digital assets and are firm believers in their long-term success, we cannot get away from the fact that digital assets are currently seen as ‘risky’, ‘growth’, and ‘tech’ assets. As noticed in the recent down move in NASDAQ, even in traditional markets, investors look at technology and digital assets unfavourably. FAANG companies, the darling of the stock market over the last decade, have pulled back anywhere from 20% to 70% since the beginning of the year.

In such a climate, it is imprudent not to expect digital assets to pull back as well. Before May 2022, BTC and ETH were also down 18% and 27%, respectively.

Is the digital asset story still intact?

While no correction is pretty, such drastic and sudden pullbacks have happened multiple times in digital assets in the past. Digital assets are volatile but are maturing quickly – investors have graduated from ‘I will invest a bit and see what happens’ to adding digital assets as a part of the alternate asset allocation strategy. We seem to be very much in a bear market now, and we may witness further such moves, however, price is just a lagging metric to gauge the story. Every leading metric – user growth, developer growth, AUM, capital inflows – has continued to grow unabated and is on the right trajectory. In the medium to long term, as fundamental indicators continue to grow, the lagging indicators will catch up.

We are also witnessing immense talent transitioning into the web3 ecosystem where developers are flocking from web2 to web3 or directly starting their career in the blockchain space. According to a recent report by Electric Capital, the active developer count was at ~ 18000 in Jan 2022. The report analyzed data from nearly 500,000 code repositories and 160 million code commits across web3, finding that over 34,000 new developers committed code to web3 projects in 2021 — the highest number of developers in history, according to the document. The number is expected to grow rapidly, indicating the potential this technology holds in the long term.

It is important to note that not only tech roles are being filled in the digital assets space, but we also see a significant workforce transitioning from verticals like Marketing, Finance, People Management, and Operations.

On the user side, we have reached 300mn users (4% of the world’s population), and we had a similar number of internet users in 2000. In 2000, many wrote the internet was a passing fad with no long-term utility.

Last but not least, use cases of various blockchain applications are filled with endless possibilities and are seeing accelerated traction. Let’s talk about a few –

Blockchain networks enable instant value transfer in a permissionless manner across the world without an intermediary (banks).
DeFi enables lending and borrowing (both collateralized and uncollateralized) of digital assets and helps users generate yield with further potential upside of the underlying tokens.
Fractionalisation and tokenization of real-world assets using NFTs help revolutionize industries like art, music, real estate, etc.
GameFi is set to change the gaming landscape. With P2E and M2E models, web3 games enable people to own their in-game assets, build a reputation across games, and monetize their efforts as they level up.

The digital asset story is the proliferation of web3 as the “new internet” that utilizes public blockchain technology and digital assets to create a decentralized tech stack that gives users and developers significantly more control, governance, and economic incentives. We have some way to go, but this story will eventually play out.

WOODSTOCK IN THE NEWS

Himanshu Yadav, Founding Partner, Woodstock Fund featured in a panel discussion organized by 256 Network on “Web3 in India: Where do we go from here?”

Prashanth Swaminathan, Partner and Head of Institutional Business, Woodstock Fund, was part of an in-person discussion organized by TVS Capital Funds in Mumbai. Watch the discussion here.

Team Woodstock was at Permissionless 2022 – Adam Mastrelli – Partner(US), Angelika Hajela – Talent Director, and Jaskirat Singh – Ecosystem and Product.

MARKET NEWS

Dubai’s Virtual Assets Regulatory authority (VARA) announced entry into the metaverse

LGT Bank, the largest family-owned banking group in the world(with over $288B AUM), is offering cryptocurrency custody and brokerage services to private clients, starting in Switzerland and Liechtenstein.

Spotify, the leading music streaming platform has joined forces with Roblox to provide its users with a virtual universe experience. Spotify Island is a paradise of sound where fans and artists from all over the world can hang out and explore a wonderland of sounds, quests, and exclusive merch.

SEC approves Valkyrie’s Bitcoin Futures ETF. This makes Valkyrie the second ETF to win approval following Teucrium.

Instagram announced that the platform is going to start testing NFTs in the US. Creators and people who are part of the test can share NFTs that they’ve made or bought. One can share these NFTs in their main Instagram Feed, Stories, or in messages.

DEX protocol Uniswap hit a $1 trillion cumulative trading volume milestone on 24th May,2022 since its first iteration went live in 2018.

Terra, one of the top DeFi ecosystems, collapsed along with its algorithmic stablecoin UST wiping US$ 30bn from the digital assets market. While a community-voted revival plan was implemented and Luna 2.0 has been launched, investors are advised to stay cautious.