November 2022

INTRODUCTION

2022 has been eventful, to say the least. The digital assets markets have seen many turmoils throughout the first three quarters, and this one hasn’t been any different. Since January 1, 2022, Bitcoin’s price has shed over $30k, going from $47k to $17k, a drop of ~64%. In fact, Bitcoin’s price plummeted almost 40% in June ‘22, making it one of its worst calendar months ever, following the infamous collapse of Terra in May ‘22. All other cryptocurrencies have followed suit, with the global cryptocurrency market cap falling below $900mn for the first time this year, as FTX filed for bankruptcy a fortnight ago. 

The broader equity markets have also pulled back this year. While the S&P 500 is 15% down YTD, the NASDAQ composite is down 30%, as it is weighted towards growth and tech stocks that are also priced unfavourably in a rising rate environment. However, since the start of Q4, the equity markets have made a decent recovery, primarily due to a slowing rate hike environment and a partial anticipation of a Fed pivot.

Prices apart, the year has been quite positive for the web3 space. We have seen 1) retail, institutional, and enterprise interest on the rise, 2) countries adopting Bitcoin as legal tender and launching CBDC pilots, 3) regulators developing web3 and cryptocurrency policies, 4) significant shifts to sustainable energy sources, and 5) massive strides in technology across the web3 stack. As 2022 comes to an end and we welcome 2023, we look at some of the biggest headlines from the year, go over the lessons learnt, and take a cursory look at the road ahead.

Wrapping Up The Biggest Headlines

1. Federal Interest Rates – The Federal Reserve has been in the news almost every week, with the global markets keeping a close watch on the biggest saga of 2022. We have seen 6 Fed Rate hikes to counter the burning inflation caused by the COVID pandemic, the following quantitative easing, and the Fed Rate cuts in 2020. The Federal Funds rates have gone from just 0.25% at the beginning of the year to 4% at the November FOMC meeting. The US monetary policy has taken centre stage, with the fate of the capital markets resting in the hands of the Federal Reserve (more or less). 
2. Elon Musk and Twitter – The tech world, especially crypto, saw a big drama unfold as Elon Musk, the world’s richest person, bought Twitter in a staggering $44bn deal. The buyout holds significance because Elon has publicly supported free speech, decentralization, privacy, and other ethos associated with blockchain, cryptocurrencies, and the broader web3 space. The 250mn+ monthly active users (bots aside) on Twitter could add to the existing web3 userbase as applications of NFTs and identity are rolled out on the platform. 
3. Terra (and Crypto) Collapse – Q2 was an extremely tense quarter for the crypto market, with multiple major crypto events making headlines: the collapse of LUNA and UST in May ‘22, followed by the subsequent bankruptcy of Voyager, 3AC, and Celsius. Markets were not resilient enough to withstand such negative pressures, especially with the overhang of a challenging macro backdrop, and we saw what is now the worst quarter in crypto’s financial history.
4. Enterprises making Headlines  – The year has seen many household names tread the web3 waters. JP Morgan, Starbucks, Walt Disney, Meta (previously Facebook), and Stripe, amongst others, got comfortable with what Polygon had built and what it can offer more to them and their customers. Many others, such as Adobe, Google, BNY Mellon, and CME, tried their hands on Ethereum, NEAR, Algorand, Solana, and more, as covered in a detailed report by Forbes. 
5. The Merge and the Future of Ethereum – We covered the Ethereum Merge event from Q3 in our blog post here and looked at the future roadmap in detail. This was the most prominent tech news for the web3 space as Ethereum made the much-awaited move away from Proof-of-Work to Proof-of-Stake. With the token burn mechanics already live on ETH after the implementation of EIP-1559, ETH has shown signs of becoming deflationary as network activity spikes on the network. 
6. FTX Collapse – In the last few days, we have read about the downfall of Sam Bankman-Fried’s FTX and Alameda empires and the contagion that has come with it. The bankruptcy of FTX and all its subsidiaries has also led to instability in Genesis, the bankruptcy of BlockFi, turbulence in the Solana ecosystem, a shake-up at Silvergate, and the birth of web3 Proof of Reserves for centralized exchanges, lenders, and the like. Although the Solana ecosystem has since stabilized and Silvergate has found a new supporter, there are still unknowns in the industry that could suffer due to the contagion.
7. Hacks – 2022 has been no different than other years when we look at the exploits and hacks that shook web3. Over $2.7bn was siphoned across centralized platforms and decentralized networks, with some returning due to good intentions or fear of reprimand. The biggest hacks and exploits included the following names – Ronin Network/Axie Infinity ($624mn), Binance Bridge ($586mn), FTX ($477mn), Wormhole ($326mn), Nomad Bridge ($190mn), Beanstalk ($181mn), Wintermute ($27.6mn + $160mn), Harmony Bridge ($100mn), Mirror Protocol ($90mn), Qubit Finance ($80mn), Fei Protocol/Rari Capital ($80mn), Mango Markets ($65mn), Cashio ($48mn), Crypto.com ($33.7mn), and Deribit ($28mn). Unless the industry is able to create secure systems, it would be difficult for users to trust web3 for their daily financial and social interactions. 

How Woodstock Fared?

Woodstock Fund II has performed significantly better than the market. Having started investing at the beginning of 2022, the NAV of the fund is at a modest discount of ~15% at the end of October 2022. In comparison, BTC and ETH were both down 55-60% in the same timeframe, and prominent funds have also suffered significant losses. 

While asset performance is a key factor in fund performance, counterparty risk assessment and risk management are also important factors in safeguarding AUM. We have been prudent, relatively risk-averse, and had strict diligence processes for both projects and counterparties.

Out of the two biggest falls (Terra and FTX) in the web3 space this year, Woodstock had no direct exposure to either of the companies or their ecosystems (Genesis, BlockFi, Voyager, Solana). Our experience in the last 4 years as a venture capital firm has helped us steer clear of 

1. unsustainable financial models as seen in Terra and its ecosystem, 
2. over-leveraged lending and borrowing as employed by 3AC, FTX, and Alameda, 
3. unreliable technology as developed by Solana, and 
4. concentrated-power setups as witnessed in Terra and FTX.

We have evaluated thousands of ideas, business models, technology paradigms, and legal structures to make sound investment decisions and will continue to do the same with our robust due diligence process and our post-investment portfolio support. 

Lessons Learnt and the Road Ahead

For the web3 industry to move forward and achieve its true potential, it is important that we analyze our past, understand our mistakes, and learn lessons. This year has taught us a lot, and we all should take away at least the following, if not more:

• thinking ahead is important,
• (over) leverage is a recipe for disaster in the long run,
• things that are too good to be true are probably not true,
• regulations are needed in the industry,
• decentralized finance worked just fine,
• don’t trust, verify,
• not your keys, not your coins,
• security is paramount in the trilemma, and
• hail technology!

As we approach 2023, we anticipate these few predictable but major headlines.

1. Inflation will decline gradually, and the Fed reserve rates will stabilize around the terminal rate of 5%. 
2. More enterprise blockchain use cases will be developed, such as Quant Network’s partnership with SIA in Europe, JP Morgan’s first DeFi trade on Polygon, and so on.
3. Changes to Ethereum’s core technology would result in better L2 performance, a substantial improvement in scalability, and cheaper gas prices. Technological advancements will dominate in 2023.
4. Last but not least, we will witness significant enhancements to the user experience (UX) of web3 protocols for onboarding a large number of users while simultaneously making the web3 ecosystem safer and more accessible to non-native users.

Next year, we will tackle these themes in greater depth in our monthly newsletters, so keep an eye on your inboxes at the beginning of each month.

WOODSTOCK IN THE NEWS

• Pranav Sharma, General Partner, was a speaker at the YourStory TechSparks, Bangalore and Algorand Decipher 2022 event in Dubai. He shared his views on investing in digital assets, how is the Web 3.0 landscape evolving and two aspects of Decentralisation – Social and Technology.

• Abhinav Pathak, Research Partner at Woodstock Fund, also featured as a speaker at the Decipher 2022 alongside Keli Callaghan, Chief Growth Officer at Arrington Capital, and Ryan Terribilini, Head of Ecosystem Fund at Algorand Foundation. The panel shared perspectives on venture capital investing in the digital assets landscape and the theses that institutions work with while investing in web3.

• Woodstock’s Tech Team conducted 2 Twitter spaces – Custody Solution post-FTX Debacle and A look at the RPC space. Do listen to the recordings and reach out to the team if you have any questions or feedback.

• We conducted our Masterclass #4 on “Scaling for Growth – A Leader’s Perspective”, where we hosted Nilesh Sudrania, Founder and CEO at Formidium. The Masterclass was hosted by Indrajeet Sirsikar, Partner at Woodstock. Watch the recording of the session here.

• Neel Daftary, Research Lead and Adam Mastrelli, Partner (US), also represented Woodstock and were featured in a panel discussion at the IGDC Hyderabad and Web3 Miami.

MARKET NEWS

• The Reserve Bank announces the launch of the first pilot for retail digital Rupee (e₹-R) on December 01, 2022.
• Cryptocurrency options and futures exchange Deribit was hacked, with $28 million being drained from its hot wallet. Strijers(CCO) also revealed that the entirety of the loss will be covered by Deribit’s balance sheet assets, which are separate from the company’s $40 million insurance fund.
• Updates to privacy policies of some major dApps came as a surprise as these companies might be able to identify individuals and reduce the amount of privacy available on the network.
• Uniswap, the largest Ethereum decentralized exchange, published a new privacy policy to provide transparency on the data it collects. The privacy policy states that the DEX collects certain on-chain and off-chain data connected to users’ crypto wallets. 
• ConsenSys collects IP addresses and wallet address information of those who access Ethereum wallet MetaMask via the blockchain infrastructure service Infura. That’s according to its updated privacy policy.
• Binance CEO Changpeng Zhao (CZ) pledged $1 billion in relief funds for illiquid crypto firms.
• The newly formed Digital Agency of Japan said that it would form its own decentralized autonomous organization (DAO) in order to better understand its apps before granting them legal status.

MARKET DASHBOARD

*Updated on 1st Dec 2022

Key Market Assets/Indices

Market Movers

If you were forwarded this newsletter and would like to receive it, sign up here.

Questions? Feedback? We’d love to hear from you! Simply reach out to us at contact@woodstockfund.com

Warm Regards,

Woodstock Team