Investing in a Simpler, Easier Web3
The Current State of Web3
You’re watching the 2021 superbowl and seeing ads for crypto play on-air for the first time ever. Both the LA Lakers and LA Clippers, professional basketball teams in the NBA, call Crypto.com arena home. Your family members are asking you how to invest in, and use, crypto. The crypto and NFT craze is finally breaking into the mainstream. With the advent of the rapidly growing web3 industry, the general public is hearing about crypto and blockchain more than ever. Crypto technology and innovation in the blockchain industry has grown at a rapid pace.
But the industry faces a massive onboarding issue.
In the crypto industry, we hear a lot about onboarding the next one billion users, but many may argue that this is not currently possible with the current infrastructure as most companies and their products don’t have the bandwidth to function at those levels. In addition, there are too many barriers to entry for the average consumer.
“55% of non-users cite the steep learning curve as the reason they haven’t invested into crypto,”
as reported in VISA’s 2021 report, The Crypto Phenomenon: Consumer Attitudes & Usage.
In Gemini’s 2022 State of Crypto report they state that education is the greatest barrier to crypto ownership:
“Globally, respondents were nearly twice as likely to say that more educational resources on cryptocurrency would help them get started with crypto (40%), compared to recommendations from friends (22%). More than half of respondents in Latin America (51%) and Africa (56%) said that educational resources would make them more comfortable purchasing cryptocurrency. Forty-four percent in Asia Pacific and 42% of those in the United States said the same.”
The massive barriers to crypto adoption lead me to believe that the crypto products that solve onboarding issues and help bring new users into web3 easier by abstracting away complexities from blockchain technologies are the future.
This can include simplifying the wallet sign-up process, using familiar web2 log-in methods, high quality or no-code developer tooling, both interoperable layers and blockchain infrastructure solutions to help lay the foundations for a seamless user experience, and centralized exchanges as well as “super apps” that help aggregate complicated utilities into one place.
Here is a non-exhaustive list of some notable players in each of the verticals mentioned:
- Simple wallet onboarding: Cupcake Protocol, Hypermint by Moonpay, Paper.xyz
- Web2 log-in methods: Web3auth, Crossmint, Moonpay, Reddit avatars, NBA Top Shot
- High-quality / no code dev tooling: NiftyKit, ThirdWeb, Bueno
- Interoperability layers: Cosmos, Polkadot, Wormhole, LayerZero, Axelar
- Infrastructure solutions: Blockdaemon, Quicknode, Chainstack, Nodereal
- Exchanges / “Super apps”: Coinbase, Binance, Blockbank, Mara, Trader Joe
A great example of start-ups easing user onboarding are ones that utilizes the power of web2 login methods, using just a username & password, would be Reddit and Dapper Labs.
In just four months, Reddit manages to become one of the world’s biggest NFT marketplaces, onboarding thousands of new users into NFTs. Most Reddit users didn’t even realize they were buying NFTs onto a wallet. They replaced crypto jargon with words such as “digital collectibles” and “vaults”, enabling users to store their digital collectibles without the need for seed phrases or knowledge of crypto.
Dapper Labs & Flow saw massive success in the NFT space with NBA Top Shot.
Recur saw repetitive sellouts with NFTs featuring cartoon characters from Nickelodeon.
What was their edge?
Using easy web2 logins to access digital collectibles of high demand IP.
This unique combo attracted massive interest, the barrier to entry wasn’t high, and it allowed users to participate in the world of blockchain and crypto using a login method that all users were familiar with. If Reddit or Dapper Labs required users to set up their own crypto wallet and handle private keys, this may have prevented growth and open up users to security vulnerabilities from a more complex UX.
We have also begun to see newer players plant their flag in the web3 landscape by providing access to web3 infrastructure solutions, gaining notable traction due to the value they give other businesses in the web3 industry in terms of node/RPC support. In laymen’s terms this means they help web3 decentralized products run smoothly for the user when connecting and conducting activities on the blockchain (dApps, wallets, blockchain games). A node/RPC infrastrucutre provider can be thought of as opening more lanes on a highway along with exit points, allowing for an easier flow of traffic for those using the highway. Some of the notable newer players helping contribute here would be Blockdaemon, Quicknode, Chainstack, and Nodereal.
Nodereal is a notable player to watch for as they help support web2 companies and gaming studios make their debut onto the blockchain, providing custom application chain builds and other web3 solutions for companies that may not be able to undertake this task on their own. The most significant of which is #1 Korean mobile gaming studio, Netmarble. Netmarble, in partnership with Nodereal, has developed a gaming application chain called FNCY, which is Netmarble’s very own blockchain gaming platform.
In terms of the interoperability tech stack, we are seeing various players emerge that play a key part as the ecosystem evolves wider and more blockchains are involved, which can make the user experience more complicated. Therefore interoperability solutions are very necessary to abstract away this complexity. Currently, Polkadot and Cosmos lead in developer activity right after Ethereum, as reported by Messari and Artemis. Meanwhile Axelar is currently slotted as Circle’s partner for native USDC stablecoin issuance across multiple chains.
Currently, the web3 landscape is ripe with innovation and products, but with amazing infrastructure, complexity abstraction, and a focus on great UI/UX, all are a highly necessary focus for the industry to move the needle forward for adoption.
Web3 Funding Outlook
With the current bear market and a bleak macroeconomic climate, we are seeing less funding overall in the space with a 50% drop in crypto funding in Q3 from Q2 according to Fortune Crypto and over 77% decrease in funding between the first half of 2022 and second half of 2022 according to Messari.
However, according to Blockworks, most of the funds being raised are for web3 startups focused on user adoption and infrastructure for payments and tooling for developers.
We are now even seeing giants like BNB Chain coming out with a $10M program for startups working to increase active users and grow user adoption. Meanwhile Coinbase Ventures gives their current outlook on today’s market:
“Coinbase Ventures made 9 investments over the quarter; our lowest quarterly total since Q2 2020. In this slower environment, we took the opportunity to narrow our near-term focus areas and concentrate activity on a fewer absolute number of investments. We also doubled down on support for existing portfolio companies.”
In terms of payment infrastructure, we have seen a number of raises in the last few months. Ramp raised a $70M Series B in early November 2022 led by Mubadala Capital and Korelya Capital. Ramp provides frictionless payment infrastructure for on and off ramping with more local payment methods in low income areas. They are working to help more people globally (especially in Latin America and Asia) gain access to crypto.
In addition to Ramp, we have also seen Sardine, which provides payment infrastructure for real time fraud prevention, raise a $51.5M Series B led by a16z at the end of September.
We have seen two significant raises for companies focused on developer tooling, Stardust and Thirdweb. Thirdweb raised $24M in a Series A in late August 2022 led by Haun Ventures. Thirdweb has a developer toolkit to make it easy for startups to launch almost any type of platform in web3. Stardust is a company focused on developer tooling for blockchain gaming and recently raised a $30M Series A led by Framework Ventures.
As for crypto VCs, CoinFund Looks to Raise $250M for its next seed fund, and BlockTower successfully raises $150m to focus on interoperability, credit, and payments within crypto.
Longhash Ventures is ready to deploy $100m in their Fund II to invest in web3 infrastructure:
“Over the next five years, [Longhash Ventures] hopes to double down on projects that offer scaling solutions, cross chain systems and other tools that impact gaming, NFTs, the metaverse and more.”
Even in Q3, we saw VCs launch large funds focused on crypto and web3 startups despite the market conditions. Cointelegraph reported in the graphic below that 10 VCs launched funds ranging from $220M all the way to $9B with the latter being Sequoia.
Gaps to Fill
The funding gaps to be filled are with web3 startups focused on consumers, but more specifically infrastructure that allows for a simple and seamless onboarding.
VCs are primarily focused on infrastructure and tooling for developers currently, but if we want to reach mass adoption we also need to be investing in how we go about that effectively for consumers. Infrastructure had significant funding with managing to contain 20.1% of all crypto venture capital deals of Q3 in 2022.
Other gaps in the market that need to be filled, fundamentally speaking, is the excessive hiring and rapid scaling that occurred during the most recent crypto bull market- and the fallout of the massive contraction that came after it during the current bear cycle. Reverberations of the many hacks, ecosystem crashes (as seen with Anchor Protocol on Terra), exchange insolvencies (as experienced with FTX) are still felt even today.
Going into 2023 and beyond, I believe founders and crypto companies should expect to put more emphasis on building secure, well crafted products, with a focus on garnering real traction, as there is a strong need for actual revenue generation and user numbers to maintain sustainable businesses beyond initial venture funding. Previously, this was not necessarily required for start-ups raising seed rounds during the crypto bull frenzy.
For founders raising funding currently or considering such, having traction whether it is real revenue or real users, will set your company above the rest, especially given the tough macroeconomic outlook worldwide. This traction demonstrates that there is a need for your product or service, and shows the true value that is being provided to the market.
One interesting example of a web3 company taking real world traction to heart is Pudgy Penguins, driving brand exposure full throttle by doubling down on culture pervasiveness on web2 platforms, such as Instagram and extremely well-made GIFs.
The marketing tactic is unique in that this web3 brand is directly attempting to reach non-crypto users culturally, through viral Instagram posts and GIFs that anyone can view, share, and use (crypto wallets or ownership of Pudgy Penguin NFTs are not necessary to participate, but are quite cute to have).
Currently at the time of writing, Pudgy Penguins have amassed 237k followers on Instagram, and 1 billion GIF views.
The four startups below are newer players on the scene focused on building out seamless and streamlined onboarding for consumers. This is not meant to be exhaustive, but simply products and companies that caught my eye recently. This includes Cupcake Protocol, Web3Auth, Decaf, and Bueno.
One of the most innovative use-cases for the onboarding and wallet creation is bridging physical goods with digital assets via Cupcake Protocol. This can be done with custom NFC tags on physical products or locations to facilitate web3 mechanisms, such as token airdrops and wallet creation. Bringing the physical world into web3.
Cupcake Protocol is focused on building this, and their use case was piloted with Solana at Lollapalooza 2022, onboarding more than 30,000 users with their first crypto wallet. Their use case is innovative as it eases the onboarding of new web3 users via seamless web2 methods, by entering a quick email or phone number after a phone tap.
On any product that has Cupcake’s NFC tag, a user just taps their phone, enters their phone number, and they instantly mint their first NFT on their new crypto wallet. (A prior crypto wallet is not required to engage in this experience nor is any crypto knowledge needed). Within seconds any user with a smartphone is onboarded onto web3. The possibilities are limitless as Cupcake can serve as a powerful tool for crypto adoption for any brand.
Another notable start-up in the crypto onboarding vertical is Web3Auth, formerly known as Torus Wallet. Web3Auth raised $13m in a Series A round led by Sequoia Capital, Union Square Ventures, and Multicoin.
Web3Auth is building critical infrastructure which allows users to wield a decentralized wallet and play around with all the cool apps utilizing blockchain technology, but it takes all the complexity of private keys away from a crypto wallet by letting users login with methods that they are familiar with. All a user needs is an email and password which keeps the login process familiar, simple, and easy to understand for anyone.
Using web2 login methods also makes it more secure as Web3Auth users aren’t engaging in unsafe practices with their precious private keys, such as screenshotting them to images or typing them out, which can be scanned or keylogged, and therefore hacked by nefarious actors.
Decaf is building a full-featured point-of-sales platform. Decaf helps retailers start accepting crypto payments in USDC or Bitcoin. They also allow for NFT gated commerce to airdrop merchant’s customers NFTs which can include perks for holding them. They are also fully integrated with Square to make it easy to manage inventory and for managing taxes. Decaf also has a one click wallet creation method similar to Cupcake Protocol.
Last but not least is Bueno. Bueno is a no code toolkit for NFT artists and creators. Users can create their own customized smart contracts including “ready-to-go drop pages” for minting. They also created Microverse, a toolkit for NFT communities to build their own multiplayer 2D world.
Overall, there’s a large need in the web3 market for infrastructure that helps onboard more users for mass adoption. It’s important for founders and funds right now to allocate resources into building out a strong foundation focused on easier onboarding and a seamless user experience. Focus should be placed on generating revenue and/or garnering real users, or at least strong plans to. This way, when the next bull market comes for both crypto and the worldwide macro economy, and the world’s attention turns to crypto again, the industry will be ready to onboard millions of users with less barriers to entry.
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Finding a Home for Labs — Delphi Digital
Galaxy Digital Report: Exploring the Cosmos
Crypto VC funding down 50% from last quarter as volatility persists | Fortune
Funding Wrap: A Quiet Q3 for Crypto VC Investment — Blockworks
Stardust Raises $30 Million for Gaming Tools Despite Crypto Slump — Bloomberg
A16z Leads $51.5M Round for Web3 Fraud Protection Startup Sardine
Web3Auth raises $13M Series A to drive mass adoption on Web3 applications and wallets via simple, non-custodial authentication infrastructure
Ramp Network Raises $70M to Provide Crypto Payments Infrastructure
Thirdweb raises $24M at a $160M valuation from Haun Ventures, Shopify and Coinbase for its web3 development kit | TechCrunch
BNB Chain Introduces $10m Fund to Incentivize Project Growth on the Blockchain
Coinbase: A Simple Guide to the Web3 Developer Stack
Cointelegraph Research Venture Capital Report Q3 2022
Coinbase Ventures Q3 recap and market outlook — Blog
FNCY: Brings Entertainment to the Metaverse
Bueno Generator | No-Code NFT Tools
The Block: Still working in crypto? You’re one of the lucky ones.