As the crypto market digests the past few days of chaos, venture capitalists see the moment as a warning, but also as an opportunity for the growth of decentralization and maturation of the larger blockchain space.
“As venture investors, we take a long-term view on the industry; despite the current market turmoil. We are actively assessing and investing in the right opportunities,” Marc Weinstein, founding partner of Mechanism Capital, said to TechCrunch. “The premise of DeFi has, if anything, been strengthened by the collapse of centralized entities from opaque counterparty relationships.”
Decentralized finance (DeFi) is often associated with trusting blockchain technology to execute services through smart contracts, while centralized finance (CeFi) usually refers to more traditional business models and involves having people manage funds and manually execute services.
“Market sentiment is shaken, but committed VCs with experience from several crypto market cycles will continue to invest.” Marc Weinstein, founding partner, Mechanism Capital
Historically, the venture market doesn’t get “too offended” by what transpires in secondary markets, David Gan, general partner at OP Crypto, said to TechCrunch. Regardless, he said, the seeming death of FTX is saddening for everyone, “not just in the VC space, but across the board.”
When there are massive crashes and burns, it speaks to what we’ve been seeing over the past decade: It’s the Wild West out there, Samantha Lewis, principal at Mercury, said to TechCrunch.
“When summarizing it all, I see it as a continuation of the phase that started when winter hit and we saw Luna and all these crazy companies crash and burn like BlockFi, Celsius and now we have FTX,” Lewis said. “As an early-stage venture investor, it’s telling me the hype is now for sure gone. But that ushers in the maturation of the space that a lot of us have been craving for a really long time.”
Capital raises will probably remain limited for the next couple of months, Gan said. “At the same time, people or even venture funds had a lot of deposits on FTX, so they’re locked out for the foreseeable future.”
For example, Multicoin Capital was hit by the FTX collapse with about 10% of its Master Fund’s total assets under management still pending withdrawals on the exchange, according to a report by The Block.
“With the global macro situation, we still have a very bearish look on the market regardless of the FTX situation,” one investor at a crypto-focused fund said to TechCrunch. “That will last a little longer than people think, for at least for a year.”
Overall, investors want the hype and high valuations for crypto startups to dissipate.
“Valuations are coming down, so it’s a good time to reset everything and come back to sanity in terms of valuations and what you can achieve with tokens, etc.,” the investor said. Crypto natives are freaking out, but so many people don’t even know what FTX is outside in the world, Lewis added.
“I guarantee if I called my grandma right now, she would not even know what FTX is,” Lewis said. “This doesn’t matter to her one bit, but this matters to the crypto community.”
Two years from now, when new people onboard into the industry, they might vaguely remember this moment in time, but it won’t carry as much weight as it does for those currently in the space, Lewis said. “But the conversations now need to be around what is needed now and can be solved with better infrastructure and regulation.”
“Market sentiment is shaken, but committed VCs with experience from several crypto market cycles will continue to invest,” Weinstein said.
This moment leaves a huge opportunity for actors who have been building real value for the space, Lewis said. “I’m not saying FTX didn’t add value, but we’re thinking about it in a long-term sustainable way.”
“I think what happened this week is a culmination of this perfect storm that’s been brewing, which is way too much money floating around and a complete lack of regulation,” Lewis said. “Put those two together and there’s bound to be bad actors.”
Then when you zoom into venture, “there was so much money being thrown at anyone who can speak intelligently about blockchain and crypto,” Lewis joked. “That money had to find a home and was being spent in areas with no underlying value. There weren’t really fundamental business use cases driving the value.”
The situation with FTX, a centralized crypto exchange, has shifted conversations as many investors and market players believe decentralization is the best solution going forward due to a number of elements, like transparency through on-chain data.
“This really sets out that decentralization really matters,” Gan said. “I think a lot of centralized projects were being funded [and] we’ve seen Voyager, Celsius, FTX, etc. are centralized, non-transparent, opaque companies. So decentralization will start to matter more and more. Any protocol open source projects will see more funding.”
Despite the short-term pain, Weinstein thinks smart investors will “take a hard look at DeFi and improve the user experience for on-chain activity going forward.”
“It’s like why would you go to an overleveraged non-secure centralized platform when you can have open access to DeFi?” the investor asked. “Until there’s proper regulation on these centralized actors, we’re going to see history repeating itself. What prevents another Celsius from emerging?”
But not everyone agrees. Lewis, for one, believes that there are two schools of thought between crypto-native firms and non-crypto-native firms.
“We still need to have institutions interested in the space,” Lewis said. “They’re not comfortable with decentralization yet, so if we go full decentralization, we’re going to leave them behind.”
There’s a lot of value across the global economy that hasn’t touched web3 or the world of decentralization either, Lewis said. “And they’re definitely not going to touch it if they don’t understand it.”