- An implosion of terra’s UST stablecoin and an uncertain economic outlook have hammered crypto markets.
- VCs pumped $17.9 billion into Web3 startups last year, according to Crunchbase data.
- Industry experts have tipped widespread consolidation to take hold in the Web3 sector.
This is not the first time cryptocurrency markets have crashed.
A ban on bitcoin by China in 2013 triggered a huge selloff in digital assets while Tesla’s decision to renege on its move to accept bitcoin for payments brought crypto’s runaway record year to a shuttering halt in 2021.
Now, an implosion of terra’s UST stablecoin mixed with an incredibly uncertain economic outlook, which has most investors bracing for an intense
recession
, has wiped hundreds of billions of dollars off the value of the crypto markets.
However, this time the stakes are higher with more capital invested in the sector than ever before.
Venture capitalists pumped $17.9 billion into Web3 startups last year, according to data from Crunchbase. Investors backed 1,312 rounds into companies betting that blockchain technology will act as the foundation of a new decentralized digital future.
For investors and industry watchers, the latest downturn in crypto is likely to lead to widespread consolidation among Web3 startups.
Alex Lim, managing partner at Blossom Capital, said private Web3 markets were “only just starting to correct now.”
“It will separate the companies and projects building long-term products, communities, and economies, from those trying to make a quick buck,” Lim told Insider. “A healthy thing in our mind.”
Blossom Capital
Jonathan Simnett, director at M&A and corporate advisory firm Hampleton Partners, said “in the medium term, strategic consolidation amongst winners in crypto will take place for exactly the same reasons as any other technology-based sector.”
Experts believe consolidation will take place among startups working on layer one or “L1” networks – an industry term that refers to base networks like bitcoin and ethereum.
Tomasz Tunguz, managing director at California-based Redpoint Ventures, predicted around five to 10 players to emerge as leaders that were “driven by apps that attract users and net new GDP into their ecosystems.”
Filip Dames agrees. The founding partner of Berlin-based Cherry Ventures, which has established a dedicated Web3 fund, thinks although retail confidence is dropping, consolidation should take place as the ecosystem evolves.
“For the blockbuster to emerge it takes concentration,” he said. “We’re seeing this already. Big guys seem to emerge as the winners that have traction, that have product-market fit.”
Dominik Tobschall, investor at European VC Speedinvest, believes “we will see consolidation” at the L1 level, though he doesn’t think it will be triggered by the current decline in the market. Instead, he sees the downturn accelerating the consolidation process.
“People focus on projects that have real users and real fee capture, so L1s that have been buying users with incentives get hit the hardest and eventually fade into irrelevance,” he said.
According to Nic Niedermowwe, a blockchain and cryptography expert, the user adoption of Web3 taking off in 2021 meant transaction prices – particularly on the ethereum blockchain – went “so high” that other L1s emerging could attract developers with lower fees.
Though many of these L1s have “done really well,” they could face pressure and “become less attractive” once the ethereum blockchain undertakes a “merge event,” he said.
The merge event is an upgrade to the entire ethereum network that aims to address existing issues such as high gas fees, which refer to the fee require to conduct a transaction on the network, and other security issues.
“Once the merge has been completed, ethereum will be able to process many more transactions per second, drastically reducing transaction costs,” Niedermowwe said.
“This may lead to consolidation among other L1s, who may lose some of the users they gained before ethereum could implement its scaling solutions.”
