Noted venture capital firm Andreessen Horowitz (a16z) has released its second annual "State of Crypto" report highlighting the importance of Web3, blockchain infrastructure and a price-innovation cycle that makes the bear market a prime time for builders.
The firm also unveiled on Tuesday its new State of Crypto Index, an interactive tool that tracks on a monthly basis 14 technology-focused metrics that offer a health snapshot of sorts for the industry.
“Our 2023 report aims to address the imbalance between the noise of fleeting price movements – and the data that tracks the signals that matter, including the durable progress of Web3 technology. Overall, the report reflects a healthier industry than market prices may indicate, and a steady cycle of development, product launches, and ongoing innovation,” wrote a16z’s Daren Matsuoka, Eddy Lazzarin, Robert Hackett and Stephanie Zinn in a blog post.
The report says that the headline-grabbing scandals and collapses of the past year have demonstrated the failure of centralized systems versus the open, resilient nature of decentralized infrastructure. A16z notes that Web3 is “more than a financial movement, it’s an evolution of the internet” and it advances the internet through “crypto computers, not crypto casinos.”
A16z notes the advantages of Web3 over prior technological models include decentralized blockchain networks, the community-governed nature, the lack of power consolidation among corporations and value occurring to network participants.
Web3 adoption is still in its early stages, and decentralized finance (DeFi) and non-fungible token (NFT) metrics have become more stable after falling from record highs in 2021, according to the report. Gaming has shown particular strength: 700 Web3 games launched last year, and games now generate 23 times more on-chain transactions than DeFi.
Time for builders
Last month in the broader crypto industry, there were more than 15 million active addresses, the highest number the firm has ever tracked and more than twice as much as seen in March 2021.
The price-innovation cycle says that market downturns bring more dedicated developers into the crypto space and then the excitement around those projects eventually begins to drive asset prices higher.
“Product cycles are where new things that lead to consistent and more robust growth over many years are occurring, regardless of financial cycles,” A16z Chief Technology Officer Eddy Lazzarin told CoinDesk during an interview.
A16z highlighted the ongoing improvements in blockchain infrastructure. Key factors include new layer 1 chains that improve scalability and programmability and layer 2 scaling systems, such as optimistic and zero-knowledge rollups. The firm is particularly positive on zero-knowledge proofs, a method of computationally verifying that a transaction is valid.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.