Daniel Kuhn is a features reporter and assistant opinion editor for CoinDesk's Layer 2. He owns BTC and ETH.

Venture capital firm Andreessen Horowitz published on Tuesday what it hopes to be the first of many “State of Crypto” reports. The summary covers the world of Web 3 – a term the firm uses to describe its vision for the future of the internet and also its regulatory ambitions.

It’s a positive report. In 56 pages, a16z (the 16 referring to the number of letters that separate the A in Andreessen and the Z in Horowitz) presents the case that the revolution is just starting. That is even if crypto is staring down a bear market.

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Web 3 is a term that has been in use for years, but has recently been criticized for a lack of clarity. Gavin Wood, one of the co-founders of the Ethereum blockchain, is often said to have coined the term to describe a crypto-based web.

For a16z, the term covers everything from NFTs (non-fungible tokens), DAOs (decentralized autonomous organizations) and crypto gaming to actual blockchains like Ethereum and Solana and their scaling tools.

A16z has a complicated relationship with the crypto industry. One of the first venture firms active in the sector, it more than doubled its investment efforts over the recent bull run. It launched a $2.2 billion crypto fund last year and has made investments in familiar and unfamiliar projects. It holds tokens, and it is big and blockchain agnostic.

Some see venture capital as crypto’s lifeline, especially as the markets turn south. But other, hardcore crypto natives see the presence of institutions like Andreessen Horowitz as contradicting the subversive aims of crypto. Web 3 may be open for all, but that may not mean much if you’re a16z’s exit liquidity.

In some sense, there’s very little that’s new in a16z’s report. It presents up-to-date data, for instance, on how many Ethereum users there are and how many DAO governance votes have been cast, but it largely stays within the realm of well-traversed “narratives.”

Crypto is good, the firm says, because it's an alternative financial system to the current banking status quo that excludes 1.7 billion people worldwide. The firm raises that point in an overview of the report, summarizing that “crypto is having a real-world impact.”

Web 3 is a turning point, a16z says, a natural continuation of the web’s evolution from “write only” to “read and write” websites.” Said differently, the primitive “world wide web” allowed people to read information online, Web 2.0 let people create content, and Web 3 allows people to “own a piece of the internet,” the report says.

Digital assets may be volatile, the firms say, but that’s a positive attribute. “There is an underlying logic at work” for crypto markets where prices are “leading indicators” for technological adoption.

The price hook

“Prices are a hook. The numbers drive interest, which drives ideas and activity, which in turn drives innovation,” a16z writes. That process, called “the price-innovation cycle,” was first described in 2020.

You can’t fault a capitalist enterprise for saying something like that. Although a16z has pretensions of investing in builders of a better world, it’s fair to say it is primarily looking to turn a profit.

And in many ways, the data presented shows how crypto could be a sound investment. DeFi, or decentralized finance, would “represent the 31st-largest U.S. bank by total assets under management” after just two years, a16z said.

NFTs offer similar potential for crypto and are driving innovation around crowdfunding models, royalties and intellectual property issues. The same could be said for the gaming industry or the metaverse. “We are just beginning to see the potential,” a16z writes.

That said, the “State of Crypto” report “should not be construed as or relied upon in any manner as investment, legal, tax or other advice,” a16z discloses. The “views are “purely for “informational purposes.”

Who is this report for then?

A16z is courting legislators and regulators to present what could be called lenient rules for the crypto market. But the report doesn’t discuss those efforts or touch on the knotty regulatory issues that surround crypto.

The report also excludes mention of bitcoin, the first cryptocurrency, and so it doesn’t address the entire digital asset industry. Although many investors think bitcoin is still a good investment, it’s not a sure way to make profit – even if some bitcoiners think all assets will depreciate against the hard-capped, highly memetic currency.

Web 3’s key innovation is that it allows anyone to invest in aspects of it. Crypto’s markets, open 24/7 to anyone with an internet connection, are fundamentally different from the private funding rounds a16z led into Web 2 giants like Facebook over a decade ago.

There’s indication that the industry is growing sustainably. A16z cites CoinMarketCap, GitHub, Pitchbook, Twitter and others to show how there are millions of developers and “active users” across different blockchains. (Notably, Solana apparently has three times as many active addresses, 15 million, as the Ethereum layer 1, so take the figures with a grain of salt.)

“[T]hough it’s very hard to estimate, if the trendlines continue as depicted, web3 could reach 1 billion users by 2031,” the venture firm writes. I don’t know what crypto would look like with 1 billion users. It’s not unreasonable to say that as currently designed, these systems would be super expensive and may buckle under that strain.

Of course, no one knows where the industry is heading. That’s especially true as rising interest rates and inflation could drive capital out of the riskiest markets. As a statement of fact, the report is an interesting, if expected, view into the “state of crypto.” But it’s definitely not investment advice.

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Daniel Kuhn is a features reporter and assistant opinion editor for CoinDesk's Layer 2. He owns BTC and ETH.

Daniel Kuhn is a features reporter and assistant opinion editor for CoinDesk's Layer 2. He owns BTC and ETH.