The a16z State of the Crypto Report: Many words to sell you bags
The a16z State of the Crypto Report is currently widely shared within the crypto bubble on LinkedIn, so I decided to have a look.
TLDR: The report is full of crypto fan fiction, driven by a16z’s desperation to hand their bags of bad assets to somebody else.
Slides 5–8: The Web-1–2–3 Myth
I’ve seen this generational comparison of the Web multiple times now, and they all fundamentally misunderstand why the Web evolved into centralized platforms in the first place.
The Web is already decentralized. It has been since its inception. Everybody can add a server to the web and distribute content, form a community, provide value, whatever.
In the 1990s the Web consisted of many small, individual websites and forums. Platforms like phpBB and WordPress represented the bulk of the global Web traffic.
The problem was finding anything as a user and making money as a content creator.
Forums, backlinks, and link lists acted as manual content curation, eventually spawning platforms like Delicious (text) or Last.fm (audio), but that was still tedious. Many approaches for microtransactions came and failed.
Eventually platforms emerged that brought together content hosting, discovery, and monetarization. And now we call these companies “Big Tech” as they represent hugely influential quasi-monopolies.
This is how big tech became big: By solving issues with the decentralized nature of the web.
- Google = Finding text content
- YouTube: Finding videos
- Facebook = Finding people
- Amazon = Finding things
a16z states that Web3 is now about “taking away the power from Big Tech” and giving it back to the people. How? Nobody knows. But everything will somehow work better, be public and open source, extensible and governed. Because of Blockchains!
Unfortunately, none of this will work.
Slides 9–14: Crypto is totally not a casino!
“Believe me, bro, cryptocurrencies are totally not a casino and Blockchains are really a computer!” (9)
What a16z is saying is: “Please ignore that despite being around for 14 years, cryptocurrencies didn’t fulfil any of the original aspirations.” They are not usable as currency, are not a hedge against the traditional financial system, and aren’t used much peer to peer.
Crypto — and indeed Blockchains as a whole — only had two real hits:
- Being used as unregulated, speculative financial assets
- Facilitating extortion via ransomware
It’s important to understand that the whole speculative financial thing is a negative-sum game. Blockchains themselves don’t do anything, they are detached from any real goods and services. Tokens like Bitcoin, Ethereum, and others are not backed by any economic activity or value. The only money in the system is what people put in, it cannot generate new money.
That means: For somebody to make a profit in crypto, somebody else needs to lose money. Zero sum. And the miners that handle the transaction scrape something off for themselves to pay for the operating costs of the system, making it negative-sum.
And guess who invested a lot of money in crypto and is now trying to offload their investments onto retail investors?
Hence a report that wants to convince YOU to put money in, so that NUMBER GOES UP and WAGMI! There TOTALLY is a predictable pattern in the chaos! GREAT PRODUCT! Are you in?!
It’s a computer, totally not a casino!
Slide 15 — 21: Blockchains still don’t scale
When the report states that “Blockchains are scaling through multiple promising paths” it actually means: “Blockchains don’t scale, and we hope to bolt something on so that they will”.
The fact that Blockchains don’t scale isn’t exactly a surprise to anyone in the field. Blockchains are really SLOW. The issue is the way Blockchains achieve a distributed system without central authority: Consensus Mechanisms.
These are the mechanisms by which all participating nodes in the blockchain network look at each other and go: “I want to add these transactions to the database. Do you all agree? Yeah? We all agree? Great — it’s added now”. They periodically stop to have these discussions, then continue.
It’s a little bit more complicated, but technically speaking all nodes in the blockchain must be synchronized to have the same state and verify the state together. This implies that blockchains are operating synchronously and blocking, meaning their speed is limited by the “tick” of that consensus mechanism.
This “waiting” makes them horrendously slow compared to regular databases, to the point where it’s mathematically provable that they cannot scale.
Running something like Facebook on a Blockchain is just delusional.
For the same reason, Blockchains are also hopelessly inefficient. Yes, Ethereum just completed “The Merge”, bringing the overall Ethereum efficiency from “This is literally burning a rainforest per hour” to “Well, it’s only a small California wildfire now, see?”
What I love is the creative way the report compares Ethereum efficiency to other services. Slide eighteen shows the energy consumption of Ethereum (0.0026 TWh) and YouTube (244 KWh), making Ethereum 94,000 times more efficient! Wow!
Except when you calculate actual energy consumption per user or transaction, it’s bad. According to a report there were 3.9 million active wallets in 2022 doing roughly one million transactions per day. YouTube has 2 billion active users per month watching 5 billion videos per day.
In other news, my little Fiat Punto also requires less energy than a high-speed train, but weirdly the train is way more efficient in transporting people.
Slide 22 — 27: NFTs, Games and Things!
I am tired of commenting on this. Watch Dan Olsens video instead.
Slide 28 — 30: Regulation is waking up
Well, representative Jake Auchincloss, Democrat of Massachusetts, put it succinctly when he said his “patience with the crypto bulls is wearing thin” during the recent congressional hearing:
“It’s been 14 years and the American public has heard lots of promises, but it has seen lots of Ponzi schemes,” he said. “For crypto, it’s time to put up or shut up.”
“Other disruptive technologies have already delivered game-changing innovation that affects my constituents in their daily lives. Blockchain has thus far delivered whitepapers and podcasts about Bitcoins and DAOs and NFTs and DeFi and more and it’s all interesting and exciting even — but none of it has achieved product market fit at scale.”
Regulators are getting the memo that there are no sensible scale use-cases for Blockchains — except the casino and ransomware thing. And they are gearing up to stamp those out to protect retail investors.
Slide 31-The End: Many graphs going down
I don’t even know where to start with the rest.
Most of the graphs show a downward trend, accompanied by the headline stating that this is “Good, actually! Totally bullish!”
Looking at the details is even more depressing. Slide thirty-six states that 50k developers are active monthly, which is an absurdly small number for a “global phenomenon & next generation of the Internet”.
The output is also laughably small. Slide thirty-eight shows that only 30k smart contracts are created per month. And if you look at the underlying data, most of those contracts are a simple clone job of NFT templates.
Active addresses are not users since one user needs an address for each protocol (44), “Blockchain transactions exploding” (45) is meaningless amidst findings of wash trading, DEX traffic are essentially bots that try to pry arbitrage out of themselves, and the number of NFT buyers is rising because NFTs are almost worthless now (49).
All this points to the real issue: The music is stopping.
And a16z wants to get rid of the bags.
Enjoy the report.