Crypto VCs can't just buy 'community'

Hello everyone, and welcome back to Chain Reaction

In our Chain Reaction podcast this week, Anita and I chatted with Kevin Rose of True Ventures and Proof Collective on the latest crypto crash and what the future of NFTs looks like in a bear market. More details below.

Last week, we talked about the efforts of regulators to chase crypto crime. This week, the markets have crashed, and a new generation of crypto startups are likely about to find out that you can't pay for loyalty.

This week was a doozy for crypto investors, there's no other way to put it. But it was a different kind of doozy than the crashes before it.

For a brief summation, hundreds of billions in value were erased from the global crypto market cap this week as top coins like Ethereum and Bitcoin saw major declines while other blockchain networks essentially imploded. Hundreds of thousands of crypto investors were liquidated on trades as tokens indiscriminately crashed across the board, meanwhile Terra's stablecoin fiasco -- which my colleague Jacquie has plenty of details on here -- seems to have evaporated tens of billions in crypto wealth in the course of a day or two.

For longtime crypto traders, the wild downward pressure on the markets may appear to be old hat, but the amount of money being lost and the amount of people losing money is an order of magnitude larger than ever before because crypto markets have expanded so dramatically during this bull run. If the crypto markets continue to go to hell in a hand basket, there's going to be a lot of lasting damage when it comes to consumer onboarding as web3's paid acquisition budget runs dry with decreased volumes.

After several years of Robinhood and r/wallstreetbets retail investor gambling on public stocks, consumers were ready for crypto and the industry welcomed them with open arms. For the past couple years, venture capitalists have been making bets on crypto verticals geared towards consumers, gamifying investing with actual games that boasted tokens and NFT integrations. All the while, web3 acolytes have highlighted "community" as one of the killer features of crypto-based platforms with the explanation that giving users a financial stake in the platform will lead them to act in the platform's best interest and spread the gospel accordingly.

This has all played out well enough during the "up-only" era of this crypto bull run, but now comes the interesting part.

Giving users financial incentives to enjoy your product works well enough when those financial incentives exist, but things look a little different when the air is taken out of the space and users are left with the naked and unexciting platform. Play-to-earn gaming companies have raised billions for games that are only fun when you're getting rich and otherwise awful. NFT projects have similarly coaxed users into trading card-like mechanics that are only fun when the money is flowing. Meanwhile, VCs have bankrolled web3 media companies, publications and social networking companies that are all overly reliant on crypto speculation while generally shipping bad products.

Some might read this as a general indictment of the ponzinomics of crypto, but the other way to read this is that in the gold rush of web3, blockchain founders forgot what it meant to love something because it was a great product and over-indexed on the sustainability of consumer greed or financial desperation. Now, the crypto market could bounce back tomorrow, but it won't be any less true that you can only pay for loyalty for so long.

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