The Current State of Web3

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I went boogie boarding at the beach once.  

At first I wasn't really sure if I wanted to get in the water. It looked cold. A bit rough. But after dipping my toes in, there wasn't much hesitation. It simply looked too fun. Before I knew it, I was in...and I was enjoying it. More than that. I was exhilarated by it. 

After a little time in the water, I felt like I was actually getting good. I kept catching bigger and better waves. It felt like the fun levels could only go up.

Then came the moment that anyone who's ever spent time in the waves has inevitably  experienced.

You finish riding a wave. You stand up still facing the shoreline — and without warning you get slammed in the back with what feels like the full force of a very pissed off Poseidon. But that's not it. He also shoves you headfirst underwater and fills that once smiling face of yours with heavy serving of saltwater. You tumble through the waves for a short moment before emerging, feeling beat-up and bruised. Eyes stinging. Boogie board lost. All that once was fun, now absolutely sucks. You're left to ask yourself why the hell you ever decided to get in the ocean in the first place. 

That's what the first month of 2022 felt like in the cryptocurrency markets. 

Many of us got used to boogie boarding in the waves of green charts back in 2021. This January on the other hand... that'd be described as a sea of red.

This can be disheartening for some and utterly demoralizing for others. Portfolio values cut in half in a week. People selling for huge losses to try to salvage what they have left. With it comes another cycle of fear towards web3 and cryptocurrencies that will inevitably scare off anyone who was about to get involved.

So in layman's terms — a shitty month. 

Yet I'm still optimistic. Very optimistic. I think overall the space is only getting increasingly exciting. I am by no means "unbiased" when it comes to discussing this space — I'm obviously a huge fan of web3 — but today I'm going to try my best to give you an objective-ish idea of where we're at and what's in store for this space over the coming months. So let's dive in. Or should I say...

Let's boogie.

• A Bear Market? Some perspective on crypto bear markets.

• Ecosystems. What's got me excited?

• Environmental Concerns. It's not all bad.

• Culture. It's good... but needs some work.

• Building. Rome wasn't built in a day.

The Bear Market.

Yep. Things are bad right now. After quite a few months of growth and expansion, the market is taking a little step back. Well, a pretty big step back actually. Some of the top tokens in the space receded close to 50% down from their all-time highs, although this past week has begun to see some recovering in the market.

This isn't the first time crypto has seen a rough patch like this, and I'm sure it won't be the last. Nor do I know how long this period is going to last. 

Back in early 2018 was the start of an event known as "Crypto Winter". Bitcoin's price crashed from $19650 down to a low of $3400. The crypto space went quiet for a few years. Many other coins effectively died over this time, but as you know, eventually there was resurgence. A huge one. The last year especially has seen some insane growth.

Although we may be in a bear market right now, I'm confident we won't see another "winter". I wasn't around back during the last, but from what I've read, it was truly quiet in the crypto world. No twitter engagement. No excitement. Most importantly, there wasn't anything you could do with cryptocurrency. It was purely speculative. 

That's not to say that a lot of the space isn't still speculative. However, the use-cases are finally arriving. Things are being built. The community engagement is here. The excitement is palpable. Simply put... I don't think this bear market will last forever. 

Ecosystems.

The fundamental thing that drives the adoption of a cryptocurrency is its utility.

Many people still think that cryptocurrencies function as stocks, as in you purchase them from an exchange and hope their values go up. Sure that's one option, but there is a lot more to this game now. This is where decentralized finance (DeFi), NFT's, and the metaverse come in to the equation. 

All of these are built on top of blockchain networks, and the more things built on a specific network...you guessed it — the more utility. Which in turn, drives adoption. 

There are a literally hundreds of networks that are being built out right now. There is probably one that will gain so much traction that it will 10,000x in price over the next year or so. Obviously I can't predict those. I wish I could. So instead, let me tell you what's happening in some of the most important and exciting chains right now. 

Ethereum ($ETH) - This is the big one. The most well established. The most widely used.  The OG smart contract enabled cryptocurrency (aka. the first one you could truly build on top of). This is why all of the largest DeFi protocols and NFT projects all live on the Ethereum blockchain. However, it has a big problem. It has experienced so much growth over the last year, that the blockchain effectively costs too much to interact with for anyone without a handsome portfolio size. Your average transaction might cost you $50-150 in gas fees. So  regardless of how many exciting things might be built on Ethereum, I'm not gonna dabble with this ecosystem anytime soon.

Avalanche ($AVAX) - Honestly my favorite ecosystem right now, Avalanche is almost like a more accessible and fun version of Ethereum. With gas fees ranging from a just a few cents to $1 on a high traffic day, the user experience is substantially better than Ethereum currently. The AVAX community casts a wide net of web3 interests, and the ecosystem is being built at a wild rate. DeFi options have been expanding. Avalanche NFT's have seen massive growth over the last few months. AVAX has attracted a huge share of the new growth in gaming on the blockchain (GameFi). Just take a quick look at this slightly overwhelming tweet showcasing why Avalanche is an exciting ecosystem to get involved in.

Fantom ($FTM) - The Fantom ecosystem really popped off over the last few months. According to many statistics, it's still very undervalued. Currently the ecosystem is well stacked with DeFi options, with many opportunities to earn super high yield. Lot's of high reward opportunities. Gas fees here are even cheaper than Avalanche which is another perk. One of the biggest names in crypto, Andre Cronje, is close to releasing a wildly anticipated project called Solidly. The build up to this release led to an influx of nearly $7.8 billion worth of assets into the ecosystem over a period of 25 days. In summary, this ecosystem looks primed to see some serious growth very soon.

Terra ($LUNA+$UST) - Terra is the first major ecosystem to be built around a stablecoin. I won't go into the mechanics behind the $UST+$LUNA pair here, but the system has built the backbone for an entire new ecosystem. The market cap for $UST has grown from $260 million to over $11 billion over the last year, and with this growth, $LUNA has seen massive price appreciation as well. One major draw to this network has been Anchor Protocol, a savings protocol that earns ~19.5% annual yield on your stablecoins. I wrote about this here. The ecosystem has gone from 1 project to 17 in the last year and has 100+ coming down the pipeline. So similar to Avalanche and Fantom, the key thing to take away is that people are building. More utility for cryptocurrency is coming for all of these ecosystems...

Layer 2 Ecosystems ($MATIC, Avalanche Subnets etc.) - One thing that Ethereum has shown us is that blockchain networks can get too congested at scale and become expensive and slow to transact with. That's the opposite of what we want obviously. This has led to the growth of Layer 2 (L2) ecosystems. Some well known examples are the Polygon and Arbitrum networks. These networks are built on top of the Ethereum network. 

What does it mean to be built "on top of" a network? To give you a conceptual idea of this, imagine a one-story office building. If a large company tries to fit all of its employees on this single floor, it might get too congested for people to move around freely. Now what if you built another floor above... This new floor has all the same framework and foundations of the first floor, but any workers on this new floor are much more free to get there work done without being overly concentrated. That's effectively what a Layer 2 network is. 

Outside of Ethereum, there is also a ton of excitement for Avalanche subnets. This is going to make it possible for projects to help reduce this same congestion problem on the Avalanche chain by utilizing their own subnet (aka. a Layer 2 network). L2's are going to be hugely important as more and more people begin to utilize these networks.

Environmental Concerns.

An often utilized argument against cryptocurrency is that it is bad for the environment. So is this true?

Well... yes and no. As we mentioned earlier, Ethereum is the largest smart contract enabled blockchain in the world currently. The way this network functions is that powerful computers have to solve incredibly complex problems in order to confirm a transaction onto the blockchain. This uses a ridiculous amount of power. Bitcoin mining works in a similar way. Computers use power to solve difficult puzzles. This is called Proof-of-Work (POW).

And yes. This is bad for the environment.

However, what about all those other networks I just mentioned? Well the majority of these run on a different system called Proof-of-Stake (POS). These networks are no where near as power intensive. For example, the Avalanche network currently processes daily transaction volumes at effectively the same scale as Ethereum, yet it is consuming 35,000x less energy. 

So are we out of the woods with this issue? Not quite... but we're getting there. So without doing a full deep-dive into the environment concerns, the takeaway here is that some networks are better than others... (Ethereum has some catching up to do)

Culture.

Web3 is all about community. Every project lives or dies based on the community it can build around it. The value of a token or an NFT often originates from its users. Overall this is a net-positive on the ecosystem. People truly take ownership over the projects they are involved in and rightfully so. You actually own a project and can often participate in governance of it when you purchase their NFT or token.

Do you ever see a community of people rallying around their bank? Definitely not. You simply won't find an excitement level on par with the web3 hype for any traditional web2 company. 

I've noticed (partially from my own experience) that people who fall down the rabbit hole of crypto and web3 at this early adoption phase... well they typically fall deeeeeep down the rabbit hole. 

This is good and bad. On the good side, it leaves us with very passionate and involved community members and contributors. These are the people who will push this space forward as a whole. However, this oft-mentioned rabbit hole makes it very easy to get stuck in an echo chamber.

It often appears that crypto people can forget that not everyone out there is a crypto person. There is definitely a time and place for technical talk, however, if all of the Twitter content and web3 articles are written by crypto people for crypto people... you end up making it very difficult for new entrants to find their footing in the space. It's hard to join a community when the language barrier is high. 

This passion for projects also leads to one of the most dangerous parts of the culture  — shilling. Inevitably when people put their money into a project, they want to see returns. Many people spend their time trying to convince people to put money into the projects they love. Whether or not this passion is true conviction on the merits of a project or simply a means to inflate the price, the outcome is the same. If you scroll through the crypto side of Twitter, it's literally a never ending stream of people hyping up their holdings.

This dynamic isn't all bad. I've learned about many exciting projects that I would've never seen without people talking about them. Some people are putting out great content through Twitter, newsletters, and or videos that are super informative about projects in the space. I think this needs to be the focus going forward. Less shilling. More teaching. If a project is truly valuable, teach others why it is rather than just aimlessly hyping it up. Hype only goes so far if people don't understand what they are getting involved in. However, with all that being said, I still believe the web3 community is going to be a powerful force in the coming years.

Building.

At risk of sounding cliché, I'm going to use a classic quote: "Rome wasn't built in a day".

In the grand scheme of things, we are still insanely early to the shift towards web3. Pretty much the entirety of the DeFi, NFT's, and DAO spaces are less than 5 years old.

So many projects have been built in such a short time period, but it will take time for everything to fall into place. There is still much experimentation and failure to be had ahead of us, but with every new inventive project comes a building block for the next wave of projects. In the last 5 months I've already seen new concepts go through several evolutionary steps forward as projects learn what works. I've also seen individual projects doing massive overhauls to adjust to everything that they've learned. Things are being built fast, but it will take time to see everything truly come together. I can assure you that no matter how many rough waves hit, I ,along with the rest of the web3 community, will keep boogie boarding until we figure it all out.

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-Levi

I do my best to explain how it all works in these letters, but I won't be able to outline all of the risks. So if you read this and want to get involved, make sure you do your due diligence. For full transparency, I am involved in some of the tokens mentioned in the writing. This letter is not financial advise.