A16z’s ‘State of Crypto’ report: A rehash of bad crypto market pitches

It’s been a terrible few weeks for crypto. The markets are tumbling. A major stablecoin turns out to be unstable. And the media are all reporting that the NFT market has crashed. 

Now what? You are the biggest venture capitalist firm in the crypto and NFT space. You need to keep the public believing in this nonsense, so you can dump your heavy bags. What do you do? 

You double down and regurgitate the same tired lies and propaganda you have been spewing all along in the hopes you can reel in some fresh suckers in the process. 

Andreessen Horowitz (a16z) released its 2022 State of Crypto Report on Tuesday, along with 56 slides.

The report was cobbled together by general partner Chris Dixon, content creator Robert Hackett, a former Fortune journalist, and two number crunchers, Daren Matsuoka and Eddy Lazzarin, to lend an air of actual research to the study. 

A16z has funded more than 50 crypto startups. In the NFT space, it has backed over a dozen firms, including NFT marketplace OpenSea, play-to-earn game Axie Infinity (which recently suffered a $600 million hack), investor pool PleasrDAO, and Yuga Labs, the company behind the Bored Apes Yacht Club. 

The Silicon Valley VC world is making a fortune off of the securities fraud-as-a-business model. It works like this: A crypto project comes out with a really dumb idea. The dumb idea is powered by a token! The token is an unregistered securities offering. A16z gives the project money and gets a pile of the project’s shitcoins in return. After a lockup period, it blatantly dumps the coins on the public via Coinbase, where Marc Andreessen sits on the board, along with a16z general partner Katie Haun. If the token isn’t busted by the SEC, a16z makes a bundle; if the token is busted by the SEC, a16z get all their money back as the injured investor. David Gerard explains the process in detail.  

The report compiles standard talking points for crypto VCs. You often see these points mindlessly repeated in mainstream media. You can think of Silicon Valley VCs as a pump-and-dump group. When you see Chris Dixon, Katie Haun, Alex Ohanian, Ashton Kutcher, and Guy Oseary all tweeting the same things, it’s part of a coordinated pump-and-dump. 

Here are the five primary lies a16z makes in its report:

Lie #1: ‘We’re in the middle of the fourth price-innovation cycle’

The crypto markets are crashing, but you shouldn’t worry about this. “Pay no attention to Mr. Market,” Dixon and friends write. Crashing prices are a natural part of the “price innovation cycle.” The numbers will go up in due time! 

A16z wants you to believe that the roller coaster of crypto markets is driven by technical innovation, rather than things like GBTC’s reflexive Ponzi or tens of billions of dubiously backed tethers sloshing around on unregulated off-shore crypto exchanges. 

In reality, crypto markets are driven by a series of grifts designed to lure real money into the cryptoverse. In 2017, we had the ICO grift. After the SEC put its foot down, new grifts evolved, including DeFi, NFTs, fractionalized NFTs, DAOs and their governance tokens, and P2E games. 

These grifts exist for one purpose: to create the illusion that tokens have real value. They don’t. Their value is purely speculative. When you go to sell, the only money you make comes from new investors — and there is a finite supply of suckers in the world, which explains why the grifts keep evolving. 

Lie #2: ‘Web3 is much, much better for creators than Web2’

Web3 is a meaningless buzzword a16z loves to kick around. They’ve written entire papers on it. 

In the fantasy world of Web3, which only ever exists in the future, everything will run on blockchains, so you should buy tokens today because number will go up!

A16z argues that Web3 platforms, such as OpenSea have a lower “take rate” for creators than Facebook, Twitter, and Instagram. (A16z led a $100 million round in OpenSea last year. After a $300 million round in January, the platform is now valued at $13 billion.)  

OpenSea takes 2.5% of every transaction on its platform, as opposed to Facebook, Instagram, and Twitter, which take 100% of creator value, the VC firm argues. 

Some of these things don’t belong together.

Talk about comparing apples to oranges. These things aren’t the same! OpenSea is a marketplace where people buy and sell tokens. The others are social media platforms. Better comparisons? eBay charges sellers 2-12%, depending on the category. Bandcamp takes 15%, which is very low for a record shop. But also, these are just sales. OpenSea is a trading platform. Coinbase takes 0.6% commission on trades below $10,000. 

Dixon et al also claim that OpenSea is better for creators because it pays royalties. You can get a percentage of secondary sales going forward. 

This is the crux of how Yuga Labs has made untold millions. Every time a Bored Ape Yacht Club NFT sells on OpenSea, Yuga Labs pockets 2.5% of the sale price.  

Ironically, despite the fact that they are getting hysterically rich, Yuga Labs pulled the rug on the actual artist behind the monkey cartoons. Lead artist Seneca told reporters that her payment was “definitely not ideal.” In a now-deleted tweet, she wrote: “Bored Apes rugged me.”    

As for other artists getting rich on royalties on OpenSea, there is no secondary market for them to make money on. It’s mainly wash trades. 

Lie #3: ‘Crypto is having a real-world impact’

Crypto peddlers routinely talk about how crypto will help undeveloped countries. “Banking the unbanked” is a phrase that a16z uses regularly. “Crypto offers a shot at financial inclusion,” it says in its report. 

Truth: Crypto has completely failed as a payment system. It’s too slow, too volatile, and too irreversible — one fat finger mistake, and your money is gone forever. 

In El Salvador, Nayib Bukele, the country’s authoritarian president, passed a law making bitcoin legal tender. However, nobody in the country is actually using bitcoin for payments. Instead, they almost all use a wallet (Chivo wallet) that updates the balance in a central database. And they are not even using that! 

A16z lists other examples of how crypto is saving the world:

  • Flowcarbon ($GNT) is “revamping carbon credits.” Truth: Crypto traders have been searching the carbon market for older, cheaper offsets to buy and tokenize. Climate experts are specifically horrified by carbon credits on a blockchain. These tokens are akin to collateralized debt instruments.
  • Helium ($HNT) is the “first legitimate, decentralized challenge to entrenched telecom giants.” Truth: Helium is a utility token ICO scam where you mine HNT to pay for long-range/low-bandwidth wireless connectivity. To start mining, you have to buy $80 worth of gear from a Helium-approved vendor marked up to $600. Some miners report making less than $1 per day. HNT has lost 85% of its value since November.
  • Spruce ($SPR) is “enabling people to control their own identities, rather than ceding that power to online intermediaries, like Google and Meta, who profit off people’s information through their data-mining business models.” I’m sure everyone wants their identities stored on an immutable blockchain!

A16z also talks up DAOs (decentralized autonomous organizations), which are neither autonomous nor decentralized. As with the Apecoin DAO, decisions are made by those who hold the most $APE, meaning Yuga Labs and a16Z. (Yuga Labs recently raised $450 million in seed funding in a round led by a16z. VCs got $APE in return.)

Dixon also claims NFTs “grant people virtual property rights across profile pictures, artworks, music, in-game items, access passes, land in virtual worlds, and other digital goods.” 

This is simply false. NFTs don’t convey any rights at all. Copyrights and ownership rights are only passed along in a separate written contract — something that doesn’t need a blockchain.  

Lie #4: ‘Ethereum is the clear leader, but faces competition’

Web3 is built on the myth that the infrastructure exists to support a plethora of apps running on blockchains. A16z writes: “Ethereum dominates the Web3 conversation, but there are plenty of other blockchains now too. Developers of blockchains like Solana, Polygon, BNB Chain, Avalanche, and Fantom are angling for similar success.”

Reality: Ethereum can’t cope with any of this. In 2017, Ethereum slowed to a crawl when CryptoKitties, a game where people trade cartoon cats, became popular. Last month, when Bored Apes Yacht Club sold 55,000 NFTs representing plots of virtual land for its Otherside MMO, people ended up paying twice the cost of the land in gas fees, and the network became virtually unusable for other projects. 

Nicholas Weaver, a former researcher at the International Computer Science Institute at Berkeley and CEO at Skerry Technologies, estimates that Ethereum has 1/5000 of the compute power of a Raspberry Pi, a tiny hobbyist computer-in-a-matchbox.

Ethereum has a goal to move to a proof of stake consensus mechanism to solve these problems, but the move has been six months away for years now.   

As for these other blockchains, they are tiny projects that haven’t been tested at scale. Solana gets clogged regularly too, with shutdowns of the entire network.  

A16z writes that “with Ethereum L1 as the hub, a significant amount of value is deposited into bridges.” (Slide 17.) 

Truth: Ethereum doesn’t work, so games are resorting to bridges, which are being hacked in record numbers. The $600 million in ETH that was once on the Axie-Ronin Bridge is now in the hands of North Korea. Bridges are smart contract pinatas. 

Bridges are a honeypot for hackers.

Lie #5. ‘Yes, it’s still early’

Once again, a16Z falls back upon this B.S. argument of comparing Web3 to the internet: “We estimate there are somewhere between seven million and 50 million active Ethereum users today, based on various on-chain metrics…Analogizing to the early commercial internet, that puts us somewhere circa 1995 in terms of development.”

Crypto is 13 years old. At that age, the World Wide Web was in peak dot-com bubble, and adoption was limited by access to bandwidth, not by lack of interest or usefulness.  

I doubt any actual investors will read a16z’s State of Crypto report. It’s a string of excuses to feed the media in the hope they can keep the music playing a bit longer. At some point, I predict that most of the shitcoins that a16z is peddling will trade close to their real value, which is nothing. And Web3 will become widely recognized for what it is — a joke. 

I need your support! If you like my work, please consider subscribing to my Patreon account for $5, $20, or $50 a month. Your contributions really make a difference.