Crypto Rout deflates some Web3 startups supported by Push Into Digital Tokens

The cryptocurrency route has spread to startups that offer users digital tokens, lower the prices of digital assets and drive out hordes of users.

Startups – part of what came to be called Web3 – allowed users to play virtual games and collect digital assets, and the growth of companies was based on the interest of people who wanted to get into assets, blockchain-based. The broader cryptocurrency downturn this year is driving user numbers down across many Web3 companies, and players and investors are reassessing the usefulness of token-based business models.

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“Many crypto companies can only exist through technical speculation,” said Adam Fisher, a Tel Aviv-based partner at venture capital firm Bessemer Venture Partners. “The use of Web3 is not ready at all.”

In 2021, investors poured more than $ 4.5 billion into blockchain-based gaming, digital media and trading companies – popular sectors of Web3 investment – up from $ 197 million by 2020, according to data.data from Crunchbase. The increase reflected the increase in cryptocurrency investment in Silicon Valley: last year, venture capitalists invested about $ 17.9 billion in blockchain-related startups, compared to $ 2.1 billion in dollars in 2020, according to Crunchbase.

Axie Infinity is an online game where users can make money by raising virtual pets and earning other digital assets on the blockchain, which they can then sell for cash on crypto exchanges. . Axie Infinity’s parent company Sky Mavis Ltd, based in Vietnam, along with digital arts Yuga Labs and fitness app StepN offered services that they said were part of a new iteration of the Internet that distributed ownership and power to users in the form of digital applications. tokens. Venture capital firms like Andreessen Horowitz and Paradigm have raised billions of dollars in new funds dedicated to crypto startups.

Andreessen Horowitz led a $ 152 million investment in Sky Mavis in October, valuing it at about $ 3 billion. General Partner Arianna Simpson hailed Axie Infinity as part of a “gaming to win revolution”, saying the ability to own and sell digital assets in the game would build loyalty to the platform. The platform’s daily users peaked at 2.7 million in November, according to data from Sky Mavis.

Blockchain-based game Axie Infinity lost users as cryptocurrencies lost value.

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Sky Mavis / via REUTERS

As the crypto boom crumbled amid inflationary fears and a broader market downturn, prices for Axies in-game tokens plummeted and Axie users fled the platform. Since July 4, since 368,456 daily active users, a 86% drop from November, a drop that came after hackers stole more than $ 500 million in cryptocurrency from the game in March.

Sky Mavis co-founder Aleksander Larsen says that the company is phasing out the older version of Axie Infinity, so that future users have the opportunity to use digital tokens or play without them. .

Web3 supporters say blockchain is a new way to shift economic power from mainstream companies like Facebook parent company Meta Platforms Inc. and institutions such as central banks. In recent years, this has led to the emergence of industries like decentralized finance, where people can buy and sell auto-validated cryptocurrencies on the blockchain instead of relying on financial intermediaries.

StepN is a fitness app that allows users to earn a token called Green Satoshi based on their walking or jogging time. Users earning tokens after purchasing a non-fungible token or NFT representing a pair of sneakers flocked to the platform as the price of the Green Satoshi token rose in the first months of the year.

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The fitness app StepN has seen its token price drop over the last two months.

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Step N

Over the past two months, the price of the token has plummeted and the number of monthly active users on the platform has fallen by more than 30% from May to June, according to data from Dune Analytics. A spokeswoman said the data excludes active users who do not transfer their tokens to other cryptocurrencies and therefore “does not represent the full picture for active StepN users.” StepN, based in Adelaide, Australia, announced in January that it had raised $ 5 million from investors, including Sequoia Capital India

The difficulties that some Web3 companies have in keeping users in the middle of falling prices for their tokens have confirmed some crypto – skeptics’ belief that there are not many cases where consumers have any real need for services based on blockchain.

“What subset of things created in this cycle will work? A small subset,” said Haseeb Qureshi, managing partner at crypto-VC firm Dragonfly Capital. “It’s normal,” he said. The role of venture capital is to try to come up with a lot of good ideas, and a few of them work and end up changing the world “.

When the cryptocurrency lending platform Celsius froze user accounts in the midst of declining valuations, it caused consequences for the entire industry and raised questions about what happens to users.user assets if a cryptocurrency platform files for bankruptcy. WSJ’s Vicky Ge Huang explains. Photo illustration: Jordan Wreaths

Some well-funded crypto-startups introduced tokens before developing the products associated with these sales. The approach generated early earnings as users bought and started trading tokens, increasing their value.

The year-old startup Yuga Labs and its partners, including gaming company Animoca Brands, earned more than $ 300 million in revenue by selling a collection of NFTs depicting unique plots around the world in late April. Virtual Otherside. Yuga Labs has not yet published Otherside. Since its launch, the bottom price of NFT, or the price of the cheapest NFT available for sale, has fallen by more than 70%, according to data from CoinGecko.

The fall in the NFT price for Otherside follows a wider sale in the market for NFTs, which last year was announced as a new way of owning digital objects, but which so far has been a way to buy popular luxury items in the crypto community. OpenSea, the world’s largest marketplace for these assets, saw $ 697 million in transaction volume in June, compared to $ 4.9 billion in transactions in January, according to Dune Analytics.

“I think many of these NFTs are just temporary fashion catchers and will die out,” said Marcos Veremis, a partner at Accolade Partners, which invests in crypto-venture capital funds, including Andreessen Horowitz. He thinks it will take time for NFTs to mature, but remains optimistic.

“The current leaching that is happening is very healthy,” he said.

Write to Berber Jin at berber.jin@wsj.com

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