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Digital Assets

Digital Asset Weekly | The State of Crypto


Richard Barnett, CFA

Friday Focus: The State of Crypto

Venture Capital powerhouse Andressen Horowitz, also known as a16z, recently published “State of Crypto 2022”.  Then they put their investors' money where their mouth is by announcing last week that they raised a whopping $4.5 billion for their fourth crypto venture fund.  To put that in context, their first fund was for $300 million in 2016, the second was $550 million in 2020, the third was $2.2 billion in 2021, for a total of $7.5 billion across the fund series.

With serious money continuing to flow into the digital space in spite of the recent steep price declines, the a16z report, which blazes through Web3, the Ethereum ecosystem, Layer 1s and 2s, DeFi, Stablecoins, NFTs, and DAOs, is worth a closer look.   There is quite a bit to cover, so we are breaking their report into parts.  Part one, below, discusses the Ethereum ecosystem and Layer 1 and 2 solutions.  Part 2 discusses everything else and will be included in a future article.

While a number of competing Layer 1 blockchains (BNB, Avalanche, etc) have more activity than Etherium, ETH pays out much more in transaction fees, which drives demand for blockspace on the blockchain and usage by validators and miners who can earn the fees.  This is why Ethereum continues to dominate in spite of (or perhaps because of) its high transaction costs.  

High ETH fees are driving competition, and Cross chain bridges are being developed and growing fast to try to drive usage to other blockchains.  There are over 300,000 ETH ($600mm) locked in these bridges. The report does not discuss the security issues with bridges, which have led to some of the biggest crypto hacks in the last two years.

Ethereum continues to attract the most developers of all the competing protocols by a wide margin.

The report covers Layer 2’s, which are scaling solutions to creasing the transaction speed of layer 1’s.  The two competing technologies in this space are Optimistic Rollups and Zero-Knowledge Rollups.

Why this matters to you:

According to a16z, the internet as we know it is flawed, with increasingly competitive and centralized big tech firms (Google, Facebook, Amazon, Twitter, etc) collecting enormous amounts of user data and extracting nearly all the value from the Web.  Web3 holds the hope of a more cooperative and fair internet, where all the users can benefit from the value of the assets and protocols, providing opportunities for creators, investors, developers, and operators. This is made possible by the ability for users to own the underlying cryptocurrencies that the Web runs on.


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