Over the last year, Florida Funders has made a few investments in companies that are rooted in web3 and blockchain. Like the rest of the world, we are closely following this movement, and taking a conservative approach to our investments. We believe that the fundamentals of blockchain are solid, and with this most recent downturn, the strongest will survive and weed out many of the inadequate business cases and/or bad characters in this space. In our on-going series of "Making Sense of Blockchain," our Miami-based Investor Associate Yasmine Morrison kicks us off by breaking down the history and basics for us.
A Brief History of Cryptocurrency, Blockchain, & Web3
Pre-Bitcoin Era (1983-2008)
The world’s first “cryptocurrency”, eCash was developed by David Chaum in 1983 to allow people to send money anonymously over the Internet. Chaum later went on to create DigiCash, a project that really started taking off in the mid-90s, when he established partnerships with large corporations such as Deutsche Bank. However, the general market wasn’t ready to adopt this new digital currency and as a result, DigiCash fell apart.
It wasn’t until 1998 the term cryptocurrency was coined and during the same year, Dai Wai launched B-money with a primary focus on decentralization. The term cryptocurrency ended up outlasting B-money, but Dai would go on to become an important name in the history of crypto.
Cryptocurrencies Rises (and collapses) (2008-2018)
The 2008 financial collapse shook the foundations of the financial industry. As a result, public confidence in banks and financial institutions declined. The same year, a person (or group of people) using the name Satoshi Nakamoto invented the blockchain as a public ledger for bitcoin transactions using Proof-of-Work.
In early 2009, Bitcoin was launched to the public, and the same year the very first cryptocurrency exchange, New Liberty Standard was introduced. It was not until 2011 that true competition to Bitcoin started to emerge with new altcoins popping up such as Litecoin. In 2012, the Proof-of-Stake concept was introduced as a safer and more energy-efficient alternative to Proof-of-Work. That same year, Coinbase was launched, which today is the largest exchange in the world.
Although conceived in 2013, the blockchain Ethereum (co-created by Vitalik Buterin) wasn’t launched until mid-2015. When compared to the blockchain which was invented to support Bitcoin, developers were now able to implement a significant amount of functionality enabling smart contracts using Ethereum as a protocol.
After an unprecedented boom in 2017, the price of Bitcoin plummeted by 65 percent in early 2018. Nearly all other cryptocurrencies followed Bitcoin's decline. By the third quarter of 2018, cryptocurrencies had plummeted 80% from their peak in January 2018, making the 2018 cryptocurrency crash worse than the Dot-com bubble's collapse. During these two years, the ICO (initial coin offering) boom also took place with approximately 1,000 different token projects raising around $22 B. Several of these projects went unremembered, some were outright frauds, and a few are still known today.
Web3 Goes Mainstream (2019-)
In 2019, large enterprises and financial institutions such as Microsoft, JP Morgan Chase, Amazon, IBM, and Walmart started to make massive investments into cryptocurrency, with Ethereum becoming the blockchain of choice for many developers. In 2020 we saw how cryptocurrency lending went mainstream as a result of the worldwide pandemic, when interest rates fell and lending opportunities plummeted. In 2021, the total value of all cryptocurrencies surpassed $2 T, and new ways of using the technology and investment strategies for generating income rapidly emerged (think metaverse and staking). Today, the cryptocurrency market is experiencing another round of volatility as a result of macroeconomic challenges and the contagion effects from the implosion of Terra, Three Arrows Capital and Celsius.
Future of Web3
In the past year, there has been a lot of buzz around “web3”. Web3 is described as a new iteration of the internet based on blockchain technology and incorporating concepts such as decentralization and token-based economics. Numbers from Crunchbase show how hot the market has been. In 2021 ~$17.9 B was invested in 1,312 deals in web3-related startups, up from $2.1 B and 790 deals in 2020. Investments in web3 have cooled in 2022, as the ramifications of the broader market downturn are having an impact. However, web3 is clearly here to stay. Large VCs are still committed to the space, and the community and developers are still building their projects. It’s an exciting time for web3. As with most early stage tech companies, many companies will fail, but the companies that survive this contraction could be the greatest investment of a generation.
Yasmine Morrison, Investment Associate at Florida Funders