“We overestimate the impact of technology in the short-term and underestimate the effect in the long run.”
Amara’s Law

You’ve probably heard several variations of this quote. At its core, Amara’s Law alludes to the notion that early disillusionment in novel technologies, following periods of hyperinflated expectations, clouds our understanding and judgement of their long-term potential. 

With prices in crypto dropping dramatically, unregulated systematic risk unwinding and WAGMI crypto twitter evangelists rugging their choirs, we’re seeing Amara’s Law play out. All of this is against a macroeconomic backdrop that crypto has never faced before.

For the first time in crypto’s young history, price volatility is increasingly correlated with capital market movements; mirroring, and in some cases amplifying, sentiments and behaviours of TradFi in a largely unregulated environment. 

Moreover, inflation, its monetary policy implications and the looming threat of a recession are adversely affecting the crypto ecosystem, with cornerstone CeFi institutions rescinding employment offers and laying off sizable numbers of employees. 

Whilst the outlook appears bleak, we’ve also seen real progress towards an open financial system, innovation of digital property rights, and a migration of talent on an unprecedented scale. 

If you take the entirety of crypto as a tech startup, no other tech startup has been quicker to create value and achieve a $1 trillion market cap than crypto.  

Apple was the first to achieve the fabled $1T, and it took them 42 years to cross that line. 

Crypto got there in 13 years. 

In these tumultuous times, maintaining perspective is important. We hope to distil, reflect and condense all the key things we’re seeing leave the ecosystem, and point to a couple of elements we’re quite excited by. 

Growing pains

The past couple of months have been difficult, yet enlightening, for many within crypto. We’ve seen major protocols collapse very publicly; bringing many over-leveraged investors and speculators to their knees. 

Whilst the infamous death spiral of Terra-Luna will likely go down in history as a watershed moment, the events which precipitated after are symptomatic of deeper issues plaguing the ecosystem. It appears that the nascent crypto industry is facing an existential threat from within. 

Let’s explore some of these underlying issues.

1. Unsustainably high returns

As competition within the crypto ecosystem intensified, protocols sought to incentivise usage of their product by offering high and unsustainable annual percentage yields (APYs). To achieve these returns, these protocols were driven to invest their users' funds in risky and volatile protocols and provide high-risk loans. As the value of these assets fell and withdrawals from CeFi increased without a liquidity backstop, CeFi institutions began to pause withdrawals. 

@jonwu_'s thread grapples with the current state of CeFi, the unsustainability of the current model and the implications on the wider crypto ecosystem. 

2. Mismanaged leverage

The depegging of UST and hyperinflation of Luna had cascading effects throughout crypto markets. 3AC, one of crypto’s largest hedge funds, was hit hardest. After weeks of speculation, the reality of their insolvency crystalised on July 1st when 3AC filed for chapter 15 bankruptcy. 

On the surface, 3AC appears to be another victim of the Terra contagion; the truth is slightly more nuanced.

@TheDefiEdge suggests 3AC engaged in questionable behaviours and traded heavily on leverage in an attempt to recover losses following the Luna debacle. This had inverse consequences, further expanding the contagion and revealing poor risk assessment and fund mismanagement practices across a range of protocols. 

3. Decentralisation

Decentralisation is a fundamental tenet of cryptocurrency. Today, many protocols use democratic systems of governance for collective decision-making. However, subversion and erosion of these fundamental notions by founders and communities building and participating in this system is becoming increasingly apparent. 

@JackNiewold’s thread grapples with the dissonance and the spiritual turmoil within the crypto ecosystem balancing and reconciling decentralisation with private gain.

@LucaProsperi’s thread explains one of the most contentious votes in MakerDAO’s history which became a proxy war between TradFi VCs and DeFi Founders and community. 

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The bright side

With fears of crypto winter looming in tandem with the uncertainty and volatility of present market conditions, being bearish is pretty justified. However, this cycle is markedly different from the last. 2020-2021 will go down in history as being an industry defining period for crypto. Here’s why:

1. Mass adoption

According to Chainalysis’ most recent publication on crypto adoption, global adoption has grown by over 2300% since Q3 2019 and over 881% in the last year. This remarkable growth is primarily driven by adoption of cryptocurrencies in emerging nations with DeFi summer of 2020 and NFT summer of 2021 playing a significant role in driving adoption in western nations. There’s still only <5m DeFi users and <40m Metamask wallets. Crypto is still in the early innings of the adoption curve. 

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2. Robust infrastructure

Over the past 2 years we’ve seen incredible innovation in the creation of core blockchain infrastructure with alternative Layer 1s like Solana gaining significant traction and the rise of zero-knowledge Layer 2s, as a viable scaling solution for the Ethereum network. Moreover, with new use cases expanding and founders placing concerted effort into building utility driven-protocols, core infrastructure in respective crypto verticals are being actualised.

3. Increased developer activity

The previous crypto winter saw the capitulation of many web3 devs and subsequent stagnation of developer activity. Whilst developer activity picked up in 2020, 2021 saw more developers join web3 than any year before, with over 34k new web3 developers committing code in web3. Moreover, a tidal wave of Venture Capital went into funding real builders and projects, so there’s much more innovation to surface.

These three pillars laid the foundations for a thriving crypto ecosystem. This cycle has provided a glimpse into the future of web3 from DeFi, GameFi and DAOs to broader notions of the digital identity, ownership and creator economy.  If the 3rd cycle served as a proof of concept for web3, the current cycle demonstrates proof of mechanism. 

The mass capitulation revitalises the crypto ecosystem, allowing it to continue to evolve, mature and expand. The sharp and punishing contraction of crypto allows many to recognise the inherent structural and cultural flaws, learn from them, and build towards more robust and resilient protocols and culture within the ecosystem.

Another winter, not an Ice Age‍

Nassim Nicholas Taleb, esteemed mathematician, philosopher and author of the Black Swan recently tweeted about the journalistic use of “crypto winter” as deceiving.

Sure, it’s possible that we’re entering an ice age. But on the balance of probabilities, we think decentralisation will be an important part of the future of the internet and our conviction in the promise of crypto remains strong. We have always been huge supporters of the open source movement, believers in permissionless innovation and building trust in trustless systems.

At Airtree, we’ve been investing in crypto projects and participating in their communities as a fund since 2020 and as individuals since 2013. We’ve had the pleasure of meeting and working alongside incredible talent and founders in the ecosystem. 

Bear markets are the best time for founders to recalibrate and re-assess their positions and broader visions. Founders now have time to breathe, experiment and innovate to build the best protocol and product for communities.  

If you’re building something cool in web3, we’d love to meet you.