2022 State of Cryptocurrency Report

Translator’s note: This article is divided into two parts. The first part explains the concept of the cryptocurrency “price-innovation” cycle and its basic logic, and analyzes crypto activities in three cycles (2009-2012, 2012-2016, and 2016-2019) through data.

The next section summarizes the current state of cryptocurrency in 2022 into five key points, introducing the opportunities and challenges we are currently facing in the middle stage of the fourth "price innovation" cycle of cryptocurrency.

Cryptocurrency Price-Innovation Cycle

Long-time cryptocurrency traders believe the market develops in cycles, alternating between periods of high activity and “ crypto winters .”

So far, there have been three cycles. The first cycle peaked in 2011, the second in 2013, and the third in 2017.

These cycles may seem chaotic, but they actually have a basic logic, which can be roughly described as:

1) The price of Bitcoin and other crypto assets rises;

2) generate new interest and social media activity;

3) Attract more people to participate and contribute new ideas and codes;

4) Promote the creation of new projects and the establishment of start-ups;

5) Further product launches are introduced to incentivize more users, ultimately ending in the next cycle.

This view is supported both by industry anecdotes and real data. In hundreds of conversations with cryptocurrency entrepreneurs, we always hear stories like this:

“I heard about cryptocurrency in 2011, 2013, and 2017, when the price of cryptocurrency skyrocketed and everyone was talking about it. At first, I thought it was a topic about money, but when I started reading a series of white papers and blog posts, I understood the potential of this technology, and eventually, I fell in love with it.”

We recently worked on an internal project at a16z to see if the data would show similar patterns.

Led by cryptocurrency data scientist Eddy Lazzarin , we analyzed 10 years of data, including comments on the cryptocurrency subreddit, commits to crypto-related repositories on Github , and funding data from Pitchbook (more on the methodology below). The results are shown in the next chart.

First cycle: 2009-2012

The first cryptocurrency cycle peaked in 2011. Before then, even cryptocurrency enthusiasts viewed Bitcoin as an interesting experiment that was unlikely to generate real value.

After this, entrepreneurs realized that they could create businesses in the cryptocurrency market. Many of today’s large exchanges, mining groups, and wallets were created at this time.

BTC price, developer activity, startup activity, and social media activity from October 2010 to July 2012

Notice how developer, social media, and entrepreneurial activity persists after the price drop. As we’ll see later, this is an ongoing pattern that leads to long-term, steady growth in fundamental innovation.

Second cycle: 2012-2016

The second cycle peaked at the end of 2013, which was probably the first time most people outside the industry heard of Bitcoin . This cycle brought about a dozen times more developers and startups to the cryptocurrency industry.

It is also the time when many important projects are created and funded, most notably Ethereum, which had an exciting third cycle in 2017. The key feature of cryptocurrency cycles is that each individual sows a seed that later grows and drives the next cycle.

BTC price, developer activity, startup activity, and social media activity from July 2012 to January 2016

The third cycle: 2016-2019

The third cycle peaked in 2017, when the widespread impact of the cryptocurrency market attracted mainstream attention. This cycle once again greatly increased the number of developers and startups, up to about ten times. The cryptocurrency market also changed from a marginal industry to a real entrepreneurial industry.

BTC price, developer activity, startup activity, and social media activity from January 2016 to October 2019

Back to the present, when you look back at these three cycles in combination, you will find that all key indicators have fluctuated but continued to grow.

Combining the above three charts

The icons in the top row are examples of high-quality projects launched in each cycle. The 2017 cycle saw the birth of many exciting projects in a wide range of areas including payments , finance , gaming , infrastructure , and web applications . Many of the projects here will be released in the near future and will likely drive the fourth cryptocurrency cycle.

The average annual compound growth rate of BTC price, social media activity, developer activity, and entrepreneurial activity

Although cryptocurrency cycles seem chaotic, in the long run, they have steadily increased in new ideas, code, projects, and entrepreneurial activity, which is also an important driver of software innovation. In the coming time, technicians and entrepreneurs will continue to push cryptocurrency forward. We are looking forward to their achievements.

Methodology:

Startup activity refers to the total number of companies on Pitchbook that were founded after January 1, 2019 and raised their first round of funding in the cryptocurrency/blockchain vertical. The data only covers a few rounds of funding under the conditions of a specific year and month. Some companies that are not related to cryptocurrency and blockchain were manually screened out. The data is directly exported from Pitchbook .

Developer activity is the sum of all “ collections ” of all crypto-related repositories listed at github.com/electric-capital/crypto-ecosystems as of February 4, 2020. These categories are referenced without modification. Data collected directly from GitHub ’s API .

Social media activity refers to the collection of all comments on 91 cryptocurrency-related subreddits on Reddit . These subreddits were identified by querying the raw data multiple times with crypto-related keywords, and then manually verifying the comment data. The data was collected directly from PushShift.io.

As indicated, all data is presented by month and year, not cumulatively.

The first three charts reflect only each individual period, intended to illustrate trends within a specific period; the fourth chart shows the overall trend from 2009 to 2019.

2022 State of Cryptocurrency Report

Source | a16zcrypto.com

Author | Daren Matsuoka, Eddy Lazzarin, Chris Dixon, Robert Hackett

Since a16z began investing in the crypto industry nearly a decade ago, the industry has undergone tremendous changes.

This report is the first annual crypto industry trend report, and our team wrote this report with two advantages we have in the crypto industry: the ability to track data and the opportunity to communicate with countless companies and builders. This report is suitable for readers who are trying to understand the evolution of the Internet and where we are in this journey from centralized web2 platforms to the decentralized, community-driven web3 world - creators and builders are particularly concerned about this.

The most important themes from the report can be distilled into the five key takeaways below, but to be sure to dive into all 50+ slides (the full 2022 State of Crypto report is available for download below); also be sure to subscribe to a16z’s newsletter to stay updated on insights and upcoming resources.

Five key points

We are in the middle of the fourth price-innovation cycle

Markets are seasonal; crypto is no exception. Summer gives way to the chill of winter, and winter melts away in the heat of summer. During the dark days, progress made by builders will eventually reignite optimism across the industry once the dust settles. And with the recent market decline, it seems we are now entering one of these dark times.

The cryptocurrency market cycle: price – interest – new ideas – startups & projects

Despite the volatility and chaotic cycles of the cryptocurrency market, as Chris and Eddy first pointed out in 2020 (i.e. the price-innovation cycle above): it has a basic working logic. (See slides 9 to 12.)

While in some industries, price is often a lagging indicator of market performance, in the cryptocurrency market, price is a leading indicator .

Price is the lure, and rising prices drive interest in the industry, which in turn drives creativity and activity, which in turn drives innovation. We call this feedback loop the “ price-innovation cycle .”

And, since the creation of Bitcoin in 2009, this cycle has become the driving force that has driven the crypto industry forward in multiple waves.

This result is sustained long-term growth driven by a feedback loop between profits and innovation.

Legendary investor Benjamin Graham once said: It’s best not to pay attention to “Mr. Market,” who can quickly swing from high spirits and euphoria to despair and depression.

Based on Graham's wisdom, we add our own humble opinion: it's better to invest in construction. Think about it, after the Internet bubble burst in the early 21st century, the so-called future investors gave up technology and the Internet, causing them to miss the best opportunities in the first decade: cloud computing, social networks, online live broadcasts, smartphones and other technologies. Now, it's time to think about what equivalent success web3 will achieve.

#2 For creators, web3 is far superior to web2

web2 giants take ridiculously high rates; web3 platforms offer fairer economic terms. (See slide 39) Meta takes nearly 100% of Facebook and Instagram users, compared to NFT marketplace OpenSea ’s 2.5%.

“When big tech companies are taking a bigger cut than the mafia, you know there’s something seriously wrong with our economy,” U.S. Congressman Richie Torres wrote in an editorial.

The pumping rate of web3 platforms is much lower than that of current Internet giants

Our team has conducted new data analysis to assess how much creators are paid on web2 vs web3. (See slide 40) Although it’s early, the data is telling.

In 2021, the primary sale of Ethereum-based NFTs (ERC-721 and ERC-1155) and the payment of creators fees in secondary sales on OpenSea generated a total of $3.9 billion in revenue. This is four times the $1 billion Meta will pay to creators in 2022, which only accounts for 1% of Meta's revenue.

NFTs provide creators with a new way to connect financially with their fans

This figure is even more staggering considering the huge difference in the number of web2 and web3 users: our team calculated that there are 22,400 web3 creators (based on the number of NFT collectibles), while there are nearly 3 billion users publishing content on the Meta platform.

Although in absolute terms, Spotify and YouTube pay creators $7 billion and $15 billion respectively, the stark difference when divided per capita is shocking. According to analysis, web3 pays $174,00 per creator, while Meta only pays $0.1 per user, Spotify pays $636 per artist, and YouTube pays $2.47 per channel. web3 may be small, but it is powerful.

Cryptocurrency is impacting the real world

Creator payouts are just one example of how users benefit in the cryptocurrency market; there are many more to be gained.

Consider the financial system, which is already a disappointment to many: more than 1.7 billion people do not have a bank account, according to the World Bank. As the next slide shows, even taking into account the recent economic downturn, demand for decentralized finance, or DeFi, and digital dollars has surged over the past few years. (See slides 26, 28, and 33.) Among the underserved and unbanked population, 1 billion of whom have smartphones, the crypto industry offers an opportunity for financial inclusion.

Programs like Goldfinch are giving more people access to capital who otherwise wouldn’t be able to in emerging markets.

DeFi’s total assets under management may represent the 31st largest U.S. bank

The cryptocurrency market is also addressing other fragmented markets. (See slide 53) Flowcarbon is making increasingly important unit accounts transparent and traceable on the blockchain to improve the carbon credit model. As a grassroots wireless network, Helium is providing the first legitimate and decentralized challenge to entrenched telecom giants.

Spruce is also empowering people to control their own identity information, rather than giving this right to online intermediaries such as Meta , which profit from users through data mining business models.

The cryptocurrency market is impacting the real world

Continuing down the list, DAOs (decentralized autonomous organizations) show how strangers can coordinate and cooperate economically to achieve goals. NFTs give people virtual asset rights to avatars, artwork, music, game props, proof of access, virtual world land, and other digital products.

Moreover, token rewards allow newcomers to avoid the " cold start " problem and introduce network effects. The crypto industry is far more than a financial innovation, it is also a social, cultural and technological innovation.

We have only scratched the surface of its possibilities.

Ethereum is a clear leader, but faces stiff competition

Ethereum is the dominant player in web3, but many other blockchains are now playing similar roles. Developers of blockchains like Solana, Polygan, BNB Chain, Alvalance, and Fantom are all vying for similar victories. (See slides 15 and 27)

Ethereum continues to attract the majority of developers, but there are several emerging ecosystems competing in the same race

Ethereum’s lead has a lot to do with its early launch and healthy community. As for developer interest, Ethereum clearly has the most builders, at nearly 4,000 monthly active developers. (See slide 18) Behind it are Solana (nearly 1,000 monthly active developers) and Bitcoin (around 500 monthly active developers).

Ethereum’s overwhelming share explains why its users are willing to pay more than $15 million in daily fees to use the chain. This is an impressive achievement for such a young project. (See slide 16)

While other smart contract platforms are still competing with Ethereum for users and usage, the demand for block space on Ethereum is unmatched

Ethereum’s popularity is also a double-edged sword. Because it has always placed a high priority on decentralization rather than scalability, other blockchains can take advantage of this and attract users with the promise of better performance and lower fees. (Some people might say they are sacrificing security.)

In addition to challenger chains, we’ve also seen amazing progress in Ethereum’s interoperability, which allows users to “ bridge ” assets from one chain to another, and incredible developments in Layer 2, such as optimistic rollups and zk-rollups, which aim to reduce fees by expanding available block space. (See slides 17 and 21-23.)

Optimistic rollups are the most popular L2 technology, but ZK rollups are just starting to come online

Blockchain is the hottest product in the new wave of computers, just like personal computers and broadband in the 1990s and 2000s, and like mobile phones ten years ago. There is a lot of room for innovation, and we believe there will be many winners in the future.

Yes, it's still early.

Although the exact number of web3 users is difficult to calculate, we can estimate the scale of the web3 movement. Depending on different on-chain parameters, our team estimates that there are currently between 7 million and 50 million active users on Ethereum. (See slide 54.) Compared to the early commercial Internet, our development is roughly around 1995.

The Internet reached 1 billion users in 2005, coincidentally, at which time web2 began to take shape with the creation of future tech giants such as Facebook and YouTube.

It is still early days for web3 development

Again, although it is difficult to measure user volume now, if the trends depicted in the graph continue, web3 can reach 1 billion users by 2031. In other words, it is still early to get in. There is still a lot of work to be done on web3, so let's keep building.

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