A16z sees Web3 strength in second ‘State of Crypto’ report

Renowned venture capital firm Andreessen Horowitz (a16z) has released its second annual “State of Crypto” report highlighting the importance of Web3, blockchain infrastructure and a price-innovation cycle that makes the bear market a prime time for builders.

The firm also unveiled on Tuesday its new State of Crypto Index, an interactive tool that tracks 14 technology-focused metrics on a monthly basis that provide a kind of health snapshot of the industry.

“Our 2023 report aims to address the imbalance between the noise of volatile price movements – and the data that tracks the signals that matter, including the enduring evolution of Web3 technology. Overall, the report reflects a healthier industry than market prices might indicate, and a steady cycle of development, product launches and ongoing innovation,” a16z’s Daren Matsuoka, Eddy Lazzarin, Robert Hackett and Stephanie Zinn wrote in a blog post.

The report says the headline-grabbing scandals and collapses of the past year have demonstrated the failure of centralized systems versus the open, resilient nature of decentralized infrastructure. A16z notes that Web3 is “more than a financial movement, it’s an evolution of the internet” and it promotes the internet through “cryptocomputers, not cryptocasinos.”

A16z notes that the advantages of Web3 over previous technological models include decentralized blockchain networks, its community-driven nature, the lack of consolidation of power among companies, and value arising for network participants.

Web3 adoption is still in its early stages, and decentralized finance (DeFi) and non-fungible token (NFT) metrics have become more stable after falling from record highs in 2021, according to the report. Gaming has shown particular strength: 700 Web3 games were launched last year, and games now generate 23 times more on-chain transactions than DeFi.

Last month in the broader crypto industry, there were more than 15 million active addresses, the highest number the firm has ever tracked and more than double the number in March 2021.

The price innovation cycle says that market downturns bring more dedicated developers into the crypto space, and then the excitement around these projects eventually starts to drive real estate prices higher.

“Product cycles are where new things that lead to consistent and more robust growth over many years emerge, regardless of economic cycles,” A16z CTO Eddy Lazzarin told CoinDesk during an interview.

A16z highlighted the ongoing improvements in blockchain infrastructure. Key factors include new layer 1 chains that improve scalability and programmability and layer 2 scaling solutions, such as optimistic and zero-knowledge rollups. The firm is particularly positive about zero-knowledge proof, a method of computationally verifying that a transaction is valid.