Users and investors are re-evaluating token-based companies amid the broader cryptocurrency downturn.
4 min
The cryptocurrency rout has spread to startups that offer users digital tokens, pushing down digital asset prices and driving away hordes of users.
The startups—part of what has been called Web3—allowed users to play virtual games and collect digital assets, and the companies’ growth was hinged on interest from people eager to wade into blockchain-based assets. The broader cryptocurrency downturn this year is causing a downturn in users in many Web3 companies, and players and investors are re-evaluating the utility of token-based business models.
“Many crypto companies can only exist by engineering speculation,” said Adam Fisher, a Tel Aviv-based partner at VC firm Bessemer Venture Partners. “The utility of Web3 is not clear at all.”
Investors in 2021 poured more than $4.5 billion into blockchain-based gaming, digital media and commerce companies—popular sectors of Web3 investment—compared with $197 million in 2020, according to data from Crunchbase. The increase mirrored the rise of cryptocurrency investing in Silicon Valley: Last year, venture capitalists invested about $17.9 billion into blockchain-related startups, compared with $2.1 billion in 2020, according to Crunchbase.
Axie Infinity is an online game where users can make money by breeding virtual pets and earning other digital assets on the blockchain, which they can then sell for cash on crypto exchanges. Axie Infinity’s parent company, Vietnam-based Sky Mavis Ltd, along with digital-art creator Yuga Labs and fitness app StepN, offered services they said were part of a new iteration of the internet that distributed ownership and power to users in the form of digital tokens. Venture firms such as Andreessen Horowitz and Paradigm raised billions of dollars in new funds dedicated to crypto startups.
Andreessen Horowitz led a $152 million investment into Sky Mavis in October, valuing it at about $3 billion. General partner Arianna Simpson touted Axie Infinity as part of a “play-to-earn revolution,” saying the ability to own and sell in-game digital assets would drive loyalty to the platform. Daily platform users reached a high of 2.7 million in November, according to data from Sky Mavis.
As the crypto boom has crumpled amid inflationary fears and a broader market downturn, the prices of Axie’s in-game tokens crashed, and Axie users fled the platform. As of July 4, the site had 368,456 daily active users, down 86% from November, a drop that came after hackers stole more than $500 million worth of cryptocurrency from the game in March.
Sky Mavis co-founder Aleksander Larsen said the company is in the process of phasing out the older version of Axie Infinity, so future users will have the option of using digital tokens or playing without them.
Proponents of Web3 say the blockchain is a new way to shift economic power from dominant companies such as Facebook parent Meta Platforms Inc. and institutions like central banks. Over the past few years, it has fueled the rise of sectors such as decentralized finance, where people are able to buy and sell cryptocurrencies validated automatically on the blockchain instead of relying on financial middlemen.
StepN is a fitness app that allows people to earn a token called Green Satoshi based on how much they walk or jog. Users, who earn the tokens after they buy a nonfungible token, or NFT, representing a pair of sneakers, flocked to the platform as the price of the Green Satoshi token increased in the first few months of the year.
In the past two months, the token price has crashed, and the number of monthly active users on the platform dropped more than 30% from May to June, according to data from Dune Analytics. A spokeswoman said the data excludes active users who don’t transfer their tokens for other cryptocurrencies and thus “does not represent the full picture for active users of StepN.” StepN, based in Adelaide, Australia, announced in January it raised $5 million from investors including Sequoia Capital India
Some Web3 companies’ difficulty in keeping users amid the plummeting prices of its tokens has validated some crypto sceptics’ beliefs that there aren’t many instances where consumers have a true use for blockchain-based services.
“What subset of things created in this cycle are going to work? A small subset,” said Haseeb Qureshi, a managing partner at crypto VC firm Dragonfly Capital. “That’s normal,” he said. The role of venture capital “is to try and find a lot of big ideas, and a few of them work and end up changing the world.”
Some well-funded crypto startups have introduced tokens before they have developed the products associated with those sales. The approach led to early revenue as users bought and started to trade the tokens, driving up their value.
One-year-old startup Yuga Labs and its partners, including gaming firm Animoca Brands, made more than $300 million in revenue by selling a collection of NFTs at the end of April representing unique plots of land in virtual world Otherside. Yuga Labs still hasn’t released Otherside to the public. Since the launch, the NFT’s floor price, or the cost of the cheapest NFT available for sale, has declined more than 70%, according to data from CoinGecko.
The declining price of the NFT for Otherside tracks a broader selloff in the market for NFTs, which were held out last year as a new way to own digital items but so far have been a way to buy luxury items popular within the crypto community. OpenSea, the world’s largest marketplace for such assets, saw $697 million in trading volume in June, down from $4.9 billion in trades in January, according to Dune Analytics.
“I believe that many of these NFTs are just temporary fads and are going to disappear,” said Marcos Veremis, a partner at Accolade Partners, which invests in crypto venture funds including Andreessen Horowitz. He thinks it will take time for NFTs to mature but remains optimistic.
“The current washout that’s happening is very healthy,” he said.
What a quarter-million dollars gets you in the western capital.
Alexandre de Betak and his wife are focusing on their most personal project yet.
CIOs can take steps now to reduce risks associated with today’s IT landscape
3 min
As tech leaders race to bring Windows systems back online after Friday’s software update by cybersecurity company CrowdStrike crashed around 8.5 million machines worldwide, experts share with CIO Journal their takeaways for preparing for the next major information technology outage.
IT leaders should hold vendors deeply integrated within IT systems, such as CrowdStrike , to a “very high standard” of development, release quality and assurance, said Neil MacDonald , a Gartner vice president.
“Any security vendor has a responsibility to do extensive regression testing on all versions of Windows before an update is rolled out,” he said.
That involves asking existing vendors to explain how they write software, what testing they do and whether customers may choose how quickly to roll out an update.
“Incidents like this remind all of us in the CIO community of the importance of ensuring availability, reliability and security by prioritizing guardrails such as deployment and testing procedures and practices,” said Amy Farrow, chief information officer of IT automation and security company Infoblox.
While automatically accepting software updates has become the norm—and a recommended security practice—the CrowdStrike outage is a reminder to take a pause, some CIOs said.
“We still should be doing the full testing of packages and upgrades and new features,” said Paul Davis, a field chief information security officer at software development platform maker JFrog . undefined undefined Though it’s not feasible to test every update, especially for as many as hundreds of software vendors, Davis said he makes it a priority to test software patches according to their potential severity and size.
Automation, and maybe even artificial intelligence-based IT tools, can help.
“Humans are not very good at catching errors in thousands of lines of code,” said Jack Hidary, chief executive of AI and quantum company SandboxAQ. “We need AI trained to look for the interdependence of new software updates with the existing stack of software.”
An incident rendering Windows computers unusable is similar to a natural disaster with systems knocked offline, said Gartner’s MacDonald. That’s why businesses should consider natural disaster recovery plans for maintaining the resiliency of their operations.
One way to do that is to set up a “clean room,” or an environment isolated from other systems, to use to bring critical systems back online, according to Chirag Mehta, a cybersecurity analyst at Constellation Research.
Businesses should also hold tabletop exercises to simulate risk scenarios, including IT outages and potential cyber threats, Mehta said.
Companies that back up data regularly were likely less impacted by the CrowdStrike outage, according to Victor Zyamzin, chief business officer of security company Qrator Labs. “Another suggestion for companies, and we’ve been saying that again and again for decades, is that you should have some backup procedure applied, running and regularly tested,” he said.
For any vendor with a significant impact on company operations , MacDonald said companies can review their contracts and look for clauses indicating the vendors must provide reliable and stable software.
“That’s where you may have an advantage to say, if an update causes an outage, is there a clause in the contract that would cover that?” he said.
If it doesn’t, tech leaders can aim to negotiate a discount serving as a form of compensation at renewal time, MacDonald added.
The outage also highlights the importance of insurance in providing companies with bottom-line protection against cyber risks, said Peter Halprin, a partner with law firm Haynes Boone focused on cyber insurance.
This coverage can include protection against business income losses, such as those associated with an outage, whether caused by the insured company or a service provider, Halprin said.
The CrowdStrike update affected only devices running Microsoft Windows-based systems , prompting fresh questions over whether enterprises should rely on Windows computers.
CrowdStrike runs on Windows devices through access to the kernel, the part of an operating system containing a computer’s core functions. That’s not the same for Apple ’s Mac operating system and Linux, which don’t allow the same level of access, said Mehta.
Some businesses have converted to Chromebooks , simple laptops developed by Alphabet -owned Google that run on the Chrome operating system . “Not all of them require deeper access to things,” Mehta said. “What are you doing on your laptop that actually requires Windows?”
