Translator's Note: This article is divided into two parts. The first part expounds the concept of cryptocurrency "price-innovation" cycle and its basic logic, and analyzes three cycles through data ( 2009-2012, 2012-2016 , 2016-2019) encryption activities. The next part summarizes the status quo of cryptocurrencies in 2022 into 5 main points, and introduces the opportunities and challenges we are currently facing in the middle stage of the fourth "price innovation" of cryptocurrencies.

Cryptocurrency "price-innovation" cycle

Longtime cryptocurrency industry players believe the market develops in cycles, alternating between periods of high activity and “crypto winter.” So far, three cycles have passed. The first cycle peaked in 2011, the second in 2013 and the third in 2017.

These cycles may seem chaotic, but there is a basic logic that can be broadly described as: 1) Bitcoin and other cryptoassets increase in price, 2) generate new interest and social media activity, 3) attract more people to participate, Contribute new ideas and code, 4) lead to the creation of new projects and start-ups , 5) lead to further product releases, incentivize more users, and finally end the next cycle.

Whether it is from industry rumors or real data, this view is supported. In hundreds of conversations with various cryptocurrency entrepreneurs, we always hear stories like this: "I heard about cryptocurrencies in 2011, 2013, 2017, and these times the price of cryptocurrencies skyrocketed and everyone was Discuss it. At first, I thought it was 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 were recently working on an internal project at a16z and wanted to see if the data showed similar patterns. Led by cryptocurrency data scientist Eddy Lazzarin, we analyzed 10 years of data including comments on the cryptocurrency subreddit on Reddit, commits to crypto-related repositories on Github, and funding data from Pitchbook (more methodology below ). The results are shown in the next graph.

The first cycle: 2009-2012

The first cryptocurrency cycle peaked in 2011. Until then, even cryptocurrency enthusiasts thought Bitcoin was just a fun experiment, unlikely to yield real value. After this, the entrepreneur realized that it is possible to create a business in the cryptocurrency market. Many of today's large exchanges, miner groups, and wallets were created at this time.

Note how developer, social media, and entrepreneurial activity hold up after the price drop. As we shall see later, this is a consistent pattern of long-term steady growth in fundamental innovation.

The second cycle: 2012-2016

The second cycle peaked in late 2013, probably the first time most outsiders heard about Bitcoin. This cycle has brought about a dozen times as many developers and startups to the cryptocurrency industry. It is also the time when many important projects are being created and funded, most notably Ethereum, whose performance in its third cycle in 2017 has been exciting. The key feature of cryptocurrency cycles is that everyone plants a seed that will thrive and drive the next cycle.

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

The third cycle: 2016-2019

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

Going back to the present, when you look back at these three cycles in combination, you will find that all the key indicators have continued to grow despite their ups and downs.

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

As chaotic as cryptocurrency cycles may seem, in the long run they have seen steady growth in new ideas, code, projects, and entrepreneurial activity, an important driver of software innovation. Technologists and entrepreneurs will continue to push cryptocurrencies forward in the years to come. We look forward to their results.

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 funding rounds for a given year and month. Among them, some companies that have nothing to do with cryptocurrency and blockchain were manually screened out. Data is exported directly from Pitchbook.
• Developer activity refers to the sum of "favorites" of all crypto-related repositories listed by github.com/electric-capital/crypto-ecosystemsas of February 4, 2020 . These classifications are quoted without modification. Data is collected directly from GitHub's API.
• Social media activity refers to the aggregate of all comments on Reddit's 91 cryptocurrency-related subreddits. These subreddits were identified by querying the raw data multiple times using encrypted relevant keywords, followed by manual verification of the comment data. Data is collected directly from PushShift.io.
• As indicated, all data is presented by month and year and is not cumulative.
• The first three charts reflect each individual period only and are intended to illustrate trends within a specific period; the fourth chart shows the general trend from 2009 to 2019.

Source | a16zcrypto.com

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

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

This report is the first annual look at trends in the crypto industry, and our team wrote it with two of our strengths in the crypto industry: the ability to track data and the opportunity to speak to countless businesses and builders. This report is for those trying to understand how the internet has evolved, and where we are on this journey from a centralized web2 platform to a decentralized, community-led world of web3 - with a particular focus on creators and builders .

The most important themes in the report can be distilled down to five key takeaways below, but to make sure you dive into the 50+ slides (the full State of Cryptocurrency 2022 report can be downloaded below); also make sure to subscribe to a16z's live feed for ongoing insights and upcoming resource updates.

five key points

#1 We are in the middle of the fourth "price-innovation" cycle

Markets are seasonal; the crypto market is no exception. Summer gives way to the harshness of winter, and winter will melt away in the heat of summer. On dark days, the progress made by the builders will eventually rekindle optimism across the industry when the dust settles. And with the recent market decline, we seem to be entering this dark period now.

Despite the volatility and chaotic cycles in 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 9-12.) While in some industries price is often a lagging indicator of market performance, in cryptocurrency markets price is a leading indicator. Price is the allure, rising prices generate 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 Bitcoin’s creation in 2009, this cycle has been the driving force that has driven the crypto industry forward in multiple waves.

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Legendary investor Benjamin Graham once said: It is best not to pay attention to "Mr. Market", he often falls from impassioned and happy emotions to despair and depression in a flash. Building on Graham's wisdom, we add our own humble opinion: It's better to get into construction. You may wish to 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 of the previous decade: cloud computing, social networks, online live broadcasting, smart phones, etc. The rise of technologies such as mobile phones. Now, it's time to think about what equivalent success web3 will achieve.

#2 For creators, web3 is far better than web2

The web2 giants have ridiculously high margins; the web3 platforms offer fairer economic terms. (See slide 39) Meta Inc. takes nearly 100% of Facebook and Instagram users, compared to only 2.5% for NFT marketplace OpenSea. U.S. Congressman Richie Torres mentioned in an editorial , "When Big Tech has a higher rate than the Mafia, you know there is something seriously wrong with our economy.

Our team performed new data analysis to assess how much creators are paid compared to web2 and web3. (See slide 40) Although it's early days, the data speaks volumes. In 2021, the initial sale of Ethereum-based NFTs (ERC-721 and ERC-1155) and the secondary sale of OpenSea to pay creators will generate a total of $3.9 billion in revenue. That's four times the $1 billion in earmarked payments to creators by Meta in 2022, which represents just 1% of Meta's revenue.

This statistic is even more astonishing considering the huge difference in the number of web2 and web3 users: our team calculated that there are 22,400 creators in web3 (based on the number of NFT collectibles), while users who publish content on the Meta platform But there are nearly 3 billion. While Spotify and YouTube pay creators $7 billion and YouTube $15 billion, respectively, in absolute terms, the stark difference after per-capita distribution is staggering. According to the analysis, web3 pays $174,00 per creator, while Meta only pays $0.10 per user, Spotify pays $636 per artist, and YouTube pays $2.47 per channel. The size of web3 is small, but its power is evident.

#3 Cryptocurrencies are impacting the real world

Creator payouts are just one example of user benefits in the cryptocurrency market; there are many more.

Consider the financial system, which has left many people disillusioned: more than 1.7 billion people are unbanked, according to the World Bank . As shown in the next slide, even taking into account the recent economic downturn, the demand for decentralized finance (or DeFi) and digital dollars has increased significantly in the past few years. (See slides 26, 28, and 33) Among the underserved and unbanked population, 1 billion of whom own smartphones, the crypto industry presents an opportunity for financial inclusion. Projects like Goldfinch are giving more people access to capital that would otherwise not be available in emerging markets.

The cryptocurrency market is also addressing other fragmented markets. (See slide 53) Flowcarbon is promoting the increasingly important unit accounts to become transparent and traceable on the blockchain to improve the carbon credit model. As a grassroots wireless network, Helium is presenting the first legal and decentralized challenge to the entrenched telecom giant. And Spruce is enabling people to control their identities, rather than ceding this power to online intermediaries like Meta, which use data mining business models to profit from users.

Continuing the list, DAOs (or Decentralized Autonomous Organizations) demonstrate how strangers can coordinate and cooperate economically to achieve goals. NFT gives people virtual asset rights to own avatars, artwork, music, game props, access certificates, virtual world land, and other digital products. Moreover, token rewards allow newcomers to avoid the "cold start" problem and introduce network effects. The encryption industry is far more than a financial innovation, it is a social, cultural and technological innovation.

We only know the surface of its possibilities.

#4 Ethereum is a frontrunner with a clear direction, but faces stiff competition

Ethereum dominated 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's leading position has a lot to do with its early launch and healthy community. As for developer interest, Ethereum clearly has the majority of builders, almost 4,000 monthly active developers . (See slide 18) Behind it is Solana (nearly 1000 monthly active developers) and Bitcoin (about 500 monthly active developers). Ethereum’s overwhelming share explains why its users are willing to pay an average of over $15 million a day in fees to use the chain. This is an impressive achievement for such a young project. (see slide 16)

The popularity of Ethereum is also a double-edged sword. Because it has always attached great importance to decentralization rather than expansion, and other blockchains can take advantage of this opportunity to attract users with better performance promises and lower handling fees. (Some might say they do so at the expense of safety.)

In addition to the challenger blockchain, we are also witnessing amazing progress in the interoperability of Ethereum, which allows users to "bridge" assets from one chain to another; Layer 2 developments are also incredible, such as optimistic rollups and zk-rollups, which aim to reduce fees by expanding the available block space. (See slides 17 and 21-23.)

Blockchain is the hottest product in the new wave of computing, just like personal computers and broadband in the 90s and 21st century, and mobile phones a decade ago. Innovation has a lot of room for development, and we believe that there are many winners in the future.

#5 Yep, it’s still early

Although the specific number of users of web3 is difficult to calculate, we can extrapolate the scale of this web3 movement. Depending on different on-chain parameters, our team estimates that there are between 7 million and 50 million active users on Ethereum today. (See slide 54.) Compared to the early days of the commercial Internet, our development was around 1995. The internet hit 1 billion users in 2005, and coincidentally, this is when web2 began to take shape with the creation of future tech giants such as Facebook and YouTube.

Again, although it is difficult to measure the user volume now, if the trend depicted in the figure continues to develop, then web3 can reach 1 billion users in 2031. In other words, it is still early to enter the game. There is still a lot of work to be done in web3, let's keep building.