For Web3, the proverbial calm before the storm seems to have taken an unusual turn. During the past few years, the storm already swept through the industry, leaving behind an odd quietness for investors and founders alike.
What went wrong for an industry that at one point was the next big thing to hit the techno-financial world? The last two years have seen a steep decline in Web3 investments – while in the period of July-September 2021 Web3 startups raised $8 billion, the same period this year saw startups raising a pale $1.3 billion in comparison.
The downfall of FTX and collapse of other significant crypto projects, the almost never-ending crypto bear market, the sad fate of NFTs, and the slow adoption of the Metaverse have all contributed towards the implosion of the Web3 space, experts argue.
Startups and companies across the CEE have also felt the consequences. For Sally Meouche – Ghrawi, managing director and co-founder of Bulgaria-based Web3 consultancy 4pt.O Venture Labs, many factors and black swan events such as the FTX collapse have directly impacted what is currently happening in the industry. However, there is an upside to the situation too, she says.
“These events have sparked a collective introspection, raising critical questions about our shared role in these developments and why we failed to anticipate them. This situation consequently led to a positive shift towards more regulatory-focused discussions and proactive risk-aversion, problem-solving strategies for the future. Additionally, it has served as a cleansing wave, removing bad actors from the market, most evidently seen by Binance and CZ (Changpeng Zhao, the former CEO of Binance) taking the blame on it all,” Meouche – Ghrawi tells The Recursive.
As a result, there are intensely icy market circumstances that are taking their toll on many Web3 projects.
“It’s been a wild ride in the Web3 space that’s for sure. We have witnessed very cold market conditions and curation of existing projects. But the survivors, the ones still building, are the real warriors moving the space forward,” says Filip Milosheski, head of growth at the first major regional blockchain hub NEAR Balkans.
The decline of the Metaverse and its effect on Web3
The declining appeal of the Metaverse has also affected Web3, since the space is seen primarily as the vessel that gives consumers ownership and control over their digital assets and data in the Metaverse itself.
Sandra Helou is the CEO of Dubai-based Metaverse company MetaMinds Group. Her business provides different types of Metaverse solutions for building, deploying and managing large scale virtual environments.
According to Helou, the main issue in the Metaverse space was that a lot of startups and companies had unrealistic business models, which ultimately led to failure.
“You cannot have scarce land in the Metaverse, but yet people were paying up to $5 million for what’s online on Decentraland and Sandbox (popular Metaverse games) and a couple of other environments,” Helou explains.
The cooling of the Metaverse hype helped companies re-define their business models and cleared out a lot of noise in the process, she argues.
“I think the narrative has completely shifted and a lot more people are looking at how these business models apply to the industry. Because it got to a point where companies took a lot of investor money, and then they realized that “oh, we hired a lot of people, we’re not making revenue here”. So it’s one thing to have money in the bank, but you need to balance that with revenue coming in. And I think this is why and I’m glad it happened by the way because it really cleared out a lot of the space,” Helou tells The Recursive.
Furthermore, the DeFi space saw its shortcomings as well, and this in turn additionally hurt the industry, experts point out.
“In 2023, the DeFi space experienced numerous security breaches, resulting in the compromise of several projects. It was a wild west of vulnerabilities, a stark reminder that the crypto world wasn’t all rainbows and unicorns. Over the course of the year, more than $1 billion was stolen, highlighting the vulnerability of these projects to malicious attacks,” Dmitry Mishunin, CEO of blockchain security platform HashEx, tells The Recursive.
The way back and the possibility of Web3’s resurgence
According to Mishunin, there is a way back though, and it is one in the form of increased regulation through regulatory bodies that should bring order to the crypto chaos.
“This heightened oversight aims to bring a level of accountability and regulation to the industry. Security will be a paramount focus in 2024. No more luxury of losing millions without consequences. Lawsuits, fines, and even a stint behind bars — the consequences will hit hard. It’s a wake-up call, and the industry is gearing up to spend big on fortifying its defenses,” Mishunin explains.
The past year had some standout moments as well, such as the rise of the Zero Knowledge proof, blockchain interoperability improvements, a more user-friendly Web3 space, and the promise of an even bigger integration between blockchain and AI, NEAR Balkans’ Milosheski explains.
“What awaits in 2024 is for sure exciting – blockchain meets AI is one of the first things that comes to mind. The focus already shifted towards Account Abstraction and Chain Abstraction, and blockchain interoperability is still on the center stage. We will witness the rise of dynamic NFTs, and regulatory clarity,” Milosheski tells The Recursive, adding that still, there might be some additional hiccups as well.
“Scaling battles, speed bumps, and abuse of the technology for scams. So it is important to stay alert and always remember the Web3 101: Do Your Own Research,” he adds.
For Web3 founders such as Meouche – Ghrawi, 2024 will also present an opportunity for a resurgence of social interest since the market has matured and is now offering products with real-world applications;
“We’re likely to see substantial growth in real-world assets, something that was lacking in the less mature markets of previous cycles. Additionally, gaming NFTs could emerge as a major use case, especially as larger gaming studios begin to explore this space. With regulations becoming clearer and more significant players entering the field, we can expect to see the introduction of spot ETFs, which will likely attract substantial interest from outside the web3 sector,” Meouche – Ghrawi concludes.
