How Venture Capitalists Think Crypto Will Reshape Commerce

Venture capitalists are betting billions of dollars to create what in effect is an alternative world of finance, commerce, communications and entertainment on the web that could radically transform major elements of the global economy — all built on the blockchain technology popularized by Bitcoin.

In first three quarters of 2021, venture capitalists poured a record $21.4 billion into cryptocurrency and blockchain-related companies, in 1,196 deals, according to Pitchbook, a market data provider. That is more than five times as much money compared to last year.

No one is placing a bigger bet than Andreessen Horowitz, also known by the nickname A16Z, a Silicon Valley firm whose founders helped build and fund today’s internet. They say the “digital status quo is broken,” with giant tech gatekeepers profiting off everyone’s creativity and data.

What do some of these ventures do? And how do they really work?

Collectibles and gaming

Start with fun stuff. Say you want work to be more like play — let your virtual pets do the hard labor by earning crypto in an online game drawing millions of players.

Axie Infinity, a Pokemon-inspired game with collectible characters that breed monster offspring and battle online, relies on a model called “play to earn,” meaning potentially real profits. But for now at least, players also have to pay to start playing by buying new characters, which can cost a few hundred dollars each. Axie’s Vietnamese game maker recently raised more than $150 million in a funding round led by A16Z and was valued at $3 billion, according to the firm.

This game is decentralized, meaning players access it on the Ethereum blockchain and not through an app acquired via Google or Apple, arguably curbing the dominant role those companies play and the fees they extract. That is the major appeal to A16Z, which argues that the shift to blockchain technology — a distributed open source ledger on the web that eliminates the institutional middleman — will start a wave of new and disruptive industries.

The firm is also backing platforms for so-called nonfungible tokens, or NFTs, like Open Sea, where digital artists can sell their works without needing agents and galleries. This week the platform held an online auction for “Crypto Heroe on Mars #2225,” created by an artist who calls himself Suprematic, with a “buy now” price of .04 Ether, the primary Ethereum blockchain token, or about $175 dollars. (The auction ended Thursday night with no sale.) The platform charges a 2.5 percent fee on sales, far less than an art gallery commission.

CryptoKitties is a collectible digital cat game created by Canada’s Dapper Labs in 2017, a phenomenon so curious it earned an explainer in The New York Times. A $140,000 CryptoKitties sale generated another tale in 2018 and when NFTs became popular this year, the cats were cool again. What would you pay for a fancy kitty? The value depends on “rarity, utility and appearance,” Dapper Labs explained. A16Z put $12 million in CryptoKitties in 2018.

The firm backed Dapper Labs again this year, citing the success of NBA Top Shots, where sports fans trade digital collectibles of the most memorable moments in hoops. With about $780 million worth of these collectibles sold, the National Football League, athletes and leagues globally are also striking NFT deals.

Decentralized finance and artificial intelligence

Crypto finance can sound like science fiction. But this is our reality. Right now, all over the internet, on decentralized finance programs like Uniswap, people are trading, borrowing and lending digital assets on platforms where computer code runs the show. There is now about $235 billion invested in DeFi, by one industry account.

On the DeFi protocol Compound, a recent programming snafu revealed vulnerabilities in systems deliberately designed to eliminate the middlemen regulators traditionally rely on to oversee financial transactions and guarantee consumer protection. After a bug was introduced during a software upgrade, the system inaccurately paid out about $160 million automatically, and the payments could not be reversed.

Technically, Compound is not brokering trades, just programming software for transactions. But its founder, Robert Leshner, conceded in an interview with The New York Times this summer that he has long feared an error could result in major losses. “For the first couple of years of Compound, I woke up in a cold sweat every morning,” he said.

Started in 2017, the company now claims to have $18 billion worth of cryptocurrency earning interest on its platform. Mr. Leshner’s recurring nightmare was that somebody would find a flaw in the program, a line of bad code, and steal everything. “All it takes is one bug,” he said.

Community telecommunications

A16Z is backing a network called Helium. This “decentralized wireless infrastructure” company hopes to someday compete with established brands like Verizon or AT&T. Community members create a hotspot in their neighborhood with a special device and earn data and Helium’s crypto tokens in exchange for helping to power this group 5G cellular system.

Social Networks

Popularity’s value on social networks can now be calculated when you “tokenize” yourself and create an economy fueled by your own crypto.

On BitClout, every user gets a coin and its value suggests what the internet thinks of them. “There is no company behind it — it’s just coins and code,” the developers claim. An account with the name Elon Musk is the top-valued token at about $115 dollars. But the project’s launch was controversial, with crypto insiders calling out the “dystopian social network” for relying on data collected by giants like Twitter to calculate reputation, among other critiques. DeSo, short for Decentralized Social, is a blockchain network for developers to build decentralized social media programs.

If personal tokenization is a bridge too far, try applying to join FWB, or Friend With Benefits, a members-only crypto-based social and cultural club that holds events in the virtual and physical worlds. Membership ensures entry at the club’s parties. At the Bitcoin conference in Miami in June, hundreds of aspiring friends reportedly clamored to get in, and A16Z sent a young scout on its team who was already part of the scene. The firm became intrigued and now backs the club. As the club becomes better known, its tokens rise in value and so does the price of admission.

The Babe Ruth Model

Ultimately, many of these efforts will not take off or pay off for Andreessen Horowitz. But a few might be huge hits. And that is the game the firm is playing.

It was an early investor in the cryptocurrency exchange Coinbase, now the first such publicly traded company, and it follows a simple philosophy espoused by Babe Ruth. “I swing big, with everything I’ve got,” Mr. Ruth once explained. “I hit big or I miss big.”

Daisuke Wakabayashi contributed reporting.