Analysis

Remembering the Failed Crypto Initiatives a16z Backed

Key Takeaways

  • Andreessen Horowitz is likely one of the most achieved traders within the know-how and cryptocurrency area.
  • Regardless of its spectacular monitor report, the agency has made some blunders over time.
  • A few of its worst bets embrace OpenBazaar, Diem, Foundation, and BitClout.

Andreessen Horowitz established itself as a crypto heavyweight by putting profitable bets on business mainstays like Uniswap, Solana, and Sky Mavis early on. The agency additionally launched a record-breaking $4.5 billion crypto fund in Might 2022, highlighting its dedication to blockchain know-how. However even Silicon Valley’s high gamers make funding blunders on occasion. Listed below are a few of the high failed crypto initiatives Andreessen Horowitz has made dangerous bets on over the previous few years.

Andreessen Horowitz and OpenBazaar

OpenBazaar was an early crypto challenge with hyperlinks to Bitcoin’s darkish market period. The challenge tried to create a decentralized peer-to-peer market for items and providers, akin to an open-source model of eBay with cryptocurrency funds. 

OpenBazaar was coded by Bitcoin developer Amir Taaki and a gaggle of programmers from the startup Airbitz as a part of a Toronto Bitcoin hackathon in April 2014. Nevertheless, the challenge’s creators later deserted it, and the code was adopted and rebranded to OpenBazaar by a brand new group of builders. The primary model launched on April 4, 2016. 

As OpenBazaar, the challenge attracted curiosity from a number of of crypto’s high enterprise capital corporations. Andreessen Horowitz, Union Sq. Ventures, and Digital Forex Group all backed OpenBazaar via its seed funding rounds. Andreessen Horowitz contributed to OpenBazaar’s $1 million and $3 million seed rounds in addition to a later $5 million Collection A increase. In accordance with knowledge from Crunchbase, OB1, the corporate growing OpenBazaar, acquired greater than $9 million in enterprise capital funding all through its life. 

Nevertheless, regardless of its early success and ample funding, OpenBazaar was unable to carve out a spot for itself within the quickly increasing crypto business. On January 4, 2021, OB1 introduced that it could stop supporting the OpenBazaar market’s wallets, APIs, search engine and web site, successfully ending the challenge. 

Former OB1 CEO and OpenBazaar challenge lead Brian Hoffman shed some mild on the challenge’s downfall in a July 2021 CoinDesk interview. He mentioned that conflicting narratives of Bitcoin being each an funding and a funds system was the most important headwind for OpenBazaar. “Crypto, significantly Bitcoin, advanced from an affordable money various right into a retailer of worth—a digital gold—that didn’t make it conducive to each day Amazon-type e-commerce purchases,” he mentioned. 

In hindsight, Hoffman additionally theorized that if OpenBazaar had prioritized stablecoin assist early and monetized the platform by charging a small payment on all transactions, it could have had a greater probability of success. Though OpenBazaar had a powerful basis and an all-star roster of backers, its failure will function a reminder of the dangerous nature of enterprise investing. 

Diem’s Downfall

Diem was Fb’s reply to rising curiosity in cryptocurrency funds, and it acquired large assist from Andreessen Horowitz and different heavyweights early on. Fb introduced Diem underneath the title Libra in June 2019, touting it as a strategy to ship cash throughout its suite of social media platforms with out counting on third-party intermediaries or complicated foreign money conversions.

Deliberate as a stablecoin pegged to the greenback, the challenge was set to run on a permissioned blockchain-based system created by the corporate’s builders. It rebranded from Libra to Diem in December 2020, previous Fb’s October 2021 Meta revamp because it introduced a pivot towards the Metaverse.  

Though Diem fell underneath the corporate’s centralized growth, it delegated administration to a 3rd celebration often called the Diem Affiliation, of which Meta was one in every of many members with equal voting weight. This cohort of corporations acted as stewards for the Diem foreign money whereas additionally overseeing its growth. 

Andreessen Horowitz was an early investor within the Diem challenge and a member of the Diem Affiliation alongside enterprise corporations like Breakthrough Initiatives, Union Sq. Ventures, and Temasek Holdings. It’s unclear how a lot capital Diem raised, or the quantity that Andreessen Horowitz contributed. In accordance with a July 1 article from CNET, a lot of the Diem Affiliation members had been anticipated to contribute as a lot as $10 million every to the challenge’s growth. 

Like a lot of Andreessen Horowitz’s investments, Diem began out with ample assist from business heavyweights. Early backers corresponding to eBay, Mastercard, PayPal, Stripe and Visa hinted that Diem was properly positioned to bridge the hole between conventional finance and crypto. Nevertheless, because the challenge grew, it drew growing scrutiny from U.S. lawmakers.

In 2019, a number of conflicts with regulators and politicians weighed on Diem’s long-term viability. A July Senate Banking Committee listening to resulted in policymakers evaluating Diem and its creators to arsonists and film villains, with one of many extra vocal critics, Senator Kennedy(R-LA), expressing his skepticism concerning the challenge by saying, “Fb needs to manage the financial provide. What might probably go improper?”

A number of distinguished Democrats from the U.S. Home Committee on Monetary Providers weighed in, sending a letter asking Meta to stop Diem growth, citing privateness, nationwide safety, buying and selling, and financial coverage considerations. Federal Reserve chair Jerome Powell additionally remarked that the Fed had “severe considerations” over how Diem would take care of points corresponding to cash laundering and shopper safety. 

The President’s Working Group on Monetary Markets doubled down on these considerations, stating that combining a stablecoin issuer with an enormous company “might result in an extreme focus of financial energy.” Even former President Donald Trump joined in airing his skepticism towards the challenge. “If Fb and different corporations need to turn into a financial institution, they need to search a brand new Banking Constitution and turn into topic to all Banking Rules,” he mentioned in a tweet. 

After resounding pushback in opposition to Diem within the U.S., eBay, Mastercard, Mercado Pago, PayPal, Stripe, Visa Inc., and different key backers withdrew their assist. After two extra years of sluggish growth and continued regulatory strain, the Diem Affiliation made a deal to promote the know-how behind the challenge to Silvergate Capital Corp for $200 million in January 2022. The sale marked the tip of the Diem challenge in its present kind. 

Backing Nader Al-Naji’s Foundation and BitClout

The ultimate Andreessen Horowitz funding blunder on our checklist comes within the type of a double function: Foundation and BitClout. 

First up is Foundation, a decentralized, algorithmic stablecoin challenge co-founded and led by one in every of crypto’s most notorious entrepreneurs—Nader Al-Naji. The challenge aimed to maintain its Foundation stablecoin pegged to the greenback via on-chain auctions, which issued “bond” and “share” tokens to regulate the Foundation provide. Foundation was bold in its mission, saying it needed to create a “higher financial system” that will be immune to hyperinflation, free from centralized management, and extra strong than the present strategies for transferring wealth. The challenge was an early try at making a secure, unbacked, dollar-pegged token, serving as inspiration for different failed stablecoin initiatives like Foundation Money and Terra. 

Questions of viability apart, Foundation made positive it regarded the half with cool fintech branding and a group of former Google and Goldman Sachs workers. Below Al-Naji’s steering, Foundation raised $133 million in April 2018, attracting massive names like Bain Capital Ventures, one-time Federal Reserve governor Kevin Warsh, Lightspeed Enterprise Companions, and Andreessen Horowitz. 

Nevertheless, neither the Foundation group nor the challenge’s backers had achieved their homework on U.S. securities laws. It quickly grew to become clear that the bonds and shares used to anchor Foundation to its greenback peg would represent unregistered securities, that means they might be topic to switch restrictions. As U.S. securities laws are notoriously tough to navigate, Foundation realized that making a “higher financial system” wasn’t going to be so simple as it had initially anticipated. 

In December 2018, eight months after its $133 million increase, Al-Naji posted an announcement on the Foundation web site revealing that it could be shuttering and returning its remaining capital to its backers. “Sadly, having to use U.S. securities laws to the system had a severe unfavorable impression on our means to launch Foundation,” the put up learn, including that complying with securities legal guidelines would impression the challenge’s censorship resistance and scale back liquidity for its on-chain auctions. 

Regardless of getting burned by Foundation, Andreessen Horowitz determined to take one other wager on Al Naji when he launched his subsequent blockchain startup: BitClout. 

Marketed as the primary blockchain-based social media platform, BitClout lets customers put up updates and photographs, award cash to different customers’ posts, and purchase and promote what it calls “creator cash”—customized tokens whose worth will depend on individuals’s reputations. BitClout runs by itself Proof-of-Work blockchain known as DeSo, quick for “Decentralized Social.” 

In contrast to Andreessen Horowitz’s earlier flunked investments, the agency contributed by shopping for tokens in DeSo’s preliminary coin providing (ICO). In accordance with Crunchbase knowledge, BitClout raised $200 million from 14 traders via its ICO, placing the typical contribution from every at round $14.2 million. Whereas particulars on what number of tokens traders acquired and the vesting interval are unknown, DESO is presently 97% down from its June 2021 all-time excessive of $198.68, per CoinGecko

Curiosity in BitClout hasn’t been helped by the unfavorable notion the platform has earned itself since its launch. Initially, to purchase creator cash on BitClout, customers wanted to ship Bitcoin to the DeSo blockchain, which was then transformed into BTCLT at a one-to-one ratio. Nevertheless, as soon as on DeSo, there was no strategy to convert BTCLT again to actual Bitcoin, successfully trapping customers’ funds. The withdrawal downside has since been partially resolved after DeSo made its code open-source. Nonetheless, many early customers misplaced appreciable quantities of cash because of the distinction in demand between Bitcoin and BTCLT. 

Though BitClout and the DeSo blockchain are nonetheless lively, their futures don’t look shiny. The variety of wallets and creators interacting with the BitClout platform appears to be like prefer it’s plateaued, and buying and selling volumes for BitClout’s creator cash are at an all-time low. Many have complained that BitClout monetizes Twitter profiles with out their house owners’ permission. Stephen Palley, a accomplice at legislation agency Anderson Kill., has additionally argued that the DeSo ICO ought to have been classed as an unlawful securities providing. 

In mild of yet one more of Nader Al-Naji’s crypto initiatives failing to consider U.S. securities legal guidelines, maybe Andreessen Horowitz ought to take heed of a sure previous adage when contemplating its future investments. “Idiot me as soon as, disgrace on you; idiot me twice, disgrace on me.” 

Disclosure: On the time of penning this function, the writer owned ETH, BTC, and several other different cryptocurrencies. 

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