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Source: cryptobriefing
Original title: Remembering the Failed Crypto Projects a16z Backed
a16z Billions of dollars have been allocated for the encryption space. But not all of the fund's investments have been successful.
Joe Pugliese and Artit Wongpradu
- a16z are among the most accomplished investors in the technology and cryptocurrency space.
- Despite its impressive track record, the company has made some mistakes over the years.
- Some of its worst bets include OpenBazaar, Diem, Basis, and BitClout.
a16z has established himself in the crypto space by betting on industry mainstays like Uniswap, Solana, and Sky Mavis. The company also launched a record $4.5 billion crypto fund in May 2022, highlighting its commitment to blockchain technology . But even the top players in Silicon Valley make investment mistakes from time to time. Here are some of the biggest failed crypto projects a16z has bet on over the past few years.
a16z and OpenBazaar
OpenBazaar is an early crypto project associated with Bitcoin’s dark market era. The project attempts to create a decentralized peer-to-peer marketplace for goods and services, similar to an open source version of eBay with cryptocurrency payment capabilities.
OpenBazaar was written by Bitcoin developer Amir Taaki and a team of programmers from startup Airbitz as part of the Toronto Bitcoin Hackathon in April 2014. However, the project's creators later abandoned it, and the code was adopted by a new team and renamed OpenBazaar. The first version was launched on April 4, 2016.
As OpenBazaar, the project has attracted interest from several top venture capital firms in the crypto space. a16z, Union Square Ventures, and Digital Currency Group have all backed OpenBazaar through seed rounds. a16z contributed to OpenBazaar’s $1 million and $3 million seed rounds and later its $5 million Series A round. OB1, the company that developed OpenBazaar, has received more than $9 million in venture capital funding over its lifetime, according to Crunchbase.
However, despite OpenBazaar’s early success and ample funding, it was unable to carve out a place for itself in the rapidly expanding crypto industry. On January 4, 2021, OB1 announced that it would stop supporting the OpenBazaar Marketplace wallet, API, search engine, and website, effectively ending the project.
Former OB1 CEO and OpenBazaar project leader Brian Hoffman explained the reasons for the project’s failure in a July 2021 interview with CoinDesk. The conflicting narrative that Bitcoin is both an investment and a payment system is OpenBazaar’s biggest headwind, he said. He said: “The evolution of cryptocurrencies, and Bitcoin in particular, from a cheap alternative to cash to a store of value – a kind of digital gold – does not make it conducive to everyday Amazon type e-commerce. Buying behavior.”
In hindsight, Hoffman also speculated that OpenBazaar might have had a better chance of success if it had prioritized supporting stablecoins early on and monetized the platform by charging a small fee on all transactions. While OpenBazaar has a strong base and an all-star list of backers, its failure will serve as a reminder of the risky nature of venture capital. The downfall of
Diem
Diem was Facebook’s response to the growing interest in cryptocurrency payments, and it received strong early support from a16z and other heavyweights. Facebook announced Diem under the name Libra in June 2019, touting it as a way to send money across its suite of social media platforms without relying on third-party intermediaries or complex currency exchanges.
The project is planned as a USD-pegged stablecoin, running on a blockchain-based permissioned system created by the company’s developers.Renamed from Libra to Diem in December 2020, Facebook announced its move to the Metaverse in October 2021, ahead of its Meta makeover.
Although Diem is centrally developed by the company, it delegates management to a third party called the Diem Association, of which Meta is one of many members with equal voting rights. This group of companies acts as stewards of the Diem currency while also overseeing its development.
a16z is an early investor in the Diem project and a member of the Diem Association, which includes venture capital firms such as Breakthrough Initiatives, Union Square Ventures and Temasek Holdings. It's unclear how much money Diem raised or how much a16z contributed. According to a July 1 article from CNET, most members of the Diem Association are expected to contribute up to $10 million each to the development of the project.
Like many of a16z's investments, Diem received strong support from industry giants from the beginning. Early backers such as eBay, Mastercard, PayPal, Stripe and Visa have hinted that Diem is well positioned to bridge the gap between traditional finance and cryptocurrencies. However, as the project has grown, it has come under increasing scrutiny from U.S. lawmakers.
Several run-ins with regulators and politicians in 2019 had an impact on Diem’s long-term viability. At the end of a Senate Banking Committee hearing in July, policymakers compared Diem and its creators to arsonists and movie villains, with one of the more vocal critics, Sen. Kennedy (R- LA) expressed doubts about the project, saying: "Facebook wants to control the money supply. How could it go wrong?"
Several prominent Democrats from the U.S. House Financial Services Committee also weighed in, citing privacy, national security, trade and Due to monetary policy issues, a letter was sent asking Meta to stop Development of Diem. Federal Reserve Chairman Jerome Powell also said that the Fed has "serious concerns" about how Diem will handle issues such as money laundering and consumer protection.
The President’s Working Group on Financial Markets doubled down on concerns about these matters, saying that combining stablecoin issuers with large corporations “could lead to excessive concentration of economic power.” Even former President Donald Trump has expressed skepticism about the project. He said in a tweet: "If Facebook and other companies intend to become a bank, they must seek a new banking charter and comply with all banking regulations."
eBay, Mastercard, Mercado Pago, PayPal after strong opposition to Diem in the United States , Stripe, Visa Inc. and other major backers have also withdrawn their support. After two years of slow development and continued regulatory pressure, Diem Association reached an agreement in January 2022 to sell the technology behind the project to Silvergate Capital Corp for $200 million. The sale marks the end of the Diem project.
Support Nader Al-Naji’s Basis and BitClout
The final a16z investment misfire on our list comes in the form of a dual feature: Basis and BitClout.
First up is Basis, a decentralized algorithmic stablecoin project co-founded and led by one of crypto’s most notorious entrepreneurs, Nader Al-Naji. The project keeps its base stablecoin pegged to the U.S. dollar through on-chain auctions, adjusting the base supply through the issuance of “bond” and “stock” tokens. Basis has the ambition to create a “better monetary system” that is resistant to hyperinflation, is not controlled by centralized institutions, and is more robust than existing methods of transferring wealth. The project was an early attempt to create a stable, unbacked, USD-pegged token, providing inspiration for other failed stablecoin projects such as Basis Cash and Terra.
Feasibility issues aside, Basis does look cool since it's a fintech brand and a team made up of ex-Google and Goldman Sachs employees. Under Al-Naji's guidance, Basis raised $133 million in April 2018, attracting big names including Bain Capital Ventures, former Federal Reserve governor Kevin Warsh, Lightspeed Venture Partners and Andreessen Horowitz.
However, neither the Basis team nor the project’s backers have done their homework on U.S. securities laws. The consequences were quickly apparent: Basis-anchored bonds and stocks tied to the U.S. dollar would be considered unregistered securities, meaning they would be subject to transfer restrictions. Since U.S. securities regulations are notoriously difficult to understand, Basis realized that creating a “better monetary system” would not be as simple as initially expected.
In December 2018, eight months after raising $133 million, Al-Naji posted an announcement on the Basis website, revealing that it would close the project and return the remaining funds to its backers. “Unfortunately, U.S. securities regulations have had a serious impact on our ability to launch Basis, but we must be compliant,” the post reads, adding that complying with securities laws will impact the project’s review resistance and reduce its on-chain Auction Liquidity.
Despite being screwed by Basis, a16z decided to bet again when Al Naji launched his next blockchain startup, BitClout.
As the first blockchain-based social media platform, BitClout allows users to post updates and photos, reward posts, and buy and sell so-called “creator coins”—personalized tokens whose value is based on people’s reputations. BitClout runs on its proof-of-work blockchain called DeSo, short for "decentralized social." Unlike a16z’s previous failed investment,
contributed to DeSo’s ICO. BitClout raised $200 million from 14 investors through its ICO, with an average contribution of about $14.2 million per investor, according to Crunchbase data. While details on how many tokens investors received and the vesting period are unclear, DESO is currently down 97% from its all-time high of $198.68 in June 2021, according to CoinGecko data.
The negative perception the platform has earned since its launch has not helped generate more interest in BitClout. Initially, to purchase Creator Coins on BitClout, users would need to send Bitcoin to the DeSo blockchain, which would then be converted to BTCLT at a one-to-one ratio. However, once in DeSo, there is no way to convert BTCLT back into real Bitcoin, effectively trapping users’ funds. Withdrawal issues have been partially resolved after DeSo made its code open source. Nonetheless, many early users lost significant amounts of money due to the difference in demand between Bitcoin and BTCLT.
While the BitClout and DeSo blockchains are still active, their prospects are not promising. The number of wallets and creators interacting with the BitClout platform appears to have plateaued, with trading volume for the BitClout Creator Coin at an all-time low. Many people complained that BitClout was monetizing Twitter profiles without the owner's permission. Stephen Palley, a partner at law firm Anderson Kill., also believes that the DeSo ICO should be characterized as an illegal securities offering.
Given that another of Nader Al-Naji’s crypto projects also failed to take into account U.S. securities laws, perhaps a16z should heed an old adage when considering its future investments. "If you are cheated once, it is shame on you; if you lie to me twice, it is shame on me."
Editor: Lynn
