The New Baseline, Public Goods, and Venture funding

Assessing the foundation that we have in place for the next cycle

Introduction

It’s been an interesting few weeks in the world of Crypto & Music. There’s somewhat of a rising tide of discontent among many artists who have been the biggest early supporters, citing a swing and a miss in terms of this recent wave’s success in achieving the aims that were marketed around it.

I understand the concern. The eventual shortcomings of this iteration of social tokens, NFTs, discord communities etc. are clear to see. But it’s also important to consider the larger picture. In my article The Crypto Music Industry, I spoke about waves building across an overall momentum, specifically, “rather than purely focussing on where things are at the peak of a wave, it's equally important to analyse where the baseline has shifted when Crypto winter hits”.

I put that article out in December 2021. In hindsight that was post-peak (although Eth was still around $4k), what has followed since has been steady decline into relatively stagnant price action for around a year or so. Just as we saw in the last winter of 2018-21.

So, let’s do what I suggested - assess where the baseline has shifted in this recent cycle, and talk about the two drivers of development that will be key in terms of setting up the next cycle, Public Goods and Venture Funding.

Baseline

In The Crypto Music Industry, I cited three factors that we can use to compare the current baseline vs. the previous one: Engagement, Funding, and Infrastructure.

Engagement

It’s quite tricky to quantifiably assess engagement now vs. the last wave, in part due to how much the level of analytical tools has levelled up over this period (/how lacking they were back then), and how social activity has migrated.

Last time around, the dominant platform for discussion was Reddit, with some basic activity on Twitter. Now we have Twitter, Discord, Discourse, Telegram, and more recently, tailored environments such as Lens. The conversation has expanded, broadened, and precipitated into specific communities. Where we used to have conferences and events every few weeks or months, with the same small group of people attending, there are now Twitter spaces occurring every day.

In terms of the number of active artists, Sound.xyz is still dropping 18-20 new mints a week, newer platforms such as beatsapp.xyz are providing distribution for a whole host of artists minting through polygon, and decent.xyz is exploring more and more new models.

Activity is still very high, despite the stagnation in overall volume. A huge step forward compared to how things dropped off last time around. A good example is the current Sound 30-day chart, with unique collectors in the hundreds, and mints in the thousands for the top artists. It may, probably will, further decline some, but there is clearly a much larger, more diverse, foundation of engagement.

ERC-721 and more recently ERC-1155 have helped. ERC-20 tokens, which formed the basis for much of the first wave of excitement, were a useful initial instrument for quantifying attention and signalling interest. But, “NFTs” provide a more contextual, personal, and honestly, interesting vehicle. Hinting towards non-financial use cases that may be appealing for a wider section of society.

Many people that have collected NFTs will (or already have) go dormant in the space for a while. But, and this is a big but, returning is almost certainly going to be smoother than it was previously. This is more of an infrastructure point, but I’ll never get “Steve” and “Son of Steve” my cryptokitties that I bought in 2018 back. Or indeed the Ocean protocol tokens that I bought in its ICO. Wallets were very different and much more basic back then (and tbh overall understanding was way lower). It’s different now and I think that the path to returning to the space will be far easier to navigate.

Artists who have engaged in “web3 music” so far have learned the basics of how this thing works. As have fans and collectors who have picked up NFTs and/or engaged in DAOs and communities. As things develop forwards, they will be the next generation’s “old” generation, leading them forwards.

As a rough guide, and I should probably try and put numbers behind this at some point, I’d say that the current baseline engagement has 100-200x’d since the last Crypto winter. And that the pieces are in place to make returning to the space easier for those that want to once the next wave starts up again.

Funding

Startups have risen and fallen in this latest wave, but, on the whole, it seems as though the attrition rate is far lower than in the past Crypto winter.

It could be argued that this is a factor of the downturn only having set in in the past year, and that there is still a while to go (which may shake out a few more projects). But, there were a lot more war chests raised this time round compared to last, which provides considerable sticking-around power for the teams involved. This is particularly true for the teams that raised just before the decline set in.

When thinking back to the “music & blockchain” ecosystem of 2017, basically none of the teams remain. Dotbc, Ujo, JAAK (us!), Choon, OCL, to a name a few, all stopped or pivoted in some way. The difference is funding. We were all existing on Friends and Family / Seed rounds, often raising and holding in Eth, and got rekt by the downturn. The market wasn’t ready to commit Series-A money in, which could have got us through the period between waves.

It’s different now. I obviously don’t have oversight of each team’s runway, but based on the variety of raise announcements I think it’s a fair statement to say that there is a much more solid foundation of funding underpinning the moves and experiments that these teams need to make going forwards.

In addition to this, the ecosystem for Public Goods funding has evolved significantly within this latest wave. Gitcoin was founded in 2017, launched its first grants programme in 2019, and had distributed $50m in Public Goods funding by 2023. This is another essential aspect of funding that I go into more detail about later in the piece.

Fundamentally, the price of Bitcoin is the best comparator that we have with regards to funding in the system in this baseline vs. the previous. 2018-21 saw prices of c.$4-10k, we are now currently oscillating between c.$17-28k, an implied 3-4x increase.

Infrastructure

Probably the hardest of the three to quantify; an outcome, while also a driver, of the other indicators. The state of infrastructure is arguably the most important factor in considering baseline development.

A useful lens for this comparison is to look at specific examples and think about how they have enabled the building of products within this last wave and setting up the next.

The development of underlying protocols. Ethereum is now on Proof of Stake, after an unbelievably stress-less transition last year. It is still far and away the market-leading smart contract protocol. But has more solid competition, from Solana, Avalanche, etc. than the previous baseline… where shady projects such as Brock Pierce’s EOS ran riot off the back of the ICO phase. That’s a very good thing.

“Layer 2”s are now tested, trusted, and starting to scale out into day-to-day usage. Through Optimism, Arbitrum, and Polygon, we now have a functioning system for far cheaper transactions and are moving closer to the vision where “Layer 1” is the “settlement layer” and “Layer 2” is the “activity layer”. I expect that this will be one of the core tenets of the next wave of development.

Wallet functionality and identity management are two elements that continue to improve and are good examples of the need for layers of functionality that don’t necessarily have a route to direct monetisation. I expect that their development will accelerate even quicker in the coming 18 months, based on the great work of teams such as Ceramic.

Token standards and standardisation are probably the single things that have historically precipitated a wave of development more than anything else. Last wave we had ERC-20s, and the subsequent ICO meta. In this wave, we had 721/1155 and the NFT meta. Whether the next wave will be centred around a new token standard, or whether it will be a continuation, e.g. expansion of the “Open Editions” model from 1155s, we will have to see. Regardless, there is a growing suite of tools now available to creators, far greater than in the previous baseline.

Looking forwards, the two areas of infrastructure that I am most excited about are Account Abstraction and Zero Knowledge Proofs. There’s probably an entire blog to write here at some point, but, both should accelerate the accessibility of crypto, while facilitating more comprehensive use cases, especially with regards to Wallets. I expect that they will be instrumental in the narrative of the next wave.

I could go on. But, in summary, the baseline of infrastructure that we have now vs. the last winter is very encouraging. The features highlighted above are just a selection, for example, one can go deeper into the advancement of programming languages and the impact that will have on accessibility for new developers. There is now a much more reliable and broad basis on which innovators can hold experiments and build out projects, and the future looks extremely bright.

Why Public Goods matter

I’ve made the case here that infrastructure development is a core pillar on which this new ecosystem will grow, but equally, in my previous blog I highlighted the challenges in place for building a business in the commoditising and composable stack that blockchain enables.

The traditional model for building out a platform in “web2” is to either build out your own closed stack, which acts as your moat, or to build upon APIs provided by other platforms. I argue that both are fundamentally orthogonal to the values that make up our common belief set as builders in this space.

However, building out an open-source project is tricky. The public goods funding environment is maturing, but it is still a challenge to coordinate the potential grants and rise above the noise of other (likely equally deserving) projects in the space. For context, I detailed my thoughts for neume, our open-source indexer for web3 music, here, when considering how to move the project away from its incubation period with HIFI Labs and to a future of independence.

Public Goods matter because they shift the design space. Without this, we move quickly from a period of experimentation and exploration into continuous optimisation of the status quo. In gaming terms, we go from “progress” to “parsing”.

We saw it in earnest in 2018 with the ICO meta. Once the game had been established, effort and focus were directed towards token sale mechanics (remember the “reverse-dutch auction”?) rather than developing the actual projects. Within the music NFT space, we are steadily seeing a similar direction being taken, where the focus is being put on mechanics to juice the current market instead of expanding it through novel development.

Rather than this being anyone’s fault, though, this is purely the impact of builders working on a relatively stale, solved, foundation. We need public good infrastructure development to shift the meta again, which will further incentivise teams to be daring once more.

It’s why I’m so dedicated to furthering neume towards its goals. A well-functioning neume, with a strong community supporting its growth, alongside other Public Goods projects such as Public Assembly will unlock this and the next generation of explorers to realise the objectives of the next wave of development. Whatever that may be.

Why Venture Funding (also) matters

Not everything is or should be a Public Good. It is critical for effective development that there is a marketplace for ideas and risk, and that teams and investors can be rewarded for their conviction and execution. Just as in wider society, some things should be provided by the public sector and others should be subject to competition and provide the basis for building a business (admittedly, as a European I probably lean more towards one way than some American readers may…!).

Venture Funding allows for teams to take riskier bets, and be rewarded for doing so. It enables a far greater level of funding to drive the ecosystem and for a wider range of ideas and incentives to be present as things move forwards.

The typical cycle tends to be that Public Goods developments bring about the formation of a new game (/cycle), and Venture Funding then comes in to pour gas onto this emerging state and accelerate discovery towards the new meta. Rinse and repeat. They are symbiotic in the wider context of the ecosystem.

And so, as we are in somewhat of a lul in terms of investment activity right now, it’s important to be looking forwards, for builders and investors alike. There is a great opportunity for Venture to get ahead of things and build up their conviction in what the next wave will look like.

Summary

We can be fairly confident that we are now roughly at the new baseline after the second wave of crypto and music development. Assessing the state of engagement, funding, and infrastructure shows a very positive trend vs. the previous Crypto Winter.

Many of the developments that we have made in the past couple of years will make the next wave more accessible to users, and provide for an increasingly comprehensive set of experiments. Infrastructure is the unlock for things to get increasingly interesting.

The progression of the next wave will be dependent on the development of, and symbiosis of, Public Goods and Venture Funding.