FTX meltdown: Crypto VCs bat for decentralised finance and Web3 native start-ups

Sam Bankman-Fried, founder of crypto exchange FTX, in the Bahamas. (Image: Bloomberg)

With venture capital investors in crisis-hit crypto exchange FTX such as Sequoia, Lightspeed, and Tiger Global staring at losses on their investment due to its fire sale to competitor Binance, start-up investors in the crypto space say the episode will push funding to Web3 native projects and decentralised finance companies.

“Surprises like these are definitely not a positive for an asset class which needs far more transparency, stability and predictability,” said Nitin Sharma, General Partner and Global Web3 Lead at Antler.

“Events like these, such as circular token games or liquidity crunches leading to the sudden collapse of a large player, don’t help inspire more confidence for VC-PE investing either. However, for me, the long-term infra story for Web3, and especially from India, is still a solid theme we will continue to back at Antler,” he added.

The past few months have seen multiple crises in the crypto space take sheen off the emerging sector. It began with the Terra debacle in May, which tipped the virtual asset market into a nosedive. And since then, two more firms, crypto exchange Celsius and venture capital firm 3AC, have buckled under market pressures.

But the meltdown of FTX, which was valued at $32 billion in its last funding round earlier this year, might be the biggest blow to the crypto ecosystem. This is because Sam Bankman-Fried, the billionaire co-founder of the exchange, was seen to be one of the protagonists of the rise and rise of crypto trading in the past couple of years.

According to Coindesk, Bankman-Fried was worth an estimated $15.2 billion before news of the FTX acquisition broke. Nearly $14.6 billion was wiped out overnight from his wealth. It was a stunning setback for the 30-year-old billionaire, known on social media as SBF, who was hailed by many for his meteoric rise. Fortune magazine went so far as to wonder in August if he was the new Warren Buffett.

“The overall ecosystem will suffer from some short-term pain due to this. It will also make Web2 VCs cautious of investing in CeFi (centralised finance) companies. FTX was not a crypto or Web3 native company. It was just like any other centralised product company,” said Polygon co-founder and crypto start-up investor Sandeep Nailwal.

“CeFi is the biggest culprit in the different crypto meltdowns this year. It would all be very transparent in DeFi (decentralised finance),” he added.

In August, Nailwal, along with other crypto founders, raised a $50 million venture fund to invest in Web3 startups. Besides that, Polygon also has a venture arm that bets on young companies in the crypto and blockchain space.

Amid the funding frenzy last year, coupled with the crypto bull market, scores of startups raised funding on the basis of just starting up in the crypto, NFT (non-fungible tokens) or larger Web3 space. But many of these startups are getting a reality check as now questions are being asked about the real use cases and monetisation of many of these ideas.