7 min read

Vellir #10 → Web2.5

Despite the market turmoil, there are still reasons to be confident about the underlying trends in crypto. One reason is what we've called web2.5 – combining the power of web3 functionality with the user experience, familiarity and distribution of web2.
Vellir #10 → Web2.5
Photo by Tyler Prahm / Unsplash

This week we’ve mostly been watching a resurgent England cricket team in action... But it’s been hard to miss the ongoing turmoil in the crypto markets.

In the first half of this note, we’ll take a quick look at what’s happened and why, as well as what might happen next. In the second, and in the spirit of glorious summer sunshine, we return to why we launched Project Vellir by looking at a set of interesting use cases that we’re calling web2.5, and which highlight why we’re still excited about the technology, despite the volatility!


It has been a tumultuous time for the crypto industry. The major coins have crashed, with Bitcoin and Ethereum down around 70% and 76% respectively from all time highs towards the end of last year. And there have been significant layoffs too, with Coinbase – one of the most well known crypto exchanges – announcing this week that it would reduce head count by 18%.

Following on from the Terra/Luna crash we wrote about in Vellir #5, there have been two further difficult episodes this week:

  1. Crypto lending platform Celsius Network announced on June 12 that it was suspending all withdrawals; and
  2. Three Arrows Capital (3AC), a well known crypto hedge fund, is facing potential insolvency after liquidations worth $400 million.

There are a number of reasons for these declines. Some of it is likely linked to the macro environment, but the crypto industry would be wrong to blame the crash solely on the Federal Reserve raising rates or a sluggish economy. Some projects have been built on shaky foundations, while others are revealed to be outright ponzi schemes.

On the macro side, it is true that there has been an incredible tightening of financial conditions - including inflation, interest rate rises and commodity price pressure. This has led to a general market slowdown as fears about rate rises put more stress on those companies and stocks that have seen high valuations based on future potential rather than current revenue, and are dependent on cheap borrowing to realise that growth potential. There has been a general shift to safety, and riskier assets – which includes crypto – are feeling this pain.

As people seek to sell their assets in a flight to safety, that just puts more pressure on prices in a classic downward spiral.

But it’s not just about the Fed. We saw the impact of the Terra/Luna crash, which caused many retail investors to lose considerable sums last month. And when Celsius, who operate like a bank by taking customer deposits and loaning them out in return for high rates of return (or yield), got into difficulty this week on the basis of a lack of liquidity (in part due to operating a bit like a hedge fund and using its balance sheet to take leveraged positions in other defi protocols), they weren’t able to let depositors withdraw their funds. Worth reading Unstoppable Finance’s helpful explainer if you want the details. While other projects like Stepn, which provides rewards to people that exercise if they own specific trainer NFTs, have such implausible tokenomics that rely on new inflows of cash that it is only a matter of time before it crashes (you can read more about it in a detailed post here and make up your own mind). While there are real use cases out there, the industry is going through a correction, where only the projects with real utility will survive. This is a good thing. But it also points to where sensible regulation could help.

The chances are that the actions of Central Banks have already started to have an impact. The Federal Reserve raised rates by 0.75% this week – the largest rise since 1994, while the Bank of England raised rates to 1.25%, the highest level in 13 years. The global economy is likely to slow down quite rapidly (if it hasn’t already), possibly pushing us into recession. In this scenario, with equities having crashed and inflation fears subsiding due to demand destruction, the Fed and other central banks will at some point get spooked that they have gone too far and will either pause their intended future rate hikes, or even move back towards expansionary policy. It’s hard to say when that will be, or how long any recession will last, but we’re already starting to see this shift in sentiment in Japan and at a meeting this week the ECB got a mandate to design a new "anti-fragmentation instrument" (bond purchase program), even before it has started its rate rise programme.

Ultimately, no-one can ever call the bottom and we don’t know how low crypto assets will go. But clearly many assets are closely tied to wider market sentiment, and as the macro environment stabilises, so should crypto. It’s also worth stepping back and looking at the broader trend on this log chart: while the downturn is painful, the trend remains clear.

Source: Lyn Alden

There are a few takeaways:

  1. The macro environment does matter. While the downturn is severe, the overall trend line gives us confidence in the sector and there could well be a snapback once central bank activity turns.
  2. While there are some genuine crypto use cases already, there are also projects that do not have solid foundations. It is a shame that it will be ordinary people that will shoulder the pain.
  3. Regulation could help protect consumers from the worst of these projects. The industry should work to ensure that inevitable future regulation that provides this necessary protection does not do so at the expense of innovation.
  4. The broader web3 sector should double down on products which have real value to users.

That leads us to the next section… What are some of the projects or use cases that could rise from the ashes of this downturn?


One set of use cases that we haven’t explored before is how web3 tools could add value to and enhance existing web2 products and services. We see ourselves as ruthlessly pragmatic when it comes to crypto. We think it has the potential to be a powerful technology when it is used in the right way, with the right applications and the right user experience. But not just for the sake of it…

There are some existing web2 companies that work pretty well. They probably don’t need to be disrupted by crypto, or rather, there wouldn’t be much benefit to the consumer from there being a web3 angle to the product.

But for other companies or sectors, there could be real value in integrating or exposing customers to web3. This can be hard to conceptualise, so let’s look at some examples.

  1. Shopify is an e-commerce platform. You might not have heard of them, but will almost certainly have used their technology when you’ve bought products online. They have a market cap of around $40bn and are often compared to Amazon. They enable retailers to create a bespoke online shop front and then manage the buying process from shopping baskets through to distribution of products, enabling retailers to focus exclusively on the product. They are working on integrating NFTs into their platform, including through token gated commerce. To take one example, if you own an NFT that says you went to a particular event or are part of a particular community, that could unlock access to different merchandise or new storefronts. It could allow companies to create new experiences and collaborations. You can see the first four token gated sites in action here.
  2. Audius is a crypto based music streaming service. It’s like Spotify, but has a crypto backend. When you go to the app as a consumer, it looks and feels exactly like Spotify with a traditional email login and the ability to stream music. However, by creating an account, Audius generates a crypto wallet for you on the backend, which you don’t ever have to engage with. Artists upload music to Audius directly, not via labels, and get paid in the $AUDIO token. They can connect and engage directly with their fans, offering rewards or access. And anyone can integrate Audius into their website or game, or even build a new front end for a particular audience, with the proceeds going directly to artists. In sum, Audius provides the same listening experience for users, but with additional benefits that come from a direct relationship with the artist. And an improved experience for the artist, who gets all the financial upside and a different relationship with fans, cutting out the costs of the middleman.
  3. Airbnb or Uber, or any marketplace, could integrate tokens into their offering. This could help newer marketplaces with the cold start problem - a chicken and egg issue where two sided marketplaces need enough sellers on the platform to attract buyers, but also enough buyers to attract sellers. By giving service providers ownership and a stake in future returns, it would also help with host/driver retention. To take a different example, by integrating a token, hardware providers like Lime scooters/bikes in London could incentivise different behaviour e.g. rewards for returning bikes to particular locations or carrying out maintenance, or reward repeat users.
  4. Coinbase is a major crypto exchange that enables users to buy crypto with fiat. It holds the funds on your behalf, acting as the custodian, and your account is managed with a traditional web2 email and password. It was perhaps the first example of a company that embraced the idea of bringing together web2 and web3.

Web2.5 is about combining the power of web3 functionality – asset ownership, decentralisation and inbuilt incentives, with the user experience, familiarity and distribution of existing web2 platforms.

That could mean integrating web3 tools into existing web2 companies, like Shopify is doing with token-gated commerce; or creating new web3 companies, but building out the interfaces and functionality that come from web2, like Audius.

There are opportunities to do this in just about every sector. Any online retailer could create an NFT as part of their operation; any brand could create a social token to build awareness, offer rewards and incentivise activity; and any marketplace could use tokens to incentivise or reward early adopters.

In a downturn like the one we’re in now, it’s the perfect time for existing companies and brands to develop web3 strategies. But it is also a good time for web3 startups to think about how they could plug into web2 companies and distribution channels.

Web2.5 is about how web3 tools and applications can add real value to products and services. And it could well be the path to mass adoption – web3's own on-ramp. We’re looking forward to seeing what comes next.


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