Reflecting on A16z-Backed Cryptocurrency Projects That Failed

OpenBazaar

OpenBazaar was an early cryptocurrency startup that has connections to the underground Bitcoin market. The goal of the project was to develop a cryptocurrency-based open-source eBay-style marketplace where users could buy and sell goods and services directly with one another.

In April 2014, Bitcoin developer Amir Taaki and a team of programmers from the firm Airbitz created OpenBazaar at a Bitcoin hackathon in Toronto. The original developers eventually gave up on the project, and a new group of programmers took over, renaming the software OpenBazaar. A beta version was released to the public on April 4, 2016.

When it was known as OpenBazaar, a number of the best VC firms in the cryptocurrency industry took notice. OpenBazaar received seed money from Andreessen Horowitz, Union Square Ventures, and Digital Currency Group. OpenBazaar raised a total of $5 million, with Andreessen Horowitz investing in the company’s initial $1 million and $3 million seed rounds. Crunchbase reports that OpenBazaar’s parent business, OB1, has raised over $9 million from investors so far. OpenBazaar was unable to establish itself in the quickly growing cryptocurrency business despite its early success and substantial funding. By ending development of the OpenBazaar website, wallets, APIs, and search engine on January 4, 2021, OB1 effectively put an end to the project.

In a July 2021 interview with CoinDesk, Brian Hoffman, a former CEO of OB1 and leader of the OpenBazaar project, explained the reasons behind the failure of the endeavor. According to him, OpenBazaar’s main challenge comes from the fact that Bitcoin is seen as both an investment and a payments system. Cryptocurrency, and Bitcoin in particular, “developed from a cheap cash substitute into a store of value,” he explained, “which doesn’t make it suited to daily Amazon-type e-commerce purchases.”[rb_related title=”More Read” style=”light” total=”4″]

Hoffman speculated that OpenBazaar would have fared better if it had supported stablecoins from the start and had used transaction fees to generate revenue. The demise of OpenBazaar, which had a solid basis and an impressive list of investors, will serve as a reminder of the perilous nature of venture capital.

Diem (formerly Libra)

Diem was Facebook’s response to the rising popularity of cryptocurrency payments, and it was first backed heavily by Andreessen Horowitz and other industry leaders. Libra, which Facebook rebranded as Diem in June 2019, was promoted as a mechanism to move money across Facebook’s family of social media platforms without the need for a middleman or complicated currency conversions. The company’s inventors had envisioned the project running on a permissioned blockchain-based system, with the resulting cryptocurrency pegged to the US dollar. In December 2020, it declared its shift toward the Metaverse by rebranding as Diem, a month before Facebook’s Meta redesign in October 2021.

Meta was one of many equal-voting members of the Diem Association, which was responsible for management notwithstanding Diem’s inclusion in the company’s centralized development. These businesses were responsible for safeguarding and improving the Diem currency.

Along with other venture capital firms like Breakthrough Initiatives, Union Square Ventures, and Temasek Holdings, Andreessen Horowitz was an early investor in the Diem initiative and founding member of the Diem Association. It is unknown how much funding Diem received or what portion of the funding came from Andreessen Horowitz. According to a CNET article published on July 1, most members of the Diem Association were tipped to give as much as $10 million each to the project’s development.

Diem, like many other Andreessen Horowitz investments, had strong early backing from influential companies. Diem’s early investors, including PayPal, Stripe, and Visa, gave the platform credibility as a potential link between fiat and cryptocurrency. But as the project expanded, it came under more and closer scrutiny from American lawmakers. Diem’s long-term success was threatened by tensions with regulators and politicians in 2019. Senator Kennedy (R-LA), one of the most outspoken critics of Diem, expressed his doubts about the initiative by saying, “Facebook wants to control the monetary supply,” at a Senate Banking Committee hearing in July. It’s hard to imagine anything going wrong.

Privacy, national security, trade, and monetary policy issues were all cited in a letter sent to Meta by many high-profile Democrats on the U.S. House Committee on Financial Services. Similarly, Federal Reserve chair Jerome Powell expressed “serious worries” about how Diem would handle matters like money laundering and consumer protection.

The President’s Working Group on Financial Markets echoed these worries, arguing that merging a stablecoin issuer with a large firm “may lead to an undue concentration of economic power.” As a previous president, Donald Trump has also expressed his doubts about the plan. In a series of tweets, he said that social media platforms like Facebook and other corporations would need to apply for a new banking charter and comply with all banking regulations if they decided to enter the financial services industry.

eBay, Mastercard, Mercado Pago, PayPal, Stripe, Visa Inc., and other major supporters withdrew their backing after Diem faced strong opposition in the United States. In January 2022, following another two years of slow development and persistent regulatory pressure, the Diem Association reached an agreement to sell the underlying technology to Silvergate Capital Corp for $200 million. As a result of the sale, the Diem project as it had been previously conceived was cancelled.

Fundamentals and BitClout

Last but not least on our list of poor decisions made by Andreessen Horowitz regarding investments is a double whammy consisting of Basis and BitClout.

First up is Basis, which is a decentralized, algorithmic stablecoin initiative that is being managed by one of the cryptocurrency industry’s most notorious businesspeople, Nader Al-Naji. Through on-chain auctions that produced “bond” and “share” tokens to alter the Basis supply, the project intended to maintain the dollar-pegged stability of the Basis stablecoin. Basis had lofty goals for its organization, stating that it aimed to develop a “better monetary system” that would be immune to hyperinflation, independent from centralized control, and more reliable than the various means that are now in use to transfer money. The project was an early attempt at producing a stable, unbacked, dollar-pegged token, and it served as inspiration for other unsuccessful stablecoin projects such as Basis Cash and Terra.

Putting aside concerns about its long-term viability, Basis ensured that it presented an image befitting its industry by developing a hip fintech brand and assembling a staff consisting of former employees of Google and Goldman Sachs. Basis was able to successfully finance $133 million in April 2018, thanks to the direction of Al-Naji. The company attracted major investors such as Bain Capital Ventures, former Federal Reserve governor Kevin Warsh, Lightspeed Venture Partners, and Andreessen Horowitz.

On the other hand, neither the Basis team nor the backers of the project had done their research on the securities legislation that apply in the United States. Soon after, it became abundantly evident that the bonds and shares that would be used to tether Basis to its dollar peg would fall under the category of unregistered securities, which would mean that they would be subject to transfer restrictions. Because the regulations governing the sale of securities in the United States are notoriously complex to navigate, the Foundation came to the conclusion that the development of a “better financial system” would not be as straightforward as it had previously envisioned it to be. Al-Naji made a notice on the Basis website in December 2018, eight months after it had raised $133 million, declaring that the company would be closing down and repaying any leftover funds to its investors. The statement added, “Unfortunately, having to apply U.S. securities regulations to the system had a major negative impact on our capacity to launch Basis,” adding that compliance with securities laws will impair the project’s censorship resistance and diminish liquidity for its on-chain auctions.

In spite of the fact that they lost money on Basis, Andreessen Horowitz chose to place another bet on Al Naji when he created his second blockchain firm, which was called BitClout.

BitClout is marketed as the first blockchain-based social media platform. Users are able to post status updates and photos, award money to the posts of other users, and buy and sell what the platform refers to as “creator coins.” These are personalized tokens whose value is determined by people’s reputations. BitClout operates on its own Proof-of-Work blockchain that is known as DeSo, which is an abbreviation for “Decentralized Social.”

In contrast to Andreessen Horowitz’s unsuccessful bets in the past, the firm participated in the initial coin offering of DeSo by purchasing tokens (ICO). According to the data provided by Crunchbase, BitClout successfully completed its ICO and raised a total of $200 million from a total of 14 investors, with each investor contributing an average of approximately $14.2 million. Although details on how many tokens investors received and the vesting period are unknown, according to CoinGecko, DESO’s current price is 97% lower than its all-time high of $198.68, which was reached in June 2021. The unfavorable reputation that the BitClout platform has garnered for itself since its introduction has not helped to stimulate user interest in the product. In the beginning, customers who wanted to purchase creator coins on BitClout were required to transmit Bitcoin to the DeSo blockchain. The Bitcoin was then converted into BTCLT at a ratio of one to one. However, once a person was on DeSo, there was no way to convert BTCLT back to actual Bitcoin, thus their funds were effectively trapped. Since then, and after DeSo made its code open-source, the withdrawal problem has been partially rectified. Despite this, many early adopters have incurred significant financial losses as a result of the disparity in demand for Bitcoin and BTCLT.[rb_related title=”More Read” style=”light” total=”4″]

Even though BitClout and the DeSo blockchain are still operational, the prognosis for their respective industries is not very optimistic. It appears that the number of wallets and creators that are interacting with the BitClout platform has reached a plateau, and the trade volumes for BitClout’s creator currencies have reached an all-time low. Many people have voiced their dissatisfaction with the fact that BitClout can monetise Twitter profiles even without the owners’ agreement. Stephen Palley, a lawyer at the law firm Anderson Kill, has also stated that the DeSo ICO ought to have been categorized as an illegal securities sale. He made this claim in a recent article.

In view of the fact that another another of Nader Al-cryptocurrency Naji’s initiatives broke U.S. securities regulations, Andreessen Horowitz should probably take a particular ancient saying into consideration when deciding how much money to put into its future investments. “If you deceive me once, I’ll blame on you; if you fool me twice, I’ll disgrace on myself.”