Do Crypto VCs Fuel a Land Rush Mentality that Crushes Investors?

If there’s one thing the crypto industry of 2022 has more in common with the dot-com industry of 2000 than anything else, it’s the build-launch-test development philosophy. With venture capital firms (VCs) pouring wheelbarrows full of cash at the feet of anyone with a relatively decent pitch deck, that has created a land rush mentality reminiscent of those good old sock puppet days.

The big difference is that when dot-coms imploded, the investors who got clobbered bought stock in newly minted IPOs built that were largely vaporware with months or years of development to come. In the crypto bubble, investors often bought cryptocurrency tokens of hastily developed and built blockchain projects assuming the market would go ever up despite the whims of volatility.

That’s proving to be crypto’s biggest Achilles’ heel. And nowhere is it more evident than in the tokens of decentralized finance, or DeFi, projects bought on the assumption that annualized returns starting at 5% to 20% and going up into three and occasionally four figures are reasonable and sustainable.

See also: DeFi Series: What’s Real, What’s Hype, What Matters

That’s a point Charles Hoskinson, an initial Ethereum developer who launched the competing Cardano blockchain in 2017, made in an interview with CoinDesk.

Pointing to the $45 billion collapse of the terraUSD stablecoin and its sister blockchain, Terra —called LUNA on exchanges — after the technology supporting its dollar peg failed and caused a run, Hoskinson told CoinDesk this week that speed is often crypto’s enemy.

Read more: TerraUSD’s Price Collapse Shows Vulnerability of Dollar-Pegged Cryptos

“If you move too quickly, as we’ve seen with Luna, and we’ve seen with $10.5 billion lost to hacks last year, you could actually get it to work until it doesn’t, and then when it doesn’t it’s a catastrophic failure and everybody loses their money,” Hoskinson said.

In Luna’s case, the untested and ultimately unsuccessful technology was the algorithmic stablecoin’s arbitrage-based system of maintaining its peg that replaced the “traditional” system used by top stablecoins like Tether’s USDT and Circle’s USDC that rely on one-to-one baskets of currency and — in theory — highly liquid investments like treasuries.

See more: DeFi Series: What Is an Algorithmic Stablecoin? DAI and the Fiat-Free Dollar Peg

Testing the Waters

That philosophy is the core difference of Cardano, one of the so-called “Ethereum killer” blockchains that sets itself apart with a peer review process for all code updates and blockchain upgrades. A panel of academics and developers scrutinizes any proposed changes before being integrated into Cardano.

As a result, it is easier to catch security flaws and other problems before they melt down on a live blockchain. It’s why Hoskinson calls Cardano the world’s first provably secure blockchain.

That makes Cardano’s development “a bit slower” out of the gate than other projects he acknowledged. As an Ethereum-style smart contract platform, it’s worth noting that Cardano only went live with smart contracts in 2021, four years after its launch.

Read also: DeFi Series: What Is a Smart Contract?

Yet it is also the greatest strength of a blockchain built for years and decades rather than months and weeks.

“The people who are going to survive are those who are tested under stress and exhibit resiliency,” he said. “We always say it’s not first, it’s best out of the gate.”

If that sounds familiar, it’s because it’s exactly what Federal Reserve Chairman Jerome Powell and the Treasury Department have been saying about developing a U.S. central bank digital currency or digital dollar.

Nor is Cardano the only blockchain with the test-first development philosophy.

Algorand, another Ethereum killer, was developed by Silvio Micali, a world-renowned, Turing Award-winning cryptographer and MIT professor. One of its selling points, Algorand Foundation CEO Staci Warden told PYMNTS, is that it was designed by a leader in the field with the credentials to make him one of a handful of blockchain developers considered a likely candidate to be the man behind the pseudonymous Bitcoin developer Satoshi Nakamoto.

“We are in a very divided world,” Micali told the Los Angeles Times this month. “We have blockchain 1.0, 2.0, 3.0, 4.0 — which I believe Algorand is — coexisting simultaneously.

We are at a very unique moment in which there are extremely sophisticated blockchains like ours and when there are very early generation blockchains who continue to be there simultaneously. It’s like you have Neanderthal man and Homo sapiens living together.”

Short-Term Thinking

As for Hoskinson, he told CoinDesk that projects with a short-term, get-it-out-the-door mentality will “keep collapsing.”

And it’s worth noting that blockchain data and intelligence firm Chainalysis pointed out earlier this month that almost all of the $1.7 billion in crypto stolen in 2022 came from DeFi projects, which are notorious for getting up and running as soon as possible, often by offering outlandish returns.

It’s worth noting that one of the reasons the terraUSD/LUNA collapse was so large was that the stablecoin had shot to the third largest in little more than a year, with a $28 billion market cap, in large part because people could stake it on the Anchor Protocol, a DeFi lending platform that offered a 20% APR return — hardly sustainable.

As for the fools-rush-in mentality of a fair chunk of crypto investing, although some of the VCs that were early terraUSD backers got clobbered, several others got out in time.

Top crypto VC firm Pantera Capital told CNBC that it got out of the stablecoin and its sister token LUNA in December and March — walking away with a $170 million return on its $1.7 million investment.

But then, that’s the core of the venture capital investment philosophy in crypto, just as it was in the dot-com era: Throw a lot of money and a lot of projects early, then cash out of the unicorns.

That, along with the reality that it’s very easy to start a new crypto project simply by copying the code of an existing one — a key feature of rug-pull scams — is probably why there are at least 10,000 cryptocurrencies in existence now, 13 years after the industry was born and five years after it really started taking off during the Crypto Summer of 2017.