A new survey of Layer-1 and Layer-2 executives reveals 8 causes for the current state of the market: from a lack of use cases to a loss of user trust. CEOs of projects like Hedera, Akash Network, and Celo have also shared their strategy for surviving the bear market
L2 has contracted much less than any other blockchain niche
The collapse of FTX may have triggered the most recent downward wave, but it would be too simplistic to view it as the ultimate reason. What do project founders and decision-makers view as the real causes? In order to find out, BDC Consulting conducted a survey of 50+ Layer-1 and 2 executives. The reason this group was selected is that during BDC’s recent crypto investor study, infrastructure project were named as the safest investment opportunity.
The survey brought together C-suite executives from L1 projects like Dusk Network, Hedera, Celo, ChainSafe Systems, and Akash Network; as well as L2s and bridging solutions like Convex, Allbridge, Radix Network, and Stroom.
By late December 2022, the combined capitalization of these three niches amounted to $47.3 billion, or 30% less than 6 months ago. Out of this amount, L1s accounted for 80% and L2s and bridges for 20%. Interestingly, in H2 2022 Layer-2 projects suffered the smallest market cap decrease of any niche except for memecoins: only -5% (vs. -27% in DeFi, -42% for bridges, and -45% in GameFi).
The 8 causes for the user exodus and lack of liquidity
The respondents jointly identified user outflow and liquidity deficit (and not low prices) as the key challenges that blockchain projects are currently facing. In turn, they named several causes that have led to this situation, which can be divided into several categories:
Project-related
– Poor value proposition;
– Limited use cases;
– Lack of a user retention and engagement strategy.
For example, Dusk Network founder Emanuele Francioni said, “The biggest lesson is that we should be always building for real-world use cases. We have to think, […] what does blockchain allow you to do that you may not be able to do better otherwise?” And Allbridge CEO Andriy Veliky adds, “There is a crisis of ideas in crypto right now compared to the DeFi spring, when there were a lot of experiments on different blockchains”.
Market-related
– New attack vectors and scams;
– Absence of risk management, manipulating investors’ expectations;
– Lack of a clear and progressive crypt legislation.
User behavior-related
– Poor dApp UX and a lack of Web3 integration into real life;
– Loss of user trust – in turn, caused by a lack of transparency and regulatory clarity.
The strategy to survive the bear: product development, partnerships, and security
The surveyed executives also shared their plans for surviving the crypto winter and overcoming the challenges:
– Building and adding new features remains the highest priority
– Partnerships are in the second place, especially attracting B2B partners.
– Product security is also in the top 3,
– Most projects are still hiring: a downturn doesn’t mean that the whole development strategy has to be scrapped.
Insights and recommendations for startups
Based on the survey insights, the team of BDC Consulting formulated a list of recommendations for crypto startups from all niches that face a deficit of liquidity and an outflow of users. The list includes:
– Request feedback from the community (through forms and direct channels) to find out the reasons users are leaving;
– Incentivize users to join liquidity pools and onboard external liquidity providers;
– Adjust the tokenomics to make sure that users benefit from holding on to their tokens;
– Undergo external audits and conduct penetration tests; start a bug bounty campaign;
– Engage users in a discussion and process all incoming feedback;
– Have a realistic roadmap and make sure it is followed.
BDC Consulting is a leading blockchain consulting and marketing agency with an in-house research department, publishing over 10 large market studies every year. The full version of the survey report features dozens of extensive quotes by blockchain executives, as well as a detailed analysis of challenges and solutions. Download the full report here.
Marat Gizatullin
BDC Consulting
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