The coming of the tide of death a checklist of seven ways to kill Web3 projects

The Onslaught of Defeat A Comprehensive Checklist of 7 Ways to Destroy Web3 Projects

On October 31st, cryptocurrency wallet Linen Wallet announced the closure of its application, stating that “interest in our product has declined, and overall activity from individual cryptocurrency investors seeking advanced self-custody solutions has also decreased.” Previously, in September 2019, the project received investments from Polychian, Coinbase Venture, and other institutions.

On October 17th, Web3 security solution Stelo announced the cessation of development for all its products. In February this year, the project announced a $6 million seed funding round led by a16z.

On October 23rd, Web3 creator platform Async Art announced the cessation of its operations. Previously, in February 2021, the project raised $2 million in funding with participation from Lemniscap, Galaxy Interactive, Collab+Currency, and others.

On October 3rd, fixed-interest borrowing protocol Yield Protocol announced it would stop operating. Previously, in June 2021, Yield Protocol completed a $10 million Series A funding round with participation from LianGuaiRadigm, Framework Ventures, and others.

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On September 20th, stablecoin yield aggregator GRO Protocol announced it would stop operating. Previously, in March 2021, GRO Protocol completed a $7.1 million seed funding round with participation from Galaxy Digital, Framework Ventures, Nascent, Variant Fund, and others.

On September 13th, DeFi liquidity management protocol xToken announced the cessation of its operations. Previously, in November 2021, the project raised $2 million in funding with participation from Lattice Capital and others.

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Source: “List of Crypto Industry Dead Projects in 2023”

In recent months, the Web3 industry has experienced a “death” wave, with many projects, including Stelo and Yield Protocol, which have impressive institutional backgrounds, announcing the cessation of their operations. According to Chaincatcher’s statistics, at least 16 Web3 projects have voluntarily announced their suspension in the past three months, and there will only be more projects quietly facing “chronic death.”

The survival of the fittest and a high mortality rate are the norms for startup companies, especially in the volatile cryptocurrency industry. Based on the “last words” of these projects, Chaincatcher has summarized the five main reasons behind their demise. For most projects that declare their death, insufficient funding is the primary and most direct reason. Other reasons include a lack of market fit for the product and stricter regulatory policies.

Here are the details:

Insufficient Funding

Among these projects that have announced their suspension, most of them last raised funds in the first half of 2021, more than two years ago. Combined with the fact that blockchain products often require high development and operating costs, the funding raised has been almost depleted this year. At the same time, the primary cryptocurrency fundraising market has been declining for the past two years, making it difficult for older projects to regain the favor of investors and secure new funding, forcing them to shut down.

Most projects fail due to a lack of funds, especially when they are unable to secure new funding. However, there are some projects that still have some funds remaining and plan to distribute the remaining funds to investors, including Superdao and Linen Wallet.

Lack of market fit for the product

Many projects set ambitious product plans and expect significant market adoption, but ultimately, the market does not adopt their products on a large scale as they anticipated. This means that there is a serious misconception in product positioning, making it difficult to generate the expected returns even with long-term operation. This has led to some projects choosing to shut down. These types of projects involve areas such as DAO solutions, NFTs (rental NFTs, video NFTs, etc.).

For example, Superdao, an integrated DAO platform, stated that in 2022, they will start building growth and analysis tools for Web3 projects that have already been launched and operational. They clearly see that the crypto industry itself has become much smaller than its initial ambition (“the new internet”), and providing specialized tools for crypto companies is unlikely to generate the scale of returns expected by venture capital.

Steolo, a security solution invested by a16z, stated that at the beginning of product development, the team believed that the most pressing issue was to prevent users from being deceived or falling into phishing traps. However, they ultimately found that the most important issue for users was to participate in gambling and speculative activities. The team also pointed out three mistaken assumptions: “transaction security has network effects,” “every cryptocurrency user uses an independent wallet,” and “consumers will adopt cryptocurrencies in no time.”

“AAA-level crypto games or decentralized social platforms may soon bring explosive growth, but the Stelo product portfolio cannot bring much benefit to these users or benefit from this growth. Importantly, we do not believe that our current users can represent the influx of new users that we anticipate with broader adoption.” Steolo reflected.

Hackers attacks

In the past two years, the frequency of hacker attacks has remained high, causing significant losses to the treasury funds or user assets of many projects, ranging from hundreds of thousands to tens of millions of dollars. This not only reduces the project’s ability to sustain itself but also erodes the trust of users in the project, making it difficult for the project to continue.

Hotbit stated that one of the three main reasons for its shutdown was that it had suffered from network attacks and malicious exploitation of project flaws by users, resulting in significant losses. The decentralized lending protocol Hundred Finance also ceased operations mainly due to a hacker attack, with the project losing over $7 million in April this year. Decentralized trading protocol Saddle Finance, which announced its dissolution, also suffered losses of millions of dollars in a hacker attack.

Abandoned by the parent company

Some projects meet their demise due to circumstances beyond their control, as their parent companies, for various reasons, decide to no longer support the development of the project, leading to the announcement of its closure.

In May this year, DCG announced the closure of its institutional trading platform TradeBlock, citing macroeconomic conditions, the long crypto winter, and the challenging US digital asset regulatory environment as reasons.

In September, IoT blockchain IOTA announced the halt of development for its public chain Assembly. This was done to avoid adding further complexity to the protocol and creating a potential competing solution that could devalue IOTA and its $IOTA token, thereby diluting market attention. Assembly had previously raised $18 million in funding.

Poor Management

Management is one of the most important factors influencing the long-term development of a project. Some projects, despite having ample funding and a huge market space, can ultimately meet their demise due to poor operational skills and a series of wrong decisions.

A typical case is the cryptocurrency custody company Prime Trust, which had received hundreds of millions of dollars in funding. However, it was exposed this year that the company had been embezzling customer funds since 2021, and had significant business dealings with failed projects like FTX, eventually leading to insolvency and bankruptcy.

Strict Regulatory Policies

Following the failures of projects like FTX and the increasing risks of money laundering, regulatory authorities around the world have significantly ramped up their oversight of the crypto industry over the past year. The SEC even filed charges related to securities issuance against projects like Ripple, adding to the compliance pressure faced by crypto projects in the US.

A spokesperson for Yield Protocol stated that the lack of demand and uncertain regulatory environment were the key driving factors behind the decision to cease operations. Web3 livestream platform Xeenon also expressed on its social media platforms that the regulatory environment in the US made innovation difficult, leading the team to decide to shut down its platform.

Core Team Disappearances

Unlike regulatory issues, several crypto projects this year have had their core teams directly apprehended by law enforcement due to money laundering risks, forcing the projects to cease operations. Typical cases include Multichain, BKEX, and CNHC Group, where news emerged in the middle of the year that core team members of these projects were taken into custody by law enforcement. In the case of Multichain, billions of dollars in user assets have gone missing.

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