It felt a bit like falling down the rabbit hole of that heavily meme’d corner of X that’s saturated with price charts and “.eth” suffixes. Alternatively titled: ‘Crypto Twitter.’ And, at least for now, that is ostensibly what Farcaster is: Web3’s answer to X. 

But the back-end is very different. As a decentralized protocol built atop Ethereum, developers can utilize its smart contracts—the protocol’s rule book—to build new social media applications on top of it. It also means that users have ownership of their data. You post “casts” not tweets, and pay $5 annually to store your data on-chain. One of its unique selling points behind the hype is its ‘Frames’ feature, which allows apps to run within posts, meaning users don’t have to leave the site to access them. The platform’s ability to look, smell, and feel like X, with the added benefits of scalability and data ownership, is why venture capitalists are so excited about it, sources told me.

Zach Bruch, founder of the Web3 casino MyPrize, told me he’s not surprised by those stats: With infrastructure projects now in the rearview, investors are wanting to create a “war chest” to crack this new era of consumer-focused crypto.

But Farcaster is not the first Web3 social startup, and by no means will it be the last. And its user experience is by no means reinventing the wheel. So the funding feels puzzling. And it gets even more confusing when you look at the user adoption. On Tuesday, there were just over 50,000 active users, according to Dune data. In terms of engagement, the number of casts (or posts) was just under 30,000. That same day, the number of reactions showed an 83% decline since the protocol’s peak, just two months ago. So why did a company with the same number of users as a niche Discord server reach a $1 billion valuation? 

Seth Ginn, managing partner of CoinFund, said that the fact that Web3 social projects come and go—generating “spurts of excitement” before receding— tells investors “there’s something there,” but the right person hasn’t yet been able to pull it off. And Ginn thinks Farcaster’s founder Dan Romero is the person to do it. He’s “probably the most impressive entrepreneur of this age…they’re betting on Dan.” But he acknowledged “the jury’s still out” on whether Farcaster will provide enough of a differentiated user experience to sustain growth. 

But a more cynical explanation for why the valuation has gotten so high, is crypto VCs playing ball. 

“If VCs still have LP capital left to deploy, and they “put $150 million to work” instead of giving it back, that means they get to collect an additional $20-30 million management fees for themselves,” founder Liron Shapira wrote on X. “$1 billion before even derisking the path to 500,000 DAUs is so uncalibrated that something isn’t right with the VCs – grift or incompetence,” he added. One source, who requested anonymity due to the constraints of his business, told me that, like most protocols, he expects that Farcaster will launch a token, and investors will be keen to capture the fully diluted value of it—regardless of whether there is liquidity. In lieu of perpetually eyeing their next fund, VCs want to deploy surplus capital fast in order to generate seemingly impressive returns, and tokens offer an avenue to tout this. 

But Sam Hallene, investment partner at CMT Digital, told me that he thinks the economics make sense. Web2 social has a “natural decay function” as once they find success, the platforms they are built upon have historically either tried to create a competitor, and attempted to “cut it off as its knees.” He thinks that investors are simply betting that the technology underpinning Farcaster has more longevity, and more avenues for monetization, which have simply not yet been realized. 

Niamh Rowe
[email protected]
@niamhrowe7

DECENTRALIZED NEWS

Ark Invest’s CEO Cathie Wood thinks the digital wallet industry is set to consolidate: “This truly is a winner-take-most opportunity.” (Fortune)

Venture capital firm Paradigm announced it has raised $850 million for its third fund, which will focus on early-stage crypto projects. (Bloomberg)

Crypto could stave off a U.S. debt crisis as stablecoins are becoming an important net purchaser of government debt. (The Wall Street Journal)

At the State of Crypto Summit on Thursday, Coinbase CEO Brain Armstrong touted crypto as the only bipartisan issue in Congress right now that’s gaining support from both sides of the aisle. (DL News)

It’s turning out to be a “landmark year” for crypto, according to Binance CEO Richard Teng, thanks to growing regulatory clarity, growing mainstream adoption, and the launch of spot Bitcoin ETFs. (Bloomberg Law)

MEME O’ THE MOMENT

He's not launching a celebrity shitcoin: