"The Death Tide" is coming, reviewing seven ways Web3 projects can die

Author: Gu Yu, ChainCatcher

On October 31, the cryptocurrency wallet Linen Wallet announced that it would shut down its application, stating, "Interest in our product has declined, and overall activity among individual cryptocurrency investors seeking advanced self-custody solutions is also decreasing." Previously, in September 2019, the project had received investments from institutions such as Polychian and Coinbase Ventures.

On October 17, the Web3 security solution Stelo announced that it would cease development of all its products. In February of this year, the project announced it had raised $6 million in a seed round led by a16z.

On October 23, the Web3 creator platform Async Art announced that it would stop operations. Previously, in February 2021, the project had raised $2 million, with participation from Lemniscap, Galaxy Interactive, and Collab+Currency.

On October 3, the fixed-rate lending protocol Yield Protocol announced that it would cease operations. In June 2021, Yield Protocol completed a $10 million Series A funding round, with participation from Paradigm and Framework Ventures.

On September 20, the stablecoin yield aggregator GRO Protocol announced that it would stop operations. In March 2021, GRO Protocol announced it had completed a $7.1 million seed round, with participation from Galaxy Digital, Framework Ventures, Nascent, and Variant Fund.

On September 13, the DeFi liquidity management protocol xToken announced it would cease operations. In November 2021, the project had completed a $2 million funding round, with participation from Lattice Capital.

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Source: “2023 Crypto Dead Projects List”

In recent months, the Web3 industry has experienced a wave of "deaths," with many projects backed by prominent institutions, such as Stelo and Yield Protocol, announcing their shutdowns. According to ChainCatcher statistics, at least 16 Web3 projects have actively announced their cessation of operations in the past three months, while many more are quietly experiencing "chronic death."

Survival of the fittest and high mortality rates are the norms for startups, and this is particularly evident in the cryptocurrency industry, which is characterized by pronounced bull and bear cycles. Based on the "last words" of these deceased projects, ChainCatcher has summarized five major reasons for their demise. For most projects that have declared death, insufficient funding is the primary and most direct cause, while other reasons include a lack of market fit for their products and tightening regulatory policies.

Here are the details:

Insufficient Funding

Among the projects that announced their shutdown, most last raised funds in the first half of 2021, which is over two years ago. Additionally, blockchain products often require high development and operational costs, leading to the depletion of their funding by this year. Meanwhile, the primary financing market for cryptocurrencies has continued to decline over the past two years, making it difficult for older projects to regain investor interest and secure new funding, forcing them to shut down.

The vast majority of projects have gone bankrupt due to a lack of funds, especially when unable to complete a new round of financing. Of course, several projects have indicated that they still have some funds and plan to distribute the remaining capital to investors, including Superdao and Linen Wallet.

Lack of Market Fit for Products

Many projects set ambitious product plans and believed they could achieve considerable market adoption, but ultimately the market did not adopt their products on the large scale they anticipated. This indicates a serious misalignment in product positioning, making it difficult to achieve corresponding returns even with long-term operations, leading some projects to choose to shut down voluntarily. Such projects include those in the fields of DAO solutions, NFTs (rental NFTs, video NFTs, etc.).

For example, the DAO integration platform Superdao stated that in 2022, it began building growth and analytics tools for already launched and operational Web3 projects. It clearly observed that the cryptocurrency industry itself had become much smaller than its initial aspirations ("the new internet"), making it unlikely that providing specialized tools for crypto companies would yield venture-scale returns.

The security solution Steolo, backed by a16z, indicated that at the beginning of product development, the team believed the most pressing issue was preventing users from being scammed or falling into phishing traps, but ultimately found that users were more concerned about participating in gambling and speculative activities. The team also pointed out three erroneous assumptions: "transaction security has data network effects," "every cryptocurrency user uses a separate wallet," and "consumer adoption of cryptocurrency is just around the corner."

"AAA-grade crypto games or decentralized social platforms may soon experience explosive growth, but the Stelo product suite does not offer much benefit to these users, nor can it capitalize on such growth. Importantly, we do not believe our current users can represent the new wave of users we expect to come with broader adoption," Steolo reflected.

Hacking Attacks

In the past two years, the frequency of hacking attacks has remained high, causing many projects to suffer significant losses of treasury funds or user assets, ranging from hundreds of thousands to tens of millions of dollars. This has diminished the projects' self-sustainability and eroded user trust, making it difficult for them to continue.

Hotbit stated that one of the three main reasons for its shutdown was that it had repeatedly encountered cyberattacks and project flaws exploited by malicious users, resulting in significant losses. The decentralized lending protocol Hundred Finance also ceased operations primarily due to hacking attacks, having lost over $7 million to hackers in April this year. The dissolved decentralized trading protocol Saddle Finance also suffered millions of dollars in losses from hacking attacks.

Abandonment by Parent Company

Some projects have met their demise not by their own choice, but because their parent companies decided to stop supporting their development for various reasons, leading to their shutdown.

In May this year, DCG announced it would close its institutional trading platform TradeBlock, citing macroeconomic conditions and the prolonged crypto winter, as well as the challenging regulatory environment for digital assets in the U.S.

In September this year, the IoT blockchain IOTA announced it would stop development of its public chain Assembly, as this would add further complexity to the protocol and create a potential competing solution, thereby diminishing the value of IOTA and the $IOTA token and diluting market attention. Previously, Assembly had raised $18 million.

Poor Management

Management quality is one of the most important factors affecting a project's long-term development. Some projects, even with ample funding and significant market potential, can ultimately fail due to poor operational standards and a series of erroneous decisions.

A typical case is the cryptocurrency custody company Prime Trust, which had raised hundreds of millions of dollars but was revealed this year to have been misappropriating client funds since 2021 and had significant business dealings with collapsed projects like FTX, ultimately leading to insolvency and bankruptcy.

Tightening Regulatory Policies

With the collapse of projects like FTX and the growing risks of money laundering, regulatory agencies worldwide have significantly increased their oversight of the cryptocurrency industry over the past year. The SEC has even filed securities issuance-related charges against projects like Ripple, which has greatly increased compliance pressure on cryptocurrency projects in the U.S.

A spokesperson for Yield Protocol stated that insufficient demand and an uncertain regulatory environment were key driving factors behind the decision to cease operations. The Web3 live streaming platform Xeenon stated on its social media that the regulatory environment in the U.S. made it difficult for them to innovate, leading the team to decide to shut down the platform.

Core Team Disappearance

Unlike issues related to the policy environment, several cryptocurrency projects this year have been forced to cease operations due to their core teams being taken away by the police over money laundering risks. Typical cases include Multichain, BKEX, and CNHC Group, all of which reported mid-year incidents of core team members being detained by the police, with the whereabouts of over a hundred million dollars in user assets from Multichain also remaining a mystery.