AI has taken over crypto’s share of VC funding, says Mysten Labs founder
Crypto’s share of venture capital money is now going to artificial intelligence, says Mysten Labs founder, Evan Cheng.
Artificial intelligence is now receiving a larger share of venture capital money, as blockchain and cryptocurrency startups struggle to raise funds in the aftermath of the FTX debacle, according to Evan Cheng, founder of Mysten Labs.
Despite the difficulty, Cheng believes that the situation presents an opportunity for developers to create an open and transparent infrastructure. However, late-stage funding for startups has become harder to come by, with only exceptional companies receiving support.
In a Word on the Block interview with Forkast Editor-in-Chief Angie Lau, Cheng explains the issues facing the blockchain industry, the potential of supporting Web3 developers, and the challenges of sustainability in play-to-earn games.
- VC Funding: The early stage money is still there, it’s just the valuations being hurt. But once you get to the late Series A and Series B stage, the growth capital is hard to come by. It has to be an exceptional startup to get funded, unless you’re in the bubble of the excitement around generative AI right now, it’s going to be a lot harder for any startup to raise money.
- Supporting Web3 Developers: The promise and excitement is still there and we’re seeing a lot of developer activities. In fact we are seeing a lot of more mature developer activities. People have built products that serve tens of thousands, hundred thousand or millions of customers before coming to the space and building products. And that’s the exciting part that fits with what we’re trying to do as well. They are going to be younger, smaller, nimble, more experimental teams out there trying out brand new ideas, and a lot of them will fail. Some of them will be successful, our foundation will be supporting them.
- Blockchain industry is broken: In the other blockchains you interact with a smart contract, you mint NFT, you don’t actually fully own the asset. In the future even if you transfer the NFT, you have to interact with the smart contract. The blockchain industry right now is broken. The other one (problem) is when you talk about composability, if you don’t have control of the assets, can you really put things together?
- Play-to-earn games: Play-to-Earn was a very interesting experiment. How do you reward the gamer that put their sweat and time into the game? You reward them in some way. And that general concept isn’t wrong, but it’s not sustainable. They’re trying to make money so end up printing more and more of these tokens until they sort of blow up the ecosystem because you print too much money. And you know what happens when you print too much money…
Angie Lau: It’s 2023, and the FTX contagion continues to send shockwaves through the ecosystem. Several crypto investment firms filed for bankruptcy after investors pulled out funds leaving crypto exchanges, including Coinbase, Kraken, Bybit, and so many others laying off employees to cut costs. How will the future shape up for the industry after the shakeup? Some are calling it the ‘Great Reset’ for crypto. Will we see stronger, more compliant players emerge?
Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast. I’m Forkast Editor-in-Chief Angie Lau.
Well, let’s get right to it. We are in conversation with Evan Cheng, founder of Mysten Labs, a company that is building foundational infrastructure to accelerate Web3 adoption. Evan, welcome to Word on the Block.
Evan Cheng: Well, thanks for having me.
Lau: We’ve been hearing all about this project, a lot of fanfare and a lot of investors coming into Mysten Labs. Then I guess the rug got pulled out from all of us. What was that experience like over the past couple of months?
Cheng: The FTX situation is unfortunate and there’s a lot of noise around it, so there’s a lot of questions and concerns around it.
We’re financially not impacted by all the 300 raising Series B, using essentially cash or cash equivalent in the banks. Very safe. Our company is more senior. We know what we want to do. We’d never expect to rely much on our investor partner to deliver critical needs like listing. While it’s unfortunate we lost what would be a great partner in FTX, essentially we’re really not that impacted apart from all the noise we’re getting everywhere. We’re marching forward.
Lau: There was really greater interest in the industry. The conversations I heard around how blockchain technology can solve real world problems. Talking with experts and investors and policymakers, discussing topics like sustainable growth and trust and transparency. It really felt like the conversation shifted back to what a lot of us in the industry are focusing on, which is the technology.
Cheng: The promise has always been there. Everybody who is either a fan or student of the industry or people who are open minded about the coming disruption have always been aware of the opportunity that blockchain technology can bring to financial assistance, to even consumer products. This is the case. We need to move forward. Perhaps we look at things slightly differently. There is a lot of narrative around while we’re building more infrastructure and technology, let’s just build products.
It is the infrastructure, the technology that’s holding us back. We’re going to be showing more examples of that. When you have certain limitations at the base layer, there’s things that you cannot do or find it very difficult to do. You’re seeing this in the past. While all the promise has been there, the last few waves of crypto adoption, so to speak, or the markets, were mostly driven by narrative. Every time the wave dissipates, people look around and say, ‘Well, what has the industry accomplished as a whole? Maybe some proof of concept? What could happen? What could be done? What are the benefits?’ They really haven’t been proven.
The industry feeds itself, supports itself and just collapsed very quickly. We’re seeing a bit of the NFT collectible as a collectible market as well. There were fanfares, a lot of excitement, a lot of people coming in. Then it died off and then we realized there’s real progress there. There’s some really serious brands being established, but at the same time a lot of volume. We’re just watching trading or speculative activities. A lot can be traced back to just how difficult it is to build a product of real utility to deliver real consumer impact. It’s hard to sustain given that.
Lau: I could not agree with you more. That kind of speculative hype is really what inflated the entire industry, even post Terra-Luna crash, when really the industry would have been better served had they been able to react in a transparent way data transparency is one thing, but if you don’t have the infrastructure and the indexing around it, it’s really hard to discern value. That’s what we’re thinking about on the infrastructure side. I’m curious how you think about that.
Cheng: We think about infrastructure as, ‘what are the developer needs?’ Ultimately, a blockchain platform is a developer infrastructure, developer platform. It comes down to what problems are the developers trying to solve and that goes back to what’s the spirit behind Web3? People understand, intuitively, you wrap things in the token, they can be easily transferred between parties. It’s great for financial products, but Web3 is much more than that. It really is about getting the internet back to a more fair and open and more peer-to-peer interaction model. We move away from that.
If you look at the Internet incumbents today, by and large, they build on the work of users. User-generated products are the basis behind Instagram, Facebook, Twitter, YouTube, you name it. These big incumbents basically control distribution and they profit. They squeeze a lot of profit out of it. Even more so, it’s about transparency, the lack of fairness. That’s where we need to get back to. If you understand that then you understand the ethos of Web3. What we try to deliver is the kind of infrastructure that allows developers to challenge the incumbents. What would the next content sharing website like YouTube, like Instagram look like? How can it be more fair, especially fair and open to the creators so they know exactly how much their work is worth? Do they have the freedom and the flexibility to utilize their own assets, rather than being controlled by a centralized third party? That’s the whole point.
The blockchain basically is going to be this great open database, this great medium for creating assets and controlling assets. Smart contracts are supposed to offer a lot of the capability. The centralized entity is supposed to offer custody of your assets, custody of funds, and facilitate transactions. With that, then you have a more level playing field. Right now, it’s so hard to imagine challenging the big guys.
Lau: And the big guys have a lot of ammunition with FTX’s collapse. They just point to the space and say, ‘Hey, it was all BS.’ That’s got to hurt, as you try to build up, they lead your round, but as you’ve said, you’re still highly capitalized. But has it hurt the prominent investment pool’s appetite as we hear that people are starting to migrate from blockchain into AI now?
Cheng: Yeah. What we’re seeing in the market today, it is a lot harder for startups to raise funds in this space and the software industry as well. Based on my read, the early stage money is still there. It’s just the valuations being hurt. But once you get to the late Series A and Series B stage, the growth capital is hard to come by. It has to be an exceptional startup to get funded, unless you’re in the bubble of the excitement around generative AI right now, it’s going to be a lot harder for any startup to raise money. But we’re fortunate. One, our job as a platform is to help builders with a province. What to build a building for? Well one, they are building great products to service consumers, but ultimately they need to make money, make a living. They need to gain for their reputation, by creating something that lasts. For us, it’s about helping them build the best product as well as help them build a lasting business, and the capital aspect part of it.
Lau: Well, I want to dive more into that after we come back. But we’re going to take a quick break right now. When we come back, we are going to find out more about Mysten Labs, and what Evan Cheng is building on the Sui Network. Is it a game changer when it comes to Web3 infrastructure development? Don’t go anywhere.
Lau: Welcome back. We’re here with Evan Chang, founder of Mysten Labs. Evan, your pedigree is very, very interesting. Tell the audience where you came from. What started this journey into blockchain and finally the vision that you have at Mysten? You come from a pretty interesting pedigree.
Cheng: I have been in technology for twenty plus years. I spent ten years at Apple where I built some substantial technology that’s pretty much in every smart device out there today. The focus for my career has always been pushing the technology forward, pushing the technology forward. That’s the only thing that’s really driven me. In about 2016 is when I started looking into this space, and I was initially just intrigued. When I look at the technology and say wow this promise is there, I can see the potential in changing products and changing user interaction model and all that. But the technology really isn’t mature for a lot of people. The reaction could be, ‘Oh, it’s not ready’. You just kind of step away until it becomes ready. Like you see this with wave 1. It takes a while to get to that level of maturity. For me, I’ve always been more like, well, it’s not ready, who will do something about that? I’ve done this a few times at Apple, then Facebook and so ultimately got to 2018. That’s a time I had the opportunity to either do my own thing during a startup. Facebook has also had this ambition to launch what was called the Libra project back then. I felt like that was a great opportunity for me to do something serious and hire the best talent in the world to contribute to this and learn where we are. So that project was a lot of learning.
My team built things like the move program language and everything related to it. There’s some kind of really serious technology built out there: cryptography work, a lot of design about the system, the consensus. A lot of those things were built in those three and one half years where I was leading the R&D side of the house.
And when the project was not going well, in late 2021, I decided to leave. I finally said okay, if you have great ideas, you can’t wait around for other people to make it into reality. I better come out and build it myself.
Lau: It’s an incredible experience. I note that so many people who came out of the Libra project or Diem project, Dante Disparte, chief strategy officer at Circle, yourself, so many others are still in this space. And philosophically, what’s really super interesting is that you take that really painful experience of watching this technology that you’re building and really investing in as a professional and then watching it all break apart and disintegrate because of policy and politics.
How are you bringing all of that to the table now at Mysten? Right now it would feel very similar, it must feel very similar to the environment that we’re in right now. But something that you are more than familiar with over at Diem as the world really looks, you know, with a lot of hesitation and apprehension at the blockchain industry.
Cheng: Some of the people who were previously on the sideline were thinking about maybe I should get into crypto.
Web3 has decided to take another route, another direction. That’s unfortunate, but I think again, the promise is still there and the excitement is still there and we’re seeing a lot of developer activities and in fact we are seeing a lot of more mature developer activities. People have built products that serve tens of thousands, hundreds of thousands or millions of customers before coming to the space and building products. That’s the exciting part that fits with what we’re trying to do, as well. They are going to be younger, smaller, nimble, more experimental teams out there trying out brand new ideas, and a lot of them will fail. Some of them will be successful.
Our foundation will be supporting them and their more mature team and say, ‘Okay, how do I use this tool, this new infrastructure to solve problems?’ Going back to the ethos of Web3, ‘How do I use that to change the relationship between consumers, the creators and the consumer, the platform and the distribution platform, and the products?’
There is a lot of excitement. There’s obviously a lot of unfortunate downside to the bear market. But then there’s a lot of great things that we’re seeing, as well.
Lau: You’re building layer one blockchain network Sui. In your words, it’s going to make a leap in blockchain functionality. Tell us, technically, as best as we can understand, what makes Sui different from what we’re seeing in Ethereum?
Cheng: The blockchain today is upgraded for tracking the movement of static assets. What we’re building with Sui, the first principle is that each of the objects that represent an asset, you track the history of state changes. You solve the problem of having states on chain. I buy an asset from one — what kind of entity? A car dealer — I can take my car to be serviced by another one. It’s not locked. The blockchain model actually broke the ownership model. It doesn’t have the freedom. I should be able to define a virtual cost specification, have one smart contract, sell me a virtual car, but I can take that to be serviced by another smart contract that conforms to the same specification because they offer better services.
That’s on the ownership part, the blockchain industry right now is broken.
The other one is when you talk about composability. If you don’t have the control of the assets, you can’t really put things together. The smart contract that created the NFT still has full control over it. How do you take data that’s inside the smart contract and other data sets inside another smart contract and compose them? Using Bored Ape as an example. If somebody else wants to make use of Bored Ape, is that even possible? Or if you want to say whether two products from two different companies can come together and be combined. Even if you want, the product builder won’t allow this. When your actual data is sitting in a private database, not on chain, and it’s really expensive, impossible to update these assets, do you actually have interoperability? Do you actually have composability? Can you really have a program that replaces the centralized middleman to perform the function autonomously? This comes down to the asset ownership model that’s just really broken in blockchains today.
Lau: I think the Web3 gaming space is about to be transformed. Just a quick pause right there, Evan, because when we return, I want to learn more about that and also Mysten Labs’ ambitious plans. What do you have all planned for Web3 gaming, Evan? We’re also going to hear Evan’s predictions for 2023. Stay with us…
Welcome back! We are with Evan Cheng here. We got into the rabbit hole a little bit about the technology. I want to get a little bit more about Sui and why developers are using it, how they’re using it, and especially your ideas for Web3 gaming.
Cheng: Yeah. I mean, there are lots of kinds of potential utilities or things you can try. Now you have this shared, open database for your asset in gaming.
Let’s focus on gaming. I’ll give you an example. Let’s say you have a multiplayer game with lots of lots of different players, and they all have the same magic sword to start. The magic sword that’s owned by a famous game streamer is the one that’s being used to slay that final boss, that dragon. If you want to represent it as an NFT, it should be worth a ton more than the average Joe’s level one sword which might have slain a couple of goblins only. It’s not just ‘this is a sword, level ten.’ It’s also the history. What has been accomplished. That history is what makes them more valuable. If you think about it, you understand why a lot of gaming companies are excited about this. This is now something that actually has a value and belongs to the consumer.
If I have an esports game, I want to publish the results of all the competitions on chain. Each of the characters. Here’s my history of my participation in this esports game.Then all of a sudden, the history is much more transparent and is more trustworthy. That’s the whole point of blockchain. You have a lot less concern about cheating. Yes, you can use in-game currency, you can use it for the marketplace, you can do all these things, but that’s where things get exciting. Do you generate a lot of tokens or use it for in-game currency or is it much more exciting? Yeah, it should be something that wasn’t possible before.
That’s the whole point, when you’re doing something different and new. If you’re just basically translating what has worked before, you usually don’t get that breakthrough. Just like early mobile gaming was not that interesting until Angry Birds came about. People are using the finger to fling birds around and people get it right away.
This is interesting and can only be done with this medium.
Lau: But it needs to evolve. It needs to be dynamic and players want to participate in that kind of organic evolution. Beyond just the game designers themselves, you’ve said that P2E is not sustainable. How does this blockchain transform the future of the gaming industry? Why don’t you think play-to-earn is sustainable? Where do you see this all going for the Web3 space?
Cheng: Play-to-earn was a very interesting experiment. How do you reward the gamer that put their sweat and time into the game? You reward them in some way. That’s a great, great experiment and that general concept isn’t wrong, but it’s not sustainable. Because the token value is what? Get people excited but treat this as a job? They’re trying to make money, so you end up printing more and more of these tokens until they blow up the ecosystem because you print too much money. You know what happens when you print too much money.
Lau: Yeah, we’re experiencing it right now.
Cheng: Again, why is that?
It’s just that blockchain was so limited. It’s not much you can do with these blockchains in gaming. That stateful application doesn’t match with non-stateful blockchain. People are just trying these early, very rudimentary experiments. We’re seeing that the earliest Web3 games are just basic, or they’re basic Web2 games with in-game currency and called Web3. It just doesn’t work right. We change that. We really bring utility. What do you want to do with it? It’s up to the developers, but we remove all those constraints so they can decide what they want to do.
Our job is to share some ideas and share some examples and show this is something you can do. There’s something that might be interesting to you. We built a happy game, to show people what composability really is about. Before we knew it another startup took that and said, ‘Okay, if you use our prediction market during the World Cup and you get it right, you get a little flag that represents the country and you can then stick your pin to your Cappy.’ They did it by following the open specification. It’s just a true thing, but it shows this is what composability is about. This wasn’t possible before and it’s completely permissionless.
We were not involved at all.
Lau: Testnet recently went live — Testnet Wave 2. You’re expected to launch mainnet in Q1 of this year. Are you on track?
Cheng: Q1, Q2 we are trying to get the network ready. It’s not just the software that has to be ready. Operationally, it has to be ready. We’re trying. We’re testing out a lot of the complicated logic on the tokenomics side.
I remember one of the interesting features of the Sui blockchain is to provide this elasticity, this stability of the gas fee for the end user, even if the token is volatile, or the price is volatile. A lot of these things are being tested out, whether we end up shipping this at the end of Q1 or Q2, we will see. We will only launch when there is a very, very clear readiness. Not just us – also all our partners will feel ready to go. We also want to launch when there’s clearly utility on chain.
Lau: Last question, what do you think 2023 has in store for the blockchain industry?
Cheng: Thank you for getting me that softball question. Well, Sui of course, Sui is going to change a lot of things. We took the pain to do something that’s really, really different. We came out, we say we don’t want to do yet another basic thing that other blockchains have done, or have already designed. We want to see how we can push that much further and actually solve developer problems. We believe we will be that. That, to us, is very exciting. Obviously, we should be excited about a lot of things coming in 2023 from our partners.
Lau: Are we going to see you raise for a C round?
Cheng: We don’t need to. We definitely have many years of runway. There’s no plan right now. We’re fine. As of now, we don’t have any needs or consideration for raising another round.
Lau: Evan, it was a real pleasure..
Cheng: Yes. Thank you very much, Angie. Thank you for having me. It’s been a pleasure.
Lau: Absolutely. The pleasure was all mine. Thank you, everyone, for joining us on this latest episode of Word on the Block. I’m Angie Lau. Forkast, Editor-in-Chief, until the next time.