How Web3 companies die: the right way
This rarely-discussed issue is crypto’s ticket to maturing beyond the failures of FTX and preceding collapses
Liu zishan/Shutterstock modified by Blockworks
The margin for error in the crypto industry is exceptionally narrow. With shifting regulations introducing ambiguous rules to the game, security breaches and “black swan” events keeping participants on edge, and a proliferation of greed-fueled speculative trading, the stakes are high for both entrepreneurs and investors.
It’s easy to fail in this industry. Incredibly easy.
Yet, there is a right way and a wrong way to fail. As an industry, it’s crucial to evolve to ensure that if projects falter, they do so for the right reasons—those that pave the way for future growth and learning, rather than the ill-advised blunders we’ve grown all too familiar with. Indeed, we should strive to fail for the same reasons that other entrepreneurial endeavors typically do.
Addressing this will alleviate customer and founder concerns about inherent crypto risks and pave the way for future investment inflows. The solution? Tackling a long-standing, yet rarely discussed issue in the crypto world.
The yin and yang of Web3 failure
In early 2014, the sky fell on the world of crypto. Mt. Gox, then the world’s largest Bitcoin exchange, lost over 850,000 Bitcoins (valued at over $450 million at the time) to hackers. The platform soon after declared bankruptcy, leaving a gaping hole in the shell-shocked industry.
Despite this infamous failure being etched in crypto history, nearly a decade later, the industry still grapples with routine company collapses that would be deemed exceptionally abnormal in any other industry.
In 2022 alone, crypto losses from cyber attacks exceeded a record-breaking $3.8 billion, and we all bore witness to the downfall of FTX, a company once seen as crypto’s beacon of mainstream legitimacy. The recent SEC charges against Hex founder Richard Heart, leading to a dramatic fall in HEX’s value, further underscores the industry’s challenges.
When will crypto mature and end this recurrent cycle of loss?
While hacks, tech glitches, shady activities, and lawsuits are accepted as part of crypto’s way of life, they have no rightful place in an industry built upon founding principles of freedom, personal rights, and fairness. Instead, indicative of a mature industry fostering consumer-friendly competition, companies should fail for healthier reasons like these:
Product Market Fit
The company misread market demand, offering a product or service that wasn’t desired.
Scaling
The company succeeded in its initial niche but couldn’t scale into adjacent opportunities.
Strong Competition
Either a rival outpaced the company, or the company couldn’t stand out in a crowded market.
Preventing bad failures
Preventing bad failures in business comes down to three strategies: risk avoidance, risk management, and risk transfer.
Avoiding risk—especially risk the company doesn’t get paid to take—is often the best strategy for projects to employ. Proper legal entities can help shield founders from personal risk (a lesson the Ooki DAO learned the hard way) and onboarding a KYC partner that handles and stores sensitive data helps avoid the liability associated with hacks.
Most risks can’t be entirely eliminated, leaving it up to founders to engage in proper risk management to minimize liabilities and build a strong operating system by hiring the right talent, retaining legal counsel that has crypto industry expertise, providing regular financial reports, securing a banking partner that provides consistent payments and financing access, etc.
Unfortunately, even the best risk management programs leave entrepreneurs with some residual risk. On/off ramps have anti-money laundering risk no matter how strong their compliance program. Custodians have digital asset loss risk. Decentralized exchanges have fat-fingered trade risk.
That’s why there’s risk transfer through business insurance, where projects can pay another company to take the risk on their balance sheet instead.
This is an area where the crypto industry has historically faltered, grappling with limited insurance availability, exorbitant premiums, and inadequate coverage—until Vouch stepped in.
Vouch is the first comprehensive insurance solution that caters to the unique needs of Web3 participants, featuring four core coverages:
- Directors & Officers Insurance
- Errors & Omissions Insurance
- Cyber Insurance
- Crime Insurance
Business insurance does more than protect the company. It boosts the confidence of investors by reducing the likelihood of company failure. It helps companies grow faster by unblocking large enterprise contracts that typically require insurance. It attracts more customers by creating another layer of trust where the customers know they’ll be made whole if something bad happens.
Vouch’s business insurance—enhanced with crypto-specific coverages—is more than just downside protection. It’s a cornerstone for greater upside.
Embracing maturity: the imperative of insurance in crypto
Facing impending regulations and institutional involvement by companies like Blackrock, it is time for the crypto industry to rise to the occasion and mature. Even the best companies suffer setbacks, but there’s no reason for them to turn into catastrophes. Failure should happen for the right reasons, not because of a risk that could’ve been transferred to an insurer.
Insurance is the key component that crypto is missing, and Vouch is leading the charge to make it happen.
To request an invitation to join Vouch’s Web3 protection policy private beta, visit this webpage for Blockworks readers.
This content is sponsored by Vouch
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