#20: Web3 in Central and Eastern Europe (CEE) - an overview
All you need in order to start understanding the region
This is a long post, so I’m stacking most of the value up top, then following with my musings on things like trends and future.
Web3 resources in CEE
My team compiled a very incomplete list of Web3 projects happening in Central and Eastern Europe. Web3 is a slippery term, so many of the projects are listed just because they claim to use DeFi / blockchain / crypto to do … something. They range from those with solid traction to those with a front page and a promise to just strong development teams without a particular product. All the links to their social media accounts are in there, as are the links to their career pages, for all the job seekers out there. I’ve created a public twitter list with all the accounts from the sheet.
I’d absolutely love feedback about projects we’ve missed; I’m sure there are loads. See the end of the article for more ways to contribute.
In my team’s research, we came across a few other resources that might be useful. Again, super incomplete. General CEE funding trends, new VC funds raised in 2021, a list of VCs operating in the Baltics, Bulgaria, Romania, Czech Republic, Lithuania. Most of these have little to do with Web3 but will give a flavor of what’s happening.
Useful sources to follow: CEE Valley, Vestbee, The Recursive, sifted.
Web3 project trends in CEE
No regional thematic specificity. There’s no such thing as a typical CEE Web3 project and the distribution of value propositions is roughly the same as you’d find in other geographies. The focus is on onboarding (exchanges, wallets) making money (trading, staking), and making payments. Then there are quite a few teams in infrastructure and services, with a few projects anticipating regulation in the space (KYC, AML, DID). Projects with a globally unique value proposition are few; projects with a defensible R&D moat are a handful. This is not a criticism because the same holds true for Web3 projects globally and is typical of nascent industries.
Fluid identity. On average, things go like this: A Web3 project starts in CEE. If it goes really well the team, or part of it, relocates to the West. If it’s not such a huge success then the team behind it refocuses on providing services and infrastructure to other projects. Successful projects from other parts of the world hire teams in CEE for the talent and the price. It’s often hard to understand what is a CEE project. Say, as a stretch, is Polygon one, with a Balkan co-founder and a team in Belgrade? Regional VCs often claim in their decks that the region is 10x underfunded. The truth is more nuanced: talent from the region often contributes and succeeds in more diffuse ways than their counterparts elsewhere.
Talent is stronger than projects. The calibre of people I’ve met and worked with, or whose research I’ve read, far outshines the current project offer. This only reinforces the point above.
How can CEE win the Web3 game
With the above trends in place, let’s look at what needs to happen for CEE to catch the Web3 train and profit from it. I’ll split this into what projects and investors need to do.
Intro
But first, to set the scene. In my writeup on the NEAR protocol, I made a thesis about the three phases of DeFi and how they will play out. In short, phase one has been libertarians, techies and speculators. Phase three will be the one where your grandmother uses DeFi without knowing it, as all the technology has been abstracted. The in-between phase is phase two, which we’re entering. It will feature a failing of 99.9% of the projects out there. The projects that survive will be those that have real-world value and can build a lasting community.
The best approach to Web3 in the coming period is therefore to understand that there’s no such thing as Web3. There are products and services that solve problems, or don’t.
What we currently have is a loose vision of the world where people own their data, have access to better and cheaper financial services, can be paid fairly for their creative work, and have better ways of governing their communities an advancing important causes such as climate action. For the moment, few Web3 projects conclusively move the needle on any of those promises.
It’s important to embrace this skepticism and to make a habit out of listening to smart opponents of the industry rather than just shillers with big bags to sell. DeFi won’t improve the world. Specific projects based on it will.
Projects
With the intro out of the way, here’s some unsolicited advice for those planning Web3 projects in CEE.
Be different. Don’t be the next on-ramp, don’t be the millionth PFP project. For a while this was a good strategy since the industry was very young; the space is too busy now. If many of your competitors next door, not to mention in Silicon Valley, are working on the same idea, chances are they’ll collectively outraise and outbuild you.
Take on risk. An entrepreneur in Singapore, the US or Switzerland has higher opportunity costs than a CEE one. Psychologically, they need to feel more “sure” about an idea than you do. You can be freer to take chances, experiment and iterate. Currently, the image of CEE is that of competent outsourcing teams. More money will start flowing when we change that to a hotbed of edgy ideas backed up with credible research. This will create many more failures but many more unicorns as well. VCs will feel more comfortable making bets.
Work from the vision backwards. Start from the above premise that people don’t care about Web3 but about their pain points. See a world where those pain points are solved. Ask yourself honestly if blockchain and DeFi are really the solution or if the same thing can be achieved by good ol’ SQL. Most of the time the answer will be the latter. Ask your users what they want and iterate from there, as all good businesses do.
Anticipate regulation. A few of the early projects became big fast and regulators now might need to live with them. That ship has sailed. If you want big, institutional money to start flowing your way your project needs to be regulation-proofed. If local, international and global regulation is tough to navigate that’s a good thing - it will also be tough for your competitors.
Be global. DeFi is one of the most global industries there have ever been. Moats based on language and locale can be defensible for a while, especially in B2B markets, but are likely to evaporate down the road. You can of course still treat your local market as the initial niche to capture, but your vision needs to be global, because your competition will be.
Think cross-chain and multi-chain. Being married to one platform while the L1 wars are still raging (with L2 ones to follow) is not a great idea. What is a good idea is to allow for the flexibility while making use of the immense funding opportunities that many of the L1s provide in their quest to foster ecosystem growth.
Love the bear market. The projects that are ruling the space now got built in the bear market. It’s tempting to yearn for those high valuations that the bubble provides but that comes with more competition and less need for business rigor. Many teams will give up in the inevitable downturns; good for you.
Make stuff seamless. Everyone likes good UX and ease of use. Your company will IPO in phase three of Web3, where this will be the norm. Build for that future now.
Investors
A few ideas for what CEE investors need to do.
Help with the legal framework early on. Provide an end-to-end service for operations ranging from setting up a company in a suitable jurisdiction to issuing tokens to treasury management that abides by local regulation and puts the project in a position to attract non-CEE funding down the road. Investment DAOs such as MetaCartel and The LAO are good examples to follow in terms of this service.
Speaking of Investment DAOs. We need more diverse ways of investing. Not every competent investor wants to spend time on a 2-year beauty contest to raise a VC fund. The line between venture and hedge funds is being blurred as token investment comes into play and horizons become shorter. Informal networks of investors already exist in the region. DAOs are not a bad way of organizing, with advantages (speed) and drawbacks (consensus-driven = risk averse). Investors should keep thinking creatively in this regard. And be as ready to take on the risks as the projects are.
Be a bridge to the government. Many people in CEE live in effective “stabilocracies,” i.e., societies that feature relatively free elections but where freedoms of expression and organization are curtailed and corruption is a fact of life. Different factions in the same government might try to foster innovation, pretend like they foster innovation, or merely extract profit from the innovators. It’s the investors’ job to prove their claimed added value by engaging the government so that the most advantageous climate for the entrepreneurs results. That’s all assuming the endgame here is successful companies run by people who choose to stay in their countries of origin; for many VCs that’s not the endgame.
Be a bridge into sustainability. Sustainable finance and ESG-based investing constitute the other uber-trend of our time, along with crypto. Imagine we brought them together! The best-case scenario are DeFi projects that provably improve the world - reduce carbon footprint, enhance social inclusion, promote good governance - while making money for investors. The potential of such initiatives is endless. The big caveat is that, just like Web3, sustainability is an area full of greenwashing, posturing and fluff. The disciplined investor will have a clear idea of how sustainability is operationalized, i.e., what the criteria are and how different projects meet them, or not. The VCs need to educate themselves and, by extension, the LPs and the entrepreneurs. The LPs are especially relevant - while many institutional investors already have sophisticated sustainability metrics in place, other LP segments often struggle to wrap their mind around the topic. They also associate the concept with lower returns which doesn’t need to be the case, especially in DeFi. I wrote more about the topic, and proposed a common-sense methodology, here.
Summary
It’s early. Nobody knows how Web3 will pan out. This is good. CEE projects and investors might be uniquely positioned with their talent density and their capacity for risk taking to shape the narrative and profit from the trend.
How you can contribute
If you enjoyed some of this content then please do let me know about projects I’ve failed to include. I’d also like to compile a list of accelerators and research centers working on all things Web3, as well as of regional events on the topic. My twitter is here, Linkedin here.