Web 3.0: A Seat at the Investor’s Roundtable

Web 3.0: A Seat at the Investor’s Roundtable

The next generation of the internet is at our doorstep.

Netscape in 1995. Source: NPR

“Why the obsession with blockchain?”

“The main use case is Bitcoin speculation.”

“It’s just another technology to be incorporated, like AI.”

Investors often wonder about the industry’s unquenchable confidence in the potential of blockchain technology. Many bearishly suggested that decentralized ledger technology remains just another tool for enterprises to eventually cut costs or do business more efficiently.

Truth be told, few have managed to take the necessary step back to appreciate and assess the 2nd and 3rd order effects of an unfolding digital revolution. For traditional investors and curious onlookers eager to take a look behind the scenes, here is where you will find the untold perspective of blockchain as it forms the actual foundation an entirely new Internet will be built upon:

Welcome to Web 3.0.

What is Web 3.0?

Netscape in 1995. Source: NPR
  • The Internet started with Web 1.0, where users could mainly find read, and obtain information (informational websites like Alta Vista, GeoCities);
  • Entering into Web 2.0, we can now interact freely with a relentless stream of digital content (applications like YouTube, Instagram);
  • In the next phase, Web 3.0 will not only allow for access to data as we know it today, but also replicate the same behaviour with digital assets (economies like Bitcoin, Ethereum)

The current limitations of Web 2.0 means that the same interaction with digital assets is not yet possible because of the “double spending” problem. In a world where data can be reproduced indefinitely, our long-standing reliance on trusted intermediaries such as banks and platforms is easily understood.

The advent of distributed ledger technology, and most commonly blockchains, is thus precisely powerful in allowing the impossible. We can now achieve free movement of digital assets, drawing upon the immutable nature of blockchains as a foundation to verify and validate transactions, ownership, and ultimately trust.

Creators of software are like the masters of the digital universe, where they can freely create, copy, and destroy anything.

For the very first time, with blockchain, cryptographers cracked the omnipotent stone paradox by creating a “stone so heavy they cannot lift it”. In this case — Digital assets which they cannot control as long as the user holds the keys.

At the same time, digital assets may in themselves include data presented in other shapes and forms, whose origin can be tracked against a particular source, a particular time, by a particular party(s). For example, the history of your internet browsing, your e-commerce purchases, or your location data. This spectrum also extends to include traditional and intangible assets like your money, your house, or even your identity.

Recommended reading on blockchain: technology, business, vision

What sets Web 3.0 apart?

Netscape in 1995. Source: NPR

Sharp eyed critics are quick to point out that this is not unlike the status quo. Do we not already have digital banking, e-government, and various internet platforms pulling along the economic wagon?

“..When an online service is free, you’re not the customer. You’re the product.” — Tim Cook

As we purchase goods and services, or engage free platforms that monetize our attention, unknowingly we then give away the true ownership and responsibility of our digital assets. More than ever, we are at the mercy of others to uphold the fundamental right to protect our digital property, privacy, and by extension — autonomy.

With a continuous data feed spurring the growth of giant monoliths, it comes as no surprise that Google, Apple, Facebook, Amazon and Microsoft all face antitrust issues. In building out digital kingdoms within ultra-defensible moats of data, these technological titans have isolated or even stifled innovation outside of their walled garden ecosystems. In return, these siloed monopolies mark themselves as attractive targets for increasingly adept cyber-attacks.

Existing problems with the centralization of Web 2.0 companies:

Recommended reading for surveillance capitalism, big tech’s data dominance, and data security

Why invest in Web 3.0?

While lawmakers scramble to regulate away the flaws of Web 2.0, a more organic and effective movement for Web 3.0 has started gaining traction. Blockchain has zipped through technology hype cycle within a few years, and ~84% of companies globally are already actively preparing for its eventual adoption.

So far, the industry has forged ahead with fresh enthusiasm, with startups in the space scooping up $822 million in the first half 2019 alone. As the wave of growth brings on increasing maturity, we have witnessed the growth of blockchain companies moving into Series B funding and more, with noted examples such as Elliptic and Anchorage. 2019 also saw the first-ever SEC-approved token sale undertaken by Blockstack, as well as Canaan Inc., first blockchain company to head down the IPO route.

Beyond the exuberance, 3 major aspects in the fundamental nature of Web 3.0 companies will drive their inevitable rise:

1. Unprecedented pace and freedom of innovation

Netscape in 1995. Source: NPR

For example, a Web 3.0 car sharing platform can immediately integrate with existing services for driver reputation, car loans, payments, and even parcel delivery marketplaces, without signing any agreements and minimal technical effort.

Instead of tech giants building super-apps, start-ups can seamlessly integrate to form super-ecosystems.

Built on the same/interoperable protocol, Web 3.0 products and services are synergistic by nature. Components of infrastructure can be pieced together as building blocks. Offerings can be bundled to deliver an improved experience. Derivatives can be created without permission. In other words, any value-adding infrastructure, product, or service in a Web 3.0 ecosystem can create a ripple effect for complementary companies.

Even today, we see early embers of this promise in the finance industry. DeFi, or Decentralized Finance run on blockchain, has witnessed a meteoric growth from $181 million of AUM in 2018 to close to $700M at the start of 2020. The spark behind this growth: Composability — the ability to combine distinct services for an entirely separate proposition. For example, InstaDApp, a smart wallet, allows users to combine 2–3 financial products with just one click. With the industry embracing inherently interoperable solutions, the proliferation of a more robust set of DeFi building blocks are creating choices that were simply not possible before.

Across Longhash’s portfolio: Polkadot, an interoperable platform for flexible, autonomous economies to act together; AlphaWallet, a programmable mobile wallet engine for the web3 world; and Plasm by Stake Technologies, which enables developers to launch a high-speed custom blockchain within minutes.

Open Web 3.0 ecosystems also create freer markets, allowing long tail players to acquire users and reap fair rewards, regardless of their size. This is possible because digital assets are now inherently controlled by the user, and the ecosystem collectively reaps benefits from the economies of scale. A renewed environment lays the stage for more user friendly and competitive products to rival the closed-door innovation of technology giants.

In Web 3.0, the winners are no longer those who most effectively kill off competition and trap users, but those who truly and consistently serve their needs.

For example, Web 3.0 social media posts could be automatically shared/ viewed across any platform. The only difference are the features (e.g. AR face filters) and user experience (e.g. news feed prioritizes positive posts). A Web 3.0 social media platform can let its new users port in personal information and all their contacts instantly, while accessing the same content as before. Crucially, this shifts the focus of the battleground to one of user experience and value proposition, as users can easily revoke and migrate data in any instance of data abuse or exploitation.

Across LongHash’s portfolio: Xanpool, the world’s first automated peer-to-peer crypto to fiat platform; Polkascan by WEB3SCAN, the first and only multi-chain explorer in the Polkadot ecosystem; and Mintable, a digital marketplace for creators to own and monetize unique ERC-721 tokens.

This open and interoperable mode of interaction is not possible for Web 2.0 companies unless they willingly share their data, allow 3rd parties to integrate freely, and allow users to port in and out freely. And even then, Web 2.0 companies will introduce security flaws when integrating openly, because they control user data and permissions.

2. Nothing to steal, nothing to hide

Netscape in 1995. Source: NPR

By design, Web 3.0 companies return digital ownership and control to users, in the same sweep removing the risks stemming from the storage of confidential information with only one party.

For example, a Web 3.0 e-commerce platform may allow users to import their social media selfies for suggested fashion recommendations. However, the platform does not store the users’ login details, selfies, browsing behavior, purchase history, or payment details. The threat is simply eliminated without the need for information to be leaked beyond its owner within Web 3.0 infrastructure.

It is time we take control of our own identity, our personal information, and our secrets. They have failed us far too many times.

Across LongHash’s portfolio: Keyless, a decentralized protocol for authentication and identity management driven by user-friendly, secure biometrics, as well as AID:Tech, the world’s first decentralized digital ID platform bridging interoperability across blockchains.

At the same time, the open-source nature of protocols inspires confidence when it comes to enforcing greater standards of security. While there were some painful lessons to be had initially, hygiene auditing of smart contracts and public code has quickly become the norm among Web 3.0 projects. Developer communities also continuously monitor for vulnerabilities, and have in fact disclosed flaws responsibly on multiple occasions. Encouragingly, this presents an additional layer of protection on top of professional security audits and conventional bug bounties.

Yet, the industry continues to be abuzz with news of various cryptocurrency exchanges getting hacked. And that’s because most of them are still Web 2.0 centralized custodial solutions which hold users’ credentials, 2FA, and private keys. Increasingly, there is a strong push towards decentralized exchanges (DEX) and decentralized finance (De-Fi), with many of the top exchanges setting up their own DEXes, and existing ones gaining traction.

Across LongHash’s portfolio: Button Wallet, a messenger based multi-cryptocurrency wallet that stores private keys in users’ QR codes, as well as Polkawallet, a one-stop platform for management, staking and governance of cross-chain assets, with self-ownership of private keys.

This user self-sovereign approach, and open-sourced/ transparency-focused mode of operations, is not possible for Web 2.0 companies unless they expose their code and diminish their roles by letting users take back control of their data/ digital assets. A common argument against this move is that companies will lose their competitive edge or advantage—which brings us to our next point on Web 3.0 native ways to jump-start growth.

3. A new way to grow

Netscape in 1995. Source: NPR

The ICO madness peaked in 2017 (raising $5–7B) and 2018 (raising $10–20B), surpassing global early-stage VC funding volume. It has largely subsided by 2019. While the one-track obsession with tokens is reminiscent of the dot-com bubble with its “irrational exuberance”, this also signifies the start of an exponential journey. Companies founded in the dotcom era like Amazon, eBay, PayPal were accelerated by venture capital, IPOs, and the inherent scalability of software to become giants we know today.

By democratizing the creation and transference of verifiable digital assets, Web 3.0 companies are able to issue said assets to incentivise stakeholders, partners, and users. This is typically in the form of a cryptographic token, and the possibilities of its application remain limited only by our imagination. Aside from obvious use cases in gamification, the flow (velocity) of digital assets can have a real economic impact or represent intangible properties. As an example, tokens that are ‘staked’ or locked as collateral can create economic value proportional to the income expected.

For example, a Web 3.0 e-commerce platform can issue tokens to be “staked” or locked by merchants to earn the right to sell goods, and kept as collateral in case of fraud. This creates an economic value for the token proportional to the income expected by the merchants. Another mechanism could then exist to issue these tokens to reward developers who contribute to the platform, or for new user referral. The tokens can also be used for discounts, payment, or unlocking premium features. By controlling the issuance and flow (velocity) of these tokens, a mini economy can be created around each company.

Ethereum, for instance, shows early success of this approach in its creation of a thriving developer ecosystem. In typical open-sourced projects, co-founders and core developers often have to bootstrap for many years, and struggle to monetize even with network effect kicking in. Ethereum upends this paradigm by issuing a native token, which is required to use their platform. This allows them to monetize from day 1 of launch, a move virtually unprecedented in the open-sourced software world until then. To solve the cold-start challenge, they are distributing $20 million USD worth of grant funding towards the development of the core protocol. Another co-founder of Ethereum also contributed hundreds of millions funding projects building key infrastructure and applications on their blockchain. Where does the money come from? They essentially created their own asset based on the shared vision of the network, which has become one of the most liquid crypto-assets today. The results speak for themselves: within 5 years Ethereum has amassed ~1200 developers, the same order of magnitude as giants like Linux and Apache. While there are still many kinks to be worked out in token engineering around governance, valuation, and mechanisms, its immense potential is undeniable, and the entire industry is iterating rapidly around various models in search of maturity.

Why are so many people buying machines to calculate random numbers, and using up more energy than all of Switzerland? There’s no company, no founder to hold liable. Only code, and Bitcoin.

Because tokens can be created by any entity, a Web 3.0 company does not necessarily require a large amount of venture capital upfront, although it is still standard practice for now. By effectively designing the mechanism to bootstrap and create token value, incentives perpetuate the growth of the ecosystem in a virtuous cycle. As early adopters benefit the most from such a growth trajectory, this stands in stark contrast to the oft-debated problematic investment paradigm of today: that of unprofitably burning cash as fuel for growth. Web 3.0 companies have a unique opportunity to channel fund flow to higher impact activities such as R&D, product development, or strategic business development.

For these mechanisms involving tokens to be fully effective as economic instruments, the assets need to be provably scarce, and governed by transparent mechanisms. This is not effective for Web 2.0 companies unless they make their processes transparent to their users and give away control of these digital assets (tokens) created for this purpose.

To sum it up:

Investing in Web 3.0 means betting on a new breed of companies — which are more synergistic, more secure, and more efficient in growing.

The spirit of Web 3.0 is more respectful of users, more collaborative to partners, and more benevolent to competitors. The more level playing field also means more investments are likely to generate returns, rather than the winner-takes-all dynamic we see in most digitized industries.

Web 3.0: What’s next?

As with investing in any new trend or asset class, those who are willing to take the risk earlier on will reap the most rewards. The potential for Web 3.0 to transform entire economies is clear.

It is true that the technology is still nascent, regulation is still being clarified, and companies are still experimenting with various approaches. However, the potential for Web 3.0 to transform entire economies is clear.

Netscape in 1995. Source: NPR

“ We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”

— Amara’s Law

As it is, momentum is steadily gaining traction across the landscape:

  • More than 3000 applications are live on major blockchains
  • ~7000 developers are working on open-sourced components of blockchain infrastructure, applications, and smart contracts — multiple times the contributors of other open-sourced ecosystems like Linux or Apache
  • Outside of the tech sector, governments like China and Singapore are racing to become leaders in Web 3.0 by deploying blockchain in key industries. Major corporations have already deployed pilot and live solutions. International research bodies like World Economic Forum and United Nations recognize its potential at a global scale.
Netscape in 1995. Source: NPR

To invest in the next trillion-dollar ecosystem, to shape the future of the internet economy, to charter the course of the next technological decade— the time for Web 3.0 is now. Are you in for the ride?

About LongHash Ventures

LongHash Ventures is a global blockchain incubator and investor. We are venture building and investing in early stage blockchain start ups, with a mission to enable the Web 3.0 blockchain native economy.

We are funded by world-leading blockchain VC Fenbushi Capital, leading Chinese conglomerate Wanxiang Group, and the Singapore government.

We source projects globally, leveraging especially on our strong Asia network across key hubs like Singapore, China, Hong Kong, and Japan.

In addition to providing capital, we support portfolio companies with a rigorous hands-on venture building platform with strategy formulation, go-to market execution, and our comprehensive investor network.

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