How to Invest in WEB3 with its Intrinsic Value 

The prolonged crypto bear market makes it necessary to rethink some essential questions. At #Insights, we shared our thoughts on the buzzword “Web3” and its investment. The report is our thinking in the targeted stage.

How to Define Web3?

Firstly, it is necessary to define an important concept.

Web3 is an umbrella term or abstract designation for a new business model or collaborative relationship, the underlying layer of which is the blockchain, a key technology consisting of the Internet, cryptography, and distributed computing. Blockchain is in essence a big table of data readable by global Internet users, and its writer is determined by a consensus mechanism (learning from Mr. Jianshuo Wang). Because it is readable by everyone and difficult to tamper with, it costs very little to reach a blockchain-based consensus, and trust is thus generated.

Further, since Web3 is an abstract term, it is necessarily rich in observations, interpretations, and even definitions.

  • Those who value individual sovereignty and data privacy will emphasize the role of Web3 in data affirmation, arguing that Web3 primarily allows users to take back the sovereignty of their accounts (identity) and data.
  • Those who are dissatisfied with the monopoly of the Internet platform opine. Web3 has transformed the relationship between business and users, where users should not only be consumers but also owners of products/protocols/platforms, and Web3 adds an element of ownership in addition to the read/write norms of Web2;
  • Others see Web3 as more of an idea that promotes resilience, openness, autonomy, transparency, and decentralization, and DAO (decentralized autonomous organization) as the best practice of this idea for human collaboration.
  • There are also many who see Web3 as a frothy tech narrative that currently provides a medium primarily for speculators (cryptocurrency).

All of these statements may be true.

That is to say, investors should figure out their specific needs, and then find a perspective from which they define Web3 based on their own needs.

For example, the computer is a statistics and arithmetic tool for a financial assistant, and a color screen showing TV episodes for the old lady who retires at home. Thus, the definition of a computer as “an electronic device with the ability to process information at high speed” makes no sense for them. So what perspective should investors have in WEB3?

There are 2 perspectives can be considered as below:

  • What economic and business values that Web3 provide?
  • How do business projects leverage their values?

Intrinsic Values: Free Market + Credit Machine

“What new value does Web3 offer compared to the past Internet paradigm?” This is the most common question asked by Mint Ventures during the job interview.

Investors should have a preliminary answer to this question before doing something long-term in the Web3 space – starting a business, practicing, or investing.

When compared to conventional internet projects, Web3 is often introduced with the following features:

  • Web3 projects introduce token incentives to place great emphasis on economic models.
  • Web3 projects are decentralized, so its product business is often determined by community governance.
  • Web3 projects share the value of its projects with the community and users, who can not only use the protocol but also “own it”.

These features are indeed more common in Web3 projects, but they are not the intrinsic value of Web3, because they are not a good answer to the question “What new value does Web3 provide?”

As we know:

  • Previous Internet products have been equally adept at designing financial incentives. “Qutoutiao” (NASDAQ: QTT), a content syndication project, for example, went public (albeit now defunct) after gaining a huge number of users by the read-to-earn model. Traditional online games, on the other hand, are good at designing economic models. After nearly two decades of operation, “Fantasy Westward Journey” is still popular for its in-game props and currency system, which are models for many GameFi projects.
  • Decentralization is the only means, not the purpose; and the token-based community voting mechanism is highly similar to the traditional shareholder meeting system. 
  • If a user “owns the protocol” by holding tokens, does holding shares in a company mean “owning the company”?

It is far from that simple.

Web3 is indeed a new “paradigm” that encompasses not only the blockchain technology and the crypto products built on it but also the trend of thought and innovation standards. Greater freedom and cheaper trust are the core values offered by this new paradigm, where the value of the former is magnified geometrically by the presence of the latter.

“Freedom” is abundantly defined in Web3, including at least:

  • Freedom at the monetary level: Free to create an account, free to transfer money, and the property rights in the account are owned only by the user and difficult to be appropriated by force.
  • Freedom of collaboration and contracting: Free to contract with any person or project through smart contracts to carry on transactions and collaborate.
  • Freedom of using identity accounts: A system of accounts that does not depend on centralized institutions, where users can access all kinds of products with an anonymous address and feel free to exit.

And more complex freedom derived from the above:

  • Freedom to combine products: Various projects can be combined in the form of Lego blocks to create newer services.
  • Freedom of Fork Code: Advocate open source contract and it triggers the emergence of Fork and re-creation based on smart contracts for ready-made products, greatly reducing the project development threshold, and accelerating product competition and iteration (it has also caused pressure on the Forked project).
  • Freedom of open copyright: Numerous projects in the IP content category try to adopt the CC0 standard to open up IP copyrights to Public Goods (resources that are not exclusive to use, such as open knowledge).

Because of these “freedoms”, the blockchain-based Web3 world has created the largest free market in human society to date: users anonymously access and participate in the market wherever there is a network. Free markets provide foundations for the free flow of resources and for people to collaborate, produce, and innovate on a large scale, but they will not always lead to economic prosperity.  This is because resource flows and collaborative innovation can only occur smoothly if “transaction costs” are low enough.

In addition, “cheaper trust” is the second value provided by the Web3 paradigm.

Traditional systems of trust rely on justice, violent authorities, and customs and culture, an integrated consensus for people to collaborate and resolve divergences. Web3 provides a new trust system that is based on a transparent public ledger on the blockchain, open-source traceable contract code, and unbreakable cryptography.

With this new system, people are comfortable with interacting and transferring money with contracts, issuing their artwork and authenticating their rights simply, believing that their assets are difficult to misappropriate by force.

Andreessen Horowitz (a16z) says that blockchain is doing the “job of removing the gatekeepers”. It means at least two things: 1. remove the gatekeepers that stand in the way of accessing and building services, and give users “freedom”; 2. remove the bloated, bulky janitors of the old trust system and replace them with cheaper “trust” systems. It was based on vast freedom + cheap trust that an unprecedentedly large free market emerged, the pedestal for innovation and prosperity.

But the vast freedom + cheap trust cannot be achieved in one step, but a continuous evolution with the improvement of infrastructure, product innovation and continuous iteration. In this continuous evolutionary process, more freedom is released with lower-cost trust. For example, L2 scheme based on ZK (zero-knowledge proof) technology increases privacy protection (enhances freedom) while improving capacity (reducing cost).

Intrinsic Values in Investment

Understanding the intrinsic value of Web3 is critical since its the beginning of project evaluation in the practical investment. There are 2 go-to questions while evaluating a Web3 startup project: why the project is being done with the Web3 approach and what problems the blockchain solves. 

If the “token incentive” is considered to be the feature and value of Web3, investors will go after “xx to earn” type of projects and reckon that all Internet products are worth redoing in a xx to earn way.”

If “decentralization” is considered to be the main value of Web3, then why many projects have not only failed to solve the original problem after decentralization but have become even worse. But from the perspective of “freedom” and “trust”, many excellent projects are found to have developed well, often because they have deployed “freedom” and “credit” of Web3 in the right way:

  • Stablecoins enable people all around the world to transfer money across borders cheaply and quickly as long as they keep their private keys safely. People no need to be concerned about the security of the asset. (perhaps taking regulation out of the equation, if they are using centralized stablecoin). For the first time, users experienced great freedom and high efficiency in money transfers.
  • Compound, a borrow-lending protocol, offers people unprecedented freedom of financial services to deposit/withdraw assets without having complex financial procedures. Additionally, the on-chain bank has no branch offices or human capital. The trust can be established due to its open source code and smart contracts, and it is built on the Web3 trust system, which greatly reduces the cost of trust.
  • Synthetix, a synthetic asset and derivatives platform, can theoretically create mirror assets of all financial assets, such as stocks, bonds, precious commodities, and derivatives, providing users with a wealth of trading options. This is for the free creation of financial products. People trust and trade such assets, not because they are live on NASDAQ or ChiNext, but because of the transparent underlying asset pledges, the open source code, and the oracle machine.

Leading Web3 projects have identified the lack of “freedom” and “trust” in traditional services, and have leveraged blockchain to provide a more competitive solution.

Even if these are examples of DeFi (decentralized finance),  doesn’t the lack of freedom and the high cost of trust exist in social, music, gaming, education, scientific research, politics, organizational management, and many more areas?

Yes, they do exist.

As the infrastructure matures and the raging innovations and combinations collide in the right direction in a competitive market, Web3’s business and social practices will debut in more areas, when the problems are identified and solved in the right way.

The Power of Web3 Does not Lie in Invading Old Systems But Comes From New Demands

Web3, a new trust system, is not in opposition to traditional trust systems based on justice, custom, and centralized institutions, but rather in the long run is a collaborative relationship, each with its own scenarios of application. This means that some problems can be solved with Web3, but it is unnecessary and costly.

For example, the concept of Refi (Regenerative Finance), Real estate on-chain, may not be necessary to recreate via Web3 due to low demand and high cost. 

Firstly, who are the on-chain demanders? Real estate or Carbon credit? No demanders, no drivers. 

The USD stablecoin gives the best example of bringing off-chain assets to the chain due to huge demand. At that time, crypto natives needed a stable monetary medium, so they brought USD onto the chain. The scale of USD stablecoins is unrivaled now.  

Secondly, both property and compliant carbon credit are based on assets that are issued, circulated and validated by traditional credit systems. It must be very difficult to move on from the traditional credit systems. 

Furthermore, there is no need to tokenize carbon credits if regulators such as Verra and Gold Standard don’t recognize on-chain carbon credits at all. If the Housing Authority does not register the title of the house you bought from another person, there is no point to transfer the corresponding NFT in this case.

To sum up, just give back to tradition the assets that traditional credit systems rule. Web3 does not acquire the real demand from the introduction of off-chain assets, but from the “recreation” of valuable services and assets on the chain.

Likewise, it doesn’t make much sense to let the artist upload the artwork created offline, but the artist can create the next work in digital format (“online” is the basis for “on-chain”) and use NFT as the contract medium to debut it on Ether. In this way, the work is created based on the Web3 credit system and is a native on-chain asset. In the medium term, we are more optimistic about projects that are born in the Web3 credit system, considering both business models and assets.

Closing Summary

The free market that WEB3 produced may be the largest incubation pool for future business innovations because innovation is most likely to emerge in systems where the hand of God does not exist and where participants compete on an equal footing.
In such a system, participants who survive on administrative monopolies will be eliminated. Those competitors who find the right needs, evolve desperately and hold an open mind will sustain.

This is the reason why we firmly believe in Web3 ultimately.