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Web3 is the next generation of the internet that will redefine our everyday digital experiences. Leveraging cryptography and distributed-ledger technology, Web3 is laying the framework for a user-owned and controlled internet. A tsunami of Web3 projects has emerged, unlocking new opportunities for various industries like financial services, gaming, esports, media, entertainment, retail, and more.
The Web3 ecosystem is currently undergoing significant growth in terms of funding from venture capital. There is an ever-expanding list of Web3 startups, be it DeFi protocols, NFTs, decentralized autonomous organizations (DAOs), play-to-earn (P2E) games, data storage and social media services.
According to a report by DappRadar, venture capital funds and investors have already invested more than $2.5 billion into blockchain gaming and related infrastructure during the first quarter of 2022 alone. That’s an enormous increase relative to the $4 billion total invested in 2021 and the $80 million in 2020. And this is just one aspect of the expansive Web3 ecosystem.
Another report, published on GitHub, suggests that there are more than 18,000 active developers in the Web3 ecosystem who commit their code to open-source blockchain projects at least once every month. The report further clarifies that the real number is likely higher as it doesn’t consider the development work done on proprietary Web3 projects.
By all metrics, the growth of Web3 has been unprecedented. But it still has a long way to go before entering the mainstream-adoption phase. Although investor and user interest in Web3 products and services is increasing, several factors need to be addressed to accelerate the ongoing transition.
For Web3 to truly thrive, there are three critical areas that Web3 investors, developers and users need to address.
1. Users need to shift their mindset to a “user-owned” model
In the current Web2, “as-a-service” iteration of the internet, users essentially don’t have a say in the future direction of the products or services they utilize. In most cases, users and owners of the platform or service tend to be separate until said platform or service lists in a public stock market, which allows for greater ownership accessibility amongst users.
Sure, shareholders are invited to vote on specific initiatives, but ordinary investors are far from being the driving force of corporate change. Even after purchasing shares, the amount of decision-making power granted to smaller shareholders via ownership is relatively minimal, preventing them from taking a seat at the table with institutional investors or funds that have more power to influence corporate decisions.
The Web3 model, on the contrary, offers true ownership. Tokens enable early and decentralized ownership of the platform or service users enjoy. Existing users who previously compromised on near-zero ownership in private companies must become acquainted with the responsibilities of ownership and governance. They need to realize the power of this “ownership” and the extent to which they can contribute and influence the development direction of a product or service.
By investing at an early stage, even an average individual can become part of the project’s governing body, thereby driving the product roadmap in conjunction with the community. The decision-making process becomes transparent, inclusive and fair — attributes that don’t ordinarily exist in the Web2 ecosystem.
2. Investors need to change to a “community-driven, collaborative and participatory” mentality
In the Web2 paradigm, investors vie for percentage of control and board seats in order to ensure value capture and governance oversight.
However, this approach is less effective in Web3. Decentralized ownership is a key founding principle of Web3. Network effect can be best accelerated via decentralized ownership among community members who can have multiple roles (user of service, investor, supplier, business partner) within the ecosystem.
3. Projects need to think of a sustainable way to attract users
Usually, projects generate immense hype within a short period of time with token incentives. There is no doubt that such campaigns quickly attract users and liquidity providers, which ramps up the key metrics that everyone evaluates.
However, this practice has its drawbacks. It tends to attract mercenary capital and token hunters who have no appreciation or loyalty for the platform’s purpose and long-term vision. Second, artificially pumped key metrics driven by short-term incentives tend to obscure an accurate evaluation of product-market fit. Third, over-expensing token reserve is equivalent to wasting market budgeting on things that don’t truly matter in the long run, leaving the projects with much less “ammunition” in their war chests down the road.
Instead, every project should design the tokenomics thoughtfully. It is a good idea to start allocating tokens only after projects have found the right audience that share similar interests and goals.
We are still in the first inning of Web3. Although the phrase “We’re still early” has been overused, it is not a trope. It sounds cliche because it’s true — we are still very early. I hope that I have provided some food for thought for those of us who are hard at work building the next generation of the internet.
Emma Cui is CEO and founding partner of LongHash Ventures.
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Author: Emma Cui, LongHash Ventures