Web3 for TradBiz

Web3 for TradBiz

Understand Web3 and crypto foundations, use cases and value propositions, as well as implications and investment opportunities

Web3 for TradBiz executives and investorsWeb3 and crypto foundationsWhy embrace Web3 nowInevitable Web3 futureCrypto and Web3 basicsAdvanced Web3 topicsUsing crypto walletsUse cases and value propositionsWeb3 use case categoriesDecentralized Finance (DeFi)NFTs and the MetaverseDecentralized Autonomous Organizations (DAOs)Web3 implications and opportunities TradBiz market and business model implicationsInvestment opportunitiesEvidence of mainstream adoptionCharting your path forwardEnd notes

Web3 for TradBiz Executives and Investors

If you’re an established business executive or investor, you’re likely already familiar with cryptoassets like Bitcoin and Ethereum, and you may have heard a bit about Web3. By Web3, we mean the Internet-enabled market paradigm to which we are beginning to transition, in which users own open, distributed networks that leverage cryptoasset incentives. You may be well into a successful business career where you earned the right degrees, mastered best practices, took on leadership roles, made tough decisions, and chalked up some wins along the way. But perhaps because you’ve done so well, you may still be firmly rooted in traditional business (TradBiz) models, and thus haven’t yet invested the time to understand and incorporate Web3 into your business and professional life.

This series introduces Web3 to TradBiz executives and investors, providing an overview of core concepts, emerging Web3 use cases, business implications and investment opportunities. We’ve adapted this content from the Web3 working sessions we facilitate regularly with leadership teams, investors, and other executives, drawing from strategic research we’ve conducted since 2015. Given the speed at which the Web3 space evolves, we update this content frequently based on market developments and reader feedback.

If you’re ready to begin your Web3 journey, get started with part one, Web3 and Crypto Foundations, which includes Why Embrace Web3 Now, the Inevitable Web3 Future, Crypto and Web3 Basics, Advanced Web3 Topics, and Using Crypto Wallets. Next, explore part two, Web3 Use Cases and Value Propositions, which provides an overview of Web3 Use Case Categories, with deeper coverage of Decentralized Finance (DeFi), Non-fungible Tokens (NFTs) and the Metaverse, and Decentralized Autonomous Organizations (DAOs). Part three, Web3 Implications and Opportunities, leverages what you’ve learned to discuss TradBiz Market and Business Model Implications, Investment Opportunities, and Evidence of Mainstream Adoption. Wrap things up by Charting Your Path Forward, with curated resources to help you explore, invest, engage, and build in the Web3 future.

Begin by exploring Why Embrace Web3 Now.

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Why Embrace Web3 Now

We’re frequently asked by TradBiz executives and investors why they should invest time and effort to address Web3 now, especially given the 2022 downturn in asset values often referred to as crypto winter by the Web3 community. Our answer is that we believe Web3 innovation is inevitable, and that learning about, assessing and addressing Web3 opportunities can create value across multiple dimensions, including improving investment performance, innovating traditional business models, enhancing professional careers, futureproofing yourself and organization, and even changing the world. If you’re interested in applying Web3 to your business, the crypto winter provides you with the time and space to explore and act upon Web3 developments, enabling you and your organization to be positioned when crypto markets recover.

Why TradBiz  Executives Should Embrace Web3

Adding crypto and other Web3 assets to investment portfolios provides the potential for improving performance. While the 2022 bear market has seen leading cryptoasset prices decline significantly from 2021 highs, these declines came off tremendous appreciation in leading cryptoasset values over the past five years. For example, while the S&P 500 returned a solid 22% annual growth in the five-year period ending December 2021, Bitcoin’s value grew at an impressive 164% annually, while Ethereum surged at an incredible 364% annual growth rate. We’re not recommending that you become a Web3 degen and ape your entire portfolio into crypto-based investments. However, since we are still early in Web3 adoption, cryptoassets may have the potential to outperform other asset classes in the foreseeable future. If you haven’t already started investing in cryptoassets, consider allocating a small percentage of your portfolio to Web3-related investments. Even a small two-to-five percent allocation has the potential to increase the risk-adjusted returns of your overall portfolio over time. This isn’t investment advice – we recommend that you do your research, find knowledgeable advisors that you trust, invest in reputable established projects, and never invest more than you can afford to lose. We discuss Web3 Investment Opportunities in more detail in part three of this series.

Innovate traditional business models by incorporating Web3 technologies, ecosystems, and communities. Companies are already leveraging Web3 innovations to expand markets served, establish deeper customer relationships, develop new value propositions, automate business processes, attract and retain talent, improve supply chain efficiencies, and improve partner relationships. These translate into revenue growth from new and enhanced Web3-enabled offerings, as well as reduced operating expenses and improved capital efficiencies. You can also explore TradBiz Market and Business Model Implications further in part three.

Advance careers, improve work-life balance, and increase rewards by developing Web3 skills. There has perhaps been no better time to develop new skills in the past decade, as Web3-focused projects and organizations seek to attract scarce talent. There is already a meaningful migration of Web3 talent from traditional technology firms as ambitious professionals set their sights on the next opportunities. In fact, Web3 software developers are amongst the most sought-after employees in today’s markets. Moreover, opportunities exist for Web3-fluent professionals across a broad range of functions, including marketing, community engagement, finance, project management, investing, creative development, and more. Career prospects are not limited to traditional so-called W2 employment, but also include contributing to decentralized autonomous organizations (DAOs) instead of established companies, working from anywhere rather than physical offices, and even using pseudonymous identities where individuals are compensated for value delivered rather than who they are or where they went to school. Learn more about Decentralized Autonomous Organizations (DAOs) in part two of this series.

Futureproof yourself and your organization from Web3 disruptions that could disintermediate you or your company. If the above reasons aren’t compelling enough, consider the need to futureproof yourself and your organizations from the potential disruptions that the Web3 paradigm is enabling. Just like Jeff Bezos frequently stated, “Your margin is my opportunity” when explaining Amazon’s low-price, low-margin strategy to establish market share, Andreessen-Horowitz’s Chris Dixon describes the transition to Web3 with an updated, “Your take rate is my opportunity.” Similar to how Amazon disrupted so many markets, Web3 ecosystems are poised to do the same by providing compelling value propositions in which users gain most of the economic benefits of participating in decentralized, open-source ecosystems, rather than profits accruing to centralized, proprietary-technology companies. We examine some of the ways Web3 is disrupting markets in TradBiz Market and Business Model Implications.

Change the world by solving problems that couldn’t be solved before. The most compelling use cases and value propositions during the Web3 transition will come from teams developing ecosystems that solve problems that simply couldn’t be addressed previously with TradBiz models. Opportunities abound to bootstrap new communities using token network effects, innovate never-seen-before decentralized finance (DeFi) solutions, reward users with participate-to-earn (P2E) models, monetize relationships between content creators and fans, exit startup projects to community ownership rather than via acquisitions or initial public offerings, and many more. If you’re passionate about addressing market needs that have not yet been solved, then maybe Web3 provides the building blocks you’re looking for to change the world. To begin to develop intuition about the broad range of potential problem-solving opportunities, check out the nearly 100 use cases identified in Web3 Use Case Categories.

There are many compelling reasons for TradBiz executives and investors to embrace Web3 now. If any of the above dimensions are compelling – improve investment performance, innovate TradBiz models, enhance professional careers, futureproof yourself and organization, and change the world — then read on as we explore the Inevitable Web3 Future.

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Inevitable Web3 Future

We are transitioning to a new Web3 paradigm in which users own open, distributed networks enabled by and incentivized with cryptoassets. While there is no consensus on a single definition, Chris Dixon of venture firm Andreessen-Horowitz defines Web3 as “…an Internet owned by users and builders orchestrated by tokens.” Well-known commentator Fred Wilson from Union Square Ventures provides greater detail, describing Web3 as “…the next generation of the web in which decentralized apps (dApps) operate on top of a shared data layer and users have control of their data and the ability to move between dApps with little or no switching costs.” In this section, we will take a closer look at Web3, provide context on previous Web1 and Web2 phases, discuss how the transition to Web3 is already happening, and provide our perspective on why the Web3 future is inevitable.

Web3 is the third major wave of internet-enabled change impacting the economy. Over the last three decades, internet-enabled markets have evolved from the read-only Web1, to the read-write Web2, and are now transitioning to the read-write-own Web3.

Inevitable Web3 Future

The commercialization of the internet in the 1990s brought about what we now think of as Web1. This was a time of experimentation as millions of people came online for the first time, hobbyists and businesses set up first-generation websites, and venture-funded businesses contributed to the dot com boom, bubble and then crash. While many early internet companies, such as AOL and Netscape, didn’t make it, those who did – including Amazon, Angie’s List (now Angi), eBay, Priceline (now Booking Holdings), Shutterfly, and ZipCar – paved the way for continued internet innovation and adoption.

Whereas Web1 was characterized by users consuming published content provided on static websites, Web2 users began sharing information with others via increasingly centralized websites and mobile applications. Today we’re arguably at the height of the Web2 period, dominated by companies like Alphabet (Google), Amazon, Meta Platforms (Facebook), Tencent, Alibaba, Salesforce, ServiceNow, PayPal, Netflix, Airbnb and many more. There is no question that Web2 innovation has delivered tremendous value propositions across a wide variety of use cases; however, this has come at a heavy price, including the rise of mega companies in lieu of open competition, the monetization of user data at the expense of privacy, the risk of data breaches due to centralized applications, the threat of users being de-platformed or censored, and the loss of user voice in the evolution of the applications where people spend an increasingly greater portion of their lives.

Recognizing these challenges, a growing army of entrepreneurs, software developers, creatives, investors, and users are hard at work enabling the transition from today’s dominant Web2 to the more decentralized Web3 paradigm. Enabled by trustless “Internet money” pioneered when Bitcoin was launched pseudonymously in 2009, the Web3 definition has expanded to include a vast variety of multi-directional, peer-to-peer applications where users create content in exchange for shared ownership of distributed protocols and applications. Web3 has grown far beyond Bitcoin, encompassing more than 20,000 crypto-enabled ecosystems, 500,000 developers, and thousands of businesses and investors.,

We believe this Web3 transition is inevitable as attitudes and behaviors across stakeholders change. As we cover in detail throughout this series, Web3 projects increasingly utilize an open-source, robust Web3 technology stack, rather than proprietary, IP-protected technologies. Self-organizing communities of participants with ownership of distributed applications are emerging, replacing product and service consumers who are marketed and sold to by individual companies. Institutional investors increasingly recognize cryptoassets as a new asset class rather than shunning crypto and digital assets. Enterprises are becoming participants in distributed ecosystems, rather than owners of markets with centralized control. And regulators, accepting that crypto is here to stay, are focusing more on protection and compliance, rather than aversion and distrust of decentralized systems.

Inevitable Web3 Future

Yet we’re still early in the transition to Web3. Total crypto market capitalization was hovering around US$ 1 trillion when this series was published in mid 2022, down from more than US$ 3 trillion in late 2021. In contrast, the total market value of all companies in the S&P 500 index totaled US$ 31.9 trillion as of June 30, 2022, with Apple, Microsoft, and Amazon each more valued than the entire cryptoasset market.

If you’re a TradBiz executive or investor, this means you still have time to understand how the Web3 read-write-own paradigm may redefine how your markets work, allowing you to identify opportunities for new value creation, and respond to potential disruptions to existing business models. The next article, Crypto and Web3 Basics, starts you down the path of what you need to know to get started.

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Crypto and Web3 Basics

Before exploring Web3 use cases and business implications, it is important to start with a few foundational basics. These include understanding conceptually how blockchains work, the role of crypto keys, passwords and wallets, tradeoffs in blockchain designs, and the emerging Web3 technology stack. If you’re already familiar with these topics, feel free to jump ahead to the next section, Advanced Web3 Topics.

Let’s start with the blockchains and other distributed ledgers that provide the foundation for cryptoassets and Web3. Think of a blockchain as a ledger containing transaction data and account balances, much like any other spreadsheet or database, but that are replicated, shared, updated, and synchronized across a distributed network of computers, or nodes. The key breakthrough is that blockchains provide mechanisms for ensuring that everyone using them agrees on the value of all the transactions, without any one entity owning or controlling the network. Blockchains solve the so-called double-spending problem, preventing any specific cryptoasset from being used more than once.

Blockchains and Distributed Ledgers

A blockchain like Bitcoin works when a transaction is initiated by a user holding some of the blockchain’s cryptoassets, or tokens. The requested transaction is broadcasted to a distributed, peer-to-peer network of nodes, which run an algorithm to authenticate the transaction. These validated transactions are then combined with others to form a new block, which is added to the end of the blockchain. Each block records the permanent, time-stamped transaction transparently in an immutable, or non-changeable manner. In this way the requested transaction is completed, with any changed balances recorded in the appropriate users’ addresses. Many blockchains also provide additional functionality enabling smart contracts, other kinds of digital assets, and the wide variety of use cases that we will explore later.

Blockchains can be public, private, or a hybrid blend of both. Public blockchains like Ethereum and Bitcoin are permissionless, meaning that anyone with the appropriate technology and resources can participate. Blockchains can also operate privately, such as when organizations adopt technologies like Hyperledger to enable industry-specific supply chains and other processes. Still others, like Ripple, operate as hybrids, with transactions processed privately, but relying on a public blockchain for finality.

Users interact with blockchains using wallets, crypto keys, and backup seed phrases. Private and public cryptographic keys determine the digital identity of users in crypto ecosystems, enabling them to complete transactions which are recorded on the blockchain. These keys are stored in software or hardware based crypto wallets. For a basic value transfer transaction, a sender signs a transaction using their public key, which is then validated by the network, transferring the value to the receiver’s public address. Wallets increasingly allow users to recover their private crypto keys using a series of 12-24 simple words generated by the crypto wallet, providing users with back-up access to underlying private keys, even if the wallet is destroyed or lost.

Every blockchain makes tradeoffs between scalability, security, and decentralization. The Crypto Trilemma refers to how blockchains can only maximize two of three dimensions – scalability, decentralization, and security – which forces trade-offs in network design. Scalability is determined by network throughput, typically measured in the number of transactions per second. Security is the ability to ensure immutability of the data that has been recorded on the blockchain, as well as resistance to attacks from malicious actors. Decentralization is the degree of diversification in ownership, influence, and value in the blockchain.

Every blockchain’s design has made tradeoffs that provide different profiles of scalability, decentralization, and security. For example, Bitcoin is arguably the most decentralized and secure blockchain, but is limited to an average of five transactions per second and a 10-minute transaction confirmation time. Ethereum, an open source blockchain with smart contract functionality launched in 2015, is the second largest cryptoasset in market capitalization and provides the foundation for many Web3 use cases. Ethereum performs a bit better than Bitcoin, at 12-25 transactions per second with a six-minute confirmation time, while still providing good decentralization and security. On the other hand, Solana, a competitive chain to Ethereum, processes about 2,800 transactions per second with an average processing time of less than one second; however, the Solana network is far more centralized than either Bitcoin or Ethereum, with just 1,861 validators compared to Bitcoin’s 15,752 nodes and Ethereum’s 407,550 Beacon network validators.

Crypto Trilemma

Blockchain teams continue to evolve solutions to address the crypto trilemma trade-offs. These solutions include developing more recent consensus mechanisms like Proof-of-Stake, enhancing layer one protocol performance with sharding to split blockchains into smaller partitions, and increasing block sizes to store more transactions. Newer innovations include creating layer two solutions like state channels, off-chain computing, and side chains that increase transaction volumes while leveraging the underlying security of an existing layer one chain.

Blockchains also use different types of mechanisms to validate transaction and maintain consensus across their networks. Proof-of-Work (PoW) was the first consensus mechanism implemented for a blockchain, commonly associated with Bitcoin. With PoW, network nodes compete by solving mathematical puzzles in a process called mining, to earn the right to create the next block in the chain. PoW chains are often both decentralized and secure, but operate at low transaction speeds and high energy intensity, as miners need significant capacity of advanced servers to solve puzzles quickly.

Proof-of-Stake (PoS) was conceived to address some of the limitations of PoW. In PoS, validators are selected from a node pool based upon the amount of cryptoassets each has staked in the network. Transaction fees charged by the network are used to incentivize validators, with some platforms also offering block rewards. PoS networks have the advantages of being energy efficient, performing at higher throughput, and maintaining high security; however, they also risk higher centralization as the validators with the largest holdings have increased influence. Many newer blockchains use some form of PoS as their consensus mechanism. Importantly, Ethereum is currently in the process of transitioning from its original PoW mechanism to a new PoS model, which will make Ethereum far more energy efficient and pave the way for planned scalability enhancements.

Smart contracts are programs stored on blockchains that run when certain conditions are met. These programs consist of code, called functions, and data, referred to as state, that run when certain conditions are met and verified by the nodes. Smart contracts provide the building blocks for automating transactions and decentralized applications, such as transferring cryptoassets, rewarding users, and sending messages or notifications. Smart contracts are often coded in a dedicated programming language like Solidity, Ethereum’s JavaScript-like native language. Virtual machines are required to interact with and deploy smart contracts on a network. These are sandboxed programs that emulate an entire computer system, including CPU, memory, and storage. The Ethereum virtual machine (EVM) is the most widely used virtual machine. While native to the Ethereum network, the EVM has also been adapted to work on many competitive blockchains. Smart contracts enable blockchains to do much more than simply send and store units of value like Bitcoin does. In fact, the bulk of Web3 use cases discussed in this series are built on blockchains that make extensive use of smart contracts.

Many different types of crypto tokens have emerged, with associated token standards to ensure that smart contracts and applications are consistent and composable. For example, Ethereum tokens are referred to by their Ethereum request for comment (ERC) number. ERC-20 is the standard for fungible tokens, widely used in Ethereum-based projects in value, staking, governance, and other use cases. Non-fungible tokens, referred to as NFTs, often utilize the ERC-721 standard to develop and trade collectibles, profile pictures, art, access keys, and other virtual assets. A growing number of other ERC standards exist to meet a wide variety of use cases, such as preventing accidental burning of tokens (ERC-223), building more functionalities on top of tokens (ERC-777), bundling transactions (ERC-1155), and accommodating subscription models (ERC-1337).,

Web3 ecosystems are categorized into four layers that we refer to as the Web3 technology stack. Let’s use what we’ve learned so far to see how this all comes together in the Web3 technology stack. It’s useful to think about Web3 ecosystems categorized into one or more of four layers: protocols, enablers, applications, and wallets and custody. Protocols, such as Bitcoin and Ethereum, are the underlying layer one blockchains and other digital ledger technologies that process and store transactions. Enablers are layer two solutions that improve protocol extensibility and scalability, including helping to address the crypto trilemma challenge discussed earlier. These include Ethereum rollups, state channels, sidechains, oracles, and bridges. Distributed applications, or dApps, are layer three solutions built on top of blockchains that cater to specific use cases and value propositions. As we discuss later, there are already thousands of dApps operating across nearly 100 use cases at various stages of development and user adoption. Finally, layer four is composed of the mechanisms for using and protecting cryptoasset keys and related data, including crypto wallets as well as institutional custody solutions.

Web3 Tech Stack Layers

Crypto regulations are lagging but catching up. We’ll finish up this section by briefly discussing how regulators are approaching the Web3 space. This is a complex topic, as regulations are in flux and different across jurisdictions around the world; however, we believe it is safe to assume that regulators will increasingly address crypto, and that a balance will emerge between enabling innovation while putting in place frameworks for taxation, fraud, securities, and consumer protection.

The U.S. currently treats cryptoassets as property, which means that the gains or losses from trades are subject to capital gains taxes. The U.S. Securities and Exchange Commission (SEC) has also issued guidance that the sales of tokens classified as securities must be registered, expanding the use of the Howey Test to determine when cryptoassets are securities. Exchanges offering security tokens trading must also be registered with the SEC. On the other hand, the U.S. Commodity Futures Trading Commission (CFTC) classifies cryptoassets as “commodities” under the Commodity Exchange Act, making them subject to the agency’s compliance oversight.

U.S. SEC Howey Test

Cryptoassets are also subject to anti-money laundering (AML) and know-your-customer (KYC) requirements. For example, the Financial Crimes Enforcement Network (FinCEN) published in 2013 that crypto service providers fall under money services, making them subject to AML/KYC measures. Exchange users are therefore required to submit identity documents, addresses, credit cards, and bank account information as part of the registration or onboarding process.

With both the SEC and CFTC vying for control over cryptoasset regulation, the market is waiting for more explicit guidance from the U.S. executive and legislative branches that has yet to arrive. In March 2022, U.S. president Biden issued the Executive Order on Ensuring Responsible Development of Digital Assets, calling for an inter-agency exploration of crypto regulation, including user protection, financial stability, national security, innovation, financial inclusion, and technological support. As a response, the U.S. Treasury and Justice Departments released separate statements that they will be working closely with international partners to monitor and prevent illicit cryptoasset-related activity, bridge regulatory gaps across countries, promote inclusive access to financial services, and develop standards for digital payment architectures.,

From the legislative branch, the U.S. House of Representatives introduced the U.S. Virtual Currency Market and Regulatory Act in 2021, which would have required the CFTC to recommend enhancements to existing U.S. crypto regulations, but failed to pass in the Senate. In June 2022, the Senate began reviewing a bipartisan proposal, the Lummis-Gillibrand Financial Innovation Act, which aims to guide the digital asset space, including making cryptoassets transactions under $200 tax-free, defining most cryptoassets as commodities rather than securities, backing stablecoins with fiat reserves, granting the CFTC with exclusive spot market jurisdiction over cryptocurrencies defined as commodities, and confirming the SEC and CFTC as the main regulators of digital assets.

Given regulatory treatment, there are significant differences between utility and security tokens. While these differences are subject to change based upon proposed regulations, they do provide useful guidance when evaluating the regulatory implications of different Web3 ecosystems. Utility tokens are a unit of account that provide access to the functionalities provided by a network. In many jurisdictions, utility tokens are exempted from laws and regulations governing securities, and therefore are accessible to everyone. Bitcoin has been classified by the U.S. SEC as a utility token given its fully decentralized nature and history. Ether is also considered a utility token by many, including the U.S. CFTC; however, some believe there is risk of security classification due to the initial coin offering (ICO) Ethereum’s founders used to launch the network.

Security tokens, on the other hand, are considered to represent a stake in an investment contract, such as the criteria outlined in the SEC’s Howey Test. These tokens may act like or represent other tradable securities, such as stocks, bonds, and derivatives. As such, security tokens may provide financial rights, such as voting, profit share or dividends. Depending upon proposed legislation, they may be subject to securities laws, such as U.S. SEC regulations and AML/KYC. Tokens classified as securities by the SEC may limit ownership to institutional and accredited individual investors. Some Web3 projects have even excluded investors in certain jurisdictions, such as the U.S., from investing in their tokens due to potential regulatory risk.

Utility vs. Security Tokens

This distinction between utility and security tokens may be transitory, as innovation is leading to a wide variety of additional token types, including stablecoins, central bank digital currencies (CBDCs), governance tokens, non-fungible tokens (NFTs), and more. The hope is that a consistent set of frameworks will emerge from the changing regulatory environment, providing better guidance on how to classify and manage tokens across a wide variety of use cases going forward.

The crypto and Web3 basics that we’ve covered in this section provide the basis for understanding more advanced Web3 topics. As a review, we started by defining blockchains and distributed ledger technologies, explaining how users interact with blockchains use wallets, crypto keys, and backup seed phrases. You now know that the Crypto Trilemma causes every blockchain to make tradeoffs between scalability, security, and decentralization, and that there are significant differences between energy-intensive Proof-of-Work (PoW) chains like Bitcoin and Proof-of-Stake (PoS) chains like Ethereum 2.0. We explained how smart contracts programs are stored and run on blockchains, enabling a wide variety of functionality, token types, and distributed applications (dApps). We’ve seen how Web3 ecosystems can be categorized into a Web3 technology stack that includes layer one protocols, layer two enablers, layer three applications, and layer four wallets and custody. Finally, we reviewed how crypto regulations are lagging but beginning to catch up, including the debate about which tokens are classified as securities versus commodities. Equipped with this new knowledge, you are now ready to tackle a few more Advanced Web3 Topics.

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Advanced Web3 Topics

Now that we’ve covered the basics, it’s worth spending a bit more time exploring a few more advanced Web3 topics, including value exchange models, tokenomics, bridges, and security.

All Web3 ecosystems involve multiple participants who interact and create value for each other and the broader network. Think about Web3 ecosystems as focused economies where participants are coordinated and incentivized to create value around specific use cases. Value exchange models show how value is transferred between stakeholders to achieve an ecosystem’s objectives. These stakeholders frequently include a diverse set of participants, including users, developers, foundations, DAOs, validators, oracles, and investors. Users are the individuals, organizations or even software bots that are the primary beneficiaries of an ecosystem’s use case, such as people acquiring, storing, or spending a cryptoasset. Developers create, update, and manage the software on which the network runs, which often includes not only blockchain-specific functionality, but front-end websites and mobile apps used to access the ecosystem’s services. Some ecosystems have established non-profit foundations in jurisdictions like Switzerland that play a role in guiding and funding the ecosystem’s development. Others have organized around a decentralized autonomous organization, or DAO, which we discuss later. Layer one and two blockchains need some combination of miners, validators, and nodes, depending on the type of consensus mechanisms they use. Oracles may be used to provide validated external information that the ecosystem’s smart contract need to function, such as a cryptoasset’s current market price. Investors provide capital to the ecosystem in exchange for tokens that have the potential to appreciate over time, comparable to the roles venture capital and private equity firms play in the TradBiz world.

Value Exchange Model

Tokenomics are mechanisms for driving ecosystem value. Just like traditional economies are based upon economics principles, so are Web3 ecosystems. Tokenomics are the mechanisms for creating, allocating, distributing, using, and exchanging tokens within these economies. In this sense, designing and governing a Web3 ecosystem is a bit like playing the role of central banker, as one needs to take into consideration concepts like token supply, issuance, distribution, burning, and fee structures. Maximum supply is the highest number of tokens that will ever be in circulation, usually determined upfront in the design of the ecosystem. For example, Bitcoin’s maximum supply of 21 million is encoded in the protocol, making it exceedingly difficult to change. Circulating supply refers to the number of tokens that have been issued to date, which in Bitcoin’s case is a bit more than 19 million. Issuance mechanisms determine how tokens are created and issued, differing greatly based upon the consensus mechanisms and use cases of each ecosystem. Once tokens are created, distribution mechanisms guide how they are allocated and distributed to stakeholders, such as rewards or incentives for ecosystem participation. Some ecosystems also have burning mechanisms meant to decrease token supply, which can be used to mitigate inflation or increase the future value of tokens. Finally, there is a wide range of fee structures used to fund ecosystem operations and development.

Tokenomics

When evaluating the long-term sustainability of Web3 ecosystems, it is important to think about how each ecosystem’s tokenomics will impact the token supply curve over time. For example, Bitcoin had high token emissions in its earlier years, gradually decreasing over time with so-called halving rates that occur approximately every four years. Other projects, such as alternative layer one EOS and decentralized exchange Uniswap, are inflationary with token emission based on pre-determined inflation rates. Many decentralized apps have fixed supplies, with the maximum number of tokens minted at the time of launch. Examples of fixed supply ecosystems include Basic Attention Token and Chainlink. Binance coin and lending platform Aave utilize deflationary models, minting a maximum supply of tokens upon launch, which are then bought back and burned based upon the project’s utilization level, until the minimum supply has been reached. Mint-and-burn models, such as distributed telecom provider Helium and more recently, Ethereum, implement burning mechanisms to control inflation, based upon the project’s utilization level, and may or may not have a maximum token supply. Other token supply variations exist to manage stablecoins, NFTs, and other digital assets.

Cross-chain bridges enable interoperability between Layer One and Two ecosystems. Until relatively recently, there were limited options to move digital assets across different layer one and two ecosystems. To move value to a new ecosystem, users first had to exchange fiat currency or an existing cryptoasset, such as Ether, for a cryptoasset native to the desired target chain, like Sol on the Solana network. This is changing, as cross-chain bridges have emerged to connect two or more blockchain ecosystems, facilitating the transfer of cryptoassets, enabling dApps to utilize multiple blockchains, and allowing users to participate across ecosystems more easily.

Bridges work by allowing users to lock a cryptoasset into a smart contract on one network, which then issues the equivalent asset on another network. For example, to utilize decentralized finance (DeFi) apps running on the Ethereum-compatible Polygon network, one deposits Ether into the Polygon bridge, which then issues an equivalent amount of wrapped Ether on Polygon. While bridges provide more seamless experiences across blockchains, they are more centralized than the blockchains themselves, and are thus subject to greater security risks. In fact, there have been several notable hacks of bridges that have resulted in the loss of cryptoassets valued in the hundreds of millions of U.S. dollars.

Bridges to Multichain Future

Security is an important consideration when evaluating Web3 solutions. Keep in mind that Web3 transfers many responsibilities from companies and other legal entities to smart contracts and ecosystem users. This means that for many use cases there are no equivalents to banks, government depository insurance, or written legal contracts. Because of this, Web3 users should be aware of the various attack vectors that could potentially threaten crypto ecosystems, including those targeting network states, nodes, consensus rules, and token owners.

Layer one and two networks need to be designed to fend off a broad range of network state and operations attack vectors. These include double spending attempts to spend the same tokens twice, denial-of-service shutdowns caused by excessive spamming, 51% attacks where a single entity gains control of a blockchain’s consensus, forks that cause permanent divergence of blockchains, and many other attacks.

Every Web3 ecosystem, regardless of its layer in the Web3 stack, is also subject to smart contract risks, in which vulnerabilities in the smart contract code could lead to internal failures or external attacks. Potential smart contract risks include a malicious actor taking control of the code to burn existing tokens, mint new tokens, or transfer tokens to unauthorized addresses. Risks could also include programming logic mistakes that cause the smart contracts to not work the way they are supposed to. Fortunately, teams are learning from mistakes as Web3 matures, implementing tools and best practices to mitigate smart code risks. These include completing comprehensive contract testing on testnets before deploying live on mainnets, conducting smart contract security audits, hiring developers with up-to-date knowledge of vulnerabilities, and launching bounty campaigns to identify bugs early. Smart contract insurance providers, such as Nexus Mutual, have also emerged to cover users in the event of losses.

While the above discussion focused on blockchain and smart contract risks, token ownership and custody represent an equally important risk. Many crypto owners place their tokens into the custody of a third-party service, such as a centralized exchange, thereby removing control of the assets from the actual owner. By centralizing tokens into a single entity, this opens the possibility of high-value honeypots that hackers could attack. A common saying in Web3 is “not your keys, not your crypto,” which refers to the trust a user places in a custody provider who holds crypto for them, rather than securing keys individually.

Even when individuals hold keys themselves, there are numerous ways in which they could lose access to their cryptoassets. Phishing attacks, for example, use fake emails, websites, links, impersonations, tech support or other methods to gain access to a user’s private keys. Private keys and backup seed phrases should never be kept on an unencrypted computer, since this could make them accessible by hackers via malware infections. There is also the real risk of simply losing access to private keys, such as when losing a mobile device where the user has not properly backed up and secured their seed words. Best practices include being constantly on guard for attacks, as well as properly backing up and securing the seed phrases used to access crypto accounts.

Web3 Security Risks and Attacks Vectors

These advanced topics provide a more complete picture of how Web3 works. In this section, we’ve covered how value exchange maps help us map how multiple participants in Web3 ecosystems interact, creating value for each other as well as the broader network. You now understand that tokenomics help coordinate ecosystem value, and include mechanisms governing token supply, issuance, distribution, and fees. Cross-chain bridges are enabling interoperability between layer one and two blockchains, paving the way for a more seamless multi-chain future. Finally, we discussed why security is such an important consideration when evaluating or using Web3 solutions. The next section will focus on understanding and Using Crypto Wallets, including setting up your own if you haven’t done so previously.

←     Crypto and Web3 basics Using crypto wallets     →

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Using Crypto Wallets

Now that you’re equipped with a solid foundation of Web3 knowledge, it’s time to roll up your sleeves and set up your first self-custodied crypto wallet. If you’re already familiar with crypto wallet, feel free to skip to the next section, Web3 Use Case Categories. Otherwise, let’s learn about the different kinds of crypto wallets, their common features, and some of the most popular wallets currently available. We’ll then take you through the steps to setup the MetaMask mobile wallet, a popular Ethereum-compatible software wallet. Finally, we discuss how you can use blockchain explorers like Etherscan to track transactions that you and others have made.

Crypto wallets are used to secure, receive, spend and track cryptoassets. It’s worth emphasizing that cryptoassets are different than the physical wallet used to store credit cards, identification, and money. Cryptoassets are not stored in wallets; instead, crypto wallets are the software or hardware that manage the private and public keys controlling cryptoassets on their respective blockchains. Custodial wallets store crypto keys on third-party servers, such as crypto exchanges or the cloud-based servers of software applications. Self-custodied wallets store crypto keys directly on user devices, giving owners full access, control, and responsibility over their cryptoassets. Wallets can utilize either hot or cold storage. Hot wallets are those connected to the Internet, making them more accessible, but also opening the risk of being hacked or compromised. Cold wallets store keys offline, providing higher levels of security in exchange for lower accessibility. Wallets come in a variety of formats, including mobile, web and desktop apps, hardware, and even paper.

Crypto Wallets

Most wallets provide basic security and management features, with some providing advanced functionalities. Up until recently, crypto wallets were quite difficult to use and often had limited functionality; however, wallets are getting both easier and more fully featured as Web3 evolves. Expect most wallets to require a password or pin to secure access, backup and recovery of private keys using 12-24 seed words, and generation and scanning of QR codes for faster, less cumbersome transactions. Common features also include importing or exporting paper wallets, supporting multiple cryptoassets and blockchains, and providing customer support to address issues and concerns.

Look for some wallets to provide many more advanced features. These include two-factor authentication using a mobile device or security key, multi-signature transactions that are confirmed by more than one private key, and cross-platform availability across desktop, mobile, and web applications. Other useful features include trading cryptoassets directly in the wallet via integration with exchanges, paying merchants with cryptoassets, exploring blockchain transactions, and monitoring live crypto market data in portfolios.

Crypto Wallet Functionalities

Most crypto users start with online wallets, migrating over time to software- and hardware-based wallets. People usually get started in crypto by setting up an online, custodied account with a crypto exchange like Coinbase, or Binance, or a crypto-enabled securities account like Robinhood. These companies provide web wallets that also serve as onramps into crypto by linking user bank accounts, thus enabling movements to and from fiat currencies like U.S. dollars. In this case, users place trust in these companies to custody the crypto they indirectly own.

As people become more familiar with crypto, a frequent next step is to move some of their holdings to software wallets, such as MetaMask or Exodus. These can be mobile apps, browser plugins, or desktop-based applications. Unlike web wallets, software wallets require users to self-custody their private keys within the app. While this provides the advantage of maintaining complete control over one’s keys (remember “not your keys, not your crypto”), it also opens the possibility of losing access to crypto through theft or lost backup seed phrases. These wallets are also needed to utilize a wide variety of Web3 applications, including decentralized finance (DeFi) and nonfungible tokens (NFTs).

Hardware wallets, on the other hand, allow users to self-custody their private keys with a higher level of security. Popularized by companies like Ledger and Trezor, these store private keys on small hardware devices that are needed to authenticate transactions done using software-based wallets. If you’re accessing a meaningful amount of cryptoassets value, we highly recommend using a hardware-based wallet.

Selected Popular Crypto Wallets

Use MetaMask to store and transact Ether and other ERC-based cryptoassets. If you’re just getting started with self-custodied software wallets, consider setting up a MetaMask mobile software wallet. MetaMask is a leading Ethereum compatible wallet, available as both a mobile app and a Chrome-compatible plugin. The wallet provides access to both Ether (ETH) and other Ethereum-compatible tokens, is used to access decentralized applications (dApps) built on Ethereum and compatible blockchains, and allows users to exchange any ERC-standard token for another.

To get started, download MetaMask from the Apple or Google app store. Open the app and tap on “Get Started.” If you already have another Ethereum-compatible wallet, you can import it into MetaMask by following the directions; otherwise, create a new wallet. You will start by creating a password for your next wallet. After that, write down the 12 seed words the app provides as your backup phrase. You will then be asked to input the seed words back in the correct order for confirmation. When storing passwords and backing up seed phrases, best practice is to not store this information on a computer or mobile device. Since these devices are connected to the Internet, they are thus at risk to hacking, theft or other loss. Instead, we recommend you write down your password and seed phrase on paper, which you can then secure in a home safe, bank safety deposit box, or other safe location. Remember if a malicious actor discovers your seed phrase, you will likely lose access to your cryptoassets forever.

Once you’ve set up MetaMask, you will have the option to buy some crypto through integration with crypto onramp providers or receive some crypto from a friend. We recommend you start by obtaining a small amount of Ether (ETH), as that is used to pay gas fees on the network that cover transaction costs.

Every transaction made using a wallet can be accessed using a blockchain explorer. Most blockchains, including Ethereum and Bitcoin, provide open, transparent access to all the transactions that have been recorded on them. This is a big deal in Web3, as it means there is detailed, accessible data about every public address that can be used not only to track activity, but for analyzing and developing intuition about every distributed application (dApp) running on a blockchain.

Blockchain explorers like Etherscan provide access to a wide variety of additional information that you can explore. Blockchain statistics allow you to learn about a blockchain’s overall activity, including transaction volumes, value exchanged, gas fees, active addresses, and hash or validation rates. You can also view details about all pending and completed transactions for any public address, along with the type and amount of assets held in any given wallet. Watch lists allow you to track and be alerted about any activity within specified addresses. Etherscan also enables dApp activity monitoring and a broad range of other resources.

Check out Etherscan to understand better how transactions work on Ethereum. If you’ve set up your MetaMask account, paste your public address (not your private key!) into the search box. Any cryptoassets you have in or transactions you’ve completed using your MetaMask account will be listed in plain view. If your Ethereum address is empty you’ll see nothing because you haven’t had any transactions yet, and thus the blockchain doesn’t know your address is active.

If this is the case, try exploring what’s in the public bags (wallets) of some well-known personalities with DappRadar, an application that tracks portfolios across blockchains. For example, check out rapper and record producer Snoop Dogg, investor and entrepreneur Gary Vaynerchuk, entrepreneur Mark Cuban, TV show host Jimmy Fallon, and more here.

Using Etherscan to Access Transactions

With your crypto wallet setup, you’re ready to explore Web3 use cases and value propositions. This section introduced how crypto wallets are used to secure, receive, spend, and track cryptoassets stored on blockchains. We’ve discussed how most crypto users start with online wallets, migrating over time to self-custodied software and often hardware wallets. By now you’ve hopefully set up your mobile MetaMask wallet and perhaps have a small amount of Ether (ETH) to play with on the Ethereum network. You’ve also spent some time exploring how the Etherscan blockchain explorer allows anyone to access and make sense of blockchain transactions. If so, you’re now ready to jump into the wide and rapidly evolving set of Web3 use cases and value propositions, including decentralized finance (DeFi), nonfungible tokens (NFTs), decentralized autonomous organizations (DAOs), and participate-to-earn (P2E) models. Keep reading, starting with Web3 Use Case Categories.

←     Advanced Web3 topics Web3 use case categories     →

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Web3 Use Case Categories

The most frequently asked question we get about Web3 is probably “What are the use cases where the value propositions of Web3 exceed what is already provided using Web2 and other traditional business models?” While we are still early in the transition to Web3, there is already plenty of evidence that distributed, crypto-based ecosystems can deliver value to users in ways that wasn’t possible before. This section describes some of the nearly 100 different use cases across eight categories we’ve identified, providing examples of Web3 ecosystems that are already poised to compete against Web2 and other traditional companies.

We’ve identified nearly 100 Web3 use cases across eight categories. Our database of Web3 use cases, based on more than five years of ongoing research, currently maintains a list of nearly 100 use cases across eight different categories – infrastructure, currencies and transactions, decentralized finance (DeFi), NFTs and asset tokenization, DAOs and DAO enablement, distributed services, enterprise solutions, and consumer-focused utility. Given the rapid rate of Web3 innovation, we expect to refine these categories over time; however, they provide a good starting point for understanding the wide array of use cases being developed and offered today.

Web3 Use Cases

Infrastructure use cases include the consensus networks and solutions for building and operating the Web3 stack infrastructure – protocols, enablers, applications, and interfaces. These include blockchain explorers, cross-chain bridges, layer two chains, data oracles, wallets, and many more.

Currencies and transactions are cryptoassets and other solutions enabling the storing and transferring of financial value between people and other entities. Examples include stablecoins linked to fiat currencies like the U.S. dollar, tokens enabling cross-border payments, remittances, and microtransactions, as well as merchant point-of-sale solutions.

Decentralized finance (DeFi) includes a rich set of Web3 native financial solutions that rely on smart contracts rather than third-party intermediaries like traditional banks, securities firms, or insurers. Notable DeFi use cases include asset management, lending and borrowing, decentralized exchanges, derivatives, and insurance. This category also includes hybrid companies integrating aspects of Web3 with Web2 business models, which we refer to as centralized DeFi (CeDeFi) or Web2.5 companies, such as centralized exchanges and crypto banks. Decentralized finance (DeFi) is explored in more detail later in this series.

NFTs and asset tokenization occur when digital or physical assets are converted into tokens to facilitate ownership and exchange. This category covers a broad range of emerging use cases, including the broadly defined non-fungible tokens (NFTs) space, with its own distinct use cases, that is discussed in Non-fungible Tokens (NFTs) and the Metaverse section.

DAOs and DAO enablement use cases describe the different types of decentralized autonomous organizations (DAOs) along with the tools to manage their operations and engage productively with their members. Specific use cases include community management, analytics, governance, operations management, token services, and treasury management. Decentralized Autonomous Organizations (DAOs) also have a dedicated section in this series.

Distributed services refer to the transformation of Web2 and other existing processes, tools, and systems into distributed solutions. Almost all imaginable Web2 use cases are open for potential disruption in the Web3 space, including distributed AI, data analytics, computing, content distribution, crowdsourcing, data storage, marketing places, networking, registries, and security.

Enterprise solutions enable a broad range of TradBiz functions, processes, and capabilities. These include accounting, advertising, human resource management, market research, product provenance, publishing, loyalty programs, supply chain management, and corporate treasuries.

Finally, consumer-focused utility use cases provide a broad range of services targeted toward consumers that haven’t been covered elsewhere. These include betting and gambling, credit and trust ratings, health and wellness, identity management, online learning, online gaming, and more.

Web3 ecosystems are poised to compete with traditional Web2 companies. There are already many examples of Web3 solutions with rapidly evolving value propositions seeking to displace existing TradBiz models and companies. We’ve included a few here to provide a sense of what is possible as Web3 continues to mature.

Web3 vs. Web2 Offerings

For example, while Web2 leaders like AWS, Google, and Dropbox dominate cloud-based data storage today, Web3 protocols such as Filecoin provide alternative models to store and access data across distributed networks in which storage providers are incentivized with tokens. The Ethereum Name Service (ENS) provides domain registry services for names ending in “.eth” that resolve public Ethereum addresses in addition to internet URLs. Protocols like Steemit, Rally, and Chiliz enable content creators to monetize their community using tokens, competing with traditional publishing platforms like YouTube, Medium, and Patreon. Content delivery networks, like THETA, BitTorrent, and Livepeer, similarly incentivize people to host content that is delivered on-demand as users request. The gaming space includes Metaverse, or virtual world, projects such as The Sandbox and Decentraland, as well as a whole new genre of play-to-earn games like Axie Infinity, going up against existing online games such as Fortnite, Roblox, and Minecraft. Cryptoassets like Bitcoin, Dash, and Ripple can be used for payments, providing alternatives to incumbents such as PayPal, Visa, and Western Union. Lending and borrowing platforms have enabled the emerging decentralized finance (DeFi) category, with code-based projects like Compound, Aave, Maker and Yearn providing services previously reserved for financial services institutions. Finally, decentralized exchanges, including Uniswap and Curve, have pioneered automated market maker mechanisms enabling users to exchange tokens without a company-based exchange.

Web3 use cases are plentiful and growing. So, to the skeptics out there, there are indeed many compelling Web3 use cases that already exist, and more are emerging all the time. You now have a sense of the eight broad categories and some of the nearly 100 individual use cases. We also provided some examples of areas where Web3 projects are seeking to compete against, and maybe even displace, TradBiz models and companies. We’re now ready to take a closer look at a few of the more top-of-mind use case categories, starting with Decentralized Finance (DeFi).

←     Using crypto wallets Decentralized Finance (DeFi)     →

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Decentralized Finance (DeFi)

If Web3 is about distributed Internet money, then decentralized finance (DeFi) projects are the protocols, distributed apps (dApps), and aggregators that put it all to work. This section provides an overview of DeFi, and then introduces core innovations like lending protocols, liquidity pools, automated market makers, non-custodial vaults, and composability. As other use cases, including non-fungible tokens (NFTs) and decentralized autonomous organizations (DAOs) increasingly integrate with DeFi, this category represents a core set of building blocks for Web3.

DeFi apps facilitate financial services directly between users without the involvement of traditional intermediaries. Whereas financial services have historically been reserved for large, regulated companies like banks, brokerages, insurers, payments processors, and asset managers, Web3 enables decentralized finance applications through the use of smart contracts, liquidity providers, and users. The DeFi category has grown from almost nothing in 2020 to approximately $US 40 billion of total value locked (TVL) across 120+ projects as of July 2022.

Lending protocols enable users to borrow stablecoins and other tokens by depositing and using cryptoassets they own like Bitcoin or Ethereum as collateral. Lending and borrowing interest rates are set automatically by algorithms based on supply and demand, without a traditional intermediary taking most of the spread. Examples include multi-asset lending platform Aave as well as stablecoin provider Maker.

Decentralized exchanges allow the peer-to-peer trading of tokens enabled by automated market makers and liquidity pools, without the need for a central party. Uniswap enables the trading of a broad range of token pairs on the Ethereum mainnet and other Ethereum-compatible networks, whereas Curve focuses on the efficient trading of stablecoin pairs like USDC and USDT.

Analogous to traditional securities, derivatives projects provide on-chain exposure to a wide variety of other assets, including cryptoasset options, futures, and insurance, as well as tokens based upon other securities, currencies, and commodities. Examples include Synthetix with synthetic assets, dYdX with perpetual contracts, and Nexus Mutual with smart contract insurance.

Payments providers, like Flexa, Sablier and Tornado, help facilitate payment and value exchange securely, globally and privately, without the use of intermediaries. Finally, asset protocols, including Convex, Ren, and Yearn, enable a variety of asset management, cross-chain liquidity, and yield farming functionalities.

Decentralized Finance (DeFi)

Lending protocols enable lending and borrowing of cryptoassets using collateral and incentives. Think of lending protocols as a set of automated algorithms that provide many of the capabilities traditionally reserved for banks, but without any company required. Let’s take Aave as an example. Any crypto holder can become a lender, or liquidity provider, by depositing their cryptoassets into an Aave liquidity pool, using an Ethereum-compatible wallet like MetaMask. Anyone can also become a borrower, provided they have cryptoassets like Bitcoin or Ethereum to deposit as locked collateral. Loans are typically provided in stablecoins, such as USDC, which borrowers can then use however they want, such as paying living expenses, buying a car, or even acquiring more cryptoassets. Borrowers simply need to repay loans and interest to receive their locked collateral back. The primary risk to borrowers occurs if the market value of their cryptoassets falls to a predetermined threshold, where the algorithms will require them to provide additional collateral or may liquidate their holdings. All of this happens automatically, without any team of professionals making day-to-day decisions.

Lending Protocols

Liquidity pools and automated market makers eliminate order books, enabling decentralized exchanges with automated price discovery. Just like lending protocols have algorithms to automatically process the borrowing and lending of cryptoassets, decentralized exchanges use an innovation called automated market makers to enable cryptoasset trading. The Uniswap protocol pioneered this model, enabling smart contract pairs that manage a liquidity pool made up of the reserves of two ERC-20 tokens. The algorithms use Uniswap’s Token X * Token Y = k automated market maker pricing model, where X and Y represent respectively the number of available tokens, and k represents a constant. When X and Y are multiplied, the value must always be equal to the value k. Because the relative price of the two pair assets can only be changed through trading, divergences between the Uniswap price and external prices create arbitrage opportunities, ensuring that Uniswap prices always trend toward the market-clearing price. Uniswap has since evolved its algorithms to incorporate new features, and other decentralized exchanges utilize somewhat different models. However, the key insight is that decentralized exchanges enable any cryptoassets holder to participate in liquidity pools that are managed by software, not financial services institutions, creating far more efficiencies in trading cryptoassets. In Uniswap’s case, the protocol only charges 0.3% for swapping tokens, which is split between liquidity providers proportional to their contribution to liquidity reserves. Centralized exchanges, on the other hand, typically charge fees of 1% or more on cryptoassets transactions.

Liquidity Pools and Automated Market Makers

Non-custodial vaults enable investors to participate in crypto funds without handing their cryptoassets over to fund managers. While traditional finance makes extensive use of custodians – institutions that investors trust to hold their cash, securities, and other financial assets safely, non-custodial vaults, on the other hand, are smart contracts that allow investors to deposit funds to achieve some investment purpose, without the investor ever losing custody over their underlying assets. This opens non-custodial opportunities for distributed models enabling crypto indices, hedge funds, DAO treasuries, investment clubs, automated yield farming, and many more.

For example, Enzyme is a DeFi management system that provides a non-custodial vault that can be used for a wide variety of use cases. Investors can visit the Enzyme website to search for a non-custodial vault that fits their investment objectives. Once identified, they typically need to comply with the chosen vault’s requirements, which varies by jurisdiction and type of service offered, to gain access to the vault’s whitelist, allowing them to invest. They then lock a value of cryptoassets, such as stablecoin USDC or Ether (ETH) in the selected vault’s smart contract, receiving vault tokens back as proof of share. The Enzyme protocol allows the vault’s manager to make investment decisions based upon some number of predetermined, transparent parameters. Managers can also charge predetermined management and performance fees; however, they can never withdraw investors’ funds because investors maintain custody of their respective shares of the fund. Investors can monitor the vault’s performance in real time, and typically exit at any time by exchanging their share of the vault’s tokens held for the underlying value.

Non-Custodial Vaults

The composability of cryptoassets drives higher rates of innovation, enabling compounding utility and increased returns. Composability is the ability of decentralized applications to interact with and be built on top of each other. Syntactic composability enables every smart contract published on a public blockchain to be called by other smart contracts. Atomic composability allows the bundling of several small transactions across multiple dApps in a network into a single transaction that are executed together. Morphological composability facilitates the creation and utilization of application-level standards across a wide range of elements, including tokens, name registries, and wallets, which help to make functions and interfaces across dApps interoperable.

Why is this important? Because, as Chris Dixon from Andreessen-Horowitz has said, “Composability is to software as compounding interest is to finance. It’s sort of this magical thing where if you get it going, it has a sort of exponential hockey stick.” In other words, composability lets developers mix and match software components like Lego bricks – each software component only needs to be written once, and can then be reused whenever needed.

Composability is contributing to what some have called a “Cambrian explosion of innovation” in the DeFi category. Let’s look at a modified DeFi stack to explore this composability enabled innovation. Layer one and two blockchains provide the settlement layer for DeFi, as they’re used to facilitate, validate, and secure cryptoassets transactions. Additional cryptoassets are built in the asset layer, enabled by ERC tokens on Ethereum as well as comparable standards on other blockchains. Protocol standards that determine different use cases, such as decentralized exchanges, lending, derivatives, and payments, can be built on top of the foundation layers. As we’ve discussed, the application layer includes a wide range of user-oriented applications that are built on and connected to protocols, usually delivered through web-based interfaces. Yet it doesn’t stop there. An aggregation layer, sitting conceptually on top of the entire DeFi stack, utilizes composability to aggregate and add value to public DeFi dApps. These include decentralized exchange (DEX) aggregators that optimize market liquidity and do least-cost routing for transactions, as well as asset and yield management dApps leveraging non-custodial vaults.

DeFi Stack Composability

DeFi puts distributed Internet money to work. While we’ve barely scratched the surface, you now have a working understanding of DeFi basics. We’ve discussed how DeFi applications facilitate financial services directly between cryptoassets users, without the involvement of traditional intermediaries like banks, securities firms, and insurers. We’ve also explored some core enabling DeFi models, including lending protocols, liquidity pools, automated market makers, and non-custodial vaults. And you now have some intuition about how composability allows public Web3 stack components to become Lego bricks that drive exponential innovation. Let’s shift gears now and look at the emergence of Non-fungible Tokens (NFTs) and the Metaverse.

←     Web3 use case categories NFTs and the Metaverse     →

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Non-fungible tokens (NFTs) and the Metaverse

Apple founder Steve Jobs once reflected, after the launch of the iPad, that “Technology alone is not enough. It’s technology married with the liberal arts, married with the humanities, that yields the results that makes our hearts sing.” While he was referring to Apple’s DNA after the launch of the iPad, he could well have been talking about non-fungible tokens, better known as NFTs. Supported by a wide variety of use cases, NFTs are already impacting creative industries, creating billions of U.S. dollars in market value, innovating new forms of utility, attracting well-known brands, and launching innovative marketplaces. NFTs are joined by social tokens that connect content creators, influencers, fans, and communities of people together. These Web3 use cases are key enablers of the emerging Metaverse, the time in the near future when our digital lives become relatively more important than our physical ones.

NFTs are already making a dramatic impact on creative industries. What exactly are NFTs? Non-fungible tokens are cryptoassets that represent immutable ownership of scarce and unique digital or physical items. Because NFTs are registered on public blockchains like Ethereum, they provide proof of authenticity, cannot be duplicated, replaced, or substituted, but are still easily transferrable from owner to owner. Contrary to critics claiming that NFTs are simply “overpriced jpegs” that anyone can right-click and save onto their personal device, the NFT market is sizable and growing. Analytics firm NFTGo estimated the total NFT market to be worth approximately US$ 25 billion in July 2022, tracking more than 3,000 collections and 30 million individual NFTs. While most NFTs have minimal value, notable collections and artwork examples have traded in the millions of dollars. For example, the NFT artwork Everdays: The First 5000 Days, a collage from the digital artist known as Beeple, was sold by Christie’s auction house for US$ 69 million in March 2021.

A dizzying number of use cases for NFT are emerging. Pictures for profiles (PFPs) are the largest group of NFTs as measured by market value. Next come collectibles, utility, land, game, and art NFTs. These are joined by an increasing number of other use cases. Many NFTs are often developed and grouped together as unique collections of digital assets, ranging in size from a few dozen to 10,000 or more items.

PFPs are often avatars that are algorithmically generated, including headshots of cartoon characters or people, that are designed to be used as a profile picture in social platforms like Twitter. Collectibles are digital works created with the intent of being collected. Utility NFTs include a wide variety of utility outside of gaming or artistic applications, such as real estate, insurance, and nominative tickets. Virtual land NFTs represent properties or building within a Metaverse such as Decentraland or The Sandbox. Game NFTs are assets that can be used to play online games, and include characters, weapons, accessories, and skins. Art includes both manual creations as well as generative art collections that have been minted and sold as NFTs. Metaverse assets relate to shared virtual environments that people can access through a computer, VR headset, or smartphone. IP NFTs are intellectual property issued by some brands and celebrities. Social NFTs are issued by social media personalities who create digital collections linked to their personal brands. Sports NFTs are often collectibles relating to specific sports and teams. Music NFTs cover a broad range of use cases including playable music files, concert tickets, album artwork, and premium fan experiences. Domain name NFTs are web extensions (like .eth) introduced on public blockchains as smart contracts that turn hexadecimal wallet addresses into human-readable names and enable censorship-resistant websites. DeFi NFTs include any type of NFT that incorporates decentralized finance functionality. Photography NFTs are photos minted as NFTs, where creators often retain copyrights and share revenue each time an NFT is sold.

NFT Use Cases

PFPs are currently the most popular NFTs. If you’re familiar with NFTs, then chances are you’ve heard about top profile picture collections like CryptoPunks and Bored Ape Yacht Club. CryptoPunks launched as a set of 10,000 unique, low resolution, pixelated avatar heads in 2017, and helped pave the way for the ERC-721 standard that defines today’s NFTs. Distributed originally for free to OG crypto users, the floor price for individual CryptoPunks was approximately 80 ETH in July 2022, while CryptoPunks with rare characteristics have sold for much more. Bored Ape Yacht Club is a collection of 10,000 unique Bored Ape NFTs launched in April 2021 that also doubles as a Yacht Club membership card, granting access to online and real-world, members-only benefits. With a July 2022 floor price of approximately 95 ETH, Bored Ape NFTs have become a status symbol, with owners including well-known personalities like Tom Brady, Madonna, Justin Bieber, Jimmy Fallon, Paris Hilton, Snoop Dog, Mark Cuban, Shaquille O’Neal, and Eminem. Art Blocks is a platform where users can select their type of art from a curated collection of digital artists, with an algorithm randomly creating content based on their preferences. Otherdeed by BAYC founders and Sandbox NFTs are Land NFTs that allow users to own real estate in their respective virtual worlds where they can create and host experiences or showcase their other digital assets for themselves and other users. Note that NFT collections tend to be hit-driven, with many projects shifting out of the top 10 as attitudes and their popularity rises and falls.

Top NFT Collections

Some NFT collections are adding utility to art. NFTs have the potential to be far more than images registered on a blockchain. While we are still in the early days of NFT market evolution, many projects are exploring granting their owners with privileges, rights, or rewards that are unlocked by the NFTs they own. For example, Bored Ape Yacht Club NFTs provide access to exclusive parties and other events, offer rewards in the form of being able to mint new NFTs, and more recently gain a share of the associated fungible Ape Coin token. Moonbirds give users rewards, private club memberships, and access to Discord, Metaverse and IRL events, depending on how long they are locked, or nested. Gary Vaynerchuck’s VeeFriends provide holders with tickets to the VeeCon conference. World of Women, a project focused on educating women and increasing female participation in Web3, provide holders with ownership of the artwork underlying each NFT and invitations to real-life events. CryptoBaristas are PFPs that give owners access to exclusive discounts at future café locations, online coffee beans shop and merchandise shop. Proceeds from NFT sales are also used to help its partner farm in Honduras improve its coffee production and post-harvesting processing methods.

Well-known brands have entered the NFT space. The rise in NFT popularity has not been missed by consumer-focused companies, with many well-known brands across different industries dipping their toes into the NFT category. For example, Adidas partnered with Bored Apes Yacht Club and others to launch NFTs that provide exclusive access to physical and digital products as part of the company’s Into the Metaverse campaign. Competitor Nike acquired RTFKT, a well-known NFT studio, as its own response to venture into the Metaverse. Samsung introduced a television based NFT explorer and market aggregator, and created its own virtual world, 837X, in Decentraland, where users can win exclusive NFTs. McDonald’s raffled 10 McRib NFTs to commemorate the 40th anniversary of the popular product. Lamborghini created 360 Lamborghini Aventador NFTs as part of its space-themed collection. The National Basketball Association, in collaboration with Dapper Labs, launched an NFT-based trading card system called NBA Top Shot. Verizon launched a Valentine’s Day campaign with NFTs based on the worst gifts customers had received on that day. And while not a consumer brand, the government of Ukraine organized a campaign to fund their defense against Russia, which sold 1,200 NFTs for US$ 600,000.,

NFT Adoption by Brands

Users explore, sell, and buy NFTs in dedicated marketplaces. These marketplaces enable users to explore NFTs by different use cases and key words, identify top ranked NFTs by metrics like volume, floor price and other statistics, monitor recent sales activity, learn more, and even create unique NFT collections. Several marketplaces support NFTs hosted on different chains, such as Ethereum, Polygon, and Solana. Recently multiple crypto exchanges have announced their own NFT marketplaces, including Coinbase, Binance, and Gemini. However, most NFT transactions are still completed in dedicated NFT marketplaces.

NFT marketplaces come in different flavors, with different degrees of decentralization and collection breadth. Top ranked OpenSea, along with Foundation.app and MakersPlace, are examples of centralized marketplaces controlled by a single company, facilitating the trading of a broad range of NFTs from a huge number of collections. LooksRare, X2Y2, Rarible and others are also multicollection, but utilize a more decentralized design, commonly managed by DAOs. Some NFT collections also have their own dedicated marketplaces, such as CryptoPunks and CryptoKitties. These collection-specific marketplaces tend to be centralized around particular NFT studios today; however, we expect to see the emergence of decentralized marketplaces in the future.

Top NFT Marketplaces

Social tokens enable content creators to engage with their followers. Social tokens, which can include both fungible and non-fungible tokens, are used by influencers and other content creators to monetize their community by providing value-added experiences and rewards to their followers. Personal social tokens are released by well-known individuals to reward their supporters, potentially granting exclusive access to events and merchandise, confer status, and create a sense of connection with creators. For example, Los Angeles Rams wide receiver Brandon Powell’s $BP4 token provides access to exclusive football-related airdrops and exclusive merchandise. Content marketing guru Joe Pulizzi’s $TILT grants token holders discounted access to educational materials and events for content creation.

Building on top of personal social token benefits, community tokens can give holders governance rights, community influence, and revenue sharing. The Ultimate Fighting Championship’s $UFC token, for instance, provides access to exclusive content along with the opportunity to vote on polls. In the U.K., Manchester City football club’s $CITY allows holders to vote in polls organized by club, access exclusive promotions and content, and receive VIP treatment during games and other social activities.

Social platforms represent control and ownership of protocols that facilitate the issuance and exchange of social tokens. These include the native token of Rally Network, RLY, which is the underlying protocol of Rally.io, a social platform for personal social tokens, and CHZ, the native token of Chiliz, a platform for launching community fan tokens commonly used by sports and gaming clubs worldwide.

NFTs and social tokens will play important roles in the Metaverse. The Metaverse is not just a thing, but a time when we will be living much of our lives in the digital space, enabled by the convergence of technologies like artificial intelligence, augmented and virtual reality, data analytics, ubiquitous network connectivity, and yes, the distributed Web3 stack. Even though leading Web2 companies like Meta (Facebook), Alphabet (Google), and Microsoft would prefer the continued status quo with their dominant business models, we believe that much of the Metaverse will be decentralized, not controlled by a small number of companies, but rather composed of many different virtual spaces that connect and interact. NFTs promise to become the digital assets of the Metaverse, owned by users and movable across different virtual universes. Similarly, fungible tokens are likely to become the currencies of the Metaverse, just as cryptoassets are already becoming Internet money. Anticipated product launches from Apple and other technology companies will enable augmented reality experiences that blur boundaries between the Metaverse and IRL, or what is digital versus in-real-life.

Web3-based virtual and augmented reality platforms are enabling the Metaverse. In fact, there are already many Web3-enabled virtual worlds launched and evolving in the Metaverse. Decentraland, for example, is a decentralized virtual reality platform built on the Ethereum blockchain, where users can create, experience, and monetize their content and applications on NFT-based virtual real estate parcels called LAND. The Sandbox is virtual world that describes itself as a community-driven platform where creators can monetize voxel ASSETS and gaming experiences on the blockchain. Otherside is yet another example of a gamified Metaverse under development. Co-developed by Bored Apes Yacht Club creator Yuga Labs, the project intends to blend mechanics from massively multiplayer online role-playing games (MMORPGs) and Web3-enabled virtual worlds. NFT Worlds, Somnium Space, Voxels, Substrata, and NetVRk are more examples of work-in-progress, decentralized virtual spaces.

Selected Web3 Metaverse Virtual Worlds

NFTs, social tokens, and the Metaverse expand crypto beyond Internet money. While NFTs, social tokens, and Metaverse land can have financial value, they’re also about incorporating humanity into Web3, including art, utility, community, and virtual experiences. We’ve discussed in this section about how NFTs are already making a dramatic impact on creative industries, with a dizzying number of emerging use cases. Well-known consumer brands are experimenting in the NFT space, with more likely to come. Web3 users explore, sell, and buy NFTs using a growing number of dedicated marketplaces that cater to different needs and functionalities. Adding to this, social tokens allow content creators and influencers to engage with their followers, as well as enabling communities to form around common interests. Because of all of this, NFTs and social tokens will play important roles in the evolution of the decentralized Metaverse.

For our last deeper dive into Web3 use cases, let’s move on to Decentralized Autonomous Organizations (DAOs), a new form of collaboration emerging to govern and manage decentralized Web3 ecosystems.

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Decentralized Autonomous Organizations (DAOs)

Now that we’ve discussed emerging Web3 use cases, including deeper dives on decentralized finance (DeFi) and non-fungible tokens (NFTs), we might ask how are all these ecosystems going to be governed and managed? Fortunately, decentralized autonomous organizations (DAOs) have emerged as a new type of organization better suited to manage bourgeoning communities of stakeholders than more traditional structures like hierarchy-based organizations that have dominated since the Industrial Revolution. This section discusses the history of DAOs, how they are used to manage Web3 ecosystems, strengths and weaknesses compared to traditional organizations, types of DAOs, and the tools enabling DAO operations.

DAOs have evolved in parallel with cryptoassets. The concept of distributed governance arguably has been around since the birth of Bitcoin, as the process for evolving the cryptoasset’s protocol requires consensus building and adoption by stakeholders that include software developers, miners, node operators, and users. Ethereum founder Vitalik Buterin outlined his view of the “decentralized autonomous corporation” in a 2013 Bitcoin Magazine article. This was followed by the launch of The DAO in early 2016, a decentralized autonomous organization that intended to function as an investor-directed venture capital fund. The DAO raised more than US$150 million in Ether via a successful crowdfunding campaign; however, was subjected to an attack exploiting code vulnerabilities a month later, resulting in the loss of about one-third of the Ether raised. Given the magnitude of the loss, the Ethereum network was hard forked to recover the lost funds for original owners, with the term DAO becoming synonymous with this hack for several years. Interest in the DAO concept reemerged around 2019 and 2020, fueled in part by the rising use of governance tokens to manage DeFi protocols and other dApps. Today there are thousands of functioning DAOs with millions of members, managing cryptoassets valued in the billions of U.S. dollars.

DAOs are systems to manage Web3 ecosystems. Decentralized autonomous organizations (DAOs) are made up of the stakeholders responsible for managing an ecosystem through rules and codes enforced by smart contracts, with members incentivized through token mechanisms that align their interests to the collective goals of the community. Think of DAOs as community-led entities that may not have the same degree of centralized authority typical in traditional businesses. In its pure form, a DAO is fully autonomous and transparent, with smart contracts providing the foundational rules and executing agreed-upon decisions. DAOs are governed by individual members who collectively make critical decisions about the project’s future, such as the development roadmap and treasury allocations. Community members may create and vote on proposals, with the successful ones accepted and enforced by the rules implemented in the underlying smart contracts. Since every DAO member is an owner, incentives tend to be aligned with decision making as it is in each member’s best interest to only approve proposals that maximize the value of the ecosystem. This has the potential to create flywheel effects, in which a healthy DAO garners more ecosystem usage, which increases the value of the tokens each DAO member holds, promoting continued good governance, and thus creating long-term sustainability.

DAOs have both strengths and weaknesses. Not surprisingly, DAOs have both strengths and weaknesses compared to traditional forms of organization. DAO operations are more likely to be transparent than traditional organizations, given that major decisions and actions are recorded and accessible on a blockchain. Decision-making can also be more inclusive, including broader sets of stakeholders who can participate directly or indirectly in the governance and management of the ecosystem. Members of DAOs are typically rewarded through actual contributions of value, rather than their education background, years of experience, or potential expertise. Some notable DAO contributors, in fact, have operated pseudonymously, not sharing their legal names, race, gender, age, or other demographics publicly. This has the potential to expand access to economic opportunities and limit discrimination as people can work from anywhere to contribute measurable value. DAOs can also be more flexible and adaptive to achieve their ecosystem’s objectives through their flatter, more emergent structures.

Yet DAOs also face considerable issues that need to be addressed, many of which are related to the early stage of development and lack of best practices for organizing, managing, and operating these organizations. High amongst the issues is the uncertain regulatory landscape, with unclear, confusing, and even incompatible regulations across jurisdictions, that may hinder widespread adoption, especially among DAOs that operate with global scope. Coordinated attacks by influential stakeholders holding significant shares of governance tokens within DAOs may place individual or team interests above the ecosystem that the DAO governs. It’s also not clear what is the appropriate level of decentralization versus centralization to achieve each ecosystem’s objectives, as some DAOs may place more importance on efficient operations that require certain degrees of hierarchy and centralization, rather than operate in fully a distributed manner.,

Decentralized Autonomous Organizations (DAOs)

Different types of DAOs address varying objectives. DAOs can be grouped into use case categories based upon the types of projects they manage, including protocol, investment, grants, collector, and social DAOs.

DAO Types

Protocol DAOs use tokens for ownership and on-chain governance to maintain and evolve the underlying platforms. These are commonly seen among DeFi ecosystems. For example, Uniswap’s UNI token holders can vote or delegate their vote to guide Uniswap’s directions, fees, and treasury use. Similarly, Maker uses a DAO framework for token holders to vote on policies, fees, and protocol operations.

Investment DAOs operate as investor-controlled investment funds, where DAO members collectively decide on how to allocate their pooled capital. MetaCartel Ventures, for example, allows members, including non-accredited investors, to vote in which dApps to invest, while The LAO functions as a member-directed venture capital entity registered in the U.S. as a limited liability company (LLC).

Grants DAOs are often created as the mission-driven philanthropic arm of a bigger project, focused on missions like supporting new Web3-based ecosystems through grants. Gitcoin, for instance, is an independent platform funding developers focused on open-source applications. Moloch DAO focuses on funding Ethereum’s infrastructure development.

Collector DAOs pool funds from multiple users to acquire collectible items, such as NFTs, physical art, music, and real estate – from both Web3 and traditional markets. PleasrDAO is a collective of DeFi leaders, early NFT collectors, and digital artists that acquires and curates unique art and collectibles. The DAO’s collection includes purchasing Wu-Tang Clan’s one-of-a-kind unreleased album Once Upon a Time in Shaolin for US$4 million in October 2021, as well as Edward Snowden’s signed Stay Free NFT for US$5.4 million in April 2021. Constitution DAO was organized in November 2021 to purchase an original copy of the United States Constitution. The group raised approximately US$ 47 million in Ether within a one-week crowdfunding effort but lost to a higher bid in the Sotheby’s auction. Nonetheless, the ability to conceptualize, organize, raise money, and bid at this scale, according to Bloomberg news, “showed the power of the DAO … has the potential to change the way people buy things, build companies, share resources and run nonprofits.”

Social DAOs are clubs in which people acquire a DAO’s token, which could be an NFT, social token or other cryptoassets, to become members. Examples include Friends with Benefits, a social club composed of Web3 artists, developers, and enthusiasts, which we mentioned earlier when discussing social tokens. Another example is the popular Bored Ape Yacht Club (BAYC), in which membership is determined by ownership of the PFP (photo for profile) from the BAYC NFT collection.

Users participate in DAOs with tokens. Crypto holders generally become members of DAOs by acquiring tokens in the DAO that provides them with a share of ownership and governance rights. The specifics of how this works differ by DAO, but we can use a hypothetical investment DAO as an example. In this case, you decide to join the DAO by exchanging some of your crypto, like Ether or USDC, for tokens that represent proportional ownership of the DAO. This so-called tribute adds to the shared treasury, which the DAO uses to make investments. As a DAO owner, you have right to vote on proposals offered by fellow members on how to utilize the treasury to make investments, distribute earnings to members, reward other contributors, and otherwise fund the DAO’s operations. For example, the DAO may compensate contributors for services that improve the DAO’s value, which for an investment DAO could include investment research, portfolio management, accounting, legal advice, tax compliance, and marketing. Smart contracts determine what the organization can and cannot do, as well as define member rights and responsibilities; however, DAO members may have the ability to change these engagement rules through the voting process. As a DAO member, you also may have the ability to quit the DAO whenever you wish, redeeming your proportional share of the DAO’s treasury back into underlying cryptoassets. Some DAOs allow what is called rage quit, in which there is a predetermined time after each proposal passes where members who don’t agree can simply exit the DAO.

How DAOs Work

The numbers and size of DAOs are exploding. There are currently nearly 5,000 DAOs identified by analytics website DeepDAO, with an aggregate membership of about four million governance token holders managing more than US$ 10 billion in total treasury. Top DAOs, with treasuries valued from hundreds of millions to billions in U.S. dollars, include decentralized exchange Uniswap, crypto cross-ownership network BitDAO, crypto tool provider Gnosis, next-gen blockchain Polkadot, and Ethereum staking protocol Lido.

DAO Statistics

An increasing number of tools and services enable DAOs. As DAOs become more commonplace, the range of services from both Web3 projects and TradBiz that enable DAOs is growing. These include broad organizational frameworks, as well as focused solutions supporting community management, analytics, operations, tokens, and treasury management. Organizational frameworks provide on- and off-chain governance with decision-making tools that help DAO’s achieve their objectives. Operations management services enable day-to-day management of DAO operations, including full-stack technology platforms as well as risk and legal management systems. Community management tools help stimulate participation and collaboration, including measuring and validating the reputations members earn over time by contributing to DAOs. Analytics tools help DAOs monitor progress as well as gain insights on governance, spending, initiatives, and discussions. Token services enable DAO tokenization, including token design, issuance, distribution, and market making. And treasury management solutions aid in DAO financial management, including asset allocation, payments, and financial reporting.

DAO Enablement Tools

DAOs are innovating how business is conducted. While we don’t expect DAOs to replace established organizational structures and business entities, we do think that DAOs will have a substantial role in our Web3 future. In this section we’ve introduced DAOs, discussing how they govern and manage distributed Web3 ecosystems. You now know that DAOs enable a broad variety of use case objectives, such as protocols, investments, grants, collectors, and social. Users participate by obtaining DAO tokens, which provides both shared ownership and governance rights. There are now thousands of DAOs managing billions of U.S. dollars in shared treasuries with millions of members. And an increasing number of tools enable DAOs in areas like organizational structure, community management, analytics, operations, tokens, and treasury management.

Now that we’ve explored Web3 use cases, including decentralized finance (DeFi), non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs), let’s shift emphasis to thinking about the implications and opportunities arising from our transition to Web3, starting with TradBiz Market and Business Model Implications.

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TradBiz Market and Business Model Implications

Web3 has the potential not only to disrupt TradBiz markets and business models, but also enable compelling new growth opportunities for those who seize them. In this section, we will explore differences between token-based and traditional markets, including using tokens to bootstrap early-stage Web3 networks, vastly lower take rates of Web3 ecosystems compared to Web2 companies, how Web3 characteristics may evolve industry structures, potential business model impacts, and Web3 opportunities for existing businesses.

Token incentives bootstrap Web3 networks. Let’s start with how Web3 networks use tokens to bootstrap their growth, providing early ecosystem users with financial value until network effects kick in. As Chris Dixon from Andreessen-Horowitz points out, Web2 startups require significant venture investment to fund sales and marketing campaigns to attract new users. According to the so-called Metcalfe’s Law, the value of a network dramatically increases with the number of participants. In other words, a social network isn’t very valuable when there are just a handful of users; however, it becomes indispensable when there are a billion global users connecting each day. Once Web2 companies have scaled with network effects kicking in, it’s rational for them to try and extract as much value as possible from users through data monetization, increased subscription prices, and other revenue streams.

Web3 ecosystems, however, reward users with token-based financial utility during the early stages of network growth to make up for the lack of native utility, with rewards tapering off as the network and its associated utility scales. A user may be happy spending time in early versions of a play-to-earn game, such as Axie Infinity, since they can earn tokens that have the potential to appreciate significantly as the network grows. The same user may be incentivized to continue playing when token rewards decrease, but only if the game itself has evolved substantially to provide significant more value.

Bootstrapping Problem

If you’re an entrepreneur with a new idea, consider how you might bootstrap your network with a Web3 solution while minimizing the need for traditional venture funding. If you’re already in an established company with scale, be on the lookout for emerging competitors wielding distributed models with the potential to unseat you by luring your customers to their network with token incentives.

Web3 take rates are much lower than Web2 equivalents. Because Web3 ecosystems are designed to be owned by and give back value to users, they often have much lower take rates than comparable Web2 offerings. Just as Jeff Bezos frequently stated, “Your margin is my opportunity” when explaining Amazon’s low-price, low-margin strategy to establish market share, Andreessen-Horowitz’s Chris Dixon describes the transition to Web3 with an updated, “Your take rate is my opportunity.” Think of take rates as how much of the financial value a network generates is retained by the network provider rather than the users. Overall Web3 ecosystems tend to have much lower take rates than Web2 companies, often due to inherent designs to incentivize and be owned by users, but also because ecosystems often require smaller amounts to maintain and evolve platforms, and do not spend significantly on customer acquisition and marketing. Since users frequently own a majority of Web3 ecosystems, the bulk of revenue generated is returned to them. Moreover, because many ecosystems utilize open-source software, those ecosystems with higher than needed take rates incentivize others to fork the project, in essence becoming a competitor providing similar services with lower take rates.

Comparing Web3 with Web2 take rates shows how big a difference this makes. Let’s take Facebook as an example, which for all practical purposes has a 100% take rate. In other words, no one gets paid to spend time on the app; instead, Facebook monetizes your time and personal data, providing what appears to be free services that in fact have very high hidden costs. We see similar examples in other areas. Web3 gaming apps like Axie Infinity and The Sandbox utilize take rates around five percent, while online gaming companies operate at 30 percent and above. Digital asset NFT marketplaces, such as OpenSea and Rarible, operate with five percent or lower take rates. Compare that with Meta’s recent announcement that they plan to take a whopping 47.5% commission on digital asset sales in their proprietary Metaverse properties. Web3 content platforms, such as Rally and BitClout, regularly return 90 percent of value back to content creators, whereas Web2 comparables like YouTube, Spotify, and Twitch take 30 to 50 percent. The same take rate disparity is true when comparing different forms of Web2 marketplaces, including exchanges, labor markets, and app stores.

Web2 vs. Web3 Take Rates

If you happen to work in an established company where most of the network value is siphoned off as operating expenses and shareholder profit, you may be at risk of Web3 entrants operating with much lower take rates. As you explore the impact Web3 may have on your company, anticipate where you could be at risk, and consider making business model changes to protect your position, such as delivering value propositions better aligned with Web2 capabilities that may retain advantages against decentralized ecosystems. Even if your take rates are low, think about how you continue to evolve value to your customers to ensure long-term sustainability.

Decentralized systems may create more competitive markets. Web3 has the potential to evolve existing industry structures into more competitive markets by decentralizing access to data, trust, and technology. Today’s Web2 markets are characterized by companies providing platforms made up of proprietary technology, data, and applications designed to create competitive moats that lock users in from leaving easily. This established playbook has resulted in large, powerful companies incentivized by financial markets to put shareholders ahead of users, resulting in less-than-optimal outcomes like personal data monetization, high subscription costs, customers not owning their data, barriers switching to competitive platforms, and the risk of being de-platformed due to violations in ever-changing terms of services or government requests. While APIs enable varying levels of integration between Web2 applications, today’s markets are largely composed of siloed companies operating with a winner-take-most mentality, creating two-to-three major competitors in each market.

As we have discussed elsewhere in this series, Web3 enables solutions that are open source, permissionless, transparent, and composable, built on top of a rapidly evolving Web3 technology stack that includes blockchains, protocols, distributed applications, aggregators, and many more innovations. In this paradigm, users maintain ownership over their data, which can be used by different dApps through composability, and accessed across blockchains with the help of bridges.

This has the potential to democratize access to data, technology, and trust, evolving industry structures into more competitive playing fields than what we have with today’s Web2 environment. While it’s possible that blockchains and dApps will follow a winner-take-most outcome due to the network effects we discussed earlier, it is equally plausible that the emergence of ecosystems will enable competition between members, accelerating innovation, and perhaps making industries less concentrated.

Evolving Industry Structures

Web3 can impact nearly every aspect of TradBiz models. The TradBiz executives and investors we work with find it useful to explore how Web3 can create both opportunities and threats for their businesses. The Business Model Canvas, a widely used framework for developing and evaluating business models, is a useful tool for exploring Web3 impacts across business functions.

Web3 Business Model Implications

Starting on the right side with customer segments, Web3 provides companies with opportunities to expand geographies served as well as target crypto-native customer segments, while also facing the risk of losing share to Web3 alternatives offering compelling value propositions combined with token incentives. Evolving customers into members of token-enabled communities can deepen customer relationships, helping prevent losing customers to competitive businesses and other communities. Web3 ecosystems can also serve as valuable channels, allowing established companies to connect to and serve new customers who participate in these communities. We believe there are significant opportunities for TradBiz organizations to improve their value propositions, including integrating existing products and services into Web3 offerings, as well as developing entirely new Web3 solutions that combine the best of Web2 and Web3 capabilities.

There are additional opportunities to leverage Web3 capabilities and practices that improve a company’s efficiency and effectiveness. For example, key business processes, or activities, can be automated using blockchains, smart contracts, and machine learning. Borrowing lessons learned from decentralized autonomous organizations (DAOs), there may also be opportunities to attract and leverage resources globally, potentially aligning and incentivizing them with token-based rewards. Partnerships also can be improved through blockchain enabled supply chains, and by developing new B2DAO relationships.

By going through this business model assessment process, leadership teams will discover that Web3 has the potential for delivering attractive financial benefits as well as threats. On the revenue side, pursuing Web3 opportunities can create meaningful new revenue streams from new and enhanced Web3 offerings, better market access, and deeper customer relationships. At the same time, be aware of potential price pressure from Web3 ecosystems targeting customers with token-based incentives and lower take rates. From a cost structure perspective, Web3 enablement may help reduce operating expenses and improve capital efficiency, whereas the risk is failing to improve relative to emerging Web3 alternatives.

Opportunities exist to Web3-fy companies and plug into Web3 ecosystems. We’ve identified five opportunities for TradBiz to explore as a starting point when evaluating Web3 opportunities: B2DAO, Web3-fied offerings, token-enabled communities, Web3-fied operations, and Web3 native innovations.

TradBiz+Web3 Opportunities

Expanding beyond traditional B2B sales, TradBiz organizations have opportunities to pursue B2DAO opportunities, providing products and services that enable DAOs and other Web3-focused businesses. Services needed by DAOs include accounting and finance, legal and regulatory compliance, marketing and community development, smart contract auditing, tax management, and treasury management. Chainalysis, for example, provides compliance and risk management solutions to Web3 ecosystems, financial institutions, exchanges, government agencies, and others to protect and grow the adoption of crypto. OpenZeppelin performs smart contract audits to ensure that they execute processes as intended, counting distributed networks like Augur, Basic Attention Token, Compound, and Maker among its clients. And Microsoft’s software development platform, GitHub, is where Web3 developers collaborate to develop, manage, and evolve the code distributed networks.

Companies can also Web3-fy offerings, integrating crypto and Web3 capabilities, features, and uses cases into their existing products, services, and business models. Consider accepting crypto payments, providing customers with native crypto wallets, incorporating crypto into software user interfaces, integrating Web3 capabilities into existing offerings, and extending social logins to Web3 apps. Twitter, for example, rolled out a tipping feature that allows users to support or tip other users using different payment options including crypto. Twitter also enabled the use of verified NFTs as Twitter profile pictures (PFPs). PayPal now allows users to buy, sell or trade cryptoassets within their apps, and has introduced a “Check-out with Crypto” feature enabling users to pay for online purchases with crypto. Pharmaceutical company Merck has created a blockchain-based, Internet-of-Things powered platform for supply chain management that allows companies, laboratories, suppliers, and logistics providers to connect and exchange data seamlessly.

Established businesses can also explore creating token-enabled communities, using tokens to enable communities of engaged and empowered customers and other stakeholders. Here there are opportunities to sell products and services, provide rewards and loyalty programs, encourage referrals, involve stakeholders in proposals and decision-making, and reward users with value-appreciating tokens. The U.K. football team Manchester City, for example, launched the $CITY fan token that allows holders to vote in polls organized by the club, access exclusive promotions and content, and receive VIP treatment during games and other social activities. In the U.S., Mark Cuban-owned, NBA team Dallas Mavericks is releasing player profile pictures and photos as NFTs during home games, which fans can redeem by signing up to a dedicated portal and having their mobile tickets scanned during the game. According to the basketball club, this is one of their ways to reward users, understand consumption behavior and incentivize more people to attend live games. The discussion platform Reddit is testing a new program called “Community Points” on an Ethereum testnet, in which subreddits can reward users for their contributions and allow them to vote on important decisions. The file sharing platform BitTorrent launched the BTT token after being acquired by the Tron Foundation in 2019 to expand its peer-to-peer file sharing network and incentivize participants for sharing and hosting files.

TradBiz organizations have additional opportunities to Web3-fy operations, incorporating Web3 networks, capabilities and practices which enhance operational efficiency and effectiveness. Potential impact areas include supply chain management, human resources, accounting and finance, treasury management, and predictive asset maintenance, among others. For example, Walmart launched the blockchain-based Food Traceability Initiative in partnership with IBM, allowing users to trace the provenance of selected products, including data on manufacturer, certifications, temperature, and handling. The Canadian Imperial Bank of Commerce, or CIBC, partnered with the National Bank of Australia using Ripple to facilitate cross-border payments between them, and explore expanding on a broader scale to enable global settlements. Several high-profile companies, including Tesla, Block (formerly Square), and MicroStrategy, hold or have held Bitcoin or other cryptoassets as part of their corporate treasury, with the aim to further diversify and maximize returns on cash for shareholders.

Finally, TradBiz can consider creating Web3 native innovations, creating entirely new offerings and value propositions enabled by Web3 technologies and models. Opportunities to explore include creating virtual worlds, building public or private blockchains, releasing NFT collections, catalyzing decentralized marketplaces, and establishing Web3 on-ramps for users. Samsung, for example, has introduced a television-based NFT explorer and market aggregator. The company has also created its own virtual world within Decentraland, 837X, where users can win exclusive NFTs by entering and consuming content. Nike acquired RTFKT, a well-known NFT studio, to venture into the Metaverse and NFT space. RTFKT has since released RTFKT x Nike Dunk Genesis CRYPTOKICKS, a collection of 12,400 Nike-branded virtual sneakers. They have also launched RTFKT X NIKE MNLTH, a collection of 10,000 NFTs that look like floating black boxes which they distributed to CloneX and PodX holders. Upon completing certain quests, the MNLTH boxes will open, revealing customizable digital sneakers and another MNLTH box. Semiconductor firm AMD launched W3B Cloud, a joint venture with Consensys, that aims to provide cloud computing blockchain infrastructure for enterprises. Components include validation, computation, nodes, and application development.

Web3 will create disruptions that leading TradBiz’s will seek to exploit. In this section we’ve discussed how Web3 may impact markets, including the use of token incentives to bootstrap Web3 networks, how Web3 take rates are much lower than Web2 company equivalents, and why open, composable decentralized systems may evolve industries into more competitive markets. We’ve seen how Web3 can impact nearly every aspect of TradBiz models both positively and negatively, including customer segments, customer relationships, channels, value propositions, activities, resources, and partners, potentially transforming both revenue streams and cost structures. Finally, we’ve outlined five starting points for established companies to take advantage of Web3 evolution – B2DAOs, Web3-fied offerings, token-enabled communities, Web3-fied operations, and Web3 native innovations – and shared how leading companies are already actively evaluating, experimenting with, and launching Web3 initiatives.

In the next section, we review some of the Investment Opportunities brought about by Web3.

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Investment Opportunities

Let’s now discuss some of investment opportunities arising during the transition from today’s dominant Web2 environment to the Web3 future. This includes identifying the different types of crypto and Web3-aligned businesses that exist along with providing an overview of the various custodied and non-custodial investment vehicles you can use to make investments. We also provide a framework for evaluating Web3 investment opportunities.

While this section focuses on investment opportunities, it is not meant to be investment advice. Investing in crypto and other Web3 assets has both risks and rewards, like any other risk assets. We encourage potential investors to do their own research, solicit professional investment advice, and never invest more than they can afford to lose.

Multiple opportunities exist for investors to participate in Web3 evolution. We’ve identified multiple categories for investors to explore both crypto and non-crypto Web3 investment opportunities, including established Web3 ecosystems, DeFi yield farming, liquid venture, crypto derivatives, Web3 solutions providers, and Web3-aligned TradBiz companies.

Web3 Investment Opportunities

Many investors get started in Web3 by acquiring the cryptoassets of established Web3 ecosystems. These include investing in the tokens of the most promising, large capitalization networks, including layer one protocols like Bitcoin and Ethereum, layer two enablers and scaling solutions, distributed applications (dApps) such as Uniswap, NFT collections like CryptoPunks and Bored Ape Yacht Club, and more. Cryptoassets in this category are somewhat analogous to S&P 500 companies, in that they have an established track record, demonstrated use case product-market fit, and active stakeholder communities.

Decentralized finance provides a range of different investment choices. DeFi yield farming includes lending, staking, and participating in liquidity pools, thereby earning yields on cryptoassets invested, as well as the ability to earn additional rewards provided by protocols for providing liquidity and being involved in governance activities. Examples include lending platforms Aave and Compound, stablecoin provider Maker, exchanges Uniswap and Curve, and aggregator Yearn.

There are plentiful opportunities available to invest in the cryptoassets of early stage Web3 projects as well. We refer to this as liquid venture since the risk-return profile is similar to venture capital with companies. The big difference between the two, however, is that cryptoassets are typically tradable on exchanges, whereas traditional venture capital is not. When investing in an early-stage growth company, investors usually are making five-to-ten-year commitments of capital before they have the possibility of an exit via acquisition or initial public offering. With liquid venture, investors can monitor the progress of their investments continuously, with the opportunity to increase allocations in those that are making good progress, take money off the table by reducing allocations, or simply exit projects that have become less promising or no longer match their investment objectives.

Crypto derivatives provide yet another opportunity for investing in Web3. These are alternative products that provide indirect access to cryptoassets, such as via future contracts or options. Crypto derivatives are available through traditional financial institutions, like the CMG Group, which offers futures and options for both Bitcoin and Ether. Derivatives are also increasingly traded on crypto exchanges like Binance, OKX or Deribit. Coinbase launched its first derivative product, Nano Bitcoin Futures, in June 2022, which will initially be available through select retail brokers while the company secures its own futures commission merchant (FCM) license to cater directly to consumers. Other derivative products being offered by top exchanges include perpetual contracts, swaps and leveraged tokens.

Web3 solution providers offer non-crypto opportunities to invest in Web3. These include investing in publicly traded or private companies that are enabling Web3 ecosystems, such as centralized exchanges, crypto banks, blockchain mining, software developers, wallet providers, and analytics firms. Coinbase Global, for example, a U.S.-based crypto exchange delivering a broad range of services to individuals and businesses, is traded publicly on NASDAQ, providing investors a way to get exposure to Web3 within their existing securities accounts. IBM, on the other hand, has been developing solutions, based on the open-source Hyperledger Fabric, enabling enterprises to implement a diverse range of blockchain applications across industries. Samsung, one of the world’s leading electronics device manufacturers, has been building Web3 capabilities into their devices, including crypto wallets into their smartphones and NFT explorers in their latest line of televisions, while also building their own version of the Metaverse. Another example is Bitfarms, one of the biggest crypto mining operations in North America, helping secure Web3 ecosystems through nodes and validators deployment.

Finally, investors anticipating the broad Web3 disruptions likely to develop over the next five to ten years may want to increase exposure to Web3-aligned TradBiz securities. In other words, investing in established businesses that are well-positioned to take advantage of Web3 trends and developments, but that are not exclusively focused on Web3 enablement. Business intelligence provide MicroStrategy, for example, currently holds approximately 130,000 Bitcoin in its corporate treasury, representing the bulk of the publicly traded company’s market value. This provides some investors with another opportunity to gain exposure from a security, rather than directly holding Bitcoin. Walmart, one of the largest multinational retail corporations, has actively been exploring potential applications of Web3 technologies in both its back-end operations and engaging with customers, including its Food Traceability initiative and current plans on launching its own cryptoasset, NFT collections and Metaverse. AMD, on the other hand, is well-positioned to enable the transition to Web3 through the infrastructure and computing products it provides to both institutions and consumers. Another public company in the center of Web3 is Twitter, which is the de facto place where Web3 enthusiasts, influencers and experts engage with each other. The social network has also started incorporating Web3 capabilities into their platform, including the ability to tip people and use their NFTs as profile pictures.

Different investment vehicles are available, with distinctions in risk, use engagement, custodianship, and eligibility requirements. Just like there is an array of cryptoassets and securities providing exposure to Web3 markets, there are also numerous ways to invest in these assets.

Web3 Investment Vehicles

Many individuals begin with a self-directed approach, utilizing accounts at crypto exchanges like Coinbase or Gemini to buy, sell, and manage individual cryptoassets. Over time, some investors migrate to self-custodied wallets like MetaMask or Ledger, often using a combination of centralized exchanges and decentralized exchanges to trade cryptoassets.

Others, particularly high net worth investors, may set up managed accounts with wealth management professionals engaged to incorporate cryptoassets into their overall portfolios based upon defined risk-return objectives. While most registered investment advisors currently have limited familiarity of Web3 and provide access to only a few selected cryptoassets like Bitcoin and Ethereum, we expect many more will develop the knowledge and capability to include Web3 investments in the future. Big wealth management firms Morgan Stanley and JPMorgan and Chase offer access to select cryptoasset funds from Grayscale Investments, Galaxy Digital, NYDIG and Osprey funds with some level of restrictions., Goldman Sachs has also stated that they are currently working on cryptoasset services for their high-net-worth clients. Meanwhile, several crypto-focused wealth management platforms have also emerged, such as Abra and Wave Financial.

Regulated crypto funds that trade as securities represent another Web3 investment vehicle. These include exchange traded funds (ETFs) and trusts providing exposure to individual cryptoassets, crypto indices, and derivatives. While the U.S. Securities and Exchange Commission (SEC) has yet to approve ETFs holding Bitcoin or other cryptoassets in the U.S., ETFs backed physically by cryptoassets already trade on public markets in Canada and elsewhere. The Purpose Bitcoin ETF (BTCC.Canada), for example, was launched in February 2021. U.S. investors so far have been limited to ETFs based upon cryptoassets futures, such as the ProShares Bitcoin Strategy ETF (BITO), which don’t always accurately track the cryptoasset’s actual price. ProShares also provides the ProShares Short Bitcoin Strategy ETF (BITI), designed to give investors a way to provide from declines in the cryptoasset’s prices. The Grayscale Bitcoin Trust provides an exchange-traded alternative for investors seeking to hold cryptoassets within security accounts; however, the trust structure limits redeemability, which has resulted in the trust’s market price trading at steep discounts to the actual value of its underlying assets. Investors seeking to invest in companies enabling Web3, rather than cryptoassets themselves, can now do so through ETFs like the Bitwise Crypto Industry Innovators ETF (NYSE:BITQ), which focuses on crypto innovators and pioneers.

On-chain funds allow investments in indices and managed funds using self-custodied wallets rather than traditional securities accounts. Since these funds use on-chain vaults, they are limited to investors who are comfortable securing their own cryptoassets keys and using wallets like Ledger and MetaMask. The Index Cooperative, for example, provides a number of smart contract-enabled index products, including the Interest Compounding ETH Index, DeFi Pulse Index, ETH 2x Flexible Leverage Index, Metaverse Index, Data Economy Index, and Bankless DeFi Innovation Index. A growing number of fund managers pursuing different active and passive strategies are also emerging. Utilizing vault protocols like Enzyme, on-chain fund managers can easily set up cryptoassets funds with a full set of features, including smart contract-enforced management and performance fees, asset restrictions, and client whitelisting. With the complete transparency provided by the Enzyme protocol, investors can monitor transactions and performance in real-time, and generally can exit their positions in funds at any time.

Investment DAOs provide another on-chain opportunity, particularly for investors who want to collaborate with and benefit from the knowledge of others. These decentralized autonomous organizations enable participants to pool capital with other members, collectively deciding in which cryptoassets to invest. BitDAO, for example, describes itself as a “collective of builders and stakeholders enabling mutually beneficial Web3 ecosystems of people, products, and public goods.” As of mid-July 2022, BitDAO held approximately $US 1.4 billion of tokens in its treasury, having allocated over $US 600 million in investments. Other notable investment DAOs include MetaCartel DAO, The LAO, FlamingoDAO, and Neptune DAO.

Traditional funds round out our list of traditional funds, including both venture and hedge funds with cryptoassets or Web3-enabling companies in their portfolios. While participating in these funds are generally limited to institutions, family offices, and ultra-high-net-worth (UHNW) investors, they provide further evidence of Web3 progression. Leading venture funds Andreessen Horowitz, Sequoia Capital, General Catalyst, and Bessemer Venture Partners have renounced their standard venture capital status over the last few years, choosing to become registered investment advisors with the U.S. Securities and Exchange Commission. This designation allows them to hold investments other than direct stakes in private companies, including cryptoassets. Traditional hedge funds are also adopting cryptoassets, with more than a third of traditional hedge funds now investing in digital assets, according to the PwC Global Crypto Hedge Fund Report 2022. PwC further estimates that there are more than 300 special crypto hedge funds globally.

Evaluating the investment attractiveness of Web3 ecosystems requires new and adjusted valuation methodologies. As discussed extensively throughout this series, distributed Web3 ecosystems and their associated tokens generate value differently than TradBiz models. Since these systems generally aren’t designed to generate profits that are returned to shareholders in the form of dividends, traditional valuation techniques aren’t always relevant or need adjustment to be useful. We’ve developed our own set of criteria to identify, assess and prioritize which Web3 ecosystems may have the highest growth potential based upon future market potential, ecosystem health, and portfolio timing and allocation.

Evaluating Web3 Investment Opportunities

We often begin assessing the attractiveness of a Web3 ecosystem by considering what the future market potential could be. This includes examining the project’s use case clarity, assessing the value proposition delivered to users compared to both traditional as well as other Web3 alternatives, estimating the potential size of the ecosystem’s total and serviceable addressable market in 10 years, and excluding cryptoassets that may be scams or which have high degrees of centralization.

Next, we examine the current ecosystem health of each project. Competitive positioning compares the project’s leadership position compared to other Web3 ecosystems with similar use cases. Technology development examines the amount of developer activity, such as the number of GitHub commits over time, as well as qualitative assessments of the ability to realize technology-related targets in published roadmaps. The degree of decentralization and maturity of governance mechanisms indicates the degree to which an ecosystem functions well without the risk of one or a few active parties driving development. Tribe and social criteria draw both from the number of active on-chain users, as well as more traditional inputs like social media followers and market sentiment. It’s useful to understand how established investors and strategic partners are providing financial and other support. We also evaluate security and risk, such as potential 51% attacks, smart contracts, and regulatory.

For potentially attractive investments, we also consider timing and allocation criteria, to help determine entry points and how much relative allocation to include in each portfolio. Some useful tools include NVT ratio, PQ growth, Y+10 inflation, and liquidity. NVT ratio is the ratio of current market value to the current value of transactions in the ecosystem, and therefore is somewhat analogous to company price-to-earnings (PE) ratios. High NVT ratios indicate significant market speculation relative to actual ecosystem activity, while lower NVT potentially represent attractive market entry prices. PQ growth is the economic value of on-chain transactions (price times quantity), excluding exchange volumes, over time expressed in a fiat currency like U.S. dollars. Significant growth in PQ is positive, as it suggests that an ecosystem’s economy, the exchange of value between participants, is growing. Y+10 inflation is the expected money supply inflation and resulting dilution in a token over the next 10 years. All other things being equal, investors would prefer ecosystems with lower inflation rates than those with rapidly diluting tokens. Finally, liquidity measures the efficiency at which a cryptoasset can be converted into fiat or other cryptoassets without impacting its market price, and thus includes the number of exchanges on which a cryptoasset trades as well as its trading volumes.

The transition to Web3 provides many investment opportunities and vehicles from which to choose. We’ve now explored the different opportunities that exist for investing in Web3, including acquiring cryptoassets representing established Web3 ecosystems, DeFi yield farming, liquid venture, and derivatives, as well as investing in the securities of Web3 solutions providers and Web3-aligned TradBiz. Hopefully, you now have an appreciation of the different vehicles that exist for investing, which include self-directed, managed accounts, registered funds, on-chain funds, investment DAOs, and traditional funds. And you’ve been introduced to different methods for evaluating the future market potential, ecosystem health, timing, and allocation of potential cryptoasset investments.

As a next step, let’s take a look at Evidence of Mainstream Adoption, or how many institutional investors, established businesses, and individuals have adopted cryptoassets to date.

←     TradBiz market and business model implications Evidence of mainstream adoption     →

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Evidence of Mainstream Adoption

To conclude part three of this series, Web3 Implications and Opportunities, let’s examine where we are in terms of financial services institutions, businesses, and individuals adopting cryptoassets. While there has been significant uptake globally across these groups, the data shows that we are still early in Web3 adoption, with plenty of room for growth over the coming years as the transition from Web2 to Web3 proceeds.

Institutional investments in cryptoassets and Web3 continue to grow. Major investors are continuing to make investments in cryptoassets and Web3 projects, even during the 2022 crypto winter. According to Crunchbase, venture firms invested US$ 9.3 billion in 534 Web3 deals in the first half of 2022. While this was down from US$ 12.5 million during the same period of 2021, each of the last four quarters have exceeded US$ 4 billion in total venture investments. Venture firms include traditional investors who have pivoted toward Web3, like Andreessen Horowitz, investors focused exclusively on Web3, such as Digital Currency Group, and the venture arms of crypto-focused companies, like Coinbase Ventures. There also continues to be meaningful activity in the crypto fund space, with Crypto Fund Research tracking 88 fund launches in 2021, down slightly from 102 in 2020.

Web3 Institutional Investment Activity

Traditional financial services, or TradFi, firms also continue to adopt Web3 solutions in areas like wealth management, trading, custody services, and even as legal tender. The wealth management arms of TradFi firms like Fidelity, Goldman Sachs, Citi, and JPMorgan Chase are increasingly providing their wealth management clients with exposure to leading cryptoassets and funds. Many of these banks have either opened or are considering opening cryptoasset trading desks as well. Established custodians, including BNY Mellon, State Street, and BNP Paribas, are expanding their services to include holding crypto keys and managing Web3 ecosystem treasuries. And the countries of El Salvador and the Central African Republic have adopted Bitcoin as a form of legal tender, in advance of a number of other countries that are considering doing the same.

Web3 Adoption by TradFi Institutions

Businesses are also adopting cryptoassets and making Web3 investments. As awareness about Web3 increases, established businesses are beginning to adopt cryptoassets and participate in Web3 ecosystems. For example, several publicly traded companies, including MicroStrategy, Tesla, and Square, have begun accumulating Bitcoin in their corporate treasuries. Multiple payment companies have started incorporating cryptoassets into their payment platforms and networks, including Visa, Mastercard, Square, Venmo, and American Express. Well-known brands like Samsung, Twitter, Atari, the NBA, Manchester City, Nike, Twitter, McDonalds, Reddit, PwC, and Verizon are plugging into Web3 ecosystems. Coinbase became the first crypto company to go public in 2021, with other companies poised to do so once the crypto and securities markets recover, including Gemini, BlockFi, Bakkt, Exodus, and Kraken.

Business Cryptoasset Adoption

Just three percent of the global population has adopted cryptoassets to date. While the number of people owning cryptoassets is estimated to have grown from about 40 million in 2017 to around 250 million in 2022, today’s figure represents a bit more than three percent of the total population. Outside the United States, developing countries like India, Pakistan, Nigeria, and Vietnam have the largest numbers of cryptoasset holders, perhaps driven by the alternatives cryptoassets like Bitcoin provide to their own inflation-prone currencies. On a global basis, cryptoasset holders skew toward males and younger generations.

Global CryptoAsset Adoption

More than 30 million U.S. adults current hold cryptoassets. Representing less than 20% of the adult population, about 34 million Americans are expected to own cryptoassets by the end of 2022. Millennials and Gen Zs tend to be more likely to have adopted cryptoassets than the older Gen X and Baby Boomer generations, perhaps due to having grown up in a world of connected mobile devices and online services. Bitcoin remains the number one cryptoasset owned by Americans in 2022, followed by Ethereum’s Ether (ETH).

U.S. CryptoAsset Adoption

Financial services firms, businesses, and individuals are increasingly adopting cryptoassets, but we are still early in the Web3 transition. In this section, we covered how financial services firms continue to invest in cryptoassets and fund Web3-related deals. Major TradFi are also venturing into Web3-related services in areas like wealth management, trading, custody, and even as legal tender for a couple of countries. At the same time, businesses are holding cryptoassets in their corporate treasuries, payment companies are incorporating crypto into their platforms, and well-known brands are plugging into Web3 ecosystems. Finally, while the number of people who own cryptoassets has grown dramatically worldwide as well as in the United States, they still represent a small proportion of the global population. We are still early in the transition from Web2 to Web3, which means you still have time to position your organization and yourself to take advantage of this evolution.

To wrap things up, let’s talk about Charting Your Path Forward in Web3. 

←     Investment opportunities Charting your path forward     →

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Charting Your Path Forward

If you’ve completed the entire Web3 for TradBiz Executives and Investors series, then congratulations! This series has provided you with foundational knowledge you can use to chart your path forward in the evolving Web3 world. We’ve covered what is Web3 and why we believe it is an inevitable next phase of socioeconomic development, crypto 101 basics, some advanced Web3 topics, and how to use wallets not only to buy and sell cryptoassets, but also engage with Web3 ecosystems. We introduced the broad range of emerging Web3 use cases and value propositions, taking a closer look at hot topics like decentralized finance (DeFi), non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs). We then explored Web3 implications for TradBiz, followed by a discussion of Web3 investment opportunities, vehicles, and assessment methodologies. Finally, we showed that while adoption of cryptoassets and Web3 solutions by investors, mainstream businesses, and the overall population has grown rapidly, we are still very early in the transition from Web2 to Web3.

You have now completed the first phase of your Web3 journey – and are well on your way to integrating Web3 opportunities into your business, professional and personal life. So where do you go from here? While the answer is highly dependent on who you are and what you want to accomplish, consider next steps you may take in four areas: explore, invest, engage, and build.

Explore – Continue to explore Web3 evolution and implications. A wide variety of sources and formats exist based upon your objectives and time availability. Subscribe to newsletters, articles, podcasts, and videos that cover a wide range of crypto and Web3 trends and developments. Review crypto news and data portals that aggregate news and provide real-time market data. Leverage curated resource lists such as Web3 Resources by AcceleratingBiz, which are also often developed by Web3 investors and research teams. Read published reports and studies provided by crypto-focused research firms as well as mainstream professional services firms. Attend crypto and Web3-related conferences, which can be either in-person or virtual, held regularly around the world. Explore the websites of leading Web3 platforms, which often provide white papers, roadmaps, tutorials, and other documentation explaining the ecosystem’s value and how it works. If time allows, consider attending self-directed courses and online classes provided by ecosystems, schools, and other businesses.

Invest – Begin investing in cryptoassets and Web3. Nothing makes Web3 more real than investing in crypto and other Web3 assets. As we’ve mentioned elsewhere, this is not investment advice; prospective investors should do their own research, get advice from investment advisors, and never invest more than they can afford to lose. That said, you can start your investment journey by setting up a crypto exchange account linked to your bank account, which you can fund with an initial amount of fiat currency like U.S. dollars or Euros. Next, consider setting up one or more self-custodied crypto wallets on your desktop or mobile device. If you haven’t already, make your first crypto investments, perhaps buying small amounts of Bitcoin or Ethereum to get started. With a self-custodied wallet in place, you can also begin to learn about, buy and potentially trade your first nonfungible tokens (NFTs). You can also join decentralized finance (DeFi) yield farming protocols to earn yield on stablecoins and other cryptoassets you hold. Don’t forget to subscribe to a service that tracks your cryptoassets transactions, helping you prepare annual tax filings that specify capital gains and losses.

Engage – Participate in Web3 communities. If you prefer engaging socially, there is no shortage of online and physical social communities in which you can connect with other Web3-focused professionals. So-called Crypto Twitter is a good starting point here, as Twitter is the go-to social network for following and engaging with Web3 influencers. Join and engage proactively in online communities on Discord, Telegram, Reddit and other platforms, many of which are specific to individual crypto projects and ecosystems. Seek out and participate in local meetups of like-minded people exploring Web3-related topics. If you’re an executive, consider organizing working sessions within your organization to identify, evaluate, and act upon Web3-related opportunities and challenges. AcceleratingBiz can help you prepare for and facilitate working sessions with leadership teams, board members, investment committees, and other groups to understand Web3 implications, prioritize opportunities to address, and develop plans for moving forward. Other opportunities for engaging include finding ways to contribute your skills to a decentralized autonomous organization (DAO) that interests you, staking your cryptoassets in selected ecosystems to earn yield, and participating in on-chain governance by voting on proposals for cryptoassets you hold.

Build – Get involved in Web3 initiatives. Once you’ve explored, invested, and engaged in some of the crypto and Web3 activities discussed above, consider how you can use your overall experience, skills, and connections to further Web3 projects. Perhaps join a DAO by offering a tribute (making an investment) or performing measurable work. Or begin to futureproof your organization by building upon what you’ve learned to develop an enhanced or even new Web3-fied business model. Start a native Web3 project that solves previously unsolved problem leveraging Web3 technologies, models, and ecosystems. Learn more about what DAOs need to run efficiently and grow their ecosystems, providing B2DAO solutions that enhance your business’ existing products and services to support those needs. Or contribute to existing Web3 ecosystems by submitting proposals for the development or enhancement of new features and capabilities.

While the number of options available to you may be overwhelming, we’ve curated some of the best of the above sources and ideas for your reference, which you can explore in the Web3 Resources page of our website.

←     Evidence of mainstream adoption Web3 resources     →

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End Notes

Web3 and crypto foundations

Why embrace Web3 now

1 Bitcoin and Ether prices were extracted from Coinmarketcap.com, while S&P500 prices came from Yahoo! Finance. Bitcoin’s price in December 31, 2016 was at $955.48, and by December 31, 2017, it reached US$46,304.45. Ether’s prices for the same period went up from $7.9757 to $3,682.63. S&P500 prices, meanwhile, increased from $2,238.83 to $4,941.11 during the same period.

2 Degen definition: Web3 slang referring to individuals involved in making risky bets, and more broadly to anyone involved in the crypto and decentralized finance space. Ape definition: Web3 slang for someone investing heavily into a crypto token, NFT, other digital asset or stock, often without having much knowledge about the asset.

3 Adam Lashinsky, “Amazon’s Jeff Bezos: The Ultimate Disrupter,” Fortune, accessed April 18, 2022, https://fortune.com/2012/11/16/amazons-jeff-bezos-the-ultimate-disrupter/.

4 Chris Dixon (@cdixon), “1/ Topic: Going from Web 2 to Web 3 – “Your take rate is my opportunity, ” Twitter, August 11, 2021, https://twitter.com/cdixon/status/1425645842552086532.

Inevitable Web3 future

5 Chris Dixon (@cdixon), “Web 3 is the internet owned by the builders and users, orchestrated with tokens.,” Twitter, September 26, 2021, https://twitter.com/cdixon/status/1442201625590779909.

6 Fred Wilson, “The Web3 Stack,” AVC.com, accessed April 25, 2022, https://avc.com/2018/07/the-web-3-stack/.

7 Eshita, “Web3: in a nut shell,” Eshita.Mirror.xyz, accessed April 25, 2022, https://eshita.mirror.xyz/H5bNIXATsWUv_QbbEz6lckYcgAa2rhXEPDRkecOlCOI.

8 CoinMarketCap, accessed July 21, 2022, https://coinmarketcap.com/.

9 Pushpendra Sing, “Web3 Developer Salary Soars,” C# Corner, last updated May 18, 2022, https://www.c-sharpcorner.com/article/web3-developer-salary-soar-in-2022/.

10 Historical crypto market capitalization can be extracted from CoinMarketCap’s Global Cryptocurrency Charts at https://coinmarketcap.com/charts/. S&P 500 market cap is the total market cap of all 500 companies within the index. Data can be extracted from YCharts at https://ycharts.com/indicators/sp_500_market_cap.

Crypto and Web3 basics

11 Disha Sinha, “Top 10 Cryptocurrencies with a High Transaction Speed in 2022,” Analytics Insight, accessed July 17, 2022, https://www.analyticsinsight.net/top-10-cryptocurrencies-with-a-high-transaction-speed-in-2022/.

12 “Validators,” Solana, accessed July 14, 2022, https://solana.com/validators.

13 “Reachable Bitcoin Nodes,” Bitnode, accessed July 14, 2022, https://bitnodes.io.

14 “Earn rewards while securing Ethereum,” Ethereum, accessed July 14, 2022, https://ethereum.org/en/staking/.

15 “Introduction to Smart Contracts,” Ethereum, accessed June 8, 2022, https://ethereum.org/en/developers/docs/smart-contracts/.

16 “Virtual Machine,” Binance Academy, accessed June 8, 2022, https://academy.binance.com/en/glossary/virtual-machine.

17 “Token Standards,” Ethereum, accessed May 26, 2022, https://ethereum.org/en/developers/docs/standards/tokens/.

18 “Lesser-Known ERC Tokenization Standards On Ethereum,” Gemini Cryptopedia, last updated December 24, 2021, https://www.gemini.com/cryptopedia/ethereum-token-standards-erc777-erc1155-erc223-erc1337.

19 U.S. President Joe Biden, “Executive Order on Ensuring Responsible Development of Digital Assets,” The White House, accessed May 17, 2022, https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/.

20 Nikhilesh De, “US Treasury Develops ‘Framework’ for International Crypto Regulation,” last updated July 9, 2022, https://www.coindesk.com/policy/2022/07/07/us-treasury-develops-framework-for-international-crypto-regulation/.

21 Jesse Hamilton, “US Justice Department Urges More Coordination to Combat Crypto Crime,” CoinDesk, last updated June 7, 2022, https://www.coindesk.com/policy/2022/06/07/us-justice-department-urges-more-coordination-to-combat-crypto-crime/.

22 Jacquelyn Melinek, “Proposed bipartisan US crypto bill could be ‘sigh of relief’ for the industry,” TechCrunch, accessed July 15, 2022, https://techcrunch.com/2022/06/08/proposed-bipartisan-us-crypto-bill-could-be-sigh-of-relief-for-the-industry/.

Use cases and value propositions

Decentralized Finance (DeFi)

23 DeFi Pulse, accessed July 18, 2022, https://www.defipulse.com/.

24 Tim Ferriss, “#542: Chris Dixon and Naval Ravikant – The Wonders of Web3, How to Pick the Right Hill to Climb, Finding the Right Amount of Crypto Regulation, Friends with Benefits, and the Untapped Potential of NFTs, Chris Dixon,” The Tim Ferriss Show, accessed April 19, 2022, https://tim.blog/2021/10/28/chris-dixon-naval-ravikant/.

NFTs and the Metaverse

25 Horace Dediu, “Steve Job’s Ultimate Lesson for Companies,” Harvard Business Review, accessed July 19, 2022, https://hbr.org/2011/08/steve-jobss-ultimate-lesson-fo.

26 “Market Overview,” NFTGo, accessed July 19, 2022, https://nftgo.io/analytics/market-overview.

27 Beeple (b. 1981), “Everydays: The First 5000 Days,” Christie’s, accessed on July 19, 2022, https://onlineonly.christies.com/s/beeple-first-5000-days/beeple-b-1981-1/112924.

28 NFTGo.io Research, “NFT Annual Report 2022,” NFTGo, accessed May 5, 2022, https://nftgo.io/research/mPABNUMvPt4ZaHtW03PjpKJCMOVl6WiktxH-yvo_OJo.

29 Ryan McNamara, “Celebrities that Own Bored Ape Yacht Club NFTs,” Benzinga, last updated April 26, 2022, https://www.benzinga.com/money/celebrities-that-own-bored-ape-yacht-club-nfts/.

30 “Welcome to the Bored Ape Yacht Club,” BAYC, accessed July 20, 2022, https://boredapeyachtclub.com/#/home.

31 “Moonbirds: The Official Proof PFP,” Moonbirds, accessed July 26, 2022, https://www.moonbirds.xyz/.

32 Joseph O’Neill, “What Are Utility NFTs? Unique Tokens Offering Real-World Benefits,” Decrypt, accessed July 19, 2022, https://decrypt.co/resources/what-are-utility-nfts-unique-tokens-offering-real-world-benefits.

33 “Crypto Baristas Season 2 White Paper,” Crypto Baristas, accessed July 27, 2022, https://cryptobaristas.com/white-paper/.

34 Vanya Gautam, “10 Big Brands that Have Dipped Their Toes into the NFT World,” India Times, last updated February 02, 2022, https://www.indiatimes.com/worth/investment/brands-that-have-entered-nft-world-560907.html.

“How Brands Are Using NFTs – A continually updated list,” Adage, accessed April 25, 2022, https://adage.com/live-blog/how-brands-marketers-use-nfts-updated-list.

36 “Brandon Powell,” Rally.io, accessed July 27, 2022, https://rally.io/creator/BP4/.

37 “Joe Pulizzi,” Rally.io, accessed July 27, 2022, https://rally.io/creator/TILT/.

38 “Socios.com to Launch UFC Fan Token Today at 5:00 PM (CET),” Ultimate Fighting Championship, accessed July 27, 2022, https://www.ufc.com/news/socioscom-launch-ufc-fan-token-today-500-pm-cet.

39 “Manchester City Fan Tokens ($City),” Socios.com, accessed July 27, 2022, https://fantoken.com/city/.

40 “Classification of Social Tokens,” Messari.io, accessed April 29, 2022, https://messari.io/research.

41 “Welcome to Decentraland,” Decentraland, accessed July 28, 2022, https://decentraland.org/.

42 “The Sandbox: Welcome to the Metaverse,” Sandbox, accessed July 28, 2022, https://www.sandbox.game/en/.

43 Otherside, accessed July 28, 2022, https://otherside.xyz/.

Decentralized Autonomous Organizations (DAOs)

44 Vitalik Buterin, “Bootstrapping a Decentralized Autonomous Corporation: Part I,” Bitcoin Magazine, September 19, 2013, https://bitcoinmagazine.com/technical/bootstrapping-a-decentralized-autonomous-corporation-part-i-1379644274.

45 “The DAO (organization),” Wikipedia.org, accessed on August 2, 2022, https://en.wikipedia.org/wiki/The_DAO_(organization).

46 Paul C, “What is DAO: advantages and disadvantages of decentralized autonomous organizations,” CoinMonks Medium page, accessed April 25, 2022, https://medium.com/coinmonks/what-is-dao-advantages-and-disadvantages-of-decentralized-autonomous-organizations-e099b8e1b5dd.

47 “Decentralized Autonomous Organizations Explained,” Binance Academy, last updated November 18, 2021, https://academy.binance.com/en/articles/decentralized-autonomous-organizations-daos-explained.

48 Brynly Llyr, “Re-envisioning corporations: How DAOs and blockchain can improve the way we organize,” World Economic Forum, accessed April 25, 2022, https://www.weforum.org/agenda/2022/02/re-envisioning-corporations-how-daos-and-blockchain-can-improve-the-way-we-organize/.

49 “The Complete Guide to DAOs,” DeFiRate.com, accessed April 25, 2022, https://defirate.com/dao.

50 DefiRate.com, “The Complete Guide to DAOs.”

51 DefiRate.com, “The Complete Guide to DAOs.”

52 DefiRate.com, “The Complete Guide to DAOs.”

53 Keira Wright, “PleasrDAO adds $4M ‘OG NFT’ Wu-Tang Clan album to its collection,” Cointelegraph, accessed July 20, 2021, https://cointelegraph.com/news/pleasrdao-adds-4m-og-nft-wu-tang-clan-album-to-its-collection.

54 Ekin Genc, “Why This DAO Bought Snowden’s NFT for $5.4 Million,” Decrypt, accessed July 20, 2022, https://decrypt.co/66933/why-this-dao-bought-snowden-nft.

55 Olga Kharif, “Crypto Crowdfunding Goes Mainstream With ConstitutionDAO Bid,” Bloomberg, accessed July 11, 2022, https://www.bloomberg.com/news/articles/2021-11-20/crypto-crowdfunding-goes-mainstream-with-constitutiondao-bid.

56 DefiRate.com, “The Complete Guide to DAOs.”

57 “Organizations,” DeepDAO.io, accessed July 15, 2022, https://deepdao.io/organizations.

Web3 implications and opportunities

TradBiz market and business model implications

58 Chris Dixon, “The Web3 Playbook: Using Token Incentives to Bootstrap New Networks,” Future.com, accessed April 12, 2022, https://future.com/the-web3-playbook-using-token-incentives-to-bootstrap-new-networks/.

59 Adam Lashinsky, “Amazon’s Jeff Bezos: The Ultimate Disrupter,” Fortune, accessed April 18, 2022, https://fortune.com/2012/11/16/amazons-jeff-bezos-the-ultimate-disrupter/.

60 Dixon, “1/Topic: Going from Web2 to Web3.”

61 Owen Fernau, “Meta’s Plan to Keep 47.5% of Metaverse Sales Draws Skepticism,” The Defiant, accessed May 19, 2022, https://thedefiant.io/meta-take-rate/.

62 Philipp Stauffer, “Thin Heads and Fat Tails: Understanding the Crypto Reinvention of Capitalism,” Knowledge at Wharton, accessed April 25, 2022, https://knowledge.wharton.upenn.edu/article/web-3-0-welcome-new-sober-internet/.

63 Business Model Canvas adapted from Alexander Osterwalder et. al., “Clarifying Business Models: Origins, Present and Future of the Concept,” https://www.kth.se/social/files/546b8d75f276546614d2dffc/Osterwalder+(2005).pdf and discussed in his book Business Model Generation, published in 2010.

64 “Chainalysis: The Blockchain Data Platform,” Chainalysis, accessed April 21, 2022, https://www.chainalysis.com/.

65 “Security Audits,” OpenZeppelin, accessed April 21, 2022, https://www.openzeppelin.com/security-audits.

66 Esther Crawford, “Bringing Tips to everyone,” Twitter, accessed April 21, 2022, https://blog.twitter.com/en_us/topics/product/2021/bringing-tips-to-everyone.

67 Ivan Mehta, “Twitter launched NFT profile pictures — people are hella mad,” The Next Web, accessed April 21, 2022, https://thenextweb.com/news/twitter-nft-profile-picture-hex-analysis.

68 “Buy and Sell Cryptocurrency,” PayPal, accessed April 21, 2022, https://www.paypal.com/us/digital-wallet/manage-money/crypto.

69 “Digital Platform,” Merck, accessed April 21, 2022, https://www.merckgroup.com/research/innovation-center/en/Lightpaper_Digital_platform_Merck.pdf.

70 Socios.com, “Manchester City Fan Tokens ($City).”

71 “NFT FAQ,” Dallas Mavericks, accessed July 25, 2022, https://www.mavs.com/nft-faq/#1637012183071-a111ac1a-a02d.

72 “Community Points: Own a piece of your community,” Reddit, accessed April 21, 2022, https://www.reddit.com/community-points/.

73 “What is BitTorrent,” Kraken, accessed April 21, 2022, https://www.kraken.com/learn/what-is-bittorrent-btt.

74 James Laney, “Walmart’s Blockchain Enabled Food Traceability Initiative,” DataDrivenInvestor in Medium, accessed April 21, 2022, https://medium.datadriveninvestor.com/walmarts-blockchain-enabled-food-traceability-initiative-628b9df5febb.

75 Godfrey Benjamin, “Banking Giants CIBC and Aussie’s NAB Partners to Use RippleNet Solution,” accessed April 21, 2022, https://blockchain.news/news/banking-giants-cibc-and-aussies-nab-partners-to-use-ripplenet-solution.

76 “Bitcoin Holdings by Public Companies,” CoinGecko, accessed July 21, 2022, https://www.coingecko.com/en/public-companies-bitcoin.

77 “Nifty partners with Samsung for smart TV NFT platform,” Ledger Insights, accessed April 21, 2022, https://www.ledgerinsights.com/nifty-partners-with-samsung-for-smart-tv-nft-platform/.

78 “Experience Samsung 837X,” Samsung, accessed April 21, 2022, https://www.samsung.com/us/explore/metaverse-837x/.

79 Alexandra Pauly, “Nike Acquires RTFKT, Setting the Stage for Swoosh-Certified NFTs,” Highsnobiety, accessed April 21, 2022, https://www.highsnobiety.com/p/nike-rtfkt-nft-metaverse-acquisition/.

80 Jade Gao, “Nike X RTFKT Unveiled CryptoKicks through Gamified Mechanics,” DappRadar, accessed July 25, 2022, https://dappradar.com/blog/nike-x-rtfkt-unveiled-cryptokicks-through-gamified-mechanics.

81 Ross Wardrop, “Everything You Need To Know About RTFKT MNLTH NFT Sneakers,” last updated April 25, 2022, https://nftevening.com/everything-you-need-to-know-about-rtfkt-mnlth-nft-sneakers/.

82 W3BCloud, accessed April 21, 2022, https://w3bcloud.com/.

Investment Opportunities

83 “Coinbase Derivatives Exchange to make nano bitcoin futures available through leading brokers,” Coinbase, accessed July 25, 2022, https://blog.coinbase.com/coinbase-derivatives-exchange-to-make-nano-bitcoin-futures-available-through-leading-brokers-8df2582325da.

84 Jordan Tuwiner, “MicroStrategy Bitcoin Holdings Chart & Purchase History,” Buy Bitcoin Worldwide, last updated July 5, 2022, https://www.buybitcoinworldwide.com/microstrategy-statistics/.

85 Laney, “Walmart’s Blockchain Enabled Food Traceability Initiative.”

86 Hugh Son, “JPMorgan, led by bitcoin skeptic Jamie Dimon, quietly unveils access to a half-dozen crypto funds,” CNBC, last updated August 5, 2021, https://www.cnbc.com/2021/08/05/bitcoin-jpmorgan-led-by-jamie-dimon-quietly-unveils-access-to-a-half-dozen-crypto-funds.html.

87 Hugh Son, “Morgan Stanley becomes the first big U.S. bank to offer its wealthy clients access to bitcoin funds,” CNBC, last updated March 17, 2021, https://www.cnbc.com/2021/03/17/bitcoin-morgan-stanley-is-the-first-big-us-bank-to-offer-wealthy-clients-access-to-bitcoin-funds.html.

88 Hugh Son, “Goldman Sachs is close to offering bitcoin and other digital assets to its wealth management clients,” CNBC, last updated March 31, 2021, https://www.cnbc.com/2021/03/31/bitcoin-goldman-is-close-to-offering-bitcoin-to-its-richest-clients.html.

89 BitDAO, accessed July 24, 2022, https://www.bitdao.io.

90 Kate Clark, “Bessemer Renounces VC Status, Following Andreessen Horowitz, Sequoia,” The Information, accessed July 24, 2022, https://www.theinformation.com/articles/bessemer-renounces-vc-status-following-andreessen-horowitz-sequoia.

91 Kent Miller, “More than a third of traditional hedge funds now invest in digital assets, nearly double a year ago: PwC Global Crypto Hedge Fund Report 2022,” PwC, accessed July 24, 2022, https://www.pwc.com/gx/en/news-room/press-releases/2022/pwc-global-crypto-hedge-fund-report-2022.html.

Evidence of mainstream adoption

92 Chris Metinko, “Crypto Funding Numbers Fall During Bumpy First Half Of Year,” accessed July 24, 2022, https://news.crunchbase.com/fintech-ecommerce/crypto-funding-falls-h1-2022/.

93 “Cryptocurrency Investment Fund Industry Graphs and Charts,” Crypto Fund Research, accessed July 24, 2022, https://cryptofundresearch.com/cryptocurrency-funds-overview-infographic/.

94 “Cryptocurrencies,” Statista, accessed July 27, 2022, https://www.statista.com/outlook/dmo/fintech/digital-assets/cryptocurrencies/worldwide.

95 “Cryptocurrency across the world,” triple A, accessed July 27, 2022, https://triple-a.io/crypto-ownership-data/.

96 Triple A, “Cryptocurrency across the world.”

97 “34 Million US adults own cryptocurrency,” Insider Intelligence | eMarketer, accessed July 27, 2022, https://www.insiderintelligence.com/insights/us-adults-cryptocurrency-ownership-stats/.

Web3 for TradBiz executives and investors

Web3 for TradBiz
Executives and Investors

If you’re an established business executive or investor, you’re likely already familiar with cryptoassets like Bitcoin and Ethereum, and you may have heard a bit about Web3. By Web3, we mean the Internet-enabled market paradigm to which we are beginning to transition, in which users own open, distributed networks that leverage cryptoasset incentives. You may be well into a successful business career where you earned the right degrees, mastered best practices, took on leadership roles, made tough decisions, and chalked up some wins along the way. But perhaps because you’ve done so well, you may still be firmly rooted in traditional business (TradBiz) models, and thus haven’t yet invested the time to understand and incorporate Web3 into your business and professional life.

This series introduces Web3 to TradBiz executives and investors, providing an overview of core concepts, emerging Web3 use cases, business implications and investment opportunities. We’ve adapted this content from the Web3 working sessions we facilitate regularly with leadership teams, investors, and other executives, drawing from strategic research we’ve conducted since 2015. Given the speed at which the Web3 space evolves, we update this content frequently based on market developments and reader feedback.

If you’re ready to begin your Web3 journey, get started with part one, Web3 and Crypto Foundations, which includes Why Embrace Web3 Now, the Inevitable Web3 Future, Crypto and Web3 Basics, Advanced Web3 Topics, and Using Crypto Wallets. Next, explore part two, Web3 Use Cases and Value Propositions, which provides an overview of Web3 Use Case Categories, with deeper coverage of Decentralized Finance (DeFi), Non-fungible Tokens (NFTs) and the Metaverse, and Decentralized Autonomous Organizations (DAOs). Part three, Web3 Implications and Opportunities, leverages what you’ve learned to discuss TradBiz Market and Business Model Implications, Investment Opportunities, and Evidence of Mainstream Adoption. Wrap things up by Charting Your Path Forward, with curated resources to help you explore, invest, engage, and build in the Web3 future.

Begin by exploring Why Embrace Web3 Now.

Why Embrace Web3 Now     →

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Web3 and crypto foundations

Why embrace Web3 now

Why Embrace Web3 Now

We’re frequently asked by TradBiz executives and investors why they should invest time and effort to address Web3 now, especially given the 2022 downturn in asset values often referred to as crypto winter by the Web3 community. Our answer is that we believe Web3 innovation is inevitable, and that learning about, assessing and addressing Web3 opportunities can create value across multiple dimensions, including improving investment performance, innovating traditional business models, enhancing professional careers, futureproofing yourself and organization, and even changing the world. If you’re interested in applying Web3 to your business, the crypto winter provides you with the time and space to explore and act upon Web3 developments, enabling you and your organization to be positioned when crypto markets recover.

Why TradBiz  Executives Should Embrace Web3

Adding crypto and other Web3 assets to investment portfolios provides the potential for improving performance. While the 2022 bear market has seen leading cryptoasset prices decline significantly from 2021 highs, these declines came off tremendous appreciation in leading cryptoasset values over the past five years. For example, while the S&P 500 returned a solid 22% annual growth in the five-year period ending December 2021, Bitcoin’s value grew at an impressive 164% annually, while Ethereum surged at an incredible 364% annual growth rate. We’re not recommending that you become a Web3 degen and ape your entire portfolio into crypto-based investments. However, since we are still early in Web3 adoption, cryptoassets may have the potential to outperform other asset classes in the foreseeable future. If you haven’t already started investing in cryptoassets, consider allocating a small percentage of your portfolio to Web3-related investments. Even a small two-to-five percent allocation has the potential to increase the risk-adjusted returns of your overall portfolio over time. This isn’t investment advice – we recommend that you do your research, find knowledgeable advisors that you trust, invest in reputable established projects, and never invest more than you can afford to lose. We discuss Web3 Investment Opportunities in more detail in part three of this series.

Innovate traditional business models by incorporating Web3 technologies, ecosystems, and communities. Companies are already leveraging Web3 innovations to expand markets served, establish deeper customer relationships, develop new value propositions, automate business processes, attract and retain talent, improve supply chain efficiencies, and improve partner relationships. These translate into revenue growth from new and enhanced Web3-enabled offerings, as well as reduced operating expenses and improved capital efficiencies. You can also explore TradBiz Market and Business Model Implications further in part three.

Advance careers, improve work-life balance, and increase rewards by developing Web3 skills. There has perhaps been no better time to develop new skills in the past decade, as Web3-focused projects and organizations seek to attract scarce talent. There is already a meaningful migration of Web3 talent from traditional technology firms as ambitious professionals set their sights on the next opportunities. In fact, Web3 software developers are amongst the most sought-after employees in today’s markets. Moreover, opportunities exist for Web3-fluent professionals across a broad range of functions, including marketing, community engagement, finance, project management, investing, creative development, and more. Career prospects are not limited to traditional so-called W2 employment, but also include contributing to decentralized autonomous organizations (DAOs) instead of established companies, working from anywhere rather than physical offices, and even using pseudonymous identities where individuals are compensated for value delivered rather than who they are or where they went to school. Learn more about Decentralized Autonomous Organizations (DAOs) in part two of this series.

Futureproof yourself and your organization from Web3 disruptions that could disintermediate you or your company. If the above reasons aren’t compelling enough, consider the need to futureproof yourself and your organizations from the potential disruptions that the Web3 paradigm is enabling. Just like Jeff Bezos frequently stated, “Your margin is my opportunity” when explaining Amazon’s low-price, low-margin strategy to establish market share, Andreessen-Horowitz’s Chris Dixon describes the transition to Web3 with an updated, “Your take rate is my opportunity.” Similar to how Amazon disrupted so many markets, Web3 ecosystems are poised to do the same by providing compelling value propositions in which users gain most of the economic benefits of participating in decentralized, open-source ecosystems, rather than profits accruing to centralized, proprietary-technology companies. We examine some of the ways Web3 is disrupting markets in TradBiz Market and Business Model Implications.

Change the world by solving problems that couldn’t be solved before. The most compelling use cases and value propositions during the Web3 transition will come from teams developing ecosystems that solve problems that simply couldn’t be addressed previously with TradBiz models. Opportunities abound to bootstrap new communities using token network effects, innovate never-seen-before decentralized finance (DeFi) solutions, reward users with participate-to-earn (P2E) models, monetize relationships between content creators and fans, exit startup projects to community ownership rather than via acquisitions or initial public offerings, and many more. If you’re passionate about addressing market needs that have not yet been solved, then maybe Web3 provides the building blocks you’re looking for to change the world. To begin to develop intuition about the broad range of potential problem-solving opportunities, check out the nearly 100 use cases identified in Web3 Use Case Categories.

There are many compelling reasons for TradBiz executives and investors to embrace Web3 now. If any of the above dimensions are compelling – improve investment performance, innovate TradBiz models, enhance professional careers, futureproof yourself and organization, and change the world -- then read on as we explore the Inevitable Web3 Future.

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Inevitable Web3 future

Inevitable Web3 Future

We are transitioning to a new Web3 paradigm in which users own open, distributed networks enabled by and incentivized with cryptoassets. While there is no consensus on a single definition, Chris Dixon of venture firm Andreessen-Horowitz defines Web3 as “…an Internet owned by users and builders orchestrated by tokens.” Well-known commentator Fred Wilson from Union Square Ventures provides greater detail, describing Web3 as “…the next generation of the web in which decentralized apps (dApps) operate on top of a shared data layer and users have control of their data and the ability to move between dApps with little or no switching costs.” In this section, we will take a closer look at Web3, provide context on previous Web1 and Web2 phases, discuss how the transition to Web3 is already happening, and provide our perspective on why the Web3 future is inevitable.

Web3 is the third major wave of internet-enabled change impacting the economy. Over the last three decades, internet-enabled markets have evolved from the read-only Web1, to the read-write Web2, and are now transitioning to the read-write-own Web3.

Inevitable Web3 Future

The commercialization of the internet in the 1990s brought about what we now think of as Web1. This was a time of experimentation as millions of people came online for the first time, hobbyists and businesses set up first-generation websites, and venture-funded businesses contributed to the dot com boom, bubble and then crash. While many early internet companies, such as AOL and Netscape, didn’t make it, those who did – including Amazon, Angie’s List (now Angi), eBay, Priceline (now Booking Holdings), Shutterfly, and ZipCar – paved the way for continued internet innovation and adoption.

Whereas Web1 was characterized by users consuming published content provided on static websites, Web2 users began sharing information with others via increasingly centralized websites and mobile applications. Today we’re arguably at the height of the Web2 period, dominated by companies like Alphabet (Google), Amazon, Meta Platforms (Facebook), Tencent, Alibaba, Salesforce, ServiceNow, PayPal, Netflix, Airbnb and many more. There is no question that Web2 innovation has delivered tremendous value propositions across a wide variety of use cases; however, this has come at a heavy price, including the rise of mega companies in lieu of open competition, the monetization of user data at the expense of privacy, the risk of data breaches due to centralized applications, the threat of users being de-platformed or censored, and the loss of user voice in the evolution of the applications where people spend an increasingly greater portion of their lives.

Recognizing these challenges, a growing army of entrepreneurs, software developers, creatives, investors, and users are hard at work enabling the transition from today’s dominant Web2 to the more decentralized Web3 paradigm. Enabled by trustless “Internet money” pioneered when Bitcoin was launched pseudonymously in 2009, the Web3 definition has expanded to include a vast variety of multi-directional, peer-to-peer applications where users create content in exchange for shared ownership of distributed protocols and applications. Web3 has grown far beyond Bitcoin, encompassing more than 20,000 crypto-enabled ecosystems, 500,000 developers, and thousands of businesses and investors.,

We believe this Web3 transition is inevitable as attitudes and behaviors across stakeholders change. As we cover in detail throughout this series, Web3 projects increasingly utilize an open-source, robust Web3 technology stack, rather than proprietary, IP-protected technologies. Self-organizing communities of participants with ownership of distributed applications are emerging, replacing product and service consumers who are marketed and sold to by individual companies. Institutional investors increasingly recognize cryptoassets as a new asset class rather than shunning crypto and digital assets. Enterprises are becoming participants in distributed ecosystems, rather than owners of markets with centralized control. And regulators, accepting that crypto is here to stay, are focusing more on protection and compliance, rather than aversion and distrust of decentralized systems.

Inevitable Web3 Future

Yet we’re still early in the transition to Web3. Total crypto market capitalization was hovering around US$ 1 trillion when this series was published in mid 2022, down from more than US$ 3 trillion in late 2021. In contrast, the total market value of all companies in the S&P 500 index totaled US$ 31.9 trillion as of June 30, 2022, with Apple, Microsoft, and Amazon each more valued than the entire cryptoasset market.

If you’re a TradBiz executive or investor, this means you still have time to understand how the Web3 read-write-own paradigm may redefine how your markets work, allowing you to identify opportunities for new value creation, and respond to potential disruptions to existing business models. The next article, Crypto and Web3 Basics, starts you down the path of what you need to know to get started.

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Crypto and Web3 basics

Crypto and Web3 Basics

Before exploring Web3 use cases and business implications, it is important to start with a few foundational basics. These include understanding conceptually how blockchains work, the role of crypto keys, passwords and wallets, tradeoffs in blockchain designs, and the emerging Web3 technology stack. If you’re already familiar with these topics, feel free to jump ahead to the next section, Advanced Web3 Topics.

Let’s start with the blockchains and other distributed ledgers that provide the foundation for cryptoassets and Web3. Think of a blockchain as a ledger containing transaction data and account balances, much like any other spreadsheet or database, but that are replicated, shared, updated, and synchronized across a distributed network of computers, or nodes. The key breakthrough is that blockchains provide mechanisms for ensuring that everyone using them agrees on the value of all the transactions, without any one entity owning or controlling the network. Blockchains solve the so-called double-spending problem, preventing any specific cryptoasset from being used more than once.

Blockchains and Distributed Ledgers

A blockchain like Bitcoin works when a transaction is initiated by a user holding some of the blockchain’s cryptoassets, or tokens. The requested transaction is broadcasted to a distributed, peer-to-peer network of nodes, which run an algorithm to authenticate the transaction. These validated transactions are then combined with others to form a new block, which is added to the end of the blockchain. Each block records the permanent, time-stamped transaction transparently in an immutable, or non-changeable manner. In this way the requested transaction is completed, with any changed balances recorded in the appropriate users’ addresses. Many blockchains also provide additional functionality enabling smart contracts, other kinds of digital assets, and the wide variety of use cases that we will explore later.

Blockchains can be public, private, or a hybrid blend of both. Public blockchains like Ethereum and Bitcoin are permissionless, meaning that anyone with the appropriate technology and resources can participate. Blockchains can also operate privately, such as when organizations adopt technologies like Hyperledger to enable industry-specific supply chains and other processes. Still others, like Ripple, operate as hybrids, with transactions processed privately, but relying on a public blockchain for finality.

Users interact with blockchains using wallets, crypto keys, and backup seed phrases. Private and public cryptographic keys determine the digital identity of users in crypto ecosystems, enabling them to complete transactions which are recorded on the blockchain. These keys are stored in software or hardware based crypto wallets. For a basic value transfer transaction, a sender signs a transaction using their public key, which is then validated by the network, transferring the value to the receiver’s public address. Wallets increasingly allow users to recover their private crypto keys using a series of 12-24 simple words generated by the crypto wallet, providing users with back-up access to underlying private keys, even if the wallet is destroyed or lost.

Every blockchain makes tradeoffs between scalability, security, and decentralization. The Crypto Trilemma refers to how blockchains can only maximize two of three dimensions – scalability, decentralization, and security – which forces trade-offs in network design. Scalability is determined by network throughput, typically measured in the number of transactions per second. Security is the ability to ensure immutability of the data that has been recorded on the blockchain, as well as resistance to attacks from malicious actors. Decentralization is the degree of diversification in ownership, influence, and value in the blockchain.

Every blockchain’s design has made tradeoffs that provide different profiles of scalability, decentralization, and security. For example, Bitcoin is arguably the most decentralized and secure blockchain, but is limited to an average of five transactions per second and a 10-minute transaction confirmation time. Ethereum, an open source blockchain with smart contract functionality launched in 2015, is the second largest cryptoasset in market capitalization and provides the foundation for many Web3 use cases. Ethereum performs a bit better than Bitcoin, at 12-25 transactions per second with a six-minute confirmation time, while still providing good decentralization and security. On the other hand, Solana, a competitive chain to Ethereum, processes about 2,800 transactions per second with an average processing time of less than one second; however, the Solana network is far more centralized than either Bitcoin or Ethereum, with just 1,861 validators compared to Bitcoin’s 15,752 nodes and Ethereum’s 407,550 Beacon network validators.

Crypto Trilemma

Blockchain teams continue to evolve solutions to address the crypto trilemma trade-offs. These solutions include developing more recent consensus mechanisms like Proof-of-Stake, enhancing layer one protocol performance with sharding to split blockchains into smaller partitions, and increasing block sizes to store more transactions. Newer innovations include creating layer two solutions like state channels, off-chain computing, and side chains that increase transaction volumes while leveraging the underlying security of an existing layer one chain.

Blockchains also use different types of mechanisms to validate transaction and maintain consensus across their networks. Proof-of-Work (PoW) was the first consensus mechanism implemented for a blockchain, commonly associated with Bitcoin. With PoW, network nodes compete by solving mathematical puzzles in a process called mining, to earn the right to create the next block in the chain. PoW chains are often both decentralized and secure, but operate at low transaction speeds and high energy intensity, as miners need significant capacity of advanced servers to solve puzzles quickly.

Proof-of-Stake (PoS) was conceived to address some of the limitations of PoW. In PoS, validators are selected from a node pool based upon the amount of cryptoassets each has staked in the network. Transaction fees charged by the network are used to incentivize validators, with some platforms also offering block rewards. PoS networks have the advantages of being energy efficient, performing at higher throughput, and maintaining high security; however, they also risk higher centralization as the validators with the largest holdings have increased influence. Many newer blockchains use some form of PoS as their consensus mechanism. Importantly, Ethereum is currently in the process of transitioning from its original PoW mechanism to a new PoS model, which will make Ethereum far more energy efficient and pave the way for planned scalability enhancements.

Smart contracts are programs stored on blockchains that run when certain conditions are met. These programs consist of code, called functions, and data, referred to as state, that run when certain conditions are met and verified by the nodes. Smart contracts provide the building blocks for automating transactions and decentralized applications, such as transferring cryptoassets, rewarding users, and sending messages or notifications. Smart contracts are often coded in a dedicated programming language like Solidity, Ethereum’s JavaScript-like native language. Virtual machines are required to interact with and deploy smart contracts on a network. These are sandboxed programs that emulate an entire computer system, including CPU, memory, and storage. The Ethereum virtual machine (EVM) is the most widely used virtual machine. While native to the Ethereum network, the EVM has also been adapted to work on many competitive blockchains. Smart contracts enable blockchains to do much more than simply send and store units of value like Bitcoin does. In fact, the bulk of Web3 use cases discussed in this series are built on blockchains that make extensive use of smart contracts.

Many different types of crypto tokens have emerged, with associated token standards to ensure that smart contracts and applications are consistent and composable. For example, Ethereum tokens are referred to by their Ethereum request for comment (ERC) number. ERC-20 is the standard for fungible tokens, widely used in Ethereum-based projects in value, staking, governance, and other use cases. Non-fungible tokens, referred to as NFTs, often utilize the ERC-721 standard to develop and trade collectibles, profile pictures, art, access keys, and other virtual assets. A growing number of other ERC standards exist to meet a wide variety of use cases, such as preventing accidental burning of tokens (ERC-223), building more functionalities on top of tokens (ERC-777), bundling transactions (ERC-1155), and accommodating subscription models (ERC-1337).,

Web3 ecosystems are categorized into four layers that we refer to as the Web3 technology stack. Let’s use what we’ve learned so far to see how this all comes together in the Web3 technology stack. It’s useful to think about Web3 ecosystems categorized into one or more of four layers: protocols, enablers, applications, and wallets and custody. Protocols, such as Bitcoin and Ethereum, are the underlying layer one blockchains and other digital ledger technologies that process and store transactions. Enablers are layer two solutions that improve protocol extensibility and scalability, including helping to address the crypto trilemma challenge discussed earlier. These include Ethereum rollups, state channels, sidechains, oracles, and bridges. Distributed applications, or dApps, are layer three solutions built on top of blockchains that cater to specific use cases and value propositions. As we discuss later, there are already thousands of dApps operating across nearly 100 use cases at various stages of development and user adoption. Finally, layer four is composed of the mechanisms for using and protecting cryptoasset keys and related data, including crypto wallets as well as institutional custody solutions.

Web3 Tech Stack Layers

Crypto regulations are lagging but catching up. We’ll finish up this section by briefly discussing how regulators are approaching the Web3 space. This is a complex topic, as regulations are in flux and different across jurisdictions around the world; however, we believe it is safe to assume that regulators will increasingly address crypto, and that a balance will emerge between enabling innovation while putting in place frameworks for taxation, fraud, securities, and consumer protection.

The U.S. currently treats cryptoassets as property, which means that the gains or losses from trades are subject to capital gains taxes. The U.S. Securities and Exchange Commission (SEC) has also issued guidance that the sales of tokens classified as securities must be registered, expanding the use of the Howey Test to determine when cryptoassets are securities. Exchanges offering security tokens trading must also be registered with the SEC. On the other hand, the U.S. Commodity Futures Trading Commission (CFTC) classifies cryptoassets as “commodities” under the Commodity Exchange Act, making them subject to the agency’s compliance oversight.

U.S. SEC Howey Test

Cryptoassets are also subject to anti-money laundering (AML) and know-your-customer (KYC) requirements. For example, the Financial Crimes Enforcement Network (FinCEN) published in 2013 that crypto service providers fall under money services, making them subject to AML/KYC measures. Exchange users are therefore required to submit identity documents, addresses, credit cards, and bank account information as part of the registration or onboarding process.

With both the SEC and CFTC vying for control over cryptoasset regulation, the market is waiting for more explicit guidance from the U.S. executive and legislative branches that has yet to arrive. In March 2022, U.S. president Biden issued the Executive Order on Ensuring Responsible Development of Digital Assets, calling for an inter-agency exploration of crypto regulation, including user protection, financial stability, national security, innovation, financial inclusion, and technological support. As a response, the U.S. Treasury and Justice Departments released separate statements that they will be working closely with international partners to monitor and prevent illicit cryptoasset-related activity, bridge regulatory gaps across countries, promote inclusive access to financial services, and develop standards for digital payment architectures.,

From the legislative branch, the U.S. House of Representatives introduced the U.S. Virtual Currency Market and Regulatory Act in 2021, which would have required the CFTC to recommend enhancements to existing U.S. crypto regulations, but failed to pass in the Senate. In June 2022, the Senate began reviewing a bipartisan proposal, the Lummis-Gillibrand Financial Innovation Act, which aims to guide the digital asset space, including making cryptoassets transactions under $200 tax-free, defining most cryptoassets as commodities rather than securities, backing stablecoins with fiat reserves, granting the CFTC with exclusive spot market jurisdiction over cryptocurrencies defined as commodities, and confirming the SEC and CFTC as the main regulators of digital assets.

Given regulatory treatment, there are significant differences between utility and security tokens. While these differences are subject to change based upon proposed regulations, they do provide useful guidance when evaluating the regulatory implications of different Web3 ecosystems. Utility tokens are a unit of account that provide access to the functionalities provided by a network. In many jurisdictions, utility tokens are exempted from laws and regulations governing securities, and therefore are accessible to everyone. Bitcoin has been classified by the U.S. SEC as a utility token given its fully decentralized nature and history. Ether is also considered a utility token by many, including the U.S. CFTC; however, some believe there is risk of security classification due to the initial coin offering (ICO) Ethereum’s founders used to launch the network.

Security tokens, on the other hand, are considered to represent a stake in an investment contract, such as the criteria outlined in the SEC’s Howey Test. These tokens may act like or represent other tradable securities, such as stocks, bonds, and derivatives. As such, security tokens may provide financial rights, such as voting, profit share or dividends. Depending upon proposed legislation, they may be subject to securities laws, such as U.S. SEC regulations and AML/KYC. Tokens classified as securities by the SEC may limit ownership to institutional and accredited individual investors. Some Web3 projects have even excluded investors in certain jurisdictions, such as the U.S., from investing in their tokens due to potential regulatory risk.

Utility vs. Security Tokens

This distinction between utility and security tokens may be transitory, as innovation is leading to a wide variety of additional token types, including stablecoins, central bank digital currencies (CBDCs), governance tokens, non-fungible tokens (NFTs), and more. The hope is that a consistent set of frameworks will emerge from the changing regulatory environment, providing better guidance on how to classify and manage tokens across a wide variety of use cases going forward.

The crypto and Web3 basics that we’ve covered in this section provide the basis for understanding more advanced Web3 topics. As a review, we started by defining blockchains and distributed ledger technologies, explaining how users interact with blockchains use wallets, crypto keys, and backup seed phrases. You now know that the Crypto Trilemma causes every blockchain to make tradeoffs between scalability, security, and decentralization, and that there are significant differences between energy-intensive Proof-of-Work (PoW) chains like Bitcoin and Proof-of-Stake (PoS) chains like Ethereum 2.0. We explained how smart contracts programs are stored and run on blockchains, enabling a wide variety of functionality, token types, and distributed applications (dApps). We’ve seen how Web3 ecosystems can be categorized into a Web3 technology stack that includes layer one protocols, layer two enablers, layer three applications, and layer four wallets and custody. Finally, we reviewed how crypto regulations are lagging but beginning to catch up, including the debate about which tokens are classified as securities versus commodities. Equipped with this new knowledge, you are now ready to tackle a few more Advanced Web3 Topics.

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Advanced Web3 topics

Advanced Web3 Topics

Now that we’ve covered the basics, it’s worth spending a bit more time exploring a few more advanced Web3 topics, including value exchange models, tokenomics, bridges, and security.

All Web3 ecosystems involve multiple participants who interact and create value for each other and the broader network. Think about Web3 ecosystems as focused economies where participants are coordinated and incentivized to create value around specific use cases. Value exchange models show how value is transferred between stakeholders to achieve an ecosystem’s objectives. These stakeholders frequently include a diverse set of participants, including users, developers, foundations, DAOs, validators, oracles, and investors. Users are the individuals, organizations or even software bots that are the primary beneficiaries of an ecosystem’s use case, such as people acquiring, storing, or spending a cryptoasset. Developers create, update, and manage the software on which the network runs, which often includes not only blockchain-specific functionality, but front-end websites and mobile apps used to access the ecosystem’s services. Some ecosystems have established non-profit foundations in jurisdictions like Switzerland that play a role in guiding and funding the ecosystem’s development. Others have organized around a decentralized autonomous organization, or DAO, which we discuss later. Layer one and two blockchains need some combination of miners, validators, and nodes, depending on the type of consensus mechanisms they use. Oracles may be used to provide validated external information that the ecosystem’s smart contract need to function, such as a cryptoasset’s current market price. Investors provide capital to the ecosystem in exchange for tokens that have the potential to appreciate over time, comparable to the roles venture capital and private equity firms play in the TradBiz world.

Value Exchange Model

Tokenomics are mechanisms for driving ecosystem value. Just like traditional economies are based upon economics principles, so are Web3 ecosystems. Tokenomics are the mechanisms for creating, allocating, distributing, using, and exchanging tokens within these economies. In this sense, designing and governing a Web3 ecosystem is a bit like playing the role of central banker, as one needs to take into consideration concepts like token supply, issuance, distribution, burning, and fee structures. Maximum supply is the highest number of tokens that will ever be in circulation, usually determined upfront in the design of the ecosystem. For example, Bitcoin’s maximum supply of 21 million is encoded in the protocol, making it exceedingly difficult to change. Circulating supply refers to the number of tokens that have been issued to date, which in Bitcoin’s case is a bit more than 19 million. Issuance mechanisms determine how tokens are created and issued, differing greatly based upon the consensus mechanisms and use cases of each ecosystem. Once tokens are created, distribution mechanisms guide how they are allocated and distributed to stakeholders, such as rewards or incentives for ecosystem participation. Some ecosystems also have burning mechanisms meant to decrease token supply, which can be used to mitigate inflation or increase the future value of tokens. Finally, there is a wide range of fee structures used to fund ecosystem operations and development.

Tokenomics

When evaluating the long-term sustainability of Web3 ecosystems, it is important to think about how each ecosystem’s tokenomics will impact the token supply curve over time. For example, Bitcoin had high token emissions in its earlier years, gradually decreasing over time with so-called halving rates that occur approximately every four years. Other projects, such as alternative layer one EOS and decentralized exchange Uniswap, are inflationary with token emission based on pre-determined inflation rates. Many decentralized apps have fixed supplies, with the maximum number of tokens minted at the time of launch. Examples of fixed supply ecosystems include Basic Attention Token and Chainlink. Binance coin and lending platform Aave utilize deflationary models, minting a maximum supply of tokens upon launch, which are then bought back and burned based upon the project’s utilization level, until the minimum supply has been reached. Mint-and-burn models, such as distributed telecom provider Helium and more recently, Ethereum, implement burning mechanisms to control inflation, based upon the project’s utilization level, and may or may not have a maximum token supply. Other token supply variations exist to manage stablecoins, NFTs, and other digital assets.

Cross-chain bridges enable interoperability between Layer One and Two ecosystems. Until relatively recently, there were limited options to move digital assets across different layer one and two ecosystems. To move value to a new ecosystem, users first had to exchange fiat currency or an existing cryptoasset, such as Ether, for a cryptoasset native to the desired target chain, like Sol on the Solana network. This is changing, as cross-chain bridges have emerged to connect two or more blockchain ecosystems, facilitating the transfer of cryptoassets, enabling dApps to utilize multiple blockchains, and allowing users to participate across ecosystems more easily.

Bridges work by allowing users to lock a cryptoasset into a smart contract on one network, which then issues the equivalent asset on another network. For example, to utilize decentralized finance (DeFi) apps running on the Ethereum-compatible Polygon network, one deposits Ether into the Polygon bridge, which then issues an equivalent amount of wrapped Ether on Polygon. While bridges provide more seamless experiences across blockchains, they are more centralized than the blockchains themselves, and are thus subject to greater security risks. In fact, there have been several notable hacks of bridges that have resulted in the loss of cryptoassets valued in the hundreds of millions of U.S. dollars.

Bridges to Multichain Future

Security is an important consideration when evaluating Web3 solutions. Keep in mind that Web3 transfers many responsibilities from companies and other legal entities to smart contracts and ecosystem users. This means that for many use cases there are no equivalents to banks, government depository insurance, or written legal contracts. Because of this, Web3 users should be aware of the various attack vectors that could potentially threaten crypto ecosystems, including those targeting network states, nodes, consensus rules, and token owners.

Layer one and two networks need to be designed to fend off a broad range of network state and operations attack vectors. These include double spending attempts to spend the same tokens twice, denial-of-service shutdowns caused by excessive spamming, 51% attacks where a single entity gains control of a blockchain’s consensus, forks that cause permanent divergence of blockchains, and many other attacks.

Every Web3 ecosystem, regardless of its layer in the Web3 stack, is also subject to smart contract risks, in which vulnerabilities in the smart contract code could lead to internal failures or external attacks. Potential smart contract risks include a malicious actor taking control of the code to burn existing tokens, mint new tokens, or transfer tokens to unauthorized addresses. Risks could also include programming logic mistakes that cause the smart contracts to not work the way they are supposed to. Fortunately, teams are learning from mistakes as Web3 matures, implementing tools and best practices to mitigate smart code risks. These include completing comprehensive contract testing on testnets before deploying live on mainnets, conducting smart contract security audits, hiring developers with up-to-date knowledge of vulnerabilities, and launching bounty campaigns to identify bugs early. Smart contract insurance providers, such as Nexus Mutual, have also emerged to cover users in the event of losses.

While the above discussion focused on blockchain and smart contract risks, token ownership and custody represent an equally important risk. Many crypto owners place their tokens into the custody of a third-party service, such as a centralized exchange, thereby removing control of the assets from the actual owner. By centralizing tokens into a single entity, this opens the possibility of high-value honeypots that hackers could attack. A common saying in Web3 is “not your keys, not your crypto,” which refers to the trust a user places in a custody provider who holds crypto for them, rather than securing keys individually.

Even when individuals hold keys themselves, there are numerous ways in which they could lose access to their cryptoassets. Phishing attacks, for example, use fake emails, websites, links, impersonations, tech support or other methods to gain access to a user’s private keys. Private keys and backup seed phrases should never be kept on an unencrypted computer, since this could make them accessible by hackers via malware infections. There is also the real risk of simply losing access to private keys, such as when losing a mobile device where the user has not properly backed up and secured their seed words. Best practices include being constantly on guard for attacks, as well as properly backing up and securing the seed phrases used to access crypto accounts.

Web3 Security Risks and Attacks Vectors

These advanced topics provide a more complete picture of how Web3 works. In this section, we’ve covered how value exchange maps help us map how multiple participants in Web3 ecosystems interact, creating value for each other as well as the broader network. You now understand that tokenomics help coordinate ecosystem value, and include mechanisms governing token supply, issuance, distribution, and fees. Cross-chain bridges are enabling interoperability between layer one and two blockchains, paving the way for a more seamless multi-chain future. Finally, we discussed why security is such an important consideration when evaluating or using Web3 solutions. The next section will focus on understanding and Using Crypto Wallets, including setting up your own if you haven’t done so previously.

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Using crypto wallets

Using Crypto Wallets

Now that you’re equipped with a solid foundation of Web3 knowledge, it’s time to roll up your sleeves and set up your first self-custodied crypto wallet. If you’re already familiar with crypto wallet, feel free to skip to the next section, Web3 Use Case Categories. Otherwise, let’s learn about the different kinds of crypto wallets, their common features, and some of the most popular wallets currently available. We’ll then take you through the steps to setup the MetaMask mobile wallet, a popular Ethereum-compatible software wallet. Finally, we discuss how you can use blockchain explorers like Etherscan to track transactions that you and others have made.

Crypto wallets are used to secure, receive, spend and track cryptoassets. It’s worth emphasizing that cryptoassets are different than the physical wallet used to store credit cards, identification, and money. Cryptoassets are not stored in wallets; instead, crypto wallets are the software or hardware that manage the private and public keys controlling cryptoassets on their respective blockchains. Custodial wallets store crypto keys on third-party servers, such as crypto exchanges or the cloud-based servers of software applications. Self-custodied wallets store crypto keys directly on user devices, giving owners full access, control, and responsibility over their cryptoassets. Wallets can utilize either hot or cold storage. Hot wallets are those connected to the Internet, making them more accessible, but also opening the risk of being hacked or compromised. Cold wallets store keys offline, providing higher levels of security in exchange for lower accessibility. Wallets come in a variety of formats, including mobile, web and desktop apps, hardware, and even paper.

Crypto Wallets

Most wallets provide basic security and management features, with some providing advanced functionalities. Up until recently, crypto wallets were quite difficult to use and often had limited functionality; however, wallets are getting both easier and more fully featured as Web3 evolves. Expect most wallets to require a password or pin to secure access, backup and recovery of private keys using 12-24 seed words, and generation and scanning of QR codes for faster, less cumbersome transactions. Common features also include importing or exporting paper wallets, supporting multiple cryptoassets and blockchains, and providing customer support to address issues and concerns.

Look for some wallets to provide many more advanced features. These include two-factor authentication using a mobile device or security key, multi-signature transactions that are confirmed by more than one private key, and cross-platform availability across desktop, mobile, and web applications. Other useful features include trading cryptoassets directly in the wallet via integration with exchanges, paying merchants with cryptoassets, exploring blockchain transactions, and monitoring live crypto market data in portfolios.

Crypto Wallet Functionalities

Most crypto users start with online wallets, migrating over time to software- and hardware-based wallets. People usually get started in crypto by setting up an online, custodied account with a crypto exchange like Coinbase, or Binance, or a crypto-enabled securities account like Robinhood. These companies provide web wallets that also serve as onramps into crypto by linking user bank accounts, thus enabling movements to and from fiat currencies like U.S. dollars. In this case, users place trust in these companies to custody the crypto they indirectly own.

As people become more familiar with crypto, a frequent next step is to move some of their holdings to software wallets, such as MetaMask or Exodus. These can be mobile apps, browser plugins, or desktop-based applications. Unlike web wallets, software wallets require users to self-custody their private keys within the app. While this provides the advantage of maintaining complete control over one’s keys (remember “not your keys, not your crypto”), it also opens the possibility of losing access to crypto through theft or lost backup seed phrases. These wallets are also needed to utilize a wide variety of Web3 applications, including decentralized finance (DeFi) and nonfungible tokens (NFTs).

Hardware wallets, on the other hand, allow users to self-custody their private keys with a higher level of security. Popularized by companies like Ledger and Trezor, these store private keys on small hardware devices that are needed to authenticate transactions done using software-based wallets. If you’re accessing a meaningful amount of cryptoassets value, we highly recommend using a hardware-based wallet.

Selected Popular Crypto Wallets

Use MetaMask to store and transact Ether and other ERC-based cryptoassets. If you’re just getting started with self-custodied software wallets, consider setting up a MetaMask mobile software wallet. MetaMask is a leading Ethereum compatible wallet, available as both a mobile app and a Chrome-compatible plugin. The wallet provides access to both Ether (ETH) and other Ethereum-compatible tokens, is used to access decentralized applications (dApps) built on Ethereum and compatible blockchains, and allows users to exchange any ERC-standard token for another.

To get started, download MetaMask from the Apple or Google app store. Open the app and tap on “Get Started.” If you already have another Ethereum-compatible wallet, you can import it into MetaMask by following the directions; otherwise, create a new wallet. You will start by creating a password for your next wallet. After that, write down the 12 seed words the app provides as your backup phrase. You will then be asked to input the seed words back in the correct order for confirmation. When storing passwords and backing up seed phrases, best practice is to not store this information on a computer or mobile device. Since these devices are connected to the Internet, they are thus at risk to hacking, theft or other loss. Instead, we recommend you write down your password and seed phrase on paper, which you can then secure in a home safe, bank safety deposit box, or other safe location. Remember if a malicious actor discovers your seed phrase, you will likely lose access to your cryptoassets forever.

Once you’ve set up MetaMask, you will have the option to buy some crypto through integration with crypto onramp providers or receive some crypto from a friend. We recommend you start by obtaining a small amount of Ether (ETH), as that is used to pay gas fees on the network that cover transaction costs.

Every transaction made using a wallet can be accessed using a blockchain explorer. Most blockchains, including Ethereum and Bitcoin, provide open, transparent access to all the transactions that have been recorded on them. This is a big deal in Web3, as it means there is detailed, accessible data about every public address that can be used not only to track activity, but for analyzing and developing intuition about every distributed application (dApp) running on a blockchain.

Blockchain explorers like Etherscan provide access to a wide variety of additional information that you can explore. Blockchain statistics allow you to learn about a blockchain’s overall activity, including transaction volumes, value exchanged, gas fees, active addresses, and hash or validation rates. You can also view details about all pending and completed transactions for any public address, along with the type and amount of assets held in any given wallet. Watch lists allow you to track and be alerted about any activity within specified addresses. Etherscan also enables dApp activity monitoring and a broad range of other resources.

Check out Etherscan to understand better how transactions work on Ethereum. If you’ve set up your MetaMask account, paste your public address (not your private key!) into the search box. Any cryptoassets you have in or transactions you’ve completed using your MetaMask account will be listed in plain view. If your Ethereum address is empty you’ll see nothing because you haven’t had any transactions yet, and thus the blockchain doesn’t know your address is active.

If this is the case, try exploring what’s in the public bags (wallets) of some well-known personalities with DappRadar, an application that tracks portfolios across blockchains. For example, check out rapper and record producer Snoop Dogg, investor and entrepreneur Gary Vaynerchuk, entrepreneur Mark Cuban, TV show host Jimmy Fallon, and more here.

Using Etherscan to Access Transactions

With your crypto wallet setup, you’re ready to explore Web3 use cases and value propositions. This section introduced how crypto wallets are used to secure, receive, spend, and track cryptoassets stored on blockchains. We’ve discussed how most crypto users start with online wallets, migrating over time to self-custodied software and often hardware wallets. By now you’ve hopefully set up your mobile MetaMask wallet and perhaps have a small amount of Ether (ETH) to play with on the Ethereum network. You’ve also spent some time exploring how the Etherscan blockchain explorer allows anyone to access and make sense of blockchain transactions. If so, you’re now ready to jump into the wide and rapidly evolving set of Web3 use cases and value propositions, including decentralized finance (DeFi), nonfungible tokens (NFTs), decentralized autonomous organizations (DAOs), and participate-to-earn (P2E) models. Keep reading, starting with Web3 Use Case Categories.

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Use cases and value propositions

Web3 use case categories

Web3 Use Case Categories

The most frequently asked question we get about Web3 is probably “What are the use cases where the value propositions of Web3 exceed what is already provided using Web2 and other traditional business models?” While we are still early in the transition to Web3, there is already plenty of evidence that distributed, crypto-based ecosystems can deliver value to users in ways that wasn’t possible before. This section describes some of the nearly 100 different use cases across eight categories we’ve identified, providing examples of Web3 ecosystems that are already poised to compete against Web2 and other traditional companies.

We’ve identified nearly 100 Web3 use cases across eight categories. Our database of Web3 use cases, based on more than five years of ongoing research, currently maintains a list of nearly 100 use cases across eight different categories – infrastructure, currencies and transactions, decentralized finance (DeFi), NFTs and asset tokenization, DAOs and DAO enablement, distributed services, enterprise solutions, and consumer-focused utility. Given the rapid rate of Web3 innovation, we expect to refine these categories over time; however, they provide a good starting point for understanding the wide array of use cases being developed and offered today.

Web3 Use Cases

Infrastructure use cases include the consensus networks and solutions for building and operating the Web3 stack infrastructure – protocols, enablers, applications, and interfaces. These include blockchain explorers, cross-chain bridges, layer two chains, data oracles, wallets, and many more.

Currencies and transactions are cryptoassets and other solutions enabling the storing and transferring of financial value between people and other entities. Examples include stablecoins linked to fiat currencies like the U.S. dollar, tokens enabling cross-border payments, remittances, and microtransactions, as well as merchant point-of-sale solutions.

Decentralized finance (DeFi) includes a rich set of Web3 native financial solutions that rely on smart contracts rather than third-party intermediaries like traditional banks, securities firms, or insurers. Notable DeFi use cases include asset management, lending and borrowing, decentralized exchanges, derivatives, and insurance. This category also includes hybrid companies integrating aspects of Web3 with Web2 business models, which we refer to as centralized DeFi (CeDeFi) or Web2.5 companies, such as centralized exchanges and crypto banks. Decentralized finance (DeFi) is explored in more detail later in this series.

NFTs and asset tokenization occur when digital or physical assets are converted into tokens to facilitate ownership and exchange. This category covers a broad range of emerging use cases, including the broadly defined non-fungible tokens (NFTs) space, with its own distinct use cases, that is discussed in Non-fungible Tokens (NFTs) and the Metaverse section.

DAOs and DAO enablement use cases describe the different types of decentralized autonomous organizations (DAOs) along with the tools to manage their operations and engage productively with their members. Specific use cases include community management, analytics, governance, operations management, token services, and treasury management. Decentralized Autonomous Organizations (DAOs) also have a dedicated section in this series.

Distributed services refer to the transformation of Web2 and other existing processes, tools, and systems into distributed solutions. Almost all imaginable Web2 use cases are open for potential disruption in the Web3 space, including distributed AI, data analytics, computing, content distribution, crowdsourcing, data storage, marketing places, networking, registries, and security.

Enterprise solutions enable a broad range of TradBiz functions, processes, and capabilities. These include accounting, advertising, human resource management, market research, product provenance, publishing, loyalty programs, supply chain management, and corporate treasuries.

Finally, consumer-focused utility use cases provide a broad range of services targeted toward consumers that haven’t been covered elsewhere. These include betting and gambling, credit and trust ratings, health and wellness, identity management, online learning, online gaming, and more.

Web3 ecosystems are poised to compete with traditional Web2 companies. There are already many examples of Web3 solutions with rapidly evolving value propositions seeking to displace existing TradBiz models and companies. We’ve included a few here to provide a sense of what is possible as Web3 continues to mature.

Web3 vs. Web2 Offerings

For example, while Web2 leaders like AWS, Google, and Dropbox dominate cloud-based data storage today, Web3 protocols such as Filecoin provide alternative models to store and access data across distributed networks in which storage providers are incentivized with tokens. The Ethereum Name Service (ENS) provides domain registry services for names ending in “.eth” that resolve public Ethereum addresses in addition to internet URLs. Protocols like Steemit, Rally, and Chiliz enable content creators to monetize their community using tokens, competing with traditional publishing platforms like YouTube, Medium, and Patreon. Content delivery networks, like THETA, BitTorrent, and Livepeer, similarly incentivize people to host content that is delivered on-demand as users request. The gaming space includes Metaverse, or virtual world, projects such as The Sandbox and Decentraland, as well as a whole new genre of play-to-earn games like Axie Infinity, going up against existing online games such as Fortnite, Roblox, and Minecraft. Cryptoassets like Bitcoin, Dash, and Ripple can be used for payments, providing alternatives to incumbents such as PayPal, Visa, and Western Union. Lending and borrowing platforms have enabled the emerging decentralized finance (DeFi) category, with code-based projects like Compound, Aave, Maker and Yearn providing services previously reserved for financial services institutions. Finally, decentralized exchanges, including Uniswap and Curve, have pioneered automated market maker mechanisms enabling users to exchange tokens without a company-based exchange.

Web3 use cases are plentiful and growing. So, to the skeptics out there, there are indeed many compelling Web3 use cases that already exist, and more are emerging all the time. You now have a sense of the eight broad categories and some of the nearly 100 individual use cases. We also provided some examples of areas where Web3 projects are seeking to compete against, and maybe even displace, TradBiz models and companies. We’re now ready to take a closer look at a few of the more top-of-mind use case categories, starting with Decentralized Finance (DeFi).

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Decentralized Finance (DeFi)

Decentralized Finance (DeFi)

If Web3 is about distributed Internet money, then decentralized finance (DeFi) projects are the protocols, distributed apps (dApps), and aggregators that put it all to work. This section provides an overview of DeFi, and then introduces core innovations like lending protocols, liquidity pools, automated market makers, non-custodial vaults, and composability. As other use cases, including non-fungible tokens (NFTs) and decentralized autonomous organizations (DAOs) increasingly integrate with DeFi, this category represents a core set of building blocks for Web3.

DeFi apps facilitate financial services directly between users without the involvement of traditional intermediaries. Whereas financial services have historically been reserved for large, regulated companies like banks, brokerages, insurers, payments processors, and asset managers, Web3 enables decentralized finance applications through the use of smart contracts, liquidity providers, and users. The DeFi category has grown from almost nothing in 2020 to approximately $US 40 billion of total value locked (TVL) across 120+ projects as of July 2022.

Lending protocols enable users to borrow stablecoins and other tokens by depositing and using cryptoassets they own like Bitcoin or Ethereum as collateral. Lending and borrowing interest rates are set automatically by algorithms based on supply and demand, without a traditional intermediary taking most of the spread. Examples include multi-asset lending platform Aave as well as stablecoin provider Maker.

Decentralized exchanges allow the peer-to-peer trading of tokens enabled by automated market makers and liquidity pools, without the need for a central party. Uniswap enables the trading of a broad range of token pairs on the Ethereum mainnet and other Ethereum-compatible networks, whereas Curve focuses on the efficient trading of stablecoin pairs like USDC and USDT.

Analogous to traditional securities, derivatives projects provide on-chain exposure to a wide variety of other assets, including cryptoasset options, futures, and insurance, as well as tokens based upon other securities, currencies, and commodities. Examples include Synthetix with synthetic assets, dYdX with perpetual contracts, and Nexus Mutual with smart contract insurance.

Payments providers, like Flexa, Sablier and Tornado, help facilitate payment and value exchange securely, globally and privately, without the use of intermediaries. Finally, asset protocols, including Convex, Ren, and Yearn, enable a variety of asset management, cross-chain liquidity, and yield farming functionalities.

Decentralized Finance (DeFi)

Lending protocols enable lending and borrowing of cryptoassets using collateral and incentives. Think of lending protocols as a set of automated algorithms that provide many of the capabilities traditionally reserved for banks, but without any company required. Let’s take Aave as an example. Any crypto holder can become a lender, or liquidity provider, by depositing their cryptoassets into an Aave liquidity pool, using an Ethereum-compatible wallet like MetaMask. Anyone can also become a borrower, provided they have cryptoassets like Bitcoin or Ethereum to deposit as locked collateral. Loans are typically provided in stablecoins, such as USDC, which borrowers can then use however they want, such as paying living expenses, buying a car, or even acquiring more cryptoassets. Borrowers simply need to repay loans and interest to receive their locked collateral back. The primary risk to borrowers occurs if the market value of their cryptoassets falls to a predetermined threshold, where the algorithms will require them to provide additional collateral or may liquidate their holdings. All of this happens automatically, without any team of professionals making day-to-day decisions.

Lending Protocols

Liquidity pools and automated market makers eliminate order books, enabling decentralized exchanges with automated price discovery. Just like lending protocols have algorithms to automatically process the borrowing and lending of cryptoassets, decentralized exchanges use an innovation called automated market makers to enable cryptoasset trading. The Uniswap protocol pioneered this model, enabling smart contract pairs that manage a liquidity pool made up of the reserves of two ERC-20 tokens. The algorithms use Uniswap’s Token X * Token Y = k automated market maker pricing model, where X and Y represent respectively the number of available tokens, and k represents a constant. When X and Y are multiplied, the value must always be equal to the value k. Because the relative price of the two pair assets can only be changed through trading, divergences between the Uniswap price and external prices create arbitrage opportunities, ensuring that Uniswap prices always trend toward the market-clearing price. Uniswap has since evolved its algorithms to incorporate new features, and other decentralized exchanges utilize somewhat different models. However, the key insight is that decentralized exchanges enable any cryptoassets holder to participate in liquidity pools that are managed by software, not financial services institutions, creating far more efficiencies in trading cryptoassets. In Uniswap’s case, the protocol only charges 0.3% for swapping tokens, which is split between liquidity providers proportional to their contribution to liquidity reserves. Centralized exchanges, on the other hand, typically charge fees of 1% or more on cryptoassets transactions.

Liquidity Pools and Automated Market Makers

Non-custodial vaults enable investors to participate in crypto funds without handing their cryptoassets over to fund managers. While traditional finance makes extensive use of custodians – institutions that investors trust to hold their cash, securities, and other financial assets safely, non-custodial vaults, on the other hand, are smart contracts that allow investors to deposit funds to achieve some investment purpose, without the investor ever losing custody over their underlying assets. This opens non-custodial opportunities for distributed models enabling crypto indices, hedge funds, DAO treasuries, investment clubs, automated yield farming, and many more.

For example, Enzyme is a DeFi management system that provides a non-custodial vault that can be used for a wide variety of use cases. Investors can visit the Enzyme website to search for a non-custodial vault that fits their investment objectives. Once identified, they typically need to comply with the chosen vault’s requirements, which varies by jurisdiction and type of service offered, to gain access to the vault’s whitelist, allowing them to invest. They then lock a value of cryptoassets, such as stablecoin USDC or Ether (ETH) in the selected vault’s smart contract, receiving vault tokens back as proof of share. The Enzyme protocol allows the vault’s manager to make investment decisions based upon some number of predetermined, transparent parameters. Managers can also charge predetermined management and performance fees; however, they can never withdraw investors’ funds because investors maintain custody of their respective shares of the fund. Investors can monitor the vault’s performance in real time, and typically exit at any time by exchanging their share of the vault’s tokens held for the underlying value.

Non-Custodial Vaults

The composability of cryptoassets drives higher rates of innovation, enabling compounding utility and increased returns. Composability is the ability of decentralized applications to interact with and be built on top of each other. Syntactic composability enables every smart contract published on a public blockchain to be called by other smart contracts. Atomic composability allows the bundling of several small transactions across multiple dApps in a network into a single transaction that are executed together. Morphological composability facilitates the creation and utilization of application-level standards across a wide range of elements, including tokens, name registries, and wallets, which help to make functions and interfaces across dApps interoperable.

Why is this important? Because, as Chris Dixon from Andreessen-Horowitz has said, “Composability is to software as compounding interest is to finance. It’s sort of this magical thing where if you get it going, it has a sort of exponential hockey stick.” In other words, composability lets developers mix and match software components like Lego bricks – each software component only needs to be written once, and can then be reused whenever needed.

Composability is contributing to what some have called a “Cambrian explosion of innovation” in the DeFi category. Let’s look at a modified DeFi stack to explore this composability enabled innovation. Layer one and two blockchains provide the settlement layer for DeFi, as they’re used to facilitate, validate, and secure cryptoassets transactions. Additional cryptoassets are built in the asset layer, enabled by ERC tokens on Ethereum as well as comparable standards on other blockchains. Protocol standards that determine different use cases, such as decentralized exchanges, lending, derivatives, and payments, can be built on top of the foundation layers. As we’ve discussed, the application layer includes a wide range of user-oriented applications that are built on and connected to protocols, usually delivered through web-based interfaces. Yet it doesn’t stop there. An aggregation layer, sitting conceptually on top of the entire DeFi stack, utilizes composability to aggregate and add value to public DeFi dApps. These include decentralized exchange (DEX) aggregators that optimize market liquidity and do least-cost routing for transactions, as well as asset and yield management dApps leveraging non-custodial vaults.

DeFi Stack Composability

DeFi puts distributed Internet money to work. While we’ve barely scratched the surface, you now have a working understanding of DeFi basics. We’ve discussed how DeFi applications facilitate financial services directly between cryptoassets users, without the involvement of traditional intermediaries like banks, securities firms, and insurers. We’ve also explored some core enabling DeFi models, including lending protocols, liquidity pools, automated market makers, and non-custodial vaults. And you now have some intuition about how composability allows public Web3 stack components to become Lego bricks that drive exponential innovation. Let’s shift gears now and look at the emergence of Non-fungible Tokens (NFTs) and the Metaverse.

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NFTs and the Metaverse

Non-fungible tokens (NFTs) and the Metaverse

Apple founder Steve Jobs once reflected, after the launch of the iPad, that “Technology alone is not enough. It’s technology married with the liberal arts, married with the humanities, that yields the results that makes our hearts sing.” While he was referring to Apple’s DNA after the launch of the iPad, he could well have been talking about non-fungible tokens, better known as NFTs. Supported by a wide variety of use cases, NFTs are already impacting creative industries, creating billions of U.S. dollars in market value, innovating new forms of utility, attracting well-known brands, and launching innovative marketplaces. NFTs are joined by social tokens that connect content creators, influencers, fans, and communities of people together. These Web3 use cases are key enablers of the emerging Metaverse, the time in the near future when our digital lives become relatively more important than our physical ones.

NFTs are already making a dramatic impact on creative industries. What exactly are NFTs? Non-fungible tokens are cryptoassets that represent immutable ownership of scarce and unique digital or physical items. Because NFTs are registered on public blockchains like Ethereum, they provide proof of authenticity, cannot be duplicated, replaced, or substituted, but are still easily transferrable from owner to owner. Contrary to critics claiming that NFTs are simply “overpriced jpegs” that anyone can right-click and save onto their personal device, the NFT market is sizable and growing. Analytics firm NFTGo estimated the total NFT market to be worth approximately US$ 25 billion in July 2022, tracking more than 3,000 collections and 30 million individual NFTs. While most NFTs have minimal value, notable collections and artwork examples have traded in the millions of dollars. For example, the NFT artwork Everdays: The First 5000 Days, a collage from the digital artist known as Beeple, was sold by Christie’s auction house for US$ 69 million in March 2021.

A dizzying number of use cases for NFT are emerging. Pictures for profiles (PFPs) are the largest group of NFTs as measured by market value. Next come collectibles, utility, land, game, and art NFTs. These are joined by an increasing number of other use cases. Many NFTs are often developed and grouped together as unique collections of digital assets, ranging in size from a few dozen to 10,000 or more items.

PFPs are often avatars that are algorithmically generated, including headshots of cartoon characters or people, that are designed to be used as a profile picture in social platforms like Twitter. Collectibles are digital works created with the intent of being collected. Utility NFTs include a wide variety of utility outside of gaming or artistic applications, such as real estate, insurance, and nominative tickets. Virtual land NFTs represent properties or building within a Metaverse such as Decentraland or The Sandbox. Game NFTs are assets that can be used to play online games, and include characters, weapons, accessories, and skins. Art includes both manual creations as well as generative art collections that have been minted and sold as NFTs. Metaverse assets relate to shared virtual environments that people can access through a computer, VR headset, or smartphone. IP NFTs are intellectual property issued by some brands and celebrities. Social NFTs are issued by social media personalities who create digital collections linked to their personal brands. Sports NFTs are often collectibles relating to specific sports and teams. Music NFTs cover a broad range of use cases including playable music files, concert tickets, album artwork, and premium fan experiences. Domain name NFTs are web extensions (like .eth) introduced on public blockchains as smart contracts that turn hexadecimal wallet addresses into human-readable names and enable censorship-resistant websites. DeFi NFTs include any type of NFT that incorporates decentralized finance functionality. Photography NFTs are photos minted as NFTs, where creators often retain copyrights and share revenue each time an NFT is sold.

NFT Use Cases

PFPs are currently the most popular NFTs. If you’re familiar with NFTs, then chances are you’ve heard about top profile picture collections like CryptoPunks and Bored Ape Yacht Club. CryptoPunks launched as a set of 10,000 unique, low resolution, pixelated avatar heads in 2017, and helped pave the way for the ERC-721 standard that defines today’s NFTs. Distributed originally for free to OG crypto users, the floor price for individual CryptoPunks was approximately 80 ETH in July 2022, while CryptoPunks with rare characteristics have sold for much more. Bored Ape Yacht Club is a collection of 10,000 unique Bored Ape NFTs launched in April 2021 that also doubles as a Yacht Club membership card, granting access to online and real-world, members-only benefits. With a July 2022 floor price of approximately 95 ETH, Bored Ape NFTs have become a status symbol, with owners including well-known personalities like Tom Brady, Madonna, Justin Bieber, Jimmy Fallon, Paris Hilton, Snoop Dog, Mark Cuban, Shaquille O’Neal, and Eminem. Art Blocks is a platform where users can select their type of art from a curated collection of digital artists, with an algorithm randomly creating content based on their preferences. Otherdeed by BAYC founders and Sandbox NFTs are Land NFTs that allow users to own real estate in their respective virtual worlds where they can create and host experiences or showcase their other digital assets for themselves and other users. Note that NFT collections tend to be hit-driven, with many projects shifting out of the top 10 as attitudes and their popularity rises and falls.

Top NFT Collections

Some NFT collections are adding utility to art. NFTs have the potential to be far more than images registered on a blockchain. While we are still in the early days of NFT market evolution, many projects are exploring granting their owners with privileges, rights, or rewards that are unlocked by the NFTs they own. For example, Bored Ape Yacht Club NFTs provide access to exclusive parties and other events, offer rewards in the form of being able to mint new NFTs, and more recently gain a share of the associated fungible Ape Coin token. Moonbirds give users rewards, private club memberships, and access to Discord, Metaverse and IRL events, depending on how long they are locked, or nested. Gary Vaynerchuck’s VeeFriends provide holders with tickets to the VeeCon conference. World of Women, a project focused on educating women and increasing female participation in Web3, provide holders with ownership of the artwork underlying each NFT and invitations to real-life events. CryptoBaristas are PFPs that give owners access to exclusive discounts at future café locations, online coffee beans shop and merchandise shop. Proceeds from NFT sales are also used to help its partner farm in Honduras improve its coffee production and post-harvesting processing methods.

Well-known brands have entered the NFT space. The rise in NFT popularity has not been missed by consumer-focused companies, with many well-known brands across different industries dipping their toes into the NFT category. For example, Adidas partnered with Bored Apes Yacht Club and others to launch NFTs that provide exclusive access to physical and digital products as part of the company’s Into the Metaverse campaign. Competitor Nike acquired RTFKT, a well-known NFT studio, as its own response to venture into the Metaverse. Samsung introduced a television based NFT explorer and market aggregator, and created its own virtual world, 837X, in Decentraland, where users can win exclusive NFTs. McDonald’s raffled 10 McRib NFTs to commemorate the 40th anniversary of the popular product. Lamborghini created 360 Lamborghini Aventador NFTs as part of its space-themed collection. The National Basketball Association, in collaboration with Dapper Labs, launched an NFT-based trading card system called NBA Top Shot. Verizon launched a Valentine’s Day campaign with NFTs based on the worst gifts customers had received on that day. And while not a consumer brand, the government of Ukraine organized a campaign to fund their defense against Russia, which sold 1,200 NFTs for US$ 600,000.,

NFT Adoption by Brands

Users explore, sell, and buy NFTs in dedicated marketplaces. These marketplaces enable users to explore NFTs by different use cases and key words, identify top ranked NFTs by metrics like volume, floor price and other statistics, monitor recent sales activity, learn more, and even create unique NFT collections. Several marketplaces support NFTs hosted on different chains, such as Ethereum, Polygon, and Solana. Recently multiple crypto exchanges have announced their own NFT marketplaces, including Coinbase, Binance, and Gemini. However, most NFT transactions are still completed in dedicated NFT marketplaces.

NFT marketplaces come in different flavors, with different degrees of decentralization and collection breadth. Top ranked OpenSea, along with Foundation.app and MakersPlace, are examples of centralized marketplaces controlled by a single company, facilitating the trading of a broad range of NFTs from a huge number of collections. LooksRare, X2Y2, Rarible and others are also multicollection, but utilize a more decentralized design, commonly managed by DAOs. Some NFT collections also have their own dedicated marketplaces, such as CryptoPunks and CryptoKitties. These collection-specific marketplaces tend to be centralized around particular NFT studios today; however, we expect to see the emergence of decentralized marketplaces in the future.

Top NFT Marketplaces

Social tokens enable content creators to engage with their followers. Social tokens, which can include both fungible and non-fungible tokens, are used by influencers and other content creators to monetize their community by providing value-added experiences and rewards to their followers. Personal social tokens are released by well-known individuals to reward their supporters, potentially granting exclusive access to events and merchandise, confer status, and create a sense of connection with creators. For example, Los Angeles Rams wide receiver Brandon Powell’s $BP4 token provides access to exclusive football-related airdrops and exclusive merchandise. Content marketing guru Joe Pulizzi’s $TILT grants token holders discounted access to educational materials and events for content creation.

Building on top of personal social token benefits, community tokens can give holders governance rights, community influence, and revenue sharing. The Ultimate Fighting Championship’s $UFC token, for instance, provides access to exclusive content along with the opportunity to vote on polls. In the U.K., Manchester City football club’s $CITY allows holders to vote in polls organized by club, access exclusive promotions and content, and receive VIP treatment during games and other social activities.

Social platforms represent control and ownership of protocols that facilitate the issuance and exchange of social tokens. These include the native token of Rally Network, RLY, which is the underlying protocol of Rally.io, a social platform for personal social tokens, and CHZ, the native token of Chiliz, a platform for launching community fan tokens commonly used by sports and gaming clubs worldwide.

NFTs and social tokens will play important roles in the Metaverse. The Metaverse is not just a thing, but a time when we will be living much of our lives in the digital space, enabled by the convergence of technologies like artificial intelligence, augmented and virtual reality, data analytics, ubiquitous network connectivity, and yes, the distributed Web3 stack. Even though leading Web2 companies like Meta (Facebook), Alphabet (Google), and Microsoft would prefer the continued status quo with their dominant business models, we believe that much of the Metaverse will be decentralized, not controlled by a small number of companies, but rather composed of many different virtual spaces that connect and interact. NFTs promise to become the digital assets of the Metaverse, owned by users and movable across different virtual universes. Similarly, fungible tokens are likely to become the currencies of the Metaverse, just as cryptoassets are already becoming Internet money. Anticipated product launches from Apple and other technology companies will enable augmented reality experiences that blur boundaries between the Metaverse and IRL, or what is digital versus in-real-life.

Web3-based virtual and augmented reality platforms are enabling the Metaverse. In fact, there are already many Web3-enabled virtual worlds launched and evolving in the Metaverse. Decentraland, for example, is a decentralized virtual reality platform built on the Ethereum blockchain, where users can create, experience, and monetize their content and applications on NFT-based virtual real estate parcels called LAND. The Sandbox is virtual world that describes itself as a community-driven platform where creators can monetize voxel ASSETS and gaming experiences on the blockchain. Otherside is yet another example of a gamified Metaverse under development. Co-developed by Bored Apes Yacht Club creator Yuga Labs, the project intends to blend mechanics from massively multiplayer online role-playing games (MMORPGs) and Web3-enabled virtual worlds. NFT Worlds, Somnium Space, Voxels, Substrata, and NetVRk are more examples of work-in-progress, decentralized virtual spaces.

Selected Web3 Metaverse Virtual Worlds

NFTs, social tokens, and the Metaverse expand crypto beyond Internet money. While NFTs, social tokens, and Metaverse land can have financial value, they’re also about incorporating humanity into Web3, including art, utility, community, and virtual experiences. We’ve discussed in this section about how NFTs are already making a dramatic impact on creative industries, with a dizzying number of emerging use cases. Well-known consumer brands are experimenting in the NFT space, with more likely to come. Web3 users explore, sell, and buy NFTs using a growing number of dedicated marketplaces that cater to different needs and functionalities. Adding to this, social tokens allow content creators and influencers to engage with their followers, as well as enabling communities to form around common interests. Because of all of this, NFTs and social tokens will play important roles in the evolution of the decentralized Metaverse.

For our last deeper dive into Web3 use cases, let’s move on to Decentralized Autonomous Organizations (DAOs), a new form of collaboration emerging to govern and manage decentralized Web3 ecosystems.

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Decentralized Autonomous
Organizations (DAOs)

Decentralized Autonomous Organizations (DAOs)

Now that we’ve discussed emerging Web3 use cases, including deeper dives on decentralized finance (DeFi) and non-fungible tokens (NFTs), we might ask how are all these ecosystems going to be governed and managed? Fortunately, decentralized autonomous organizations (DAOs) have emerged as a new type of organization better suited to manage bourgeoning communities of stakeholders than more traditional structures like hierarchy-based organizations that have dominated since the Industrial Revolution. This section discusses the history of DAOs, how they are used to manage Web3 ecosystems, strengths and weaknesses compared to traditional organizations, types of DAOs, and the tools enabling DAO operations.

DAOs have evolved in parallel with cryptoassets. The concept of distributed governance arguably has been around since the birth of Bitcoin, as the process for evolving the cryptoasset’s protocol requires consensus building and adoption by stakeholders that include software developers, miners, node operators, and users. Ethereum founder Vitalik Buterin outlined his view of the “decentralized autonomous corporation” in a 2013 Bitcoin Magazine article. This was followed by the launch of The DAO in early 2016, a decentralized autonomous organization that intended to function as an investor-directed venture capital fund. The DAO raised more than US$150 million in Ether via a successful crowdfunding campaign; however, was subjected to an attack exploiting code vulnerabilities a month later, resulting in the loss of about one-third of the Ether raised. Given the magnitude of the loss, the Ethereum network was hard forked to recover the lost funds for original owners, with the term DAO becoming synonymous with this hack for several years. Interest in the DAO concept reemerged around 2019 and 2020, fueled in part by the rising use of governance tokens to manage DeFi protocols and other dApps. Today there are thousands of functioning DAOs with millions of members, managing cryptoassets valued in the billions of U.S. dollars.

DAOs are systems to manage Web3 ecosystems. Decentralized autonomous organizations (DAOs) are made up of the stakeholders responsible for managing an ecosystem through rules and codes enforced by smart contracts, with members incentivized through token mechanisms that align their interests to the collective goals of the community. Think of DAOs as community-led entities that may not have the same degree of centralized authority typical in traditional businesses. In its pure form, a DAO is fully autonomous and transparent, with smart contracts providing the foundational rules and executing agreed-upon decisions. DAOs are governed by individual members who collectively make critical decisions about the project’s future, such as the development roadmap and treasury allocations. Community members may create and vote on proposals, with the successful ones accepted and enforced by the rules implemented in the underlying smart contracts. Since every DAO member is an owner, incentives tend to be aligned with decision making as it is in each member’s best interest to only approve proposals that maximize the value of the ecosystem. This has the potential to create flywheel effects, in which a healthy DAO garners more ecosystem usage, which increases the value of the tokens each DAO member holds, promoting continued good governance, and thus creating long-term sustainability.

DAOs have both strengths and weaknesses. Not surprisingly, DAOs have both strengths and weaknesses compared to traditional forms of organization. DAO operations are more likely to be transparent than traditional organizations, given that major decisions and actions are recorded and accessible on a blockchain. Decision-making can also be more inclusive, including broader sets of stakeholders who can participate directly or indirectly in the governance and management of the ecosystem. Members of DAOs are typically rewarded through actual contributions of value, rather than their education background, years of experience, or potential expertise. Some notable DAO contributors, in fact, have operated pseudonymously, not sharing their legal names, race, gender, age, or other demographics publicly. This has the potential to expand access to economic opportunities and limit discrimination as people can work from anywhere to contribute measurable value. DAOs can also be more flexible and adaptive to achieve their ecosystem’s objectives through their flatter, more emergent structures.

Yet DAOs also face considerable issues that need to be addressed, many of which are related to the early stage of development and lack of best practices for organizing, managing, and operating these organizations. High amongst the issues is the uncertain regulatory landscape, with unclear, confusing, and even incompatible regulations across jurisdictions, that may hinder widespread adoption, especially among DAOs that operate with global scope. Coordinated attacks by influential stakeholders holding significant shares of governance tokens within DAOs may place individual or team interests above the ecosystem that the DAO governs. It’s also not clear what is the appropriate level of decentralization versus centralization to achieve each ecosystem’s objectives, as some DAOs may place more importance on efficient operations that require certain degrees of hierarchy and centralization, rather than operate in fully a distributed manner.,

Decentralized Autonomous Organizations (DAOs)

Different types of DAOs address varying objectives. DAOs can be grouped into use case categories based upon the types of projects they manage, including protocol, investment, grants, collector, and social DAOs.

DAO Types

Protocol DAOs use tokens for ownership and on-chain governance to maintain and evolve the underlying platforms. These are commonly seen among DeFi ecosystems. For example, Uniswap’s UNI token holders can vote or delegate their vote to guide Uniswap’s directions, fees, and treasury use. Similarly, Maker uses a DAO framework for token holders to vote on policies, fees, and protocol operations.

Investment DAOs operate as investor-controlled investment funds, where DAO members collectively decide on how to allocate their pooled capital. MetaCartel Ventures, for example, allows members, including non-accredited investors, to vote in which dApps to invest, while The LAO functions as a member-directed venture capital entity registered in the U.S. as a limited liability company (LLC).

Grants DAOs are often created as the mission-driven philanthropic arm of a bigger project, focused on missions like supporting new Web3-based ecosystems through grants. Gitcoin, for instance, is an independent platform funding developers focused on open-source applications. Moloch DAO focuses on funding Ethereum’s infrastructure development.

Collector DAOs pool funds from multiple users to acquire collectible items, such as NFTs, physical art, music, and real estate – from both Web3 and traditional markets. PleasrDAO is a collective of DeFi leaders, early NFT collectors, and digital artists that acquires and curates unique art and collectibles. The DAO’s collection includes purchasing Wu-Tang Clan’s one-of-a-kind unreleased album Once Upon a Time in Shaolin for US$4 million in October 2021, as well as Edward Snowden’s signed Stay Free NFT for US$5.4 million in April 2021. Constitution DAO was organized in November 2021 to purchase an original copy of the United States Constitution. The group raised approximately US$ 47 million in Ether within a one-week crowdfunding effort but lost to a higher bid in the Sotheby’s auction. Nonetheless, the ability to conceptualize, organize, raise money, and bid at this scale, according to Bloomberg news, “showed the power of the DAO … has the potential to change the way people buy things, build companies, share resources and run nonprofits.”

Social DAOs are clubs in which people acquire a DAO’s token, which could be an NFT, social token or other cryptoassets, to become members. Examples include Friends with Benefits, a social club composed of Web3 artists, developers, and enthusiasts, which we mentioned earlier when discussing social tokens. Another example is the popular Bored Ape Yacht Club (BAYC), in which membership is determined by ownership of the PFP (photo for profile) from the BAYC NFT collection.

Users participate in DAOs with tokens. Crypto holders generally become members of DAOs by acquiring tokens in the DAO that provides them with a share of ownership and governance rights. The specifics of how this works differ by DAO, but we can use a hypothetical investment DAO as an example. In this case, you decide to join the DAO by exchanging some of your crypto, like Ether or USDC, for tokens that represent proportional ownership of the DAO. This so-called tribute adds to the shared treasury, which the DAO uses to make investments. As a DAO owner, you have right to vote on proposals offered by fellow members on how to utilize the treasury to make investments, distribute earnings to members, reward other contributors, and otherwise fund the DAO’s operations. For example, the DAO may compensate contributors for services that improve the DAO’s value, which for an investment DAO could include investment research, portfolio management, accounting, legal advice, tax compliance, and marketing. Smart contracts determine what the organization can and cannot do, as well as define member rights and responsibilities; however, DAO members may have the ability to change these engagement rules through the voting process. As a DAO member, you also may have the ability to quit the DAO whenever you wish, redeeming your proportional share of the DAO’s treasury back into underlying cryptoassets. Some DAOs allow what is called rage quit, in which there is a predetermined time after each proposal passes where members who don’t agree can simply exit the DAO.

How DAOs Work

The numbers and size of DAOs are exploding. There are currently nearly 5,000 DAOs identified by analytics website DeepDAO, with an aggregate membership of about four million governance token holders managing more than US$ 10 billion in total treasury. Top DAOs, with treasuries valued from hundreds of millions to billions in U.S. dollars, include decentralized exchange Uniswap, crypto cross-ownership network BitDAO, crypto tool provider Gnosis, next-gen blockchain Polkadot, and Ethereum staking protocol Lido.

DAO Statistics

An increasing number of tools and services enable DAOs. As DAOs become more commonplace, the range of services from both Web3 projects and TradBiz that enable DAOs is growing. These include broad organizational frameworks, as well as focused solutions supporting community management, analytics, operations, tokens, and treasury management. Organizational frameworks provide on- and off-chain governance with decision-making tools that help DAO’s achieve their objectives. Operations management services enable day-to-day management of DAO operations, including full-stack technology platforms as well as risk and legal management systems. Community management tools help stimulate participation and collaboration, including measuring and validating the reputations members earn over time by contributing to DAOs. Analytics tools help DAOs monitor progress as well as gain insights on governance, spending, initiatives, and discussions. Token services enable DAO tokenization, including token design, issuance, distribution, and market making. And treasury management solutions aid in DAO financial management, including asset allocation, payments, and financial reporting.

DAO Enablement Tools

DAOs are innovating how business is conducted. While we don’t expect DAOs to replace established organizational structures and business entities, we do think that DAOs will have a substantial role in our Web3 future. In this section we’ve introduced DAOs, discussing how they govern and manage distributed Web3 ecosystems. You now know that DAOs enable a broad variety of use case objectives, such as protocols, investments, grants, collectors, and social. Users participate by obtaining DAO tokens, which provides both shared ownership and governance rights. There are now thousands of DAOs managing billions of U.S. dollars in shared treasuries with millions of members. And an increasing number of tools enable DAOs in areas like organizational structure, community management, analytics, operations, tokens, and treasury management.

Now that we’ve explored Web3 use cases, including decentralized finance (DeFi), non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs), let’s shift emphasis to thinking about the implications and opportunities arising from our transition to Web3, starting with TradBiz Market and Business Model Implications.

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Web3 implications and opportunities

TradBiz market and
business model implications

TradBiz Market and Business Model Implications

Web3 has the potential not only to disrupt TradBiz markets and business models, but also enable compelling new growth opportunities for those who seize them. In this section, we will explore differences between token-based and traditional markets, including using tokens to bootstrap early-stage Web3 networks, vastly lower take rates of Web3 ecosystems compared to Web2 companies, how Web3 characteristics may evolve industry structures, potential business model impacts, and Web3 opportunities for existing businesses.

Token incentives bootstrap Web3 networks. Let’s start with how Web3 networks use tokens to bootstrap their growth, providing early ecosystem users with financial value until network effects kick in. As Chris Dixon from Andreessen-Horowitz points out, Web2 startups require significant venture investment to fund sales and marketing campaigns to attract new users. According to the so-called Metcalfe’s Law, the value of a network dramatically increases with the number of participants. In other words, a social network isn’t very valuable when there are just a handful of users; however, it becomes indispensable when there are a billion global users connecting each day. Once Web2 companies have scaled with network effects kicking in, it’s rational for them to try and extract as much value as possible from users through data monetization, increased subscription prices, and other revenue streams.

Web3 ecosystems, however, reward users with token-based financial utility during the early stages of network growth to make up for the lack of native utility, with rewards tapering off as the network and its associated utility scales. A user may be happy spending time in early versions of a play-to-earn game, such as Axie Infinity, since they can earn tokens that have the potential to appreciate significantly as the network grows. The same user may be incentivized to continue playing when token rewards decrease, but only if the game itself has evolved substantially to provide significant more value.

Bootstrapping Problem

If you’re an entrepreneur with a new idea, consider how you might bootstrap your network with a Web3 solution while minimizing the need for traditional venture funding. If you’re already in an established company with scale, be on the lookout for emerging competitors wielding distributed models with the potential to unseat you by luring your customers to their network with token incentives.

Web3 take rates are much lower than Web2 equivalents. Because Web3 ecosystems are designed to be owned by and give back value to users, they often have much lower take rates than comparable Web2 offerings. Just as Jeff Bezos frequently stated, “Your margin is my opportunity” when explaining Amazon’s low-price, low-margin strategy to establish market share, Andreessen-Horowitz’s Chris Dixon describes the transition to Web3 with an updated, “Your take rate is my opportunity.” Think of take rates as how much of the financial value a network generates is retained by the network provider rather than the users. Overall Web3 ecosystems tend to have much lower take rates than Web2 companies, often due to inherent designs to incentivize and be owned by users, but also because ecosystems often require smaller amounts to maintain and evolve platforms, and do not spend significantly on customer acquisition and marketing. Since users frequently own a majority of Web3 ecosystems, the bulk of revenue generated is returned to them. Moreover, because many ecosystems utilize open-source software, those ecosystems with higher than needed take rates incentivize others to fork the project, in essence becoming a competitor providing similar services with lower take rates.

Comparing Web3 with Web2 take rates shows how big a difference this makes. Let’s take Facebook as an example, which for all practical purposes has a 100% take rate. In other words, no one gets paid to spend time on the app; instead, Facebook monetizes your time and personal data, providing what appears to be free services that in fact have very high hidden costs. We see similar examples in other areas. Web3 gaming apps like Axie Infinity and The Sandbox utilize take rates around five percent, while online gaming companies operate at 30 percent and above. Digital asset NFT marketplaces, such as OpenSea and Rarible, operate with five percent or lower take rates. Compare that with Meta’s recent announcement that they plan to take a whopping 47.5% commission on digital asset sales in their proprietary Metaverse properties. Web3 content platforms, such as Rally and BitClout, regularly return 90 percent of value back to content creators, whereas Web2 comparables like YouTube, Spotify, and Twitch take 30 to 50 percent. The same take rate disparity is true when comparing different forms of Web2 marketplaces, including exchanges, labor markets, and app stores.

Web2 vs. Web3 Take Rates

If you happen to work in an established company where most of the network value is siphoned off as operating expenses and shareholder profit, you may be at risk of Web3 entrants operating with much lower take rates. As you explore the impact Web3 may have on your company, anticipate where you could be at risk, and consider making business model changes to protect your position, such as delivering value propositions better aligned with Web2 capabilities that may retain advantages against decentralized ecosystems. Even if your take rates are low, think about how you continue to evolve value to your customers to ensure long-term sustainability.

Decentralized systems may create more competitive markets. Web3 has the potential to evolve existing industry structures into more competitive markets by decentralizing access to data, trust, and technology. Today’s Web2 markets are characterized by companies providing platforms made up of proprietary technology, data, and applications designed to create competitive moats that lock users in from leaving easily. This established playbook has resulted in large, powerful companies incentivized by financial markets to put shareholders ahead of users, resulting in less-than-optimal outcomes like personal data monetization, high subscription costs, customers not owning their data, barriers switching to competitive platforms, and the risk of being de-platformed due to violations in ever-changing terms of services or government requests. While APIs enable varying levels of integration between Web2 applications, today’s markets are largely composed of siloed companies operating with a winner-take-most mentality, creating two-to-three major competitors in each market.

As we have discussed elsewhere in this series, Web3 enables solutions that are open source, permissionless, transparent, and composable, built on top of a rapidly evolving Web3 technology stack that includes blockchains, protocols, distributed applications, aggregators, and many more innovations. In this paradigm, users maintain ownership over their data, which can be used by different dApps through composability, and accessed across blockchains with the help of bridges.

This has the potential to democratize access to data, technology, and trust, evolving industry structures into more competitive playing fields than what we have with today’s Web2 environment. While it’s possible that blockchains and dApps will follow a winner-take-most outcome due to the network effects we discussed earlier, it is equally plausible that the emergence of ecosystems will enable competition between members, accelerating innovation, and perhaps making industries less concentrated.

Evolving Industry Structures

Web3 can impact nearly every aspect of TradBiz models. The TradBiz executives and investors we work with find it useful to explore how Web3 can create both opportunities and threats for their businesses. The Business Model Canvas, a widely used framework for developing and evaluating business models, is a useful tool for exploring Web3 impacts across business functions.

Web3 Business Model Implications

Starting on the right side with customer segments, Web3 provides companies with opportunities to expand geographies served as well as target crypto-native customer segments, while also facing the risk of losing share to Web3 alternatives offering compelling value propositions combined with token incentives. Evolving customers into members of token-enabled communities can deepen customer relationships, helping prevent losing customers to competitive businesses and other communities. Web3 ecosystems can also serve as valuable channels, allowing established companies to connect to and serve new customers who participate in these communities. We believe there are significant opportunities for TradBiz organizations to improve their value propositions, including integrating existing products and services into Web3 offerings, as well as developing entirely new Web3 solutions that combine the best of Web2 and Web3 capabilities.

There are additional opportunities to leverage Web3 capabilities and practices that improve a company’s efficiency and effectiveness. For example, key business processes, or activities, can be automated using blockchains, smart contracts, and machine learning. Borrowing lessons learned from decentralized autonomous organizations (DAOs), there may also be opportunities to attract and leverage resources globally, potentially aligning and incentivizing them with token-based rewards. Partnerships also can be improved through blockchain enabled supply chains, and by developing new B2DAO relationships.

By going through this business model assessment process, leadership teams will discover that Web3 has the potential for delivering attractive financial benefits as well as threats. On the revenue side, pursuing Web3 opportunities can create meaningful new revenue streams from new and enhanced Web3 offerings, better market access, and deeper customer relationships. At the same time, be aware of potential price pressure from Web3 ecosystems targeting customers with token-based incentives and lower take rates. From a cost structure perspective, Web3 enablement may help reduce operating expenses and improve capital efficiency, whereas the risk is failing to improve relative to emerging Web3 alternatives.

Opportunities exist to Web3-fy companies and plug into Web3 ecosystems. We’ve identified five opportunities for TradBiz to explore as a starting point when evaluating Web3 opportunities: B2DAO, Web3-fied offerings, token-enabled communities, Web3-fied operations, and Web3 native innovations.

TradBiz+Web3 Opportunities

Expanding beyond traditional B2B sales, TradBiz organizations have opportunities to pursue B2DAO opportunities, providing products and services that enable DAOs and other Web3-focused businesses. Services needed by DAOs include accounting and finance, legal and regulatory compliance, marketing and community development, smart contract auditing, tax management, and treasury management. Chainalysis, for example, provides compliance and risk management solutions to Web3 ecosystems, financial institutions, exchanges, government agencies, and others to protect and grow the adoption of crypto. OpenZeppelin performs smart contract audits to ensure that they execute processes as intended, counting distributed networks like Augur, Basic Attention Token, Compound, and Maker among its clients. And Microsoft’s software development platform, GitHub, is where Web3 developers collaborate to develop, manage, and evolve the code distributed networks.

Companies can also Web3-fy offerings, integrating crypto and Web3 capabilities, features, and uses cases into their existing products, services, and business models. Consider accepting crypto payments, providing customers with native crypto wallets, incorporating crypto into software user interfaces, integrating Web3 capabilities into existing offerings, and extending social logins to Web3 apps. Twitter, for example, rolled out a tipping feature that allows users to support or tip other users using different payment options including crypto. Twitter also enabled the use of verified NFTs as Twitter profile pictures (PFPs). PayPal now allows users to buy, sell or trade cryptoassets within their apps, and has introduced a “Check-out with Crypto” feature enabling users to pay for online purchases with crypto. Pharmaceutical company Merck has created a blockchain-based, Internet-of-Things powered platform for supply chain management that allows companies, laboratories, suppliers, and logistics providers to connect and exchange data seamlessly.

Established businesses can also explore creating token-enabled communities, using tokens to enable communities of engaged and empowered customers and other stakeholders. Here there are opportunities to sell products and services, provide rewards and loyalty programs, encourage referrals, involve stakeholders in proposals and decision-making, and reward users with value-appreciating tokens. The U.K. football team Manchester City, for example, launched the $CITY fan token that allows holders to vote in polls organized by the club, access exclusive promotions and content, and receive VIP treatment during games and other social activities. In the U.S., Mark Cuban-owned, NBA team Dallas Mavericks is releasing player profile pictures and photos as NFTs during home games, which fans can redeem by signing up to a dedicated portal and having their mobile tickets scanned during the game. According to the basketball club, this is one of their ways to reward users, understand consumption behavior and incentivize more people to attend live games. The discussion platform Reddit is testing a new program called “Community Points” on an Ethereum testnet, in which subreddits can reward users for their contributions and allow them to vote on important decisions. The file sharing platform BitTorrent launched the BTT token after being acquired by the Tron Foundation in 2019 to expand its peer-to-peer file sharing network and incentivize participants for sharing and hosting files.

TradBiz organizations have additional opportunities to Web3-fy operations, incorporating Web3 networks, capabilities and practices which enhance operational efficiency and effectiveness. Potential impact areas include supply chain management, human resources, accounting and finance, treasury management, and predictive asset maintenance, among others. For example, Walmart launched the blockchain-based Food Traceability Initiative in partnership with IBM, allowing users to trace the provenance of selected products, including data on manufacturer, certifications, temperature, and handling. The Canadian Imperial Bank of Commerce, or CIBC, partnered with the National Bank of Australia using Ripple to facilitate cross-border payments between them, and explore expanding on a broader scale to enable global settlements. Several high-profile companies, including Tesla, Block (formerly Square), and MicroStrategy, hold or have held Bitcoin or other cryptoassets as part of their corporate treasury, with the aim to further diversify and maximize returns on cash for shareholders.

Finally, TradBiz can consider creating Web3 native innovations, creating entirely new offerings and value propositions enabled by Web3 technologies and models. Opportunities to explore include creating virtual worlds, building public or private blockchains, releasing NFT collections, catalyzing decentralized marketplaces, and establishing Web3 on-ramps for users. Samsung, for example, has introduced a television-based NFT explorer and market aggregator. The company has also created its own virtual world within Decentraland, 837X, where users can win exclusive NFTs by entering and consuming content. Nike acquired RTFKT, a well-known NFT studio, to venture into the Metaverse and NFT space. RTFKT has since released RTFKT x Nike Dunk Genesis CRYPTOKICKS, a collection of 12,400 Nike-branded virtual sneakers. They have also launched RTFKT X NIKE MNLTH, a collection of 10,000 NFTs that look like floating black boxes which they distributed to CloneX and PodX holders. Upon completing certain quests, the MNLTH boxes will open, revealing customizable digital sneakers and another MNLTH box. Semiconductor firm AMD launched W3B Cloud, a joint venture with Consensys, that aims to provide cloud computing blockchain infrastructure for enterprises. Components include validation, computation, nodes, and application development.

Web3 will create disruptions that leading TradBiz’s will seek to exploit. In this section we’ve discussed how Web3 may impact markets, including the use of token incentives to bootstrap Web3 networks, how Web3 take rates are much lower than Web2 company equivalents, and why open, composable decentralized systems may evolve industries into more competitive markets. We’ve seen how Web3 can impact nearly every aspect of TradBiz models both positively and negatively, including customer segments, customer relationships, channels, value propositions, activities, resources, and partners, potentially transforming both revenue streams and cost structures. Finally, we’ve outlined five starting points for established companies to take advantage of Web3 evolution – B2DAOs, Web3-fied offerings, token-enabled communities, Web3-fied operations, and Web3 native innovations – and shared how leading companies are already actively evaluating, experimenting with, and launching Web3 initiatives.

In the next section, we review some of the Investment Opportunities brought about by Web3.

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Investment opportunities

Investment Opportunities

Let’s now discuss some of investment opportunities arising during the transition from today’s dominant Web2 environment to the Web3 future. This includes identifying the different types of crypto and Web3-aligned businesses that exist along with providing an overview of the various custodied and non-custodial investment vehicles you can use to make investments. We also provide a framework for evaluating Web3 investment opportunities.

While this section focuses on investment opportunities, it is not meant to be investment advice. Investing in crypto and other Web3 assets has both risks and rewards, like any other risk assets. We encourage potential investors to do their own research, solicit professional investment advice, and never invest more than they can afford to lose.

Multiple opportunities exist for investors to participate in Web3 evolution. We’ve identified multiple categories for investors to explore both crypto and non-crypto Web3 investment opportunities, including established Web3 ecosystems, DeFi yield farming, liquid venture, crypto derivatives, Web3 solutions providers, and Web3-aligned TradBiz companies.

Web3 Investment Opportunities

Many investors get started in Web3 by acquiring the cryptoassets of established Web3 ecosystems. These include investing in the tokens of the most promising, large capitalization networks, including layer one protocols like Bitcoin and Ethereum, layer two enablers and scaling solutions, distributed applications (dApps) such as Uniswap, NFT collections like CryptoPunks and Bored Ape Yacht Club, and more. Cryptoassets in this category are somewhat analogous to S&P 500 companies, in that they have an established track record, demonstrated use case product-market fit, and active stakeholder communities.

Decentralized finance provides a range of different investment choices. DeFi yield farming includes lending, staking, and participating in liquidity pools, thereby earning yields on cryptoassets invested, as well as the ability to earn additional rewards provided by protocols for providing liquidity and being involved in governance activities. Examples include lending platforms Aave and Compound, stablecoin provider Maker, exchanges Uniswap and Curve, and aggregator Yearn.

There are plentiful opportunities available to invest in the cryptoassets of early stage Web3 projects as well. We refer to this as liquid venture since the risk-return profile is similar to venture capital with companies. The big difference between the two, however, is that cryptoassets are typically tradable on exchanges, whereas traditional venture capital is not. When investing in an early-stage growth company, investors usually are making five-to-ten-year commitments of capital before they have the possibility of an exit via acquisition or initial public offering. With liquid venture, investors can monitor the progress of their investments continuously, with the opportunity to increase allocations in those that are making good progress, take money off the table by reducing allocations, or simply exit projects that have become less promising or no longer match their investment objectives.

Crypto derivatives provide yet another opportunity for investing in Web3. These are alternative products that provide indirect access to cryptoassets, such as via future contracts or options. Crypto derivatives are available through traditional financial institutions, like the CMG Group, which offers futures and options for both Bitcoin and Ether. Derivatives are also increasingly traded on crypto exchanges like Binance, OKX or Deribit. Coinbase launched its first derivative product, Nano Bitcoin Futures, in June 2022, which will initially be available through select retail brokers while the company secures its own futures commission merchant (FCM) license to cater directly to consumers. Other derivative products being offered by top exchanges include perpetual contracts, swaps and leveraged tokens.

Web3 solution providers offer non-crypto opportunities to invest in Web3. These include investing in publicly traded or private companies that are enabling Web3 ecosystems, such as centralized exchanges, crypto banks, blockchain mining, software developers, wallet providers, and analytics firms. Coinbase Global, for example, a U.S.-based crypto exchange delivering a broad range of services to individuals and businesses, is traded publicly on NASDAQ, providing investors a way to get exposure to Web3 within their existing securities accounts. IBM, on the other hand, has been developing solutions, based on the open-source Hyperledger Fabric, enabling enterprises to implement a diverse range of blockchain applications across industries. Samsung, one of the world’s leading electronics device manufacturers, has been building Web3 capabilities into their devices, including crypto wallets into their smartphones and NFT explorers in their latest line of televisions, while also building their own version of the Metaverse. Another example is Bitfarms, one of the biggest crypto mining operations in North America, helping secure Web3 ecosystems through nodes and validators deployment.

Finally, investors anticipating the broad Web3 disruptions likely to develop over the next five to ten years may want to increase exposure to Web3-aligned TradBiz securities. In other words, investing in established businesses that are well-positioned to take advantage of Web3 trends and developments, but that are not exclusively focused on Web3 enablement. Business intelligence provide MicroStrategy, for example, currently holds approximately 130,000 Bitcoin in its corporate treasury, representing the bulk of the publicly traded company’s market value. This provides some investors with another opportunity to gain exposure from a security, rather than directly holding Bitcoin. Walmart, one of the largest multinational retail corporations, has actively been exploring potential applications of Web3 technologies in both its back-end operations and engaging with customers, including its Food Traceability initiative and current plans on launching its own cryptoasset, NFT collections and Metaverse. AMD, on the other hand, is well-positioned to enable the transition to Web3 through the infrastructure and computing products it provides to both institutions and consumers. Another public company in the center of Web3 is Twitter, which is the de facto place where Web3 enthusiasts, influencers and experts engage with each other. The social network has also started incorporating Web3 capabilities into their platform, including the ability to tip people and use their NFTs as profile pictures.

Different investment vehicles are available, with distinctions in risk, use engagement, custodianship, and eligibility requirements. Just like there is an array of cryptoassets and securities providing exposure to Web3 markets, there are also numerous ways to invest in these assets.

Web3 Investment Vehicles

Many individuals begin with a self-directed approach, utilizing accounts at crypto exchanges like Coinbase or Gemini to buy, sell, and manage individual cryptoassets. Over time, some investors migrate to self-custodied wallets like MetaMask or Ledger, often using a combination of centralized exchanges and decentralized exchanges to trade cryptoassets.

Others, particularly high net worth investors, may set up managed accounts with wealth management professionals engaged to incorporate cryptoassets into their overall portfolios based upon defined risk-return objectives. While most registered investment advisors currently have limited familiarity of Web3 and provide access to only a few selected cryptoassets like Bitcoin and Ethereum, we expect many more will develop the knowledge and capability to include Web3 investments in the future. Big wealth management firms Morgan Stanley and JPMorgan and Chase offer access to select cryptoasset funds from Grayscale Investments, Galaxy Digital, NYDIG and Osprey funds with some level of restrictions., Goldman Sachs has also stated that they are currently working on cryptoasset services for their high-net-worth clients. Meanwhile, several crypto-focused wealth management platforms have also emerged, such as Abra and Wave Financial.

Regulated crypto funds that trade as securities represent another Web3 investment vehicle. These include exchange traded funds (ETFs) and trusts providing exposure to individual cryptoassets, crypto indices, and derivatives. While the U.S. Securities and Exchange Commission (SEC) has yet to approve ETFs holding Bitcoin or other cryptoassets in the U.S., ETFs backed physically by cryptoassets already trade on public markets in Canada and elsewhere. The Purpose Bitcoin ETF (BTCC.Canada), for example, was launched in February 2021. U.S. investors so far have been limited to ETFs based upon cryptoassets futures, such as the ProShares Bitcoin Strategy ETF (BITO), which don’t always accurately track the cryptoasset’s actual price. ProShares also provides the ProShares Short Bitcoin Strategy ETF (BITI), designed to give investors a way to provide from declines in the cryptoasset’s prices. The Grayscale Bitcoin Trust provides an exchange-traded alternative for investors seeking to hold cryptoassets within security accounts; however, the trust structure limits redeemability, which has resulted in the trust’s market price trading at steep discounts to the actual value of its underlying assets. Investors seeking to invest in companies enabling Web3, rather than cryptoassets themselves, can now do so through ETFs like the Bitwise Crypto Industry Innovators ETF (NYSE:BITQ), which focuses on crypto innovators and pioneers.

On-chain funds allow investments in indices and managed funds using self-custodied wallets rather than traditional securities accounts. Since these funds use on-chain vaults, they are limited to investors who are comfortable securing their own cryptoassets keys and using wallets like Ledger and MetaMask. The Index Cooperative, for example, provides a number of smart contract-enabled index products, including the Interest Compounding ETH Index, DeFi Pulse Index, ETH 2x Flexible Leverage Index, Metaverse Index, Data Economy Index, and Bankless DeFi Innovation Index. A growing number of fund managers pursuing different active and passive strategies are also emerging. Utilizing vault protocols like Enzyme, on-chain fund managers can easily set up cryptoassets funds with a full set of features, including smart contract-enforced management and performance fees, asset restrictions, and client whitelisting. With the complete transparency provided by the Enzyme protocol, investors can monitor transactions and performance in real-time, and generally can exit their positions in funds at any time.

Investment DAOs provide another on-chain opportunity, particularly for investors who want to collaborate with and benefit from the knowledge of others. These decentralized autonomous organizations enable participants to pool capital with other members, collectively deciding in which cryptoassets to invest. BitDAO, for example, describes itself as a “collective of builders and stakeholders enabling mutually beneficial Web3 ecosystems of people, products, and public goods.” As of mid-July 2022, BitDAO held approximately $US 1.4 billion of tokens in its treasury, having allocated over $US 600 million in investments. Other notable investment DAOs include MetaCartel DAO, The LAO, FlamingoDAO, and Neptune DAO.

Traditional funds round out our list of traditional funds, including both venture and hedge funds with cryptoassets or Web3-enabling companies in their portfolios. While participating in these funds are generally limited to institutions, family offices, and ultra-high-net-worth (UHNW) investors, they provide further evidence of Web3 progression. Leading venture funds Andreessen Horowitz, Sequoia Capital, General Catalyst, and Bessemer Venture Partners have renounced their standard venture capital status over the last few years, choosing to become registered investment advisors with the U.S. Securities and Exchange Commission. This designation allows them to hold investments other than direct stakes in private companies, including cryptoassets. Traditional hedge funds are also adopting cryptoassets, with more than a third of traditional hedge funds now investing in digital assets, according to the PwC Global Crypto Hedge Fund Report 2022. PwC further estimates that there are more than 300 special crypto hedge funds globally.

Evaluating the investment attractiveness of Web3 ecosystems requires new and adjusted valuation methodologies. As discussed extensively throughout this series, distributed Web3 ecosystems and their associated tokens generate value differently than TradBiz models. Since these systems generally aren’t designed to generate profits that are returned to shareholders in the form of dividends, traditional valuation techniques aren’t always relevant or need adjustment to be useful. We’ve developed our own set of criteria to identify, assess and prioritize which Web3 ecosystems may have the highest growth potential based upon future market potential, ecosystem health, and portfolio timing and allocation.

Evaluating Web3 Investment Opportunities

We often begin assessing the attractiveness of a Web3 ecosystem by considering what the future market potential could be. This includes examining the project’s use case clarity, assessing the value proposition delivered to users compared to both traditional as well as other Web3 alternatives, estimating the potential size of the ecosystem’s total and serviceable addressable market in 10 years, and excluding cryptoassets that may be scams or which have high degrees of centralization.

Next, we examine the current ecosystem health of each project. Competitive positioning compares the project’s leadership position compared to other Web3 ecosystems with similar use cases. Technology development examines the amount of developer activity, such as the number of GitHub commits over time, as well as qualitative assessments of the ability to realize technology-related targets in published roadmaps. The degree of decentralization and maturity of governance mechanisms indicates the degree to which an ecosystem functions well without the risk of one or a few active parties driving development. Tribe and social criteria draw both from the number of active on-chain users, as well as more traditional inputs like social media followers and market sentiment. It’s useful to understand how established investors and strategic partners are providing financial and other support. We also evaluate security and risk, such as potential 51% attacks, smart contracts, and regulatory.

For potentially attractive investments, we also consider timing and allocation criteria, to help determine entry points and how much relative allocation to include in each portfolio. Some useful tools include NVT ratio, PQ growth, Y+10 inflation, and liquidity. NVT ratio is the ratio of current market value to the current value of transactions in the ecosystem, and therefore is somewhat analogous to company price-to-earnings (PE) ratios. High NVT ratios indicate significant market speculation relative to actual ecosystem activity, while lower NVT potentially represent attractive market entry prices. PQ growth is the economic value of on-chain transactions (price times quantity), excluding exchange volumes, over time expressed in a fiat currency like U.S. dollars. Significant growth in PQ is positive, as it suggests that an ecosystem’s economy, the exchange of value between participants, is growing. Y+10 inflation is the expected money supply inflation and resulting dilution in a token over the next 10 years. All other things being equal, investors would prefer ecosystems with lower inflation rates than those with rapidly diluting tokens. Finally, liquidity measures the efficiency at which a cryptoasset can be converted into fiat or other cryptoassets without impacting its market price, and thus includes the number of exchanges on which a cryptoasset trades as well as its trading volumes.

The transition to Web3 provides many investment opportunities and vehicles from which to choose. We’ve now explored the different opportunities that exist for investing in Web3, including acquiring cryptoassets representing established Web3 ecosystems, DeFi yield farming, liquid venture, and derivatives, as well as investing in the securities of Web3 solutions providers and Web3-aligned TradBiz. Hopefully, you now have an appreciation of the different vehicles that exist for investing, which include self-directed, managed accounts, registered funds, on-chain funds, investment DAOs, and traditional funds. And you’ve been introduced to different methods for evaluating the future market potential, ecosystem health, timing, and allocation of potential cryptoasset investments.

As a next step, let’s take a look at Evidence of Mainstream Adoption, or how many institutional investors, established businesses, and individuals have adopted cryptoassets to date.

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Evidence of mainstream adoption

Evidence of Mainstream Adoption

To conclude part three of this series, Web3 Implications and Opportunities, let’s examine where we are in terms of financial services institutions, businesses, and individuals adopting cryptoassets. While there has been significant uptake globally across these groups, the data shows that we are still early in Web3 adoption, with plenty of room for growth over the coming years as the transition from Web2 to Web3 proceeds.

Institutional investments in cryptoassets and Web3 continue to grow. Major investors are continuing to make investments in cryptoassets and Web3 projects, even during the 2022 crypto winter. According to Crunchbase, venture firms invested US$ 9.3 billion in 534 Web3 deals in the first half of 2022. While this was down from US$ 12.5 million during the same period of 2021, each of the last four quarters have exceeded US$ 4 billion in total venture investments. Venture firms include traditional investors who have pivoted toward Web3, like Andreessen Horowitz, investors focused exclusively on Web3, such as Digital Currency Group, and the venture arms of crypto-focused companies, like Coinbase Ventures. There also continues to be meaningful activity in the crypto fund space, with Crypto Fund Research tracking 88 fund launches in 2021, down slightly from 102 in 2020.

Web3 Institutional Investment Activity

Traditional financial services, or TradFi, firms also continue to adopt Web3 solutions in areas like wealth management, trading, custody services, and even as legal tender. The wealth management arms of TradFi firms like Fidelity, Goldman Sachs, Citi, and JPMorgan Chase are increasingly providing their wealth management clients with exposure to leading cryptoassets and funds. Many of these banks have either opened or are considering opening cryptoasset trading desks as well. Established custodians, including BNY Mellon, State Street, and BNP Paribas, are expanding their services to include holding crypto keys and managing Web3 ecosystem treasuries. And the countries of El Salvador and the Central African Republic have adopted Bitcoin as a form of legal tender, in advance of a number of other countries that are considering doing the same.

Web3 Adoption by TradFi Institutions

Businesses are also adopting cryptoassets and making Web3 investments. As awareness about Web3 increases, established businesses are beginning to adopt cryptoassets and participate in Web3 ecosystems. For example, several publicly traded companies, including MicroStrategy, Tesla, and Square, have begun accumulating Bitcoin in their corporate treasuries. Multiple payment companies have started incorporating cryptoassets into their payment platforms and networks, including Visa, Mastercard, Square, Venmo, and American Express. Well-known brands like Samsung, Twitter, Atari, the NBA, Manchester City, Nike, Twitter, McDonalds, Reddit, PwC, and Verizon are plugging into Web3 ecosystems. Coinbase became the first crypto company to go public in 2021, with other companies poised to do so once the crypto and securities markets recover, including Gemini, BlockFi, Bakkt, Exodus, and Kraken.

Business Cryptoasset Adoption

Just three percent of the global population has adopted cryptoassets to date. While the number of people owning cryptoassets is estimated to have grown from about 40 million in 2017 to around 250 million in 2022, today’s figure represents a bit more than three percent of the total population. Outside the United States, developing countries like India, Pakistan, Nigeria, and Vietnam have the largest numbers of cryptoasset holders, perhaps driven by the alternatives cryptoassets like Bitcoin provide to their own inflation-prone currencies. On a global basis, cryptoasset holders skew toward males and younger generations.

Global CryptoAsset Adoption

More than 30 million U.S. adults current hold cryptoassets. Representing less than 20% of the adult population, about 34 million Americans are expected to own cryptoassets by the end of 2022. Millennials and Gen Zs tend to be more likely to have adopted cryptoassets than the older Gen X and Baby Boomer generations, perhaps due to having grown up in a world of connected mobile devices and online services. Bitcoin remains the number one cryptoasset owned by Americans in 2022, followed by Ethereum’s Ether (ETH).

U.S. CryptoAsset Adoption

Financial services firms, businesses, and individuals are increasingly adopting cryptoassets, but we are still early in the Web3 transition. In this section, we covered how financial services firms continue to invest in cryptoassets and fund Web3-related deals. Major TradFi are also venturing into Web3-related services in areas like wealth management, trading, custody, and even as legal tender for a couple of countries. At the same time, businesses are holding cryptoassets in their corporate treasuries, payment companies are incorporating crypto into their platforms, and well-known brands are plugging into Web3 ecosystems. Finally, while the number of people who own cryptoassets has grown dramatically worldwide as well as in the United States, they still represent a small proportion of the global population. We are still early in the transition from Web2 to Web3, which means you still have time to position your organization and yourself to take advantage of this evolution.

To wrap things up, let’s talk about Charting Your Path Forward in Web3. 

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Charting your path forward

Charting Your Path Forward

If you’ve completed the entire Web3 for TradBiz Executives and Investors series, then congratulations! This series has provided you with foundational knowledge you can use to chart your path forward in the evolving Web3 world. We’ve covered what is Web3 and why we believe it is an inevitable next phase of socioeconomic development, crypto 101 basics, some advanced Web3 topics, and how to use wallets not only to buy and sell cryptoassets, but also engage with Web3 ecosystems. We introduced the broad range of emerging Web3 use cases and value propositions, taking a closer look at hot topics like decentralized finance (DeFi), non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs). We then explored Web3 implications for TradBiz, followed by a discussion of Web3 investment opportunities, vehicles, and assessment methodologies. Finally, we showed that while adoption of cryptoassets and Web3 solutions by investors, mainstream businesses, and the overall population has grown rapidly, we are still very early in the transition from Web2 to Web3.

You have now completed the first phase of your Web3 journey – and are well on your way to integrating Web3 opportunities into your business, professional and personal life. So where do you go from here? While the answer is highly dependent on who you are and what you want to accomplish, consider next steps you may take in four areas: explore, invest, engage, and build.

Explore – Continue to explore Web3 evolution and implications. A wide variety of sources and formats exist based upon your objectives and time availability. Subscribe to newsletters, articles, podcasts, and videos that cover a wide range of crypto and Web3 trends and developments. Review crypto news and data portals that aggregate news and provide real-time market data. Leverage curated resource lists such as Web3 Resources by AcceleratingBiz, which are also often developed by Web3 investors and research teams. Read published reports and studies provided by crypto-focused research firms as well as mainstream professional services firms. Attend crypto and Web3-related conferences, which can be either in-person or virtual, held regularly around the world. Explore the websites of leading Web3 platforms, which often provide white papers, roadmaps, tutorials, and other documentation explaining the ecosystem’s value and how it works. If time allows, consider attending self-directed courses and online classes provided by ecosystems, schools, and other businesses.

Invest – Begin investing in cryptoassets and Web3. Nothing makes Web3 more real than investing in crypto and other Web3 assets. As we’ve mentioned elsewhere, this is not investment advice; prospective investors should do their own research, get advice from investment advisors, and never invest more than they can afford to lose. That said, you can start your investment journey by setting up a crypto exchange account linked to your bank account, which you can fund with an initial amount of fiat currency like U.S. dollars or Euros. Next, consider setting up one or more self-custodied crypto wallets on your desktop or mobile device. If you haven’t already, make your first crypto investments, perhaps buying small amounts of Bitcoin or Ethereum to get started. With a self-custodied wallet in place, you can also begin to learn about, buy and potentially trade your first nonfungible tokens (NFTs). You can also join decentralized finance (DeFi) yield farming protocols to earn yield on stablecoins and other cryptoassets you hold. Don’t forget to subscribe to a service that tracks your cryptoassets transactions, helping you prepare annual tax filings that specify capital gains and losses.

Engage – Participate in Web3 communities. If you prefer engaging socially, there is no shortage of online and physical social communities in which you can connect with other Web3-focused professionals. So-called Crypto Twitter is a good starting point here, as Twitter is the go-to social network for following and engaging with Web3 influencers. Join and engage proactively in online communities on Discord, Telegram, Reddit and other platforms, many of which are specific to individual crypto projects and ecosystems. Seek out and participate in local meetups of like-minded people exploring Web3-related topics. If you’re an executive, consider organizing working sessions within your organization to identify, evaluate, and act upon Web3-related opportunities and challenges. AcceleratingBiz can help you prepare for and facilitate working sessions with leadership teams, board members, investment committees, and other groups to understand Web3 implications, prioritize opportunities to address, and develop plans for moving forward. Other opportunities for engaging include finding ways to contribute your skills to a decentralized autonomous organization (DAO) that interests you, staking your cryptoassets in selected ecosystems to earn yield, and participating in on-chain governance by voting on proposals for cryptoassets you hold.

Build – Get involved in Web3 initiatives. Once you’ve explored, invested, and engaged in some of the crypto and Web3 activities discussed above, consider how you can use your overall experience, skills, and connections to further Web3 projects. Perhaps join a DAO by offering a tribute (making an investment) or performing measurable work. Or begin to futureproof your organization by building upon what you’ve learned to develop an enhanced or even new Web3-fied business model. Start a native Web3 project that solves previously unsolved problem leveraging Web3 technologies, models, and ecosystems. Learn more about what DAOs need to run efficiently and grow their ecosystems, providing B2DAO solutions that enhance your business’ existing products and services to support those needs. Or contribute to existing Web3 ecosystems by submitting proposals for the development or enhancement of new features and capabilities.

While the number of options available to you may be overwhelming, we’ve curated some of the best of the above sources and ideas for your reference, which you can explore in the Web3 Resources page of our website.

←     Evidence of mainstream adoption Web3 resources     →

Have something to add, or a different perspective? Discuss your ideas with us on Twitter.

End notes

End Notes

Web3 and crypto foundations

Why embrace Web3 now

1 Bitcoin and Ether prices were extracted from Coinmarketcap.com, while S&P500 prices came from Yahoo! Finance. Bitcoin’s price in December 31, 2016 was at $955.48, and by December 31, 2017, it reached US$46,304.45. Ether’s prices for the same period went up from $7.9757 to $3,682.63. S&P500 prices, meanwhile, increased from $2,238.83 to $4,941.11 during the same period.

2 Degen definition: Web3 slang referring to individuals involved in making risky bets, and more broadly to anyone involved in the crypto and decentralized finance space. Ape definition: Web3 slang for someone investing heavily into a crypto token, NFT, other digital asset or stock, often without having much knowledge about the asset.

3 Adam Lashinsky, “Amazon’s Jeff Bezos: The Ultimate Disrupter,” Fortune, accessed April 18, 2022, https://fortune.com/2012/11/16/amazons-jeff-bezos-the-ultimate-disrupter/.

4 Chris Dixon (@cdixon), “1/ Topic: Going from Web 2 to Web 3 - “Your take rate is my opportunity, ” Twitter, August 11, 2021, https://twitter.com/cdixon/status/1425645842552086532.

Inevitable Web3 future

5 Chris Dixon (@cdixon), “Web 3 is the internet owned by the builders and users, orchestrated with tokens.,” Twitter, September 26, 2021, https://twitter.com/cdixon/status/1442201625590779909.

6 Fred Wilson, “The Web3 Stack,” AVC.com, accessed April 25, 2022, https://avc.com/2018/07/the-web-3-stack/.

7 Eshita, “Web3: in a nut shell,” Eshita.Mirror.xyz, accessed April 25, 2022, https://eshita.mirror.xyz/H5bNIXATsWUv_QbbEz6lckYcgAa2rhXEPDRkecOlCOI.

8 CoinMarketCap, accessed July 21, 2022, https://coinmarketcap.com/.

9 Pushpendra Sing, “Web3 Developer Salary Soars,” C# Corner, last updated May 18, 2022, https://www.c-sharpcorner.com/article/web3-developer-salary-soar-in-2022/.

10 Historical crypto market capitalization can be extracted from CoinMarketCap’s Global Cryptocurrency Charts at https://coinmarketcap.com/charts/. S&P 500 market cap is the total market cap of all 500 companies within the index. Data can be extracted from YCharts at https://ycharts.com/indicators/sp_500_market_cap.

Crypto and Web3 basics

11 Disha Sinha, “Top 10 Cryptocurrencies with a High Transaction Speed in 2022,” Analytics Insight, accessed July 17, 2022, https://www.analyticsinsight.net/top-10-cryptocurrencies-with-a-high-transaction-speed-in-2022/.

12 “Validators,” Solana, accessed July 14, 2022, https://solana.com/validators.

13 “Reachable Bitcoin Nodes,” Bitnode, accessed July 14, 2022, https://bitnodes.io.

14 “Earn rewards while securing Ethereum,” Ethereum, accessed July 14, 2022, https://ethereum.org/en/staking/.

15 “Introduction to Smart Contracts,” Ethereum, accessed June 8, 2022, https://ethereum.org/en/developers/docs/smart-contracts/.

16 “Virtual Machine,” Binance Academy, accessed June 8, 2022, https://academy.binance.com/en/glossary/virtual-machine.

17 “Token Standards,” Ethereum, accessed May 26, 2022, https://ethereum.org/en/developers/docs/standards/tokens/.

18 “Lesser-Known ERC Tokenization Standards On Ethereum,” Gemini Cryptopedia, last updated December 24, 2021, https://www.gemini.com/cryptopedia/ethereum-token-standards-erc777-erc1155-erc223-erc1337.

19 U.S. President Joe Biden, “Executive Order on Ensuring Responsible Development of Digital Assets,” The White House, accessed May 17, 2022, https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/.

20 Nikhilesh De, “US Treasury Develops ‘Framework’ for International Crypto Regulation,” last updated July 9, 2022, https://www.coindesk.com/policy/2022/07/07/us-treasury-develops-framework-for-international-crypto-regulation/.

21 Jesse Hamilton, “US Justice Department Urges More Coordination to Combat Crypto Crime,” CoinDesk, last updated June 7, 2022, https://www.coindesk.com/policy/2022/06/07/us-justice-department-urges-more-coordination-to-combat-crypto-crime/.

22 Jacquelyn Melinek, “Proposed bipartisan US crypto bill could be ‘sigh of relief’ for the industry,” TechCrunch, accessed July 15, 2022, https://techcrunch.com/2022/06/08/proposed-bipartisan-us-crypto-bill-could-be-sigh-of-relief-for-the-industry/.

Use cases and value propositions

Decentralized Finance (DeFi)

23 DeFi Pulse, accessed July 18, 2022, https://www.defipulse.com/.

24 Tim Ferriss, “#542: Chris Dixon and Naval Ravikant – The Wonders of Web3, How to Pick the Right Hill to Climb, Finding the Right Amount of Crypto Regulation, Friends with Benefits, and the Untapped Potential of NFTs, Chris Dixon,” The Tim Ferriss Show, accessed April 19, 2022, https://tim.blog/2021/10/28/chris-dixon-naval-ravikant/.

NFTs and the Metaverse

25 Horace Dediu, “Steve Job’s Ultimate Lesson for Companies,” Harvard Business Review, accessed July 19, 2022, https://hbr.org/2011/08/steve-jobss-ultimate-lesson-fo.

26 “Market Overview,” NFTGo, accessed July 19, 2022, https://nftgo.io/analytics/market-overview.

27 Beeple (b. 1981), “Everydays: The First 5000 Days,” Christie’s, accessed on July 19, 2022, https://onlineonly.christies.com/s/beeple-first-5000-days/beeple-b-1981-1/112924.

28 NFTGo.io Research, “NFT Annual Report 2022,” NFTGo, accessed May 5, 2022, https://nftgo.io/research/mPABNUMvPt4ZaHtW03PjpKJCMOVl6WiktxH-yvo_OJo.

29 Ryan McNamara, “Celebrities that Own Bored Ape Yacht Club NFTs,” Benzinga, last updated April 26, 2022, https://www.benzinga.com/money/celebrities-that-own-bored-ape-yacht-club-nfts/.

30 “Welcome to the Bored Ape Yacht Club,” BAYC, accessed July 20, 2022, https://boredapeyachtclub.com/#/home.

31 “Moonbirds: The Official Proof PFP,” Moonbirds, accessed July 26, 2022, https://www.moonbirds.xyz/.

32 Joseph O’Neill, “What Are Utility NFTs? Unique Tokens Offering Real-World Benefits,” Decrypt, accessed July 19, 2022, https://decrypt.co/resources/what-are-utility-nfts-unique-tokens-offering-real-world-benefits.

33 “Crypto Baristas Season 2 White Paper,” Crypto Baristas, accessed July 27, 2022, https://cryptobaristas.com/white-paper/.

34 Vanya Gautam, “10 Big Brands that Have Dipped Their Toes into the NFT World,” India Times, last updated February 02, 2022, https://www.indiatimes.com/worth/investment/brands-that-have-entered-nft-world-560907.html.

“How Brands Are Using NFTs – A continually updated list,” Adage, accessed April 25, 2022, https://adage.com/live-blog/how-brands-marketers-use-nfts-updated-list.

36 “Brandon Powell,” Rally.io, accessed July 27, 2022, https://rally.io/creator/BP4/.

37 “Joe Pulizzi,” Rally.io, accessed July 27, 2022, https://rally.io/creator/TILT/.

38 “Socios.com to Launch UFC Fan Token Today at 5:00 PM (CET),” Ultimate Fighting Championship, accessed July 27, 2022, https://www.ufc.com/news/socioscom-launch-ufc-fan-token-today-500-pm-cet.

39 “Manchester City Fan Tokens ($City),” Socios.com, accessed July 27, 2022, https://fantoken.com/city/.

40 “Classification of Social Tokens,” Messari.io, accessed April 29, 2022, https://messari.io/research.

41 “Welcome to Decentraland,” Decentraland, accessed July 28, 2022, https://decentraland.org/.

42 “The Sandbox: Welcome to the Metaverse,” Sandbox, accessed July 28, 2022, https://www.sandbox.game/en/.

43 Otherside, accessed July 28, 2022, https://otherside.xyz/.

Decentralized Autonomous Organizations (DAOs)

44 Vitalik Buterin, “Bootstrapping a Decentralized Autonomous Corporation: Part I,” Bitcoin Magazine, September 19, 2013, https://bitcoinmagazine.com/technical/bootstrapping-a-decentralized-autonomous-corporation-part-i-1379644274.

45 “The DAO (organization),” Wikipedia.org, accessed on August 2, 2022, https://en.wikipedia.org/wiki/The_DAO_(organization).

46 Paul C, “What is DAO: advantages and disadvantages of decentralized autonomous organizations,” CoinMonks Medium page, accessed April 25, 2022, https://medium.com/coinmonks/what-is-dao-advantages-and-disadvantages-of-decentralized-autonomous-organizations-e099b8e1b5dd.

47 “Decentralized Autonomous Organizations Explained,” Binance Academy, last updated November 18, 2021, https://academy.binance.com/en/articles/decentralized-autonomous-organizations-daos-explained.

48 Brynly Llyr, “Re-envisioning corporations: How DAOs and blockchain can improve the way we organize,” World Economic Forum, accessed April 25, 2022, https://www.weforum.org/agenda/2022/02/re-envisioning-corporations-how-daos-and-blockchain-can-improve-the-way-we-organize/.

49 “The Complete Guide to DAOs,” DeFiRate.com, accessed April 25, 2022, https://defirate.com/dao.

50 DefiRate.com, “The Complete Guide to DAOs.”

51 DefiRate.com, “The Complete Guide to DAOs.”

52 DefiRate.com, “The Complete Guide to DAOs.”

53 Keira Wright, “PleasrDAO adds $4M ‘OG NFT’ Wu-Tang Clan album to its collection,” Cointelegraph, accessed July 20, 2021, https://cointelegraph.com/news/pleasrdao-adds-4m-og-nft-wu-tang-clan-album-to-its-collection.

54 Ekin Genc, “Why This DAO Bought Snowden’s NFT for $5.4 Million,” Decrypt, accessed July 20, 2022, https://decrypt.co/66933/why-this-dao-bought-snowden-nft.

55 Olga Kharif, “Crypto Crowdfunding Goes Mainstream With ConstitutionDAO Bid,” Bloomberg, accessed July 11, 2022, https://www.bloomberg.com/news/articles/2021-11-20/crypto-crowdfunding-goes-mainstream-with-constitutiondao-bid.

56 DefiRate.com, “The Complete Guide to DAOs.”

57 “Organizations,” DeepDAO.io, accessed July 15, 2022, https://deepdao.io/organizations.

Web3 implications and opportunities

TradBiz market and business model implications

58 Chris Dixon, “The Web3 Playbook: Using Token Incentives to Bootstrap New Networks,” Future.com, accessed April 12, 2022, https://future.com/the-web3-playbook-using-token-incentives-to-bootstrap-new-networks/.

59 Adam Lashinsky, “Amazon’s Jeff Bezos: The Ultimate Disrupter,” Fortune, accessed April 18, 2022, https://fortune.com/2012/11/16/amazons-jeff-bezos-the-ultimate-disrupter/.

60 Dixon, “1/Topic: Going from Web2 to Web3.”

61 Owen Fernau, “Meta’s Plan to Keep 47.5% of Metaverse Sales Draws Skepticism,” The Defiant, accessed May 19, 2022, https://thedefiant.io/meta-take-rate/.

62 Philipp Stauffer, “Thin Heads and Fat Tails: Understanding the Crypto Reinvention of Capitalism,” Knowledge at Wharton, accessed April 25, 2022, https://knowledge.wharton.upenn.edu/article/web-3-0-welcome-new-sober-internet/.

63 Business Model Canvas adapted from Alexander Osterwalder et. al., “Clarifying Business Models: Origins, Present and Future of the Concept,” https://www.kth.se/social/files/546b8d75f276546614d2dffc/Osterwalder+(2005).pdf and discussed in his book Business Model Generation, published in 2010.

64 “Chainalysis: The Blockchain Data Platform,” Chainalysis, accessed April 21, 2022, https://www.chainalysis.com/.

65 “Security Audits,” OpenZeppelin, accessed April 21, 2022, https://www.openzeppelin.com/security-audits.

66 Esther Crawford, “Bringing Tips to everyone,” Twitter, accessed April 21, 2022, https://blog.twitter.com/en_us/topics/product/2021/bringing-tips-to-everyone.

67 Ivan Mehta, “Twitter launched NFT profile pictures — people are hella mad,” The Next Web, accessed April 21, 2022, https://thenextweb.com/news/twitter-nft-profile-picture-hex-analysis.

68 “Buy and Sell Cryptocurrency,” PayPal, accessed April 21, 2022, https://www.paypal.com/us/digital-wallet/manage-money/crypto.

69 “Digital Platform,” Merck, accessed April 21, 2022, https://www.merckgroup.com/research/innovation-center/en/Lightpaper_Digital_platform_Merck.pdf.

70 Socios.com, “Manchester City Fan Tokens ($City).”

71 “NFT FAQ,” Dallas Mavericks, accessed July 25, 2022, https://www.mavs.com/nft-faq/#1637012183071-a111ac1a-a02d.

72 “Community Points: Own a piece of your community,” Reddit, accessed April 21, 2022, https://www.reddit.com/community-points/.

73 “What is BitTorrent,” Kraken, accessed April 21, 2022, https://www.kraken.com/learn/what-is-bittorrent-btt.

74 James Laney, “Walmart’s Blockchain Enabled Food Traceability Initiative,” DataDrivenInvestor in Medium, accessed April 21, 2022, https://medium.datadriveninvestor.com/walmarts-blockchain-enabled-food-traceability-initiative-628b9df5febb.

75 Godfrey Benjamin, “Banking Giants CIBC and Aussie’s NAB Partners to Use RippleNet Solution,” accessed April 21, 2022, https://blockchain.news/news/banking-giants-cibc-and-aussies-nab-partners-to-use-ripplenet-solution.

76 “Bitcoin Holdings by Public Companies,” CoinGecko, accessed July 21, 2022, https://www.coingecko.com/en/public-companies-bitcoin.

77 “Nifty partners with Samsung for smart TV NFT platform,” Ledger Insights, accessed April 21, 2022, https://www.ledgerinsights.com/nifty-partners-with-samsung-for-smart-tv-nft-platform/.

78 “Experience Samsung 837X,” Samsung, accessed April 21, 2022, https://www.samsung.com/us/explore/metaverse-837x/.

79 Alexandra Pauly, “Nike Acquires RTFKT, Setting the Stage for Swoosh-Certified NFTs,” Highsnobiety, accessed April 21, 2022, https://www.highsnobiety.com/p/nike-rtfkt-nft-metaverse-acquisition/.

80 Jade Gao, “Nike X RTFKT Unveiled CryptoKicks through Gamified Mechanics,” DappRadar, accessed July 25, 2022, https://dappradar.com/blog/nike-x-rtfkt-unveiled-cryptokicks-through-gamified-mechanics.

81 Ross Wardrop, “Everything You Need To Know About RTFKT MNLTH NFT Sneakers,” last updated April 25, 2022, https://nftevening.com/everything-you-need-to-know-about-rtfkt-mnlth-nft-sneakers/.

82 W3BCloud, accessed April 21, 2022, https://w3bcloud.com/.

Investment Opportunities

83 “Coinbase Derivatives Exchange to make nano bitcoin futures available through leading brokers,” Coinbase, accessed July 25, 2022, https://blog.coinbase.com/coinbase-derivatives-exchange-to-make-nano-bitcoin-futures-available-through-leading-brokers-8df2582325da.

84 Jordan Tuwiner, “MicroStrategy Bitcoin Holdings Chart & Purchase History,” Buy Bitcoin Worldwide, last updated July 5, 2022, https://www.buybitcoinworldwide.com/microstrategy-statistics/.

85 Laney, “Walmart’s Blockchain Enabled Food Traceability Initiative.”

86 Hugh Son, “JPMorgan, led by bitcoin skeptic Jamie Dimon, quietly unveils access to a half-dozen crypto funds,” CNBC, last updated August 5, 2021, https://www.cnbc.com/2021/08/05/bitcoin-jpmorgan-led-by-jamie-dimon-quietly-unveils-access-to-a-half-dozen-crypto-funds.html.

87 Hugh Son, “Morgan Stanley becomes the first big U.S. bank to offer its wealthy clients access to bitcoin funds,” CNBC, last updated March 17, 2021, https://www.cnbc.com/2021/03/17/bitcoin-morgan-stanley-is-the-first-big-us-bank-to-offer-wealthy-clients-access-to-bitcoin-funds.html.

88 Hugh Son, “Goldman Sachs is close to offering bitcoin and other digital assets to its wealth management clients,” CNBC, last updated March 31, 2021, https://www.cnbc.com/2021/03/31/bitcoin-goldman-is-close-to-offering-bitcoin-to-its-richest-clients.html.

89 BitDAO, accessed July 24, 2022, https://www.bitdao.io.

90 Kate Clark, “Bessemer Renounces VC Status, Following Andreessen Horowitz, Sequoia,” The Information, accessed July 24, 2022, https://www.theinformation.com/articles/bessemer-renounces-vc-status-following-andreessen-horowitz-sequoia.

91 Kent Miller, “More than a third of traditional hedge funds now invest in digital assets, nearly double a year ago: PwC Global Crypto Hedge Fund Report 2022,” PwC, accessed July 24, 2022, https://www.pwc.com/gx/en/news-room/press-releases/2022/pwc-global-crypto-hedge-fund-report-2022.html.

Evidence of mainstream adoption

92 Chris Metinko, “Crypto Funding Numbers Fall During Bumpy First Half Of Year,” accessed July 24, 2022, https://news.crunchbase.com/fintech-ecommerce/crypto-funding-falls-h1-2022/.

93 “Cryptocurrency Investment Fund Industry Graphs and Charts,” Crypto Fund Research, accessed July 24, 2022, https://cryptofundresearch.com/cryptocurrency-funds-overview-infographic/.

94 “Cryptocurrencies,” Statista, accessed July 27, 2022, https://www.statista.com/outlook/dmo/fintech/digital-assets/cryptocurrencies/worldwide.

95 “Cryptocurrency across the world,” triple A, accessed July 27, 2022, https://triple-a.io/crypto-ownership-data/.

96 Triple A, “Cryptocurrency across the world.”

97 “34 Million US adults own cryptocurrency,” Insider Intelligence | eMarketer, accessed July 27, 2022, https://www.insiderintelligence.com/insights/us-adults-cryptocurrency-ownership-stats/.