Web3 Investment Thesis – Redefining Relations of Production and Money
Introduction
Web3 has been emerging to fundamentally change money, the financial system (DeFi), relation of production (NFTs, Token design, DAOs) and the internet more broadly (Blockchain computers).
Historically, new models of computing have tended to emerge every 10–15 years: mainframes in the 60s, PCs in the late 70s, the internet in the early 90s, and smartphones in the late 2000s. Each computing model enabled new classes of applications that built on the unique strengths of the platform. For example, smartphones were the first truly personal computers with built-in sensors like GPS and high-resolution cameras. Applications like Instagram, Snapchat, and Uber/Lyft took advantage of these unique capabilities and are now used by billions of people.
Similar to the internet in the early 90s, Web3 has poised to be one of the most potential technical and economic paradigm shifts to disrupt Web2 internet and will further drive the changes in the coming decades. Since the concept of Blockchain computers that were first proposed in 2008 by Satoshi Nakamoto in the Bitcoin whitepaper, Web3 has been dramatically expanded by developers and researchers around the world. Blockchain computers are new types of computers where the unique capability is trust between users, developers, and the platform itself. This trust emerges from the mathematical and game-theoretic properties of the system, without depending on the trustworthiness of individual network participants.
Decentralizing Global Economies
“Here begins our tale. The empire, long divided, must unite; long united, must divide. Thus it has ever been.” – The Romance of the Three Kingdoms
From a political economy perspective, global economies fragmentation and geopolitical tensions have intensified in recent years amid strained ties between the United States and China, European countries, and Russia’s invasion of Ukraine. With the rise of geopolitical risk, it poses a serious financial stability threat by affecting cross-border investment, international payment systems, and asset prices. This in turn fuels the instability of the financial system by increasing banks’ funding costs, lowering their profitability, and reducing their lending to the private sector.
On the bright side, the rising geopolitical tension and crisis of the financial system could be a blessing for Bitcoin, bringing attention to this decentralized, censorship-resistant infrastructure BTC as a hedge against systemic risk, especially the US Dollar system. In fact, the 90-day correlation coefficient between Bitcoin and the dollar index has slipped to a two-month low of -0.70, according to data from the charting platform TradingView. It had weakened to -0.11 four weeks ago.
While cryptocurrencies are still owned by less than 10% of the global population, decentralized financial systems have grown to hold over $100 billion in cumulative assets, representing a small drop in the context of the traditional financial system. It also marks the immense potential of decentralization around the globe.
Disrupting Web2 and Web1
Web3 will reshape the relation of production as well as the power relation. Web3 is the next evolution of the internet, combining the best features of Web1 and Web2 such as decentralized blockchain networks, community-governed (DAOs), advanced functionality, and value accrues to network participants.
For instance, Web3 counterbalances the trend toward internet consolidation. It is ridiculous that Google, Meta, and Twitter now generate a third of all global web traffic and the FAAMG represent 50% of the Nasdaq 100’s total market cap, up from 25% a decade ago. Web2 has deprived the creators and end users of the value creation/production process. The take rate of Facebook, Instagram, and Twitter is close to 100% while Uniswap and Ethereum only take a minimal fee of 0.3% and 0.06% respectively. In a nutshell, Web1 and Web2 democratized information and publishing while Web3 democratizes ownership. In Web3, users are empowered to own their product (value creation) and earn a greater share of revenue versus Web2 platforms and generate greater economic consequences with the Web3’s technology infrastructure.
Driving towards Mass Adoption
Similar to other tech markets, Web3 is a function of supply and demand, or innovation and adoption, where 1) new products generate new networks 2) networks attract more builders 3) builders create new products 4) consumers adopt products (See Appendix 1 for quantitative metrics)
Although Web3 has the potential to revolutionize the internet, it faces several significant challenges that must be addressed before widespread adoption can occur. Some of these challenges include scalability, interoperability, usability, privacy, regulation, and security.
Now assuming that all these hurdles mentioned is solved, a new product with product market fit, a self-sustainable business model and rich value accrual is still indispensable for mass adoption. To highlight, token design, which is how a token interacts with an associated protocol, system, or mechanism, that capture the value is still laggard. More concretely, we have been using tokens currently for ownership, alignment, incentive structures, accessing goods and services and much more across arts, and economics but these implicit values are far from explicit in the token design.
For instance, creator coins, social tokens, and NFTs allow fans to directly interact with the artists they love the most, and to prove their fandom using a traditional membership & freemium business model. Dogecoin’s strength, for instance, is the meme, temple-like community, and “religion” it represents. Tokens can be extended to not only represent membership in this community but to establish a digital cultural identity; in this context, the token design should be encoded explicitly to address and capture the value of creative decisions in decentralized collaboration between creator and community.
Another case is the AMM innovated by Uniswap, which clearly has the product-market fit and is self-sustainable with a traditional disintermediation model. However, the token utility of $UNI only includes governance power and the protocol fee earned is not reflected on the token price like the burning mechanism in $BNB as well as the cost of staffing, hosting, and development cost.
Token design is a native way in Web3 to represent and convey the relation of production between stakeholders. A revolution takes time, and we believe a new product with product-market fit, self-sustainable business model and rich value accrual that reshapes the production relation will arise from web3. Eventually, developers will be able to make implicit value explicit using a new token design with the primitives getting more comprehensive and sophisticated.
Appendix 1: There are several metrics (and much more) to monitor:
| Innovation Indicators (Supply) | Adoption Indicators (Demand) |
| Active developers | Active addresses |
| Interested developers | Transactions |
| Contract deployers | Transaction fees paid |
| Verified smart contract | Mobile wallet users |
| Developer library downloads | Dex volume |
| Academic publications | NFT buyers |
| Job search interest | Stablecoin volume |
