An Introduction to Investing in Web3

Authored by Matt Heater
Matt Heater

Matt Heater

Published April 16, 20226 mins

You’ve most likely heard of the term Web 3.0, sometimes written as Web3. But what does it mean? Could you define it in one sentence? That’s tough to do. 

Web3 in one sentence.

The best definition we’ve found for Web3 comes from one of the world’s most experienced Web3 investors, Chris Dixon, general partner at Andreessen Horowitz:

“Web3 is an internet owned by users and builders orchestrated with tokens.”

Sounds simple. Until you think about it. Let’s break that down into three parts…

Part 1: An internet.

To understand the internet in Web3, we must first visit what came before it, which is Web2, where we are now. The current internet is a worldwide system of interconnected computer networks—so far so good. In Web3, we’ll continue to have this global, connected network. With Web2 though, the internet is centralized, meaning that access and websites are largely controlled by centralized powers (aka modern day corporations and governments in some cases), led by top-down management teams. Which brings us to who owns the internet.

Part 2: Owned by users and builders.

In Web2, big tech (Google, Apple, Amazon, Facebook) essentially runs the internet, creating the experiences for users, and profiting from these creations. From data storage to photo sharing to buying diapers, much of it is controlled by big tech. In an ideal Web3 world, the internet is “decentralized” which means it is owned by users and creators, using blockchain as a consensus mechanism and community governance instead of top-down corporate structures. So how does Web3 work? Well, it’s…

Part 3: Orchestrated with tokens.

It works by using tokens. Users and builders can own digital property rights to many different things via tokens. Think of digital property rights like owning a piece of the internet. It could be owning your own data, digital art, a line of code, a digital book, or plot of land in the metaverse. All of these token transactions are recorded on the blockchain, which, in most cases, no centralized corporation owns because it’s a public network of computers. 

Why would you want to invest in Web3?

The short answer is that Web3 is thought to be the future of the internet, the future business models that many believe will create value for millions of people. So investing in Web3—owning Web3 tokens—means that you are investing in an industry at its beginning, potentially having a stake in the businesses of the future. Let’s dig a bit deeper. 

As you see every day, your current web experience is dominated by a few large tech companies, the likes of Google, Facebook, and Amazon. These companies capture an overwhelming amount of the value generated from the “public internet” and much of this is at the expense of the unknowing user. These industry behemoths have absorbed undue value from the data we (the bloggers, the vloggers, the social influencers, artists, users, etc.) generate and provide to the internet for free. Everything you do on the internet, whether it be a click, like, upload, post, story, or snap is monetized, largely absent of privacy, and subject to censorship.  

Many believe there is a different way to create value across the internet. Enter Web3, a term first coined by crypto-entrepreneur Gavin Wood (co-founder of Ethereum and creator of Polkadot). Web3 is considered the next iteration of the Web, promising to be decentralized, which will in turn shift power away from the big tech firms and back into the hands of the inventors, creators, and users. This future world wide web also aspires to be privacy-centric, censorship-resistant, and allows for creators to capture more economic value. Investing in Web3 is an opportunity to be part of a technological evolution.

So, as an investor, you probably want to know who is leading this evolution to Web3? Much of the growth is being fueled by the world’s largest venture capital firms. In 2021, more than $30 billion was deployed into Web3 startups. And traditional tech investors are getting into the action as well, like Bain Ventures with a $560 million fund and Haun Ventures who raised a whopping $1.5 billion fund. We’re also seeing a flock of professionals from big tech firms change careers, leaving Facebook, Google, and Amazon for jobs with Web3 firms, to build these new businesses. 

In its current state, Web3 presents investors an opportunity to invest early in a growing industry, flush with venture funding and supported by top technical talent. But keep in mind that these investments carry large risks as Web3 business models are yet to be proven at scale. 

Real-world examples of Web3 business models.

Web3 business models can be many different things, making it difficult to wrap your head around what Web3 actually is in the real-world. Here are a few examples alongside their Web2 equivalent:

Web Browsers

Web2 - Google Chrome: You probably have this stalwart browser installed on one of your devices (along with about 3 billion other people). A knock on Chrome is that it harvests and monetizes your data. Your web surfing is a gold mine of value that Google sells to advertisers interested in better ways to target and further monetize your digital footprint.

Web3 - Brave Browser: An open source web browser with privacy, customization, and user-centricity built into the core. Brave blocks ads and ad trackers—no more annoying pop-ups and websites following your journey through the internet. If you do decide to spend time viewing ads, then you are rewarded for that time with a type of crypto called BAT (basic attention tokens). Brave browser users can then use BAT to tip their favorite creators on the internet. Or they can simply hold BAT with a view that the value of the token will appreciate as more people adopt the Brave Browser and earn BAT themselves. Brave claims that it’s making the internet economy fairer for creators and users, along with performance that is as good as Chrome. Not too shabby.

Domain Name Registration

Web2 - GoDaddy: GoDaddy is the big daddy of domain name registration and web hosting. It has been used by over 30 million customers. You may remember GoDaddy from those funny Super Bowl commercials, which has in part led to their tremendous growth. We gather that upwards of 20% of all domain names are sourced through GoDaddy, providing them tremendous power over who gets to name what on the world wide web.

Web3 - ENS: A decentralized domain registrar for Ethereum (a decentralized computing platform). Think of ENS as your chance to snag a .com domain name on the Ethereum network. The service launched in 2017 and recently granted (or “airdropped”) a token to Ethereum wallets that have purchased a domain name. ENS allows you to attach a human-readable domain name to a long and difficult-to-remember website or crypto wallet address. You might want to move fast and claim your “Web3 Username” (or maybe your dog’s or kid’s too). 

Virtual Reality

Web2 - Second Life: Do you remember that early 2000s phenomenon where you could leave your physical self at home and enter a virtual world with a digital avatar? If you don’t remember, that virtual world is called Second Life, and it grew to impressive popularity in the 2000s, peaking at around 1 million users who explored the freedom of anonymity and the escapism of virtual reality. And while Second Life was a fun place to build a dream home or hot tub with strangers, its popularity eventually waned and never went mainstream.

Web3 - Decentraland: Claiming to be the first-ever virtual world owned by its users, Decentraland emerged as an early leader in Web3 virtual reality. It features the native token MANA that allows users to engage in the Decentraland economy, where they can buy and sell real estate, clothes, art, and more. This virtual world isn’t just basement dwellers in hoodies. Decentraland hosted 2022 Fashion Week, which included real-world brands like Tommy Hilfiger, Etro, and Dolce & Gabbana. In theory, the MANA token accrues value as the broader virtual economy grows. Perhaps this feature and the unique marketplace will be its key to long-term viability. 

That’s only three examples of Web3 in the real-world. There are a growing number of Web3 business cases from data storage to building software. We invite you to learn more about investing in Web3 and then decide if this is a piece of the crypto industry that you’d like to invest in. Like most areas of crypto, Web3 is in its infancy and a long-term outlook should be considered before making an investment. 

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Authored By
Matt Heater

Matt Heater

Matt previously led business development at a boutique digital asset consulting firm and he held a variety of roles at IBM, including as a consultative sales lead within Watson Financial Services. He led operations for the Blackstone Group’s Hedge Fund unit’s London office, and evaluated mutual funds and hedge funds as an auditor at KPMG. Matt earned his MBA from the University of Washington, his Bachelor’s degree in Business-Accounting from UNLV, Lee Business School, and holds the Chartered Alternative Investment Analyst designation (CAIA) and a Series 65 license. Matt is a fan of Michael Mann films, and has a cat named Edie.