I was talking with a friend a few days ago. Coming from a traditional web2 world, she was genuinely curious about the novelty of web3 - she was confused that since web2 can do most of the things web3 claims to do (i.e. money transfer, org governance, in-game asset, etc), what’s the big deal?
We ended up talking on this topic for a while. And I will try to summarize it here - the essence of why we care about web3 innovations is two folds:
timing matters (so much!) - the “soil”
trust-less decentralization - the new “tree”
First, on the “soil”:
Having witnessed the space over the past decade since 20131, I’ve got to be calmer about the “crypto winter” because I know each time after the “bear”, the “bull” usually comes back much stronger.
More importantly, each time when the bull arrives, the mainstream adoption of new ideas accelerated, which allowed for a wide trial and error for various types of experiments. Most faded but some stayed.
The idea of “NFT” has been around since 20122 but it takes a bull run + stimulus checks + people’s interests to try to take NFT to a somewhat mainstream position.
The market has certainly progressed a lot since 10 years ago.
The “soil” seems to be well fertilized and ready.
Now, on the “tree”:
What does trust-less decentralization mean and more importantly why does it matter?
It has multiple meanings - let us unfold.
Every tech cycle has an underlying protocol as its engine - from the early internet (TCP/IP protocol) to web 2.0 of Social Networks and Cloud (HTML, APIs) to the upcoming web3 of dApps (ETH chain, multi-chain protocols).
The cycle typically lasts from 10 to 20 years - during the process, there are tons of innovations taking place throughout the stack - from the infrastructure layer to the application one. A tremendous amount of value and wealth are created along the way3.
At Leonis Capital, we backed full-stack innovations that are built on top of paradigm-defining protocols. We are convinced that over the next decades, iconic companies/organizations are being created on the protocols of machine learning, web3, and sometimes the intersection of both.
We are cautiously excited about the development of the space as we think some of the areas might be over bubbly - from NFTs, to token economics, to DAOs.
We will share three of our somewhat unpopular beliefs as follows:
Not all NFTs have value - the communities need to cross the chasm.
Back in the ’90s, the world was so hyped when people found out that we can “buy groceries online”. From that era, Webvan emerged and crashed but almost 10 years later, InstaCart was born.
Similarly, the world might be too excited (ahead of its time) when we see that we can verify and completely own a digital item on a public ledger (i.e. blockchain). But this time around, the “hype dose” is a bit stronger —> seemingly,
NFT ≈ art + music + rarity + community + the ability to make quick money and brag
So far, the last component might be the strongest one in gluing most of the NFT projects together.
Yes, some of the NFT communities are very vibrant (just check out some of the events from NFT.NYC) - however, if we are not careful, it could simply end up as another form of “Elitists Club” or worse, a giant MLM scheme.
In the years to come, one thing is certain - the ability to make *any* digital items live on chain (i.e. to mint NFTs) will be commoditized, and what’s left would be the value-creating purpose of such communities. Or the much lack of.
We cautiously expect to see the NFT projects will start to polarized into two camps - ones that are “too big to fail”; and the others are “niche and beautiful”, while most of the NFTs projects in the middle will fade over time.
Not all things token-rated can be called web3
In fact, there have been many pseudo web3 projects throughout crypto history. They will only go away when we are truly in the mainstream adoption phase of the web3 applications (an indirect sign that we are not in the web3 mainstream phase just yet, things are still early).
On a good note, entrepreneurs finally have one big banner to rally under; however, at the same time, the “banner” might be too big, too broad, and too unclear.
At Leonis Cap, when we hear pitches from entrepreneurs, we try to distill the unique insights from founders that can create a sustainably differentiating factor in the product.
In web3’s case, we expect more than a product plus a “token economics”. To give an example:
Twitter + tokens ≠ web3 Twitter
We expect the form factor of web3 products is quite different than its so-called web2 predecessors, for the following reasons:
Token economics is a mean, not the end. The end is still building a meaningful product that people would love and use.
The incentive framework of web3 (monetary + governance influence directly on the product) is arguably more powerful than most web2 networks (mostly vanity driven).
Tokens, however, can act as a catalyst in solving the “cold start” problem and further enhance product retention due to the fact that tokens can be organically built into the product from day one if well designed - which is very different than web2 products.
Most of the web3 companies either treat tokens as the end goal and stopped short of getting the (initial) users /speculators psyched about the future token price and failed at expanding beyond the initial user circle. Without new users and with no long-term stickiness of the product itself, such projects would eventually die for the lacking of oxygen.
Of course, we also recognize that the space is evolving rapidly and users’ needs and interests might be constantly changing.
Just how fast the market is evolving? In the broader Crypto —> web3 space, we are seeing a fairly clear path of evolution at play.
Phase one (2009 - 2015) investment opportunities are: Bitcoin, Ether, and “web2” centralized companies like Coinbase.
Phase two (2016 - 2020) opportunities are: Solona, web2.5 (still centralized but with tighter chain integrations) companies like OpenSea, Binance, FTX, etc.
Phase three (2021 - Now) opportunities are: protocol-driven smart software in marketplace networks (e.g. LooksRare), decentralized exchanges and aggregators (e.g. ODOS.xyz), and token-integrated consumer apps and SaaS (e.g. StepN, Privy, Dework, Proxy, Finnt, CypherD)
The examples in phase three are only for illustrative purposes - the jury is still out on which ones of them are built to last. However, they should give a sense of where the trend is going for web3 products4.
DAO is not suitable for everything
DAO is a meaningful progression of the human collective work form. For the first time ever, we have the tools and the will to move towards the same (if not similar) goals in a decentralized fashion.
In essence, DAO, built on a “shared wallet” and a more open, decentralized governance structure, is quite the opposite of the centralized corporation structure that has been in existence for as long as capitalism.
But make no mistake. However exciting DAO is, we don’t think it will be able to replace the traditional corporate structure. Corporations like Apple, Amazon, and Tesla thrive on centralized leadership, often with special emphasis on the founder. The corp structure of human collaboration is especially good at focusing on specific product iterations - phones, software, and cars - most at the application level, with hyper clear product-market-fit.
DAOs, built on the universal vision of the initial core groups of developers/contributors, ultimately thrive on the broader consensus of the public. Unlike corporations, DAOs are *designed* to be less effective in delivering specific forms of products, especially at the application level, however, it could be extremely constructive in shipping protocol level innovations that others can build specific applications on top of (e.g. Bitcoin, Ethereum, MakerDAO, etc) and in forming broader social movements (e.g. ConstitutionDAO).
Parting Thoughts
Whenever there is a major protocol-level innovation, its impact would usually take at least 50 years to unfold, with every 10 years being the intervals5. The internet protocol (TCP/ IP) was invented almost 40 years ago (circa 1983) and we are still feeling the impact today.
Bitcoin (the blockchain protocol) was invented in 2009, we are only 10+3 years6 in this ongoing paradigm shift (we might still be in the later part of the Chasm). At Leoins Cap, we recognize Web3 is still in the early days but we are excited to see what’s about to come next. 💎
That’s an ancient age when a) Bitcoin was trading at $13/ BTC; b) Ethereum was not created yet because Vitalik was still a staff writer for Bitcoin Magazine, and c) Coinbase was founded in 2012 and we missed that investment.
At the time, the community widely talked about the idea of bringing art, title, and ownership onto the chain but it never got mainstream adoption.
It’s often easy to connect those dots in hindsight but might not be easy to realize that we are going through one when we are in it.
It might be interesting to point out that for many of the web3 products, the simple analogy to web2 comparable might not work. A good web3 product is typically not “web3 for Linkedin” - instead it’s usually “we *happen to be* the web3 version of Linkedin + Upwork + Coinbase”. I think the reason is that a PMF web3 product started with bottom-up users who might have multiple needs at the same time, which organically shapes the interesting form factor of many web3-first companies.
The later intervals typically accelerate the trend adoption much faster than the previous ones. That’s why we feel that tech innovations often happen “slowly and then suddenly”.
A fun article from Venture Capital Journal 2014 where the author was interviewing the then-new-partner Chris Dixon at a16z, Jeremy Liew at Lightspeed, Naval Ravikant, and yours truly in “Honing your bitcoin strategy” - What a title! https://www.venturecapitaljournal.com/honing-your-bitcoin-strategy/