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Web3 is the next generation of the Internet that will redefine our daily digital experiences. Leveraging cryptography and distributed ledger technology, Web3 establishes the framework for a user-owned and controlled Internet. A tsunami of Web3 projects has emerged, opening up new opportunities for various industries such as financial services, gaming, esports, media, entertainment, retail, and more.
The Web3 ecosystem is currently experiencing significant growth in terms of venture capital funding. There is an ever-growing list of Web3 startups, be it DeFi protocols, NFTs, Decentralized Autonomous Organizations (DAOs), play-to-earn (P2E) games, data storage and social media services.
According to a report by DappRadar, venture capital funds and investors have already invested over $2.5 billion in blockchain gaming and related infrastructure in the first quarter of 2022 alone. That’s a huge increase. compared to the total of $4 billion invested in 2021 and $80 million in 2020. And that’s just one aspect of the vast Web3 ecosystem.
Another report, published on GitHub, suggests that there are more than 18,000 active developers in the Web3 ecosystem who commit their code to open source blockchain projects at least once a month. The report further clarifies that the actual number is likely higher because it does not account for development work done on proprietary Web3 projects.
By all metrics, Web3’s growth has been unprecedented. But there is still a long way to go before entering the phase of adoption by the general public. Although investor and user interest in Web3 products and services is growing, several factors need to be considered to accelerate the ongoing transition.
For Web3 to truly thrive, there are three critical areas that Web3 investors, developers, and users need to address.
1. Users need to shift their mindset to a “user-owned” model
In today’s Web2, “as a service” iteration of the Internet, users essentially have no say in the future direction of the products or services they use. In most cases, the users and owners of the platform or service tend to be kept separate until said platform or service is listed on a public stock market, allowing for greater accessibility of the property between users.
Of course, shareholders are invited to vote on specific initiatives, but ordinary investors are far from driving corporate change. Even after buying shares, the decision-making power granted to small shareholders via ownership is relatively minimal, preventing them from taking a seat at the table of institutional investors or funds that have more power to influence corporate decisions.
The Web3 model, on the contrary, offers true ownership. Tokens enable early and decentralized ownership of the platform or service that users benefit from. Existing users who previously compromised on near-no ownership in private enterprises should familiarize themselves with ownership and governance responsibilities. They must realize the power of this “ownership” and the extent to which they can contribute to and influence the direction of the development of a product or service.
By investing at an early stage, even an average individual can become part of the project’s governing body, driving the product roadmap together with the community. The decision-making process becomes transparent, inclusive, and fair – attributes that typically don’t exist in the Web2 ecosystem.
2. Investors need to shift to a “community driven, collaborative and participatory” mentality
In the Web2 paradigm, investors compete for percentage of control and board seats to ensure value capture and governance oversight.
However, this approach is less efficient in Web3. Decentralized ownership is a key founding principle of Web3. The network effect can best be accelerated by decentralized ownership among community members who can have multiple roles (service user, investor, provider, business partner) within the ecosystem.
3. Projects must think of a sustainable way to attract users
Usually, projects generate immense hype in a short period of time with token incentives. There is no doubt that such campaigns attract users and liquidity providers quickly, which accelerates key metrics that everyone is evaluating.
However, this practice has its drawbacks. It tends to attract mercenary capital and token hunters who have no appreciation or loyalty for the purpose and long-term vision of the platform. Second, artificially pumped key metrics driven by short-term incentives tend to obscure an accurate assessment of product-market fit. Third, excessive token reserve equates to wasting market budgeting on things that don’t really matter in the long run, leaving projects with far less “ammunition” in their war chests down the road.
Instead, each project should design Tokenomics thoughtfully. It’s a good idea to start awarding tokens only after projects have found the right audience that shares similar interests and goals.
We are still in the first leg of Web3. Although the phrase “We’re still ahead” has been overused, it’s not a trope. It sounds cliche because it’s true – we’re still very early days. I hope I have given food for thought to those of us who are working hard to build the next generation of the Internet.
Emma Cui is CEO and founding partner of LongHash Ventures.
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