- High replacement costs, strong network effects, and smooth user experience enable the Web2.0 giants to have competitive advantages. Although the current market that monopolized by Internet giants is not to be taken by the crypto start-ups soon, we believe users will eventually desire more control over their data. Especially once they realize its (monetary) importance, the massive adoption will speed up.
- The killer application of blockchain will not be dominated by centralized entities but will be led by the open-source community-driven by user needs.
- Industry revolution (Web3.0 as well) is mostly accelerated by open-source technology innovation and would ultimately evolve the market following similar routes: decentralization, expansion, and consolidation.
- At the advent of Web3.0, distributed systems, cryptography and smart contract will ultimately upgrade the way people think and live. Just as every coin has two sides, it might lead to another frenzy period, that the inflow of investment capital (speculative value) is much faster than production capital (practical value) and eventually creates a bubble crush among crypto Industry. Without a doubt, 2020 is going to be more crypto-friendly. Protocols will keep trying to becoming industry standard by optimizing its technology and building use case with corporates, which also leaves enough space for industry-specific chains.
Open-source Innovation Drives Industry Revolution
Hardware Era (open-source computing hardware)
In the 1970s, the original costly customized CPU started to be designed applicable to a universal processor. It reduced the production cost and brought many competitors to the field. IBM took the chance, laid the foundation of the computer industry with its technological influence, and ultimately accelerated the development of personal computers which indirectly contributed to the advent of Microsoft and Apple.
Software Era (open source software)
In the 1990s, a whole new demand for shared operating systems increased as personal computers became more common. Over five years, Microsoft’s Windows 1.0 has developed from the fork version of the Mac operating system to version 3.0, which had the strongest PC compatibility. In the meantime,the competition with Linux and other open-source software also pushed Microsoft to realize the value that an interoperable platform can bring. In the end, by setting up the industry standard, capturing product value and building the ecological chain, Microsoft becomes one of the most successful companies worldwide.
Networks Era (Free Content distribution)
After the crush of the Internet bubble in 2001, some of the most valuable companies nowadays have become dominant, such as Google, Amazon, Facebook, eBay, Twitter, PayPal, and Netflix. The emergence of them indicates that the internet industry’s traditional business model has shifted from selling software (such as Microsoft) to online business (such as Google, Facebook).
Users benefit from the convenience and efficiency provided by these internet companies. However, people shall aware that every time you are offered a free service, it doesn’t mean you are a customer anymore, rather you are a product. One key reason behind their success is data monetization.
Mobile Internet era ( open-source mobile applications)
In 2010, the emergence of iOS and Android on the mobile device broke the industry pattern which was dominated by Google, eBay, Amazon. Entrepreneurs started to creat various mobile-based business models based on the new platform.
During this period, many innovative applications and platforms appeared, some of which were from China, such as Wechat, ByteDance.They use algorithm-driven technology to map end-users, trade gathered data, take advantage of networks effect and become a monopoly in their own field, and keep looking for expansion.
As Figures 1 shows,industrial revolution has been mostly driven by open-source technology innovation. And the market evolves behind each wave follow similar stages: decentralization, expansion, and consolidation, over and over again.
From Web 2.0 to Web 3.0: Blockchain Reconstructs Production Relationships and Organizational Forms
The Value of Web 3.0:To Build a Trustless, Decentralized Network
Darcy DiNucci firstly coined the term Web2.0 as a transport mechanism and predicted its profound influence. According to its characters, whole new business models have disrupted the traditional world. The internet giants started to build their defendable moats by having platforms providing content (Netflix, Youtube), marketplaces (Amazon, Taobao), sharing economy (Uber, Airbnb) and advertisements (Facebook, Google) to the public. However, we as end users created the data later taken advantage of by them have received nothing from it. Security and privacy are widely threatened but almost ignored. Web 3.0 is expected to solve these problems fundamentally and achieve many what Web2.0 cannot.
The vision and definition of Web 3.0 have experienced continuous iterations and updates over the past ten years. In 2014, Polkadot founder Gavin Wood proposed the concept of “Web 3.0” as a peer-to-peer network where people can interact in a mutually beneficial manner but without needs to trust each other. We believe that Web3.0 enables a truly decentralized ecosystem with antitrust, interoperability,privacy-respect, and mutual-assistance property.
Web 3.0:The Distributed Internet
Nic Carter (2018), the founder of Castle Island Ventures, had made detailed statistics on the description of BTC in the crypto community over the past 10 years (see Figure 2), including Electronic cash proof of concept (earliest main description), cheap P2P payment network, censorship-resistant digital gold, private and anonymous darknet currency, reserve currency for crypto, programmable shared database, uncorrelated financial assets.
If we look at the visions from one of the earliest blockchain communities — BTC community it is obvious that they have been changed significantly over the past 10 years, which has led the BTC community to diverge and move in different directions in the end.
It can be seen that changes in the vision of BTC actually contribute to some extent why fork exists.“Cheap P2P payment network” and “digital gold” are simply incompatible with each other, just as “anonymity and privacy” to “transparent blockchain” Web 3.0 will bring big changes to our lives.
American Internet medical company 23 & I launched a saliva gene test service in 2018. Customers can spend as little as 99 US dollars to access complete genetic test service. Compared with the thousands of dollars cost of traditional gene testing services, the price provided by 23 & I is undoubtedly much cheaper.
However, it is doubtful that do they make a big loss out of it? The answer is no. In fact,23 & I resold a large amount of user data to other medical and big data companies, and then use the income make up for losses. In the end,23 & I profited from users’ data.
Let’s imagine how 23 & I would function in the crypto world. Users own their data and hence are able to authorize companies who used their data to pay dividends(tokens)on data rights. At the same time, various analysis results done by medical companies are transparent to the users themselves. Users enjoy the profit and receive privacy-respect service.
Kevin Kelly systematically decomposed the theory of the decentralized model in his book “Out of Control”.The advantages of this model include:
(1) Similar to bee colony theory, individuals without high intelligence as a whole can form self-organization, and each individual in this self-organization has equal status;
(2) Distributed organizations have stronger anti-risk capabilities than centralized organizations;
(3) In distributed self-organization, system awareness is bottom-up control, and the degree of democracy is high;
(4) Distributed organizations can have effective rules and regulations because the center’s corruption and other unfavorable factors cause harm to the entire system.
The privacy leakage and security risks brought by the highly centralized Internet should not be ignored. Therefore, Web 3.0 aims to compete with the digital monopoly of the current Internet landscape. It will be composed of various projects to form a decentralized Internet with the peer-to-peer network infrastructure.
Decentralization of the Technology Stack: Investment Opportunities Inherent in the Technology Architecture
The decentralized value of Web 3.0 is based on the decentralized technology stack. Although its development is accompanied by scalability and security problems, the process of solving these problems is attractive.
Key modules of Web 3.0 stack
Key modules of the Web 3.0 stack will provide indispensable technical support for the entire Web 3.0 ecology.
In this article, we only pick out the most influential and indispensable technology components, and briefly analyze their development status and degree of decentralization. They are specifically Dapp Browser, Application Hosting, Query Layer, State Transition Machine, Consensus, and Peer-to-peer network layer.
(1) Dapp Browser
Projects: Mist, MetaMask, Coinbase Wallet, Trust Wallet, ImToken
(2) Application Hosting
Projects: IPFS, Swarm
(3) Query Layer
Projects: Chainlink, Band Protocol, Tellor
(4) State Transition Machine
Kyle Samani (2018) argued that a few major state transition machines include:
WASM — — Dfinity, EOS, Polkadot, Ethereum 2.0
(5) Consensus Layer
(6) P2P Layer
Potential key modules of Web 3.0 stack
Although the following components are not a major part of the base layer chain currently, we believe especially roll-ups and off-chain verifiable computation(zero-knowledge proof)will be playing a more important role.
（1）Sidechains and roll-ups
The most notable use cases in the BTC network are Drivechains and Liquid. In the Ethereum system, such cases are the SKALE in the Plasma framework, the Roll up certificate recently launched by the Ethereum Foundation, and Cosmos Ethermint.
（2）Payment Channel and State Channel Network
Blockstream launched the Lightning Network in 2015. In the Ethereum ecosystem, there are Raiden, Loom and Celer.
（3）Interledger Protocol ILP
Ripple Labs uses a cross-ledger agreement to connect banking systems in its products across borders. Kava uses cross-ledger protocol technology to build a DeFi platform that supports XRP, BNB, ATOM and other assets based on Cosmos.
The two most representative technologies for zero-knowledge proof are ZK-SNARK and ZK-STARK. The representative projects are Coda for ZK-SNARK and Starkware for ZK-STARK.
The Emergence of New Business Models in the Web 3.0 Ecosystem
The wave of blockchain technology over the past few years has engendered many Web 3.0 business models. Some are blockchain-native models and some refer to traditional business models from Web2.0
Innovation based on Web 2.0 Business Model
(1) Distributed content sharing platform-content monetization & distribution
Web 2.0: Youtube, Medium, Tumblr, NetFlix
Web 3.0: Steemit, Alis, HyperSpace, Flixxo
(2) Decentralized online trading platform
Web 2.0: eBay, Amazon, Taobao
Web 3.0: OpenBazaar, bitJob, CanYa
(3) Decentralized digital advertising
Web 2.0: Facebook Advertising, Google Adwords
(4) Decentralized game trading platform
Web 2.0: Steam, Expekt
Web 3.0: Dmarket, GameCredits
Web 3.0’s Business Drivers of the Future:Future Investment Directions
The technology stack constitutes the overall skeleton of the blockchain project, and the token economy drives the entire ecological operation. Max Mersch (2019) used to sort out almost all tokenized business models with great development potential. We believe that tokenized business models will overturn the traditional business model’s profit model in the future.
(1) Dual token model
Project: MakerDao (MKR/DAI)
(2) Governance tokens
Project: 0x Protocol, Aragon, DAOstack, MakerDAO(MKR)
(3) Tokenised securities
Project: Polymath, AlphaPoint, TokenSoft, RealtyBits
(4) Transaction fees for features
Project: bloXroute, Aztec
(5) Tech 4 Tokens
(6) Providing UX/UI
Project: Veil & Guesser, Balance
(7) Network-specific services
Project: Stake.fish(staking services provider), Bluzelle, BigchainDB (database), OB1(marketplace management services)
(8) Liquidity providers
Project: Uniswap, IDEX, dYdX, Alkemi
Blockchain Technology Leads the Transformation of the Economic Paradigm: Investment Logic Behind the Crypto Economy
Crypto Era Removes “Data Oligarchs”
We believe the next few decades can be characterized as Crypto Era as it keens to remove “data oligarchs”, enable open-source data and information democratization.
User data will no longer be controlled by business oligarchs and privacy and security will be respected and satisfied. as the data hosting will be decentralized,censorship-resistant and tamper-resistant
In the Web 2.0 era, user data is fragmented and stored in centralized companies (or servers for various application products). If the user decides to change to another music platform, users have to export clumsily the list of playlists from one to another since the data can not be shared and you don’t truly own your identity.
Use the theory of Technological Economic Paradigm Transformation to see the Crypto Age
Venezuela's economic theorist Carlota Perez (2003) proposed the concept of a technological-economic paradigm shift and the theory of a large surge after researching all the technological revolutions since the Industrial Revolution. She pointed out that each technological revolution-led paradigm shift in the technology economy will follow a cycle of four periods: outbreak, frenzy, synergy, and consolidation.
The development time of crypto networks gives a good example of what was mentioned above. Since the emergence of BTC in 2009, the entire market has entered an irrational frenzy period in 2017 and 2018. After the market bubble reached its peak in the first half of 2018, it experienced a crash in the second half of the year. And after 2020 it can be expected that since the crypto market has regained its rationality in 2019, a new industry restructuring and industry synergy will emerge, and finally enter a stable period of healthy development.
Use Cost Structure and Value Distribution Theory to Watch the Disruptive Innovation in the Crypto Age
As mentioned above, in the Crypto Era, encrypted tokens will replace the centralized information processing method of business giants in the Internet era through universal financial incentives across the entire network, thereby reducing the cost of building and expanding information networks. Joel Monegro (2018) proposed the “Web vs.Crypto Service Models” theory that comparing Web Service(Web 2.0)and Crypto Service(Web 3.0)in terms of their production and data custody.
As we can see in Figure 5, the production cost structure and value distribution method of the Web service model(Web 2.0)are centralized. In other words, centralized business entities like Google or Facebook manage the entire life cycle of the services they provide and control all the data that their users contribute and generate. They bear all data-related production costs(such as the cost of establishing a data center, data research, and development,etc.)
In comparison, the crypto service model(Web 3.0)combines a decentralized production model with non-custodial data. Crypto networks spread the production cost to a larger group of people by incentivizing numerous independent nodes in the network and peer-produce the service based on a shared crypto-economic protocol.
In the light of Joel Monegro’s theory, we can see that the advantage of Web 3.0 compared to Web 2.0 is that its cost structure and value distribution are more decentralized. According to the principles of traditional economics, the more decentralized cost structure of Web 3.0, the wider the distribution of the value of data.
IOSG Venture’s Long-term Investment Logic
Our deal sourcing and pipeline selection strategy are driven by our academic thesis of industry research and developer community’s needs.IOSG believes that it is essential to establish close community partnerships with early-stage start-up teams. Hence, we will choose to work together with the core development team to build a decentralized community system and be an outstanding member of the community.
In the gradually growing niche market of crypto, we hope to capture the industrial value and investment value in the full cycle. Since our investment strategy is focusing on long-term development, we will pay more attention to projects with the following qualities:
(1) In the aspect of blockchain native projects, we are optimistic about decentralized open protocols. We often feel that there are more people working on the blockchain rather than use blockchain-related products. What is the main reason we have seemingly slowed down at the “developer” stage on the adoption timeline? To change the situation, speed and user experience have to be resolved, robustness and security have to be satisfied and protocols with its composability can be a solution. One day, to build a functional Dapp, it might be just as easy as to play Lego. The founder team is another crucial aspect. To set up an industry standard, the leadership, open-source knowledge and experience will be helpful to quickly gather a strong developer community and build a user-driven product.
(2) The following aspects are just as important as when we invest: abilities of open protocol design, economic design, development strategies, community governance, and targeted market. Inefficiency within any industry is a sign of lack of trust, and that would be the desired market worth investigating.
(3) Many times we see projects focus on technology, instead of problems or products. It has to be addressed that any entrepreneurs share one goal: to give users a friendly experience. Users are not only your colleagues who have a deep understanding of crypto already but also people who have never heard of crypto.
(4) An open, transparent, collaborative attitude is highly suggested. For instance, Ethereum and MakerDao both actively post their competitors’ information which allows the public to better understand the current industry background and progress, Ethereum posts on Critique and skepticism and MakerDao posts on the Github. We believe that involving community members in the governance of the project is the key to building a successful community ecology.
Max Planck once said, a new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it. To all the people who are sharing a Web3.0 dream and on this journey.
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