Crypto, DAOs, ICOs, Web3… You have probably heard at least one of these “buzzwords” over the past year since the cryptocurrency bubble at the start of the pandemic. 

If so, you might have also heard talk about a world of “decentralization”: how the economy will shift to a more private, peer-to-peer, and digital structure, and where individuals are empowered and institutions and governments are removed. Digital currencies can change how we transact; non-fungible tokens (NFTs) can disrupt the art and media industry; decentralized finance (Defi) can impact financial institutions– these are some of the widely talked about implications of this new era of decentralization and tech. 

Now, we are seeing more startups emerging with “Web3” based solutions that seek to change society. In addition, VCs, such as W³ VC, are now pouring billions of dollars into this new and controversial industry, excited about the opportunities and bullish on its extreme returns on investment. However, what VCs don’t fully recognize is how the crypto industry can potentially disrupt their own businesses. How will these “buzzwords” change the venture development side of the economy? Will there be a shift in how startups will be funded? Let’s discuss. 

But first, let’s clarify what some of these “buzzwords” mean so we don’t get lost in the semantics. Too many people have carelessly thrown these terms around without understanding their technical definitions and their purposes. 

Here are some key definitions to know before we proceed:

• Cryptocurrency (or “crypto”): digital currency or tokens that can be traded through a blockchain network. While each cryptocurrency may serve a unique purpose, the ultimate use case of crypto is to remove large institutions such as banks from controlling your money.
• Initial Coin Offering (ICOs): When companies sell cryptocurrencies to investors to raise money and fund projects. Think of this as the cryptocurrency industry’s equivalent of an IPO (initial public offering). However, investors do not have an equity stake in the company. 
• Decentralized Autonomous Organizations (DAOs): An online organization constructed by encoded transparent rules that are controlled by its members. Through this bottoms-up management system, organizations are democratized and can act in a common interest. Think of them as community-led organizations rather than having a distinct leader. 

“What about Web3?” you might ask. How does this fit into the world of cryptocurrency? 

There are many misconceptions and definitions of what Web3 might be, but broadly speaking, Web3 is really an idea of a new era of the internet that is built upon decentralization, blockchain, and tokenomics (crypto), all with the overarching goal of empowering individuals and combating the influence of institutions. With that being said, it incorporates cryptocurrency, ICOs, DAOs, and many more concepts. 

Now that we got the terminology out of the way, let’s refocus on the potential impacts Web3 has on a specific part of the economy: venture development.

Remember, the idea of Web3 is to give power back to individuals. In the context of funding startups, I can see two ways in which this space can potentially disrupt venture capital.

1).  The rise of investment DAOs. There has been an increasing number of venture capital funds structured as DAOs that are entering the startup ecosystem, especially those focused in the crypto niche. While crypto startups are still predominantly funded by VC giants such as Andreesen Horowitz, perhaps the DAO model can offer additional benefits to founders which traditional funds cannot. 

Firstly, with the tendency of DAOs being built upon a large crypto-native community, startups can receive a wide host of feedback and advisory on their value proposition. Product and/or service prototypes can be tested, critiqued, and improved upon. Startup founders can network and understand the market they are serving with ease. VCs on the other hand, while they may have industry knowledge, may not fully understand the startup’s niche. Nor do they have a community for founders to lean on.

Secondly, having community access means an opportunity to source for human capital. Perhaps a select number of people really like a founder’s ideas, and want a stake in the startup in other ways. Perhaps these people are experts in media, hiring, legal services, etc, and the startup lacks these departments.  

On the other hand, DAOs can also serve to benefit investors through its decentralized nature.

For example, take a classic syndicate fund: in this model, there is a lead investor, who makes the investment decisions and directly interacts with the startups, and there are passive syndicate investors, who simply contribute to the fund and pay the lead carried interest. However, in an investment DAO, every member has a say in the investment decisions and opportunities to interact and network with startup founders. Democratized power.

2).  Seeking funding from ICOs. Alternatively to VC funding, startups can prepare for an ICO and create and sell their own tokens. Over 3 billion dollars have been raised this past year in ICO’s alone, and is looking to compete with venture capital funding. But why sell your own digital token rather than pitch to a VC?

Firstly, ICOs give startups the opportunity to raise from non-dilutive equity. The sale of a token does not equate to buying a share of the company. Instead, investors are betting on the high appreciation in the coin’s value, rather than owning a portion of the company’s profits (the coins may also have special use cases, but I will get to that in a bit). Thus, startup founders can still raise money while still reaping all company profits to themselves.

Secondly, startups are able to build a large community of stakeholders through an ICO. They can list their offering publicly and engage with a host of investors. In addition, perhaps these coins are governance tokens, allowing investors to have a role in the startup and make decisions. With an ICO, startups can build a community. With a community, there is traction. With traction, there is opportunity for growth. VCs don’t have a community of stakeholders to offer founders. 

Great. There are a plethora of potential benefits that Web3 offers to venture development. Why hasn’t society dumped the traditional VC model and moved on already?

Government Regulation and Concerns.

With these elements of Web3 being new and highly unregulated, combined with the fact that its primary purpose is to remove government authority, the US government is pushing for increased litigation on crypto. While the crypto space offers great potential, many are reluctant to adopt it because the space allows for many bad actors and unprotected investors. Individuals can make investments while avoiding taxes. DAOs lack an explicit tax, liability, and treasury management structure. The anonymity of the space allows for illicit transactions to be made. Scammers can put out ICOs for investors that turn out to be pump and dump and “rug pull” schemes. The list goes on. In this sense, government regulation can be seen as beneficial: there can be a safer crypto ecosystem built, investors can be better protected, and a notoriously volatile market can be stabilized by demotivating “get rich quick” schemes. 

On the other hand, remember what crypto’s premise is built on: the elimination of intermediaries, central authorities, and institutions. Government regulation is shifting the balance of decentralization back to centralization, violating Web3’s premise and pushing crypto enthusiasts away from even participating. In fact, we have already seen this last year when China banned crypto trading in its country, leading crypto markets to crash. China today is not the only country to even ban crypto transactions: Egypt, Iraq, Qatar, Oman, Morocco, Algeria, Tunisia, and Bangladesh are some of the other countries that also created strict jurisdiction over crypto. 

Perhaps worldwide government regulation will only injure the sentiment and potential of Web3.

There are many variables at play here. A community of individuals are ready to adopt a decentralized digital based economy. Others don’t see Web3’s practicality and view it as a place for crime. Governments are pushing for regulation. Now, US inflation soars at a 40-year high, causing crypto markets to crash once again and leaving investor confidence mixed– some believe this crash is just a hiccup in an otherwise opportune space for startups, while others see this as the beginning of an end. Personally speaking, to determine whether Web3 will be revolutionary to the economy in the broadest sense, the best we can do is wait and observe. Government regulation is inevitable. The economy will eventually cool down and stabilize. Thought leaders and groups will continue to promote anti-crypto sentiment. Let’s see how the crypto community reacts to all these variables in the next few years, and then we can revisit this again. 

The Polkadot blockchain’s native token (DOT), initially offered, sold and delivered to purchasers as a security, has morphed and no longer is a security. It is software.

Upon its third anniversary of proactive engagement with the SEC, the Web3 Foundation today announces a landmark step towards the achievement of Web 3.0, a decentralized, trustless, serverless internet.

Web3 Foundation announced today a landmark achievement towards the realization of Web 3.0: the Polkadot blockchain’s native digital asset (DOT) has morphed and is no longer a security. It is software.

This announcement marks the third anniversary of Web3 Foundation’s first engagement with the U.S. Securities and Exchange Commission’s (“SEC”) Strategic Hub for Financial Innovation (“FinHub”), in response to FinHub’s public invitations to digital asset-related projects to “come in and talk with us.”

At the time, the Web3 Foundation was still six (6) months away from taking the initial step to launch the Polkadot network in May 2020, and concluded with the launch of parachains in December 2021.

In November 2019, the digital asset regulatory climate was tense.

When the Web3 Foundation first approached FinHub, the SEC had recently filed its complaint against Telegram, and the FinHub staff’s Framework for “Investment Contract” Analysis of Digital Assets (the “Framework”) had been published only a few months earlier, on the heels of many other SEC enforcement actions and announcements, including its 21A Report of Investigation: The DAO (“The DAO Report”), the Munchee cease-and-desist order and the Kik decision.

“The Framework suggested that nearly every digital asset offered and sold for fundraising purposes, initially, was highly likely to constitute a security when it was delivered to initial purchasers“

Yet the Framework also contained a compliant path forward – one that would permit a digital asset initially offered and sold as a security to be re-evaluated at a later date. For purposes of U.S. federal securities laws, there was a possibility that it would no longer be a security. In other words, digital assets could morph.”, Daniel Schoenberger, Chief Legal Officer at Web3 Foundation

Over the next three years, the Web3 Foundation’s experience was a positive one, as it met regularly with the SEC and attempted to break new ground and comply with U.S. federal securities laws, including with respect to the offer and sale, marketing and delivery to initial purchasers of tokens as securities, and treatment of retail purchasers, generally in line with public companies.

In the Web3 Foundation’s view, current offers and sales of DOT, the native token of the Polkadot blockchain, are not securities transactions. DOT is used for the purposes for which it was designed – among other things, to bid for and secure parachains and facilitate on-chain governance.

“Control of the Polkadot network has long been in the hands of DOT holders. Today, DOT is not a security. It is software,” added Mr. Schoenberger.

What is Web3?

Web3 is the next generation of web technology, and it’s going to change everything. It allows users to have full control over their data and content, which means they can choose what information they share with others or restrict access completely. This opens up new opportunities for businesses because now companies will be able to collect and use data in a way that is more secure and efficient.

Why invest in Web3?

There are many reasons why you should invest in Web3. Here are just a few:

• The global market for Web3 is expected to grow from $24 billion in 2020 to $176 billion by 2025. That’s a 700% increase.
• Web3 is a more secure and efficient way to collect and use data.
• It allows businesses to create new, innovative products and services that can be delivered directly to consumers.
• The global market for web three is still in its early stages, so there is a lot of growth potential.
• It’s perceived as the future of the internet.

How to invest in Web3

Below are some of the ways to invest and gain exposure to the growth of Web3 technologies.

Invest in Web3 company and stock

Given the growing attention and interest in Web3, many technology companies are gradually preparing and repositioning for this next phase of the internet, which could reflect the overall performance in the market. Some of these companies, like Microsoft, are already trading in the public market, and you can gain exposure to the Web3 developments by investing in the company’s stock.

Besides buying stocks of companies working on Web3, you can choose to invest in startups building Web3-related products.

Buying Web3 tokens

Many web3 companies will have their token or cryptocurrency, which can be purchased through an initial coin offering (ICO) and crypto trading platforms. This is similar to buying shares of a company, where you get to invest directly into that company’s success.

Noteworthily, holding Web3 tokens exposes investors to both the success and failure of the company. Hence, it’s important to thoroughly research any Web3 project before buying any cryptocurrency they offer. 

Invest in Web3 funds

Many funds are investing in companies developing new technologies for Web3. Hence, investing in these funds can also be considered a great option to gain exposure to Web3, especially when you don’t have the time or resources to do your research. 

Of course, it’s advisable to read the fine print and understand the risks involved before investing.

NFTs and Metaverse

Web3, the Metaverse, and non-fungible tokens (NFTs) are not the same. However, people believe three can function together. Investing in NFTs and Metaverse indirectly provides investors exposure to Web3, which is expected to support NFTs and Metaverse applications.

Strategies to invest in Web3

Haven mentioned how to invest in Web3. Let’s discuss the strategies for investing in Web3, including metaverse or cryptocurrency in general.

The buy low sell high strategy

One important thing to remember is to buy low and sell high, especially if you are only interested in the short-term value of the project. This is a basic principle of trading that can help you make a profit even when the market is in a downturn. By buying assets when they are cheap and selling them when they are expensive, you can stay profitable.

Of course, there is no guarantee that these strategies will work every time. Web3 tokens are volatile, and it can be difficult to predict which way they will go next. However, if you are patient and have a little bit of luck, then you could end up making a lot of money by investing in cryptocurrencies.

You should be familiar with what you’re investing in

It’s also important to know what you’re investing in. There are a lot of Web3 related cryptocurrencies and projects, and each one has its own unique set of features that make it more or less attractive than others. By understanding the goals of Web3 startups, you can make better decisions about which ones to invest in.

Of course, it’s also important to remember that the value of any given cryptocurrency is somewhat tied to its project. If a particular Web3 project gains more traction relative to others, then it might be a good idea to invest in the native token.

Don’t invest more money than you can afford to lose.

When it comes to trading, there are a lot of different strategies that you can employ to make money. However, the most important thing is to always remember to play it safe. Make sure that you only invest an amount of money that you can afford to lose because there is always the risk that you could end up losing everything.

Maintain a diversified portfolio

It’s also important to remember that you should never put all your eggs in one basket. This is especially true when it comes to investing in cryptocurrencies. By diversifying your portfolio, you can reduce the risk of losing money if one of your investments goes south.

There are a lot of different Web3 tokens out there, and it can be difficult to choose which ones are worth investing in. However, there are some things that you can look for when trying to decide if a particular coin is right for you.

For example, it’s good practice to check what value the project is proposing and its potential market reach. You should also take a look at the technology that the currency is based on and see if it has any real-world applications.

Conclusion

Investing in Web3 can be a great way to make money, but it is important to understand the risks involved. The concept of Web3 is still at a nascent stage, so there is a lot of uncertainty about the future. However, if you do your research and invest in the right projects, you can become profitable with time.