Web3: Hype or horror?

It is human nature to always be on the lookout for the next big thing.

Whether it’s evolving as a person, browsing countless social media feeds, or identifying new investment opportunities, we don’t like to sit still.

Technology is perhaps the most evolving aspect of our lives and a field jam-packed with exciting innovations across all industries, as businesses realize the importance of its merits, from the cloud to analytics and data.

And, despite the market turmoil, venture capitalists continue to invest.

According to PitchBook, emerging technologies account for about 11% of all initial and early venture capital investments, and currently preferred areas are Web3, DevOps and artificial intelligence.

But what makes these opportunities so exciting for VCs, and when, if at all, will they have real-world relevance?

1, 2, web3

The journey from conception to actual adoption is a long one.

For example, we’re currently bombarded with information about the metaverse and how an alternate digital universe is the future for everything from shopping to corporate conferences.

Research firm Gartner even estimates that it will take at least a decade for the metaverse to become a truly mainstream concept.

So back to the current dear VCs.

According to PitchBook’s Emerging Technology Indicator (ETI) for Q2 2022, Web3 and decentralized finance, or DeFi, are by far the most popular among VCs.

Web3 largely refers to decentralized software protocols and blockchain-based products and services.

DeFi is the term for the finance-focused products it contains.

Firms attracting finance in this segment create everything from marketplaces and platforms, networks, custody services, identity and privacy tools, and payment services.

The concept differs from the current web, or Web2, in the “decentralized” blockchain aspect, but beyond that, Web3 is more of an umbrella term than a fixed technology.

Running on open source and public blockchains (based on free software), DeFi services, for example, eliminate the need for existing intermediaries such as peer-to-peer smart contracts.

The Web3 and DeFi segment became the top beneficiary of emerging tech capital in Q3 2021, overtaking fintech and biotech, and has dominated ever since.

Investments have more than halved from the fourth-quarter peak, to $874 million from over $2 billion, but the amount remains significant given the crypto winter and heightened regulatory risk.

Is media noise relevant?

Transaction analysis by PitchBook shows interest in Web3 is at an all-time high, but could decline significantly according to Gartner.

The company has developed an analytics model called the “hype cycle” (although it’s not a cycle at all) to track the development, popularity and adoption of the technology.

The growth of a significant innovation is obviously not linear, nor guaranteed, but the model provides an overview of the journey from inception to pillar. Technologies go through five stages: innovation trigger, inflated expectations peak, disillusionment transition, enlightenment slope, and productivity plateau.

In other words, when a new technology is discovered, the cycle begins with inflated attention, expectations and funding, before crashing as investors realize there may not be enough uses, poor performance or bad press.

So companies find ways to adapt the technology to their business and over time it becomes mainstream.

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Gartner places Web3 in the inflated expectations stage with related technologies like NFTs, blockchain, and decentralized identity.

This is where the hype begins and a plethora of new companies arise, as well as early adopters.

But signs are emerging that everything could fall apart for Web3.

Falling cryptocurrency valuations certainly provided a reality check, and bitcoin alone still uses more energy than Finland every year, at a huge cost to the environment.

Towards a low point

Get autonomous vehicles.

A few years ago, their arrival was supposed to be revolutionary, but it turned into a very expensive and sometimes dangerous project, placing the technology in the “trough of disillusionment”.

For example, driverless cars have gotten a lot of bad press about them “not living up to the hype,” and the space has also started to consolidate.

But, as of September 2021, three entities have permits to drive autonomous vehicles in California: Cruise, Nuro and Waymo.

Is this what awaits us for Web3?

Not yet, judging by the number and extent of the deals concluded.

The biggest investments in the second quarter included a $175 million Series A for Lightspark, a startup looking to improve the Bitcoin network and accelerate transaction times.

The second largest deal was a $148 million Series B raised by CertiK, which provides blockchain security, monitoring and auditing technology.

Other big businesses focus on NFTs, crypto wallets, identities, and tokens.

And although the difficulties are still ahead of us, some failures are resolved.

Ethereum, the blockchain used by many Web3 developers, has moved to a proof-of-stake system from the high-issue proof-of-work system.

Proof of the stake has been criticized for not supporting the idea of ​​decentralization; it doesn’t rely on computers for security, but on individuals or companies stake their own tokens – and they will be the new validators, not the decentralized servers.

Nothing new under the sun

The idea of ​​decentralization and freedom from censorship was at the heart of the Internet’s founding principles, and Web3 has thus far seen many projects that have been centralized in a similar way to BigTech, writes Molly White on the “Web3 is doing great” blog.

Additionally, there are also instances where “uncensorable” or “unchangeable” platforms have deleted or altered data.

” [Les sceptiques] he also frequently mentions that a very large number of Web3 schemes look a bit like Ponzi or pyramid schemes and questions the lack of regulation, oversight and taxation which makes fraud, tax evasion and other criminal behavior particularly prevalent in this industry,” he writes .

Gartner estimates that the technology segment will take five to 10 years to mature.

PitchBook believes that while developments have been extensive in recent years, “many digital projects and assets are highly speculative and have not yet passed the conceptual stage.”

There are technological, fraud, regulatory, and centralization risks to DeFi, just to name a few.

But for now, Web3 is riding the funding wave, and who knows, 15 years from now we may be sitting in the back of our driverless cars, making blockchain transactions from the metaverse and laughing at the history of cryptocurrencies as serial polluters.

© Morningstar, 2022 – The information contained herein is for educational purposes and provided for informational purposes ONLY. It is not intended and should not be construed as an invitation or encouragement to buy or sell any listed securities. Each comment is the opinion of its author and should not be considered a personalized recommendation. The information contained in this document should not be the only source for making an investment decision. Be sure to contact a financial advisor or financial professional before making any investment decisions.

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