Tian Hongfei of Yuanwang Capital: The Top 10 Venture Investment Opportunities in Web3

Author: Tian Hongfei

Source: Yuanwang Capital iVision

After 40 years of development, the internet has gradually entered a new era. On one hand, the consumer internet has stagnated due to monopoly by giants; on the other hand, the development of enterprise internet has made tremendous progress in the past decade, with SaaS becoming the most eye-catching stock.

Since 2010, the giants of the consumer internet have entered a harvesting phase, with the monopoly profits of major players skyrocketing, accounting for 90% of the market value of the top 10 companies. On the other hand, no new giants have emerged in the field of innovation. Although in China, the sluggish response of giants has given opportunities to mobile internet giants like ByteDance and Meituan, it is indisputable that the consumer internet globally has entered a state of stagnation.

People often say that innovation always happens at the margins, just as the internet was born in the 1970s and the World Wide Web in the 1990s. The initial internet was composed of nodes from a few universities, and after 40 years of development, various applications that changed the world emerged in ways that no one could have predicted.

Now, a new paradigm shift is coming, which is in the often misunderstood world of hackers. In 2009, Bitcoin and blockchain were born, laying the seeds for the development of Web3 in 2021. I believe Web3 will be a massive paradigm shift, and the ten major venture capital opportunities it nurtures are as follows:

1. The Technical Architecture of Web3 Must Be Blockchain

Although there is no necessary connection between Web3 and blockchain, the development of the industry has brought the two together. The blockchain technology that emerged in 1982 had long been underutilized until the advent of Bitcoin, which created the technical foundation for users to truly own information online.

The internet has evolved from Web 1.0, which provided information to users, to Web 2.0, the era of user information interaction, and now into the Web3 era, where users own their information. The underlying logic of this development is that the digital assets accumulated on the network in an information society are increasing, which is reflected in the fact that 9 out of the top 10 companies in the world are internet companies.

Web3 needs blockchain technology to support the vision of users fully owning their digital assets. As a foundational technology, blockchain will be the biggest entrepreneurial opportunity in the Web3 space. It is not an exaggeration to say that the market size of public blockchains will exceed that of all current internet companies, because Google and Facebook, logically speaking, are merely applications running on these public protocols, just as all internet companies need to operate on the TCP/IP protocol. In the future, all social networks and information searches will run on the underlying blockchain protocols.

Although Bitcoin's public chain currently occupies 40% of the cryptocurrency market value, Ethereum, which launched in 2015, has outperformed Bitcoin in the market. Of course, if you think Ethereum will dominate, then public chains like Solana, Avalanche, NEAR, Polkadot, and Cosmos, which emerged after 2018, may prove that conclusion to be premature.

Representative companies: Ethereum, Solana, Avalanche, NEAR, Polkadot, Cosmos.

Photo by Shubham Dhage on Unsplash

2. Decentralized Identity Systems

Today's internet companies own everything about their users, forcing users to register their accounts with every enterprise. The valuation of these companies is based on how many users they have and how much advertising revenue they can generate from user data.

The slogan of Web 1.0 was that "on the internet, no one knows you're a dog"; Web 2.0 is the era of social networks, where using a pseudonym to register on Facebook would be ridiculed; in the Web3 era, users will completely own their information.

Owning one's information starts with owning one's identity.

OpenID was born in 2005, allowing users to have their identity information stored on independent servers. Websites that support OpenID can obtain user information with user authorization. Unfortunately, Facebook Connect and Google Login defeated OpenID to become the mainstream third-party login solutions.

Windows Cardspace was introduced in 2003, allowing users to integrate their identity information within the operating system, and websites supporting this protocol could request access from users. However, this product never gained widespread use.

Thus, it seems that promoting independent identity information management products is very difficult, even for large enterprises. Until the Web3 era, the need for users to own their digital assets has provided a strong incentive for them to own and manage their information.

As mentioned, historical development often requires a generational process. As internet natives, users value their digital assets more and wish to own and control them.

In the technical architecture of Web3, users will pay operational costs for accessing and using websites, thus they should have the right to their own data.

In the future, everyone will have a domain name and a webpage located on a decentralized IPFS.

Representative company: ENS.

3. Distributed Data Storage and Access

In the Web3 era, users own their data and need to pay for its storage. For example, NFTs purchased by users need to be stored in a place that can be accessed permanently. Additionally, convenient access requires data transmission and indexing services.

Representative companies: Filecoin, Arweave, The Graph, Livepeer, ByteTorrent.

4. Communication Protocols

Due to technical limitations, different application scenarios will require different blockchain technologies. Different blockchains need to communicate with each other; smart contracts on one blockchain may need to call contracts on another blockchain, and digital assets on one blockchain may need to be lent to another blockchain.

Representative companies: XCMP, EPNS, XMTP.

5. Resource Allocation Optimization Protocols

DeFi, which emerged in 2018, envisions decentralized finance and democratized finance. However, I believe blockchain cannot change the traditional financial industry. Although the top 10 companies by market value today are internet companies, banks still cannot provide credit loans to high-tech industries, and the development of high-tech enterprises still heavily relies on venture capital funds. New technologies cannot fundamentally transform a traditional industry; they are more likely to create a new industry.

With the advent of cloud computing and the deep integration of digital information technology into industry and agriculture, more assets are being digitized. Various tokens represent not only computing resources and storage resources but also digital assets and physical world assets. Finance, as a scientific theory of value exchange across time and space, will be applied to distributed network collaboration.

For example, in 1980, the contract net protocol designed by Reid Smith was used to break down a large task and subcontract it to other collaborators for completion. Because the protocol did not use tokens, it had significant limitations. In the future, Software Agents driven by artificial intelligence technology that can replace user decision-making may use financial protocols for payment, trading, lending, hedging, etc., to coordinate network resources to complete user tasks.

It can be said that decentralization and personal ownership of digital assets in the Web3 world require greater collaboration of network resources.

Representative companies: Uniswap, Compound, AAVE.

Photo by Shubham Dhage on Unsplash

6. Social Network Protocols

In the Web3 era, without intermediaries, decentralized users need an open social network protocol to connect with each other. The value of a user's identity is no longer mediated by Facebook; instead, it requires a social network built by users themselves to reflect their value.

Representative companies: Context, CyberConnect, DESO, RSS3.

7. NFT

Beyond digital art, the greater role of NFTs should be as a programming unit.

If smart contracts are the classes in object-oriented programming, then NFTs are the Singletons in object-oriented programming.

8. Wallets

Just as the user interfaces of Web 1.0 and Web 2.0 were browsers, wallets will be the browsers of Web 3.0, carrying the functions of managing user information and accessing DApps.

Representative companies: Argent, MetaMask.

9. Shared Networks

The debate over whether the internet is centralized has never ceased, and there is no conclusion on whether the network should be neutral. However, with the development of mobile devices and sensors, we have the opportunity to establish a shared wireless network. Similar to P2P networks, users of the network are also its service providers. Unlike P2P, the emergence of tokens can provide settlement between users and providers.

Representative companies: Helium, DIPNET.

10. Content Creation Economy

In the Web3 era, users own their creative content and their own readers, freeing themselves from the revenue model that relies on platform-distributed traffic and advertising revenue sharing.

Representative company: Mirror.

Finally, I want to say that 90% of people think blockchain practitioners are either crazy or operating on the edge of legality. 9% of people become fanatical after encountering blockchain and decide to go all-in, only to find their expectations unmet or feel deceived, leading to disappointment. Only 1% of people can persist and become the driving force behind industry development; future leaders will emerge from this 1%.