Web3: Hype or Horror?

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

Whether we’re evolving as humans, browsing countless social media feeds or identifying new investment opportunities, we don’t like to stand still.

Technology is perhaps the most evolving aspect of our lives and a field filled to the brim with exciting innovations across sectors as businesses realize the importance of its merits, from cloud to analytics. and data.

And despite market turmoil, venture capitalists continue to invest.

According to PitchBook, emerging technologies account for around 11% of all seed and early-stage venture capital investments – and the current favorites are areas such as Web3, DevOps and artificial intelligence.

But what makes these opportunities so exciting for VCs, and when, if ever, will they matter in the real world?

1, 2, Web3

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

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

Research company Gartner even estimates that it will be at least a decade before the metaverse becomes a truly mainstream concept.

So back to the current VC girlfriends.

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

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

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

Companies raising funds 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 terms of “decentralized” blockchain, but beyond that, Web3 is more of a general term than a fixed technology.

By running on public and open-source blockchains (based on free software), DeFi services, for example, remove the need for intermediaries by existing as peer-to-peer smart contracts.

The Web3 and DeFi segment became the largest beneficiary of emerging technology capital in the third quarter of 2021 – surpassing fintech and biotech – and has dominated ever since.

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

Is media hype important?

PitchBook’s transaction analysis shows that interest in Web3 is at an all-time high, but according to Gartner, it could decline significantly.

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

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

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

Then 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 stage of inflated expectations with related technologies such as NFTs, blockchain and decentralized identity.

This is where the buzz starts and a plethora of new companies are born, beyond the early adopters.

But signs that everything could go wrong for Web3 are emerging.

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

Towards a low point

Take autonomous vehicles.

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

Driverless cars have gotten a lot of bad press for “not dealing with noise,” for example, and the space is also starting to consolidate.

But as of September 2021, three entities are licensed to operate autonomous vehicles in California: Cruise, Nuro and Waymo.

Is this what awaits us for Web3?

Not yet, judging by the number and size of deals completed.

The biggest investment in the second quarter included a $175 million Series A for Lightspark, a startup that seeks to improve the Bitcoin network and speed up its transaction times.

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

Other major deals focus on NFTs, crypto wallets, identity and tokens.

And although difficulties still lie ahead, some failures are being resolved.

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

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

Nothing new under the sun

The idea of ​​decentralization and freedom from censorship was at the core of the internet’s founding principles, and Web3 has so far seen many projects that have been similarly centralized to BigTech, writes Molly White in the blog. Web3 is doing well “.

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

” [Les sceptiques] I also often mention that a very large number of Web3 schemes look a bit like Ponzi or pyramid schemes and question the lack of regulation, oversight and taxation that makes fraud, tax evasion and other criminal behavior particularly prevalent in this area,” he writes. she.

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

PitchBook believes that while developments have been extensive over the past few years, “many projects and digital assets are highly speculative and have not yet passed the concept stage.”

For DeFi, there are technological, fraud, regulatory and centralization risks, to name a few.

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

© Morningstar, 2022 – The information contained herein is for educational purposes and is provided for informational purposes ONLY. It is not intended and should not be considered as an invitation or encouragement to buy or sell the listed securities. Each comment is the opinion of its author and should not be considered a personalized recommendation. The information 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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