Today’s problems of web3 are tomorrow’s investment opportunities.
Look for projects that work to solve these 8 big problems of the industry:
Adoption of new tech doesn’t progress linearly. It moves in staircases:
Initial innovations trigger a surge of adoption—> impact of those innovations subsides over time & growth flattens—> newer innovations fix bottlenecks to enable further adoption—> another wave of growth—> rinse, repeat.
Web3 has climbed a few of these staircases over time. Last waves of adoption were triggered by innovations in smart contract, DeFi & NFT.
We’re on a flatter part of staircases as many bottlenecks need to be resolved to unleash next wave of web3 growth.
When you look for investment candidates, focus on projects & companies that help solve major bottlenecks of the industry.
What are those bottlenecks? Here are 8 big ones by sub-sector.
1. Poor scaling and UX for DEXes
Decentralized exchanges make trading possible for a long tail of assets w/ a participatory biz model where everyone can earn by providing liquidity. For an internet of values to scale, well-run & scalable DEXes are essential.
But today’s DEXes are MVPs that suffer a host of problems resulting in shitty user experience. To name a few:
- impermanent loss
- large slippage
- MEV / sandwich attack
- slow, unreliable txn execution
- poor txn control, e.g. difficult to execute basic order types like stop loss or limit
- indexing, analytics & screening tools for asset universe sorely lacking
Many projects try to solve these problems w/ sporadic success so far.
** Possible investment angle: ** Look for projects that combine approaches of tradFi exchanges & DEX biz models to solve scaling & UX.
2. No real economy integration for on-chain lending
Lending demand for decentralized money markets / banks comes almost solely from speculation. That needs to change if deFi lending wants to attract more liquidity & user base, and actually take mkt shares from tradFi banks.
Collateral requirement & liquidation rules need to adjust and non-crypto collaterals need to be integrated.
Those aren’t easy problems to solve. We haven’t even successfully integrated NFTs into deFi lending, let alone real-world assets.
** Possible investment angle: ** Look for companies that already have distribution, users & track record in real world lending and are mix-matching existing lending products w/ crypto.
3. Unreliable 1:1 mapping w/ underlining assets
NFT tech today is primitive at best. One fundamental issue is 1:1 mapping btw a hash token on-chain & underlining asset it represents is hard to guarantee.
We haven’t even found a way to reliably point a NFT to a jpeg image since the latter is off-chain, let alone to physical assets.
To solve this it may require entire re-thinking of NFT tech stack. But if this issue is solved, it’d open the door to a thousand fold more use cases for NFTs.
**Possible investment angle: ** Look for projects working on scalable solutions to ensure mapping btw asset object & token is unique & stable, i.e. no 2 NFTs pointing to same asset, no asset switching on same token.
4. Weak tooling for NFT storage, display & verification
Primary use case for NFT today is as digital collectibles which is a limited mkt. Many proposed future use cases involve NFT as a verification tool, e.g. to prove identity, to access membership benefits, etc.
But truth is most of those use cases can be fulfilled better today by a web2 database. No NFT needed. For them to become killer applications of NFT, we need:
- a) better integration of NFT w/ other parts of blockchain ecosystem to create synergy (see #5 below), and
- b) user friendly infrastructure & UX for storing, displaying & verifying NFT ownership.
** Possible investment angle: ** Look for projects that work to substantially upgrade NFT UX & integrate NFT into daily consumer experience, e.g. NFT check-in, integration w/ retail PoS systems.
5. Poor integration w/ rest of blockchain economy
There’s surprisingly little interaction btw NFT & deFi worlds to date. E.g. fractionalizing NFT & NFT collaterals were hyped integrations but haven’t gone far.
To create strong moat for a blockchain platform ideally you’d have different parts of ecosystem like DeFi & NFT leveraging each other to grow.
Why hasn’t this happened? Part of it is that NFTs need more robust use cases & bigger mkt caps to become a meaningful asset primitive in DeFi. But to achieve this we need to solve #3 & #4— somewhat of a chicken & egg problem.
** Possible investment angle: ** Until NFT becomes a bigger asset class w/ decent numbers of NFTs having relatively stable value & broad holder base, projects that work on DeFi-NFT synergy likely remain “too early”.
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6. High cost & low performance of public blockchains
The quest for faster & cheaper smart contract platforms was a dominant investment theme for past 2 mkt cycles. This quest won’t end anytime soon given how non-performant blockchains still are despite progress.
In medium term this is a key determinant of whether public blockchains can compete w/ more centralized alternatives (e.g. CBDC networks) as THE infrastructure layer for internet of values.
** Possible investment angle: ** There’ll be more ETH killers & Solana killers entering the fray. You’ll do well identifying medium-term leaders even if they aren’t final winners. E.g. B/f Google there were AOL & Yahoo. Investors did well w/ those at different stages.
7. High friction & poor security of cross-chain operations
Cross-chain bridging/messaging has become a red hot ocean of competition. Bridges are hacked almost weekly & yet are handling bigger & bigger txn volumes.
All are signs of a high-growth sector in an extremely early stage.
“Internet of values” by definition needs smooth connections among different blockchain nations & enclaves. For web3 to scale, robust cross-chain operations is a key ingredient.
** Possible investment angle: ** Similar to L1/L2s, new players keep coming in this sector. But unlike blockchain platforms, there’s no entrenched mkt leader yet & winner unlikely takes all. Bet on medium-term mkt leaders but don’t wed to any protocol.
8. Lack of non-crypto-native projects w/ viable products
Most web3 applications to date build around project tokens, which end up being the product. These have indeed brought new users into web3 via speculation waves. But “adoption” collapses as soon as bear mkt hits.
The more sticky adoption will likely come from leveraging web3 to support growth of other industries, via tools such as blockchain payment rails, utility tokens & NFTs.
Granted these ideas & prototype projects already exist in previous cycles. But crypto awareness in social consciousness may be finally high enough now for some of “web3 + traditional economy” hybrid experiments to see success, which will help drive next wave of crypto adoption.
** Possible investment angle: ** Look for projects that bring web3 biz model & tooling to fast-growing industries in real economy. Some examples of fastest-growing industries in the US:
- direct retail
- drink manufacturing
- online gambling
- personal services
- real estate
Not saying successful web3 projects will necessarily emerge from these. But in general high growth industries provide positive demand conditions for innovations to succeed. Web3 may well be one of those innovations.