An introductionto Web3
Before we look at how to invest in Web3, or “Web 3.0” as it is often called, let’s cover the basics of this exciting new technology.
The Internet has come a long way since its inception in the early 1990s. And its evolution can be broadly divided into three main phases: Web1, Web2, and Web3.
Web1, also known as the “static web,” was the first generation of the Internet. This was characterised by static web pages that were mainly used for sharing information. In the Web1 era, the Internet was primarily a tool for content consumption rather than content creation.
Web2, also known as the “dynamic web,” was/is the second generation of the Internet. In this generation, we have seen the launch and development of social media, online marketplaces, and other interactive web applications that have enabled users to create, share, and consume content. In the Web2 era, the Internet has become a tool for social interaction, commerce, and entertainment, and it has transformed the way businesses and consumers interact and changed our lives as individuals too.
Throughout Web2, we have seen the emergence of “digitalisation” — where analog information or physical assets such as money or content have been converted into digital form. This has made the information/assets accessible, manageable, and shareable through electronic devices and networks.
Web2 has a fundamental flaw, however, and that is that users do not truly own their data or digital assets. With Web2, data and assets are stored on “centralised” servers owned by companies such as Facebook, Amazon, and Google. This means that there is the potential for issues such as data breaches, censorship, and a lack of control over personal information. In addition, many online platforms and services charge high fees for their services, limiting access to those who can afford it. This is where Web3 comes in.
Web3, also known as the “decentralised web,” is the third generation of the Internet. This version of the web is characterised by the use of blockchain technology and other decentralised technologies that create a more open, transparent, and secure economy. Web3 has the potential to revolutionise the global economy by reducing transaction costs, enabling new business models, and increasing efficiency across a range of industries, from finance and healthcare to supply chain management and content creation.
The history of Web3 can be traced back to the creation of Bitcoin, the first decentralised cryptoasset, which was launched in 2009. Bitcoin introduced the concept of a decentralised, trustless, and immutable ledger that could be used for secure and transparent transactions. This led to the development of other blockchain-based platforms and applications, such as Ethereum, which enabled the creation of decentralised applications (dApps) and smart contracts. Today, the Web3 ecosystem includes a wide range of blockchain-based projects and technologies, such as decentralised finance (DeFi) protocols, non-fungible tokens (NFTs), decentralised autonomous organisations (DAOs), and more. These projects are designed to create a more decentralised, transparent, and user-centric web that is free from the control of centralised authorities.
At this stage, it’s difficult to know exactly what Web3 will look like. There still isn’t one single definition that’s accepted worldwide. However, key features will include:
Blockchain
Blockchain is a type of distributed ledger technology (DLT). Blockchain's role in Web3 is fundamental, as it provides the foundation for the decentralised, transparent, and secure nature of this new version of the web.
A “distributed ledger” is a digital database of transactions that is implemented across a network of computers and has no central administrator. Because all of the data in the database is stored across the network and not in one central location, the network is said to be “decentralised.” The advantage of a distributed ledger is that any transaction that takes place on the network is recorded in multiple locations at the same time. This makes it pretty much impossible to forge a transaction on the network. As a result, there is a much higher level of security compared to a “centralised” ledger, where data is stored in only one place.
It’s worth noting that blockchain ledgers are not only useful for recording financial data. Ultimately, the technology can be used to enhance transparency and security across a range of industries by allowing the creation of decentralised applications (dApps). dApps are open-source, autonomous, and operate through smart contracts, which are self-executing codes that run on a blockchain. dApps are being developed for various purposes, including healthcare, entertainment, gaming, social media, and supply chain management. They are designed to provide solutions to existing problems in these industries, such as high transaction fees, slow payment processing, centralisation, and lack of transparency.
For example, imagine a company that sells organic coffee beans. With blockchain, they could create a record of each step in the supply chain, from the farm where the beans were grown to the warehouse where they were stored, and finally, to the store where they were sold. This record would be available to everyone in the supply chain, including consumers, who could use their smartphones to scan a QR code on the product packaging and view the complete history of the coffee beans.
Self-custodial wallets
Users can connect to dApps by using a self-custodial wallet and transacting directly with one another. Self-custodial wallets are a type of digital wallet that allow users to have complete control over their private keys and digital assets. Unlike custodial wallets, which are managed by a third-party service provider, self-custodial wallets enable users to store and manage their digital assets independently, providing a higher level of security and privacy.
Cryptoassets
Cryptoassets, or digital assets, are the backbone of Web3, providing a means of exchange for transactions and interactions within the network. They are used for digital tokenisation, to incentivise participation in decentralised networks, and to align the interests of network participants.
3D graphics
3D graphics also play a crucial role in Web3 as they enable new user experiences and applications. For example, 3D graphics can create immersive virtual and augmented reality environments that allow users to interact with blockchain-based applications in a more intuitive and engaging way. This is particularly important for applications such as gaming, e-commerce, and social media, which can benefit from a more immersive user experience.
Artificial intelligence (AI) and machine learning
Similarly, AI and machine learning can enable new applications and services by analysing large amounts of data on the blockchain and making predictions based on that data. For example, AI can be used to analyse transaction data to detect fraud or predict market trends. Machine learning can also be used to train algorithms to improve the performance of decentralised applications, such as optimising smart contracts for better execution speed and reducing gas costs.
In the next chapters, we will delve deeper into the different components of the Web3 ecosystem and provide practical guidance on how to invest in this exciting and rapidly evolving space.
There are a number of different ways to invest in Web3 and each approach has its advantages and disadvantages. We look at some of the main approaches below.
Cryptoassets are the best-known example of Web3 investments and, as noted in the previous chapter, they are the backbone of Web3 technologies. The use of cryptoassets for tokenisation is a significant development in the investment world, offering new opportunities for both asset owners and investors.
Cryptoasset prices are driven by supply and demand like in the stock market. Higher demand for a particular cryptoasset will push its price up, while excess supply will push its price down. Supply and demand can be impacted by many different factors including economic developments, media coverage, government regulation, and investor sentiment.
As with any investment, it is important to understand the risks and potential rewards before committing capital. Proper due diligence, risk management, and a long-term investment mindset are essential for success in the Web3 ecosystem. When analysing cryptoassets, metrics to consider include:
Market capitalisation — This is calculated by multiplying the price of the cryptoasset by the number of coins in circulation. In general, the higher the market cap, the less risky the asset is.
Trading volume — Generally speaking, the higher the trading volume of a particular cryptoasset, the more liquid the market for that particular coin or token is.
Supply metrics — Maximum supply refers to the maximum number of coins of a cryptoasset that will ever exist. The circulating supply indicates how many are currently either being traded or held in a wallet. This metric can be used to understand the potential scarcity of a coin, which can affect its price in both directions.
Active users — A large and active user base can be an indicator of the strength and adoption of an asset, and may be an important factor in determining its long-term value.
Investors can purchase crypto tokens such as Bitcoin (BTC) or Uniswap (UNI) directly from eToro’s platform and digital collectibles (i.e., Non-Fungible Tokens or “NFTs”) directly from delta by eToro.
Web3-related stocks
Web3-related stocks are stocks of companies that are involved in the development, adoption, and application of Web3 technologies. These companies are typically technology firms that are creating solutions for blockchain, decentralised applications (dApps), trading, and other Web3-related areas. Note, however, that there are no “pure-play” Web3 companies listed on public exchanges.
Investors can purchase Web3-related stocks such as those of Coinbase (COIN) or Block (SQ) directly from eToro’s platform.
Web3-related ETFs
A Web3-related exchange-traded fund (ETF) provides investors with exposure to multiple companies, which helps to reduce risk when investing in stocks.
Investors can purchase Web3-related ETFs such as the ARK Innovation ETF ($ARKK) directly from eToro’s platform.
eToro’s Web3 Smart Portfolios
Smart Portfolios are innovative, long-term investment portfolios, curated by eToro’s analysts. Each with its own unique investment strategy, Smart Portfolios are a convenient and diversified way to access major market trends. eToro’s Web3 Smart Portfolios are specifically designed for those seeking Web3 investments and are based on cutting-edge research and analysis of the market. This means that investors can benefit from a carefully curated portfolio of Web3 themes such as DeFi and Metaverse without having to spend countless hours researching and analysing the market themselves.
Investors can copy eToro’s Web3 Smart Portfolios such as @MetaverseLife and @Scalable-Crypto directly from eToro’s platform.
It’s worth noting that investing in Web3 requires a solid understanding of the underlying technologies and their potential applications. In the following chapters, we will provide investors with all of the information they need to get started. We will highlight some different investment strategies and show how eToro's Smart Portfolios can be used to create a customised investment plan that matches your unique investment profile.
