Web3 investing:The Early Adopter
The Early Adopter has a higher risk tolerance than the Traditional Investor. If you see yourself as an individual who is always eager to try out new technologies and desires to be at the forefront of innovation, this approach may be suitable for you.
The Early Adopter investments are focused on various layers of Web3, which encompass key themes and concepts such as DeFi and the metaverse, rather than solely on cryptocurrencies. In the following section, we will explain what each of these themes entails, and why early adopters are eagerly embracing them.
Decentralised finance (DeFi) is an emerging financial framework based on secure distributed ledgers. DeFi offers an alternative to today’s “centralised” financial system — which is dominated by banks and other large financial institutions — by eliminating intermediaries and allowing people, merchants, and businesses to conduct financial transactions directly through blockchain technology.
The key elements of DeFi include:
Decentralised applications (DApps) — DApps are software applications that run on distributed peer-to-peer networks rather than being hosted on a centralised server. They are like apps on your smartphone, except that they run on a decentralised network such as Ethereum.
Smart contracts — Smart contracts facilitate payments or transfers without the need for a middleman, which would traditionally be a bank or some other established financial institution.
DeFi has many use cases including:
Decentralised exchanges (DEXs) — Decentralised exchanges allow users to trade cryptoassets without intermediaries such as banks or brokers. This eliminates the need for trusted third parties, which reduces fees and enhances transparency. Notable projects in this category include Uniswap, Curve and Sushiswap.
Lending and borrowing platforms — Lending and borrowing platforms enable users to lend or borrow cryptoassets without intermediaries. Lenders earn interest on their holdings, while borrowers can access capital without having to go through a bank. Notable projects in this category include Aave, Compound, and MakerDAO.
Insurance — Decentralised insurance platforms use smart contracts to automate the underwriting and management of insurance policies, making the process more efficient and transparent. Notable projects in this category include Nexus Mutual and Cover Protocol.
Payment solutions — DeFi payment solutions aim to provide fast, cheap, and secure cross-border payments using cryptocurrencies. These solutions enable users to send and receive payments without intermediaries, which reduces costs and enhances privacy. Notable projects in this category include Ripple, Bitcoin Cash and Litecoin.
Derivatives — Derivatives are financial instruments that derive their value from an underlying asset, such as a cryptoasset, stock, or commodity. DeFi derivatives platforms allow users to trade options, futures, and other derivative contracts in a decentralised and permissionless manner. Notable projects in this category include Perpetual Protocol, and Synthetix.
Regenerative finance — Regenerative finance is a concept in DeFi that aims to promote environmental sustainability and social justice. DeFi projects that fall under this category use blockchain technology to create financial systems that prioritise these values. Notable projects in this category include Gooddollar protocol (powered by eToro).
While Web3 applications are often associated with the financial world, they have many use cases outside of finance. Let’s take a look at some potential applications of the technology:
Data storage - Decentralised storage applications store data on distributed networks that are run by computers scattered across multiple locations. This form of storage protects the integrity, accessibility, and security of the data by spreading the hosting of files across a peer-to-peer network. Notable projects in this category include Filecoin and Storj.
Browsers - Web3 browsers are designed to help users interact with decentralised applications built on blockchain technology. Key features of these browsers include enhanced transparency and security, quicker browsing performance, complete user anonymity and confidentiality, as well as crypto asset/digital wallet integration. Notable projects in this category include Brave (BAT).
Decentralised social networks (DeSo) - DeSos are social networks that operate on independently run servers, rather than on a centralised server owned by a business. The key advantage of decentralised social networks is that they give users more control and autonomy. Instead of having content monitored by a company (such as Facebook), the founder of a decentralised social network can establish what is acceptable for the site. Notable projects in this category include Lens.
Music and video streaming - Decentralised music and video streaming platforms are similar to today’s streaming platforms (YouTube, Spotify, etc.), but have several important advantages including open-source development, transparent terms and conditions, improved search algorithms, privacy-focused approaches, and alternative payment systems for content creators (cryptoassets). Notable projects in this category include Audius and Theta.
Digital Identity - With traditional identity systems, control is centralised. This means that we cannot control our identity-related information and decide who has access to personally identifiable information (PII). This is where decentralised identity systems have an advantage. Built on public blockchains such as Ethereum, decentralised identity systems allow individuals to manage their own identity-related information. Notable projects in this category include ENS.
What are scaling solutions?
For the Web3 applications we have mentioned above to be able to run effectively, “scaling” is paramount. As the number of people using the Ethereum blockchain has increased over time, the network has reached capacity limitations. Transaction speeds have slowed and the costs of using the network have increased. Scaling solutions are, therefore, needed to boost capacity.
How will it play a role in Web3?
The aim of scaling solutions is to increase blockchain transaction speeds and transaction throughput (the number of transactions per second), without sacrificing decentralisation or security (the “Blockchain Trilemma” proposes that greater scalability is possible, but decentralisation or security, or both, will suffer as a result). Once scaled up, blockchain networks should be able to successfully compete with centralised payments networks such as Visa and Mastercard.
While there are many different scaling solutions being researched, tested, and implemented today, the majority of solutions can be classified as either “Layer 1” solutions or “Layer 2” solutions. The former propose modifications to the blockchain (i.e., changing the blockchain structure), while the latter propose mechanisms that process transactions off the main blockchain.
One example of a scaling solution is Solana. It’s a Layer 1 blockchain platform that aims to provide high transaction speeds at a low cost without sacrificing decentralisation. Like Ethereum, Solana can support smart contracts.
Another example of a scaling solution is Polygon, which is a layer 2 scaling solution built on top of Ethereum. It aims to provide fast and cheap transactions, as well as support for decentralised applications.
Given that scaling is crucial for the mass adoption of blockchain technology, we can expect scaling solutions to play a key role in Web3 development.
What is the metaverse?
The metaverse is an interconnected virtual world that combines a number of different technologies, including virtual reality, augmented reality, 5G, remote work, gaming, and electronic payments technologies. It can be thought of as an internet you can enter virtually.
It’s hard to know exactly how the metaverse will evolve, however, we can expect it to have a strong link to the real-world economy. In this virtual world, you will be able to do business, network, build things, travel, shop, and more. In other words, businesses and individuals will be able to participate in the economy in the same way that they do today.
What is the difference between the metaverse and Web3?
The terms “metaverse” and “Web3” are often used interchangeably. However, there are key differences between the two terms. The metaverse is a shared digital reality that enables users to connect with each other, build economies, and interact in real time. In contrast, Web3 is more about decentralised ownership and control, and putting the web in the hands of its users and the community.
What is Staking and How Does It Work?
“Staking” in the crypto world is like putting your money into a savings account that helps support a blockchain network. By holding (staking) a certain amount of a specific cryptoasset in a digital wallet, you can participate in the running and maintaining of that network. Staking is the way many cryptoasset networks verify their transactions, and you can earn rewards for doing it, usually in the form of the same cryptocurrency. The more you stake and the longer you keep it staked, the more rewards you can earn.
Not all cryptoassets offer staking. To be able to stake, you need a cryptoasset that validates transactions with “proof of stake.” Some cryptoassets you can stake include: Ethereum, Cardano and Tezos.
As an Early Adopter, investing in Web3 presents an opportunity to get in on the ground floor of an emerging technology that has the potential to revolutionise the way we interact and transact on the Internet. In recent years, a number of well-known corporations saw the potential and have already embraced Web3 technologies. Let’s take a look at some major developments seen in 2022.
Web3 has also captured the imagination of the investment industry, and venture capital (VC) firms have been making big moves in the space. For example, in 2022, venture capital firms invested around $30 billion in crypto and blockchain start-ups — just shy of the record $31 billion invested in 2021. However, due to weakness in crypto prices caused by economic factors, VC firms saw the value of their investments decrease in 2022.
The Early Adopter has a number of options when it comes to investing in Web3.
One option is to invest in individual digital assets that offer exposure to areas such as DeFi, the metaverse, and scaling. Examples of such assets include Polygon (MATIC), Decentraland (MANA), and Uniswap (UNI).
The second option is to invest in individual Web3-related stocks of companies that implement Web3 strategy in their business model. Examples of such assets include Samsung (SMSN.L), Nike (NKE) and Meta (META).
Another option is to invest in eToro’s Smart Portfolios that provide exposure to the Web3 value chain such as:
