We are convinced that Web3 will transform the basic fabric of the financial system by creating an internet of value. At their core, blockchains bring value online into a digital, open and global financial system.
Web3 technology makes value of any kind fluid and programmable, creating a rich design space for entrepreneurs and developers. Examples today include Bitcoin and other popular crypto assets, but we foresee a future where money, art, securities, illiquid assets, collectibles and much more are represented on the blockchains.
Consequently, developers are building web3-based applications that interact with digital assets. These applications connect people and capital around the world and provide real value to users by providing liquidity, credit and yield with often better terms than the traditional financial system. As such, Web3-based applications have seen significant adoption, and we believe that this flywheel of innovation will perpetuate this trend well into the future. We think this expansion will continue until the point where all financial services -spending, borrowing and investing - are built on top of this technology.
The fundamental web-3 stack is a conceptual model for the Web3 ecosystem. It is referred to as a “stack” because it is composed of various technologies that are built on top of each other.
At the lowest level are distributed ledgers, and smart contract protocols. Examples of these include Bitcoin, and Ethereum. Bitcoin has basic functionality sufficient to maintain the ledger for a simple cryptocurrency while Ethereum, Near protocol, Flow, Optimism and other layer 1 and 2 blockchains have embedded scripting functionality (i.e. can be programmed) that can be used to build smart contracts and therefore, smart-contract based applications.
This layer is the operating system that provides memory (or state), computing power and programmability which are leveraged by components higher up in the stack. Additionally, the operating system is distributed across thousands of computers known as “nodes” to create a permissionless execution environment for users and applications.
The next layer of the fundamental web-3 stack includes primitive financial applications (DeFi) that are built using smart contracts and interact with digital assets. The power of this layer is “composability.” In production, composability means that these simple applications can be combined in different ways to create more and more sophisticated applications.
The term “primitive” is used for this layer because each component is a simple building block that can be combined with others. Primitive financial applications include money-markets, token exchanges, derivative exchanges, insurance and asset management. Specific examples include, LLido finance, Synthetix, Woo network and more. This layer has grown from $4B to $246B in global committed capital since the beginning of 2021.
The next layer of the fundamental stack is the aggregation and abstraction layer. This layer aggregates liquidity, credit and yield from various underlying primitive blockchain applications and provides APIs to embed blockchain functionality in user applications. A popular example of this is 1inch which routes orders to various decentralized exchanges, thereby leveraging their aggregate liquidity.
At the top of the stack sits user applications powered by web-3 technology and primitive DeFi applications. Currently, most development has occurred on lower layers of the fundamental stack, however, there are a number of projects building clean and intuitive user interfaces. Examples include Zengo, Binance and as well as Coinbase.
We agree with many in the web-3 industry that over the next decade, there will be massive growth in the overall adoption of web-3 technology. Currently, there are about 1-2M daily users (sum of avg. daily users of largest blockchains) who interact directly with web-3 based applications. In the next decade it’s possible that this number will increase to 100M-1B (5-15% of global population) based on the following sources of growth:
As you think about investing in web-3 assets (crypto/NFT), you should consider where the value of this technology will accrue.
Using a strict evaluation framework, our goal is to focus our portfolios on assets and clear market leaders that accrue value via transactions fees, as well as those applications that sit on top of blockchains. This framework will apply to our investments across the entire Fundamental Web-3 Stack.
In our portfolio strategies, we soley focus on crypto assets that accrue value from activity across the entire fundamental web-3 stack based on the following criteria:
In the long run, the activity conducted and facilitated by individual protocols will quite likely follow a power law, meaning that a handful of applications and protocols (~2-3 per category, 20 across the entire stack) will have dominant market share (>50%). The reason for this is network effects and economies of scale.
For example, rather than constantly pay to swap between blockchains, we expect that people will use a handful of widely used blockchains and avoid the need to swap back and forth. Additionally, users will want to use the primitive financial applications (e.g. exchanges, money markets) with the most liquidity that offer the best rates.
The goal of our investment team is to deeply understand the web-3 ecosystem and help you focus assets/ web3 protocols and applications (at all levels of the fundamantal stack) that we think can be leaders in each category based on the above framework and our proprietary research.
Given the potential of web-3 technology, we suspect the returns on these category winners will more than sufficiently compensate investors for the risk associated with investing in an emerging technology. The current market capitalization of the cryptocurrency market is $1T and we believe it can grow to $10T-$100T over the next decade. Our goal is to give you serious access to assets with clear leaderships and momentum that will benefit most from that growth.
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