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Folius Ventures: On the eve of from 1 to N, looking forward to the future of Web3.0

Since our launch in December 2020, the cryptoasset space has ushered in another evolution, and it’s enough to spur us to present this latest industry iteration report. web3

The new report will be divided into four major sections:

First, briefly introduce where we are in the current Web3 process from 0 to N;

Second, briefly describe the current development process of decentralized finance;

Third, comment on token fundamentals and governance;

Fourth, make comments on the new Web3 section that is currently sprouting.

As always, we hope this report series will be the first non-technical primer for anyone interested in this field.

As a Web3 network that can minimize the frictional cost of value transfer, its journey in the next 10-15 years has not only just begun, but compared to the Internet process, we are only in 1990-1995. In other words, the zero-to-one moment of Web3 is behind us, and the one-to-N journey has just begun.

We believe that this budding ecology will gradually become more and more multi-chain and multi-layer, and it will not only become more and more related to Bitcoin itself, but will also give birth to a new business sector that is far beyond the current decentralized financial sector.

We believe that the user experience of the Web3 portal will soon cover multiple areas, and together with the upcoming multi-chain and multi-layer ecology, will promote a "many-to-many" decentralized exchange ecology. In terms of lending, the refined functions will be more complete, but the complete system will only be born after the upper-level real economy becomes more mature. The derivatives track is about to usher in explosive growth, while the insurance track should continue to expand towards B2B, automation, and integration with auditing.

We believe that the distribution of tokens, the selection of participants, and the licensing of their own value capture will become more and more complex, and will gradually be linked to the user's own on-chain and off-chain history, background, and contributions. The token itself serves as an option for on-chain applications and company financial data. We believe that its governance will become more and more similar to the equity agreement and governance system familiar to the public, and indicators such as DuPont analysis and LTV/CAC will continue to emerge.

Games, non-standard tokens, and SaaS middleware and tools in the industry are now in a position similar to the development of the decentralized finance sector in 2019. Its birth and germination are of great significance to the entire Web3 industry – and decentralization together with the financial sector,

If you missed your project in this report, it must be my poor coverage, and be sure to contact us and give us some advice! Finally, with the rapid development of the industry, it is impossible to cover it with one person, and the help of outstanding talents in the industry is also very much needed.

Where are we today with Web3?

Web3 is the "full-featured Internet", integrating information flow and value flow

We define Web 3.0: a fully functional Internet with minimal friction, minimal cost, and minimal transmission of information and value streams.

This industry is the Web2 Internet around 1995

While Bitcoin’s development is reaching an “early adoption” stage globally, the Web3 story is just beginning, and it’s in a state similar to the 1990s, going through an “emergence of innovation.”

Web3 to the left, Bitcoin to the right, the two are about to decouple in the future cycle

Web3 is to the left, Bitcoin is to the right, and the two will be decoupled in price and development in the future cycle.

While that hasn't happened yet, we expect the Web3 ecosystem to decouple from Bitcoin price action over the next 36 months, with price action moving closer to that of independent small and mid-cap tech stocks.

For us, Web3 is not a user mind/wallet share story, but an actual usage/popularity/business cycle story. More and more sharp-eyed capital will bypass Bitcoin and directly invest in the Web3 ecosystem. We expect that we will be competing on the same stage as tech hedge funds for the foreseeable future.

It should be noted that when/if the Lightning/DLC/L2 ecosystem takes off, BTC will be re-linked to this track.

Web3's zero-to-one has happened, one-to-many is now, and will face several exponential growth cycles

As the Web3 stack relatively matures in 2020-25, we expect to see the first wave of viable Web3 applications, and as infrastructure improves further in future cycles, unforeseen innovations may emerge.

Past and current cycles have delivered 100 – 10,000x returns for industry leaders. We judge that the Web3 + application + infrastructure story may take off in this upcoming cycle.

The Web3 ecosystem is on the eve of the outbreak, decentralized finance is just an introduction, and the four business sectors are about to take shape

Since the second half of 2020, many decentralized financial elements have exploded in the Web3 ecosystem, and the quality of infrastructure/data/tools has been greatly improved, helping the industry to truly open up practical business applications other than speculation.

One thing in particular about Web3 is that all/most of its applications are directly accessible through self-hosted wallets, and can also access each other and exchange value directly with each other. This composability will be covered soon.

The interface with the end consumer and the real world is happening slowly and gradually accelerating. We think there are currently 5 key verticals.

As the cost of capital in Web3 converges with the real world, the #DeFi stack for term structures, hedging and swaps matures, and physical certificate escrow + recourse grows, this space should produce heavyweights and business.

Games and NFTs will have the best chance to become another major sector of Web3 after #DeFi. The identity of the player will change from a consumer to an ecological participant, and the way the game itself captures value will change from service-based and sales-based income to ecological rent-seeking income such as taxes and tolls.

While the physical/digital divide is still stark, with the rise of Web3, platforms that serve digitally native jobs (like programming) will soon become huge businesses.

Navigating a complex regulatory environment, ensuring fiduciary responsibility and adhering to high standards/investor recourse remain major hurdles that need to be addressed. But empowering those with domain expertise is one of the core capabilities of the Web3 platform.

Need to combine cultural relevance, practicality and presentation for wider adoption. On-chain to off-chain integration is imperative.

Similar market sectors are gradually emerging in the Web3 industry - after the financial sector,

We believe that Web3 will gradually evolve into a business ecosystem other than the financial sector, and the sector of the entire industry will gradually resemble all industries in the S&P 500. These sectors will begin to derive economic value from consumers and businesses alike, resulting in real, sustainable cash flow, ultimately propelling the Web3 industry beyond the existing speculative-led ecosystem.

Finance: 100+ protocols for cross-chain/cross-layer #DeFi stack

Media & Entertainment + Consumer Goods: Games, #NFTs, Social Media Trials.

Tech category: Web3 native SaaS infrastructure and tools.

Commercial services: auditing, governance and token holder relationship services, etc.

Unlimited composability is powerful – within the emerging Web3 ecosystem, users freely interact with any of the following protocols with a single Web3 wallet. As the flywheel continues to spin, the industry will experience exponential growth.

A multi-chain and multi-layer ecology built with DeFi wealth effect is about to be born

Emerging starts with building a native "Wall Street" that will eventually produce native and multi-protocol winners.

As can be seen from the rapid rise of BNB, the subsequent rise of MATIC, and the now booming LUNA, SOL, and DOT, a new ecosystem will be able to gain a lot of talent, liquidity, and attention when a certain gaming guarantee is established high security thresholds, making the cost and possibility of external attacks prohibitive; introducing a clear wealth effect, a clear protocol development roadmap and execution, and ample VC funding.

Reconstructing the local financial street and cleverly using inflation + leverage can quickly guide and build an ecosystem, making it quite influential. And as the initial economic stimulus fades, ensuring continued growth and market share gains hinges on three things: the emergence of real business applications, i.e. innovations outside of finance and the Ethereum ecosystem. ; continuous improvement of "utility" infrastructure; continuous infusion of capital and talent.

One way that competing ecosystems may outperform Ethereum is by figuring out the next big business area outside of #DeFi ahead of Ethereum, thereby bringing in 5-10x more users and capital to your own ecosystem first. We believe that apps ultimately have no loyalty to any ecosystem, and only flow to where wealth and users are concentrated. The development path of the application itself is limited by its internal resources, and if the pace is too slow, it will face the risk of being eliminated. We expect that the relationship between the public chains will still maintain a high degree of collaboration, and the winner of the native application of the local chain will take the lead.

About the next development of the open financial sector

Lending – The segmentation function is about to be completed, but the areas related to the term, fixed interest rate, insufficient mortgage, and strong credit require physical business activities

In the field of loans - the completion of subdivision functions is close at hand, but a more complete interest rate system requires the cooperation of real business activities. Insufficient mortgage loans require more infrastructure, and non-standard asset loans may still be a niche market.

Functional improvements will become de facto standards: In the existing floating rate, variable term loan market, certain incremental features will become industry standard - including but not limited to feedback mechanisms between interest rate and utilization, loanable The division of assets and mortgageable assets, an increasingly clear whitelist process, and integration with cross-chain protocols to enable multi-chain, multi-layer cross-collateralization, and more. In the face of competition, the net interest margin may not shrink quickly – industry participants should still be willing to pay for safety and capital adequacy; and due to the high cost of capital in the industry itself, users are not willing to pay a few points for loan interest rates. must be very sensitive.

Addressing Market Fit Points (PMFs) for term structure, fixed rate and interest rate derivatives is at the heart of physical business activity: we believe that the underlying demand for such products is primarily driven by actual business practices that need to match cash flow and funding needs. Since crypto’s current main business activity is still dominated by speculation, this more complex interest rate play should be a matter of the second half of this cycle. Nonetheless, as real web3 businesses flourish, hosting infrastructure matures, and the industry can fully accommodate on-chain/off-chain financing, as well as directly connect on-chain revenue with off-chain customers and institutions, we expect this vertical industry to grow Become the main battleground behind the cross-loan agreement. The crypto "yield curve" will appear soon.

Under-collateralized/unsecured loans will remain a thorny issue: if there is not enough collateral, the loan is all about repayment ability and recourse - thus needing to be combined with non-speculative cash flows backed by economic activity , a service mechanism that can claim power, and/or a native punishment mechanism on the chain. We think it will take another cycle to really resolve this issue, but it does. We think tokenizing defaulted debt and making it tradeable on the open market would be an interesting temporary solution in the interim.

Non-standard assets as collateral may be best for planning work: For non-standard assets with low liquidity and no continuous price, we now believe that the search costs and knowledge barriers are very high, and may be more suitable for a managed investment model managed by professionals , or somewhere between one-to-one point services for high-value assets. We are looking forward to a solution similar to "peer-to-peer pool" to help funds quickly measure non-standard assets and release funds quickly based on this.

The next capital entry point: We believe that the 3-4% overnight LIBOR-like interest rate in Web3 is very attractive to traditional capital and will push the industry to build infrastructure that makes it easy for the average person to enjoy the opportunity of this interest rate. We believe that the current leaders in the industry will benefit the most from the construction of this technical facility, and will continue to acquire other teams to enrich their services while enjoying industry dividends.

User experience – the battle of Web3 entrance is about to start, optimistic about a full set of integrated solutions

UI/UX field – the battle of Web3 entrance is about to start, optimistic about the all-round integrated silk-smooth solution.

When Web3 applications in multiple application verticals around the world increase from less than 5 million monthly active users to 100 million monthly active users, we believe that the direct-to-user "Web3 portal" will become the next field of intense competition, and expect some companies to use Its overall, smooth, and fully functional product is the winner:

For anyone who has experienced Web3 through Metamask, the magnitude of the value transfer experience of this cross-platform single sign-on should be self-evident. In our opinion, the experience of this Web3 portal should be better. We believe that the optimal solution for the future should have better multi-chain, multi-layer support, better security, choice of custody and multi-signature, better dashboard and display of all assets, and opt-in opt-in mobile terminal + instant messaging function.

Metamask's daily commission income through swap fees. This kind of monetization ability that can only be obtained by occupying user relationships is completely consistent with the traffic thinking in the web 2 world.

We anticipate that players from multiple adjacent verticals will step in and try to combine functionality and provide a more comprehensive user experience. This turnkey experience should include for example escrow-based multi-signature plus hardware wallet + mobile app as 2 additional authentication factors, the ability to sign transactions natively in the browser, with a native dashboard.

Another possible scenario is that existing Web2 companies with a large user base + pre-invested customer acquisition costs will cut into the entry side aggressively. But concerns about regulation should hold them back everywhere.

Decentralized Exchanges and Aggregators - A multi-chain, multi-layer world will bring a temporary "many-to-many" market

Spot Exchange & Aggregator Field – The multi-chain and multi-layer world will bring about a temporary “many-to-many” market structure, which will temporarily benefit the 2C and aggregation layers.

Spot exchanges are currently still in a "less to less" pattern: currently, #1 DEX on a specific chain/layer usually accounts for more than 50% of the total transaction volume and accounts for about 80% of users, and the rest is accounted for by a long list of Aggregators and DEXs share. We think so far Network effects are already being strengthened for two reasons: (a) user habits and general perceptions/expectations of the best price and (b) liquidity stuck in the best risk-adjusted return market. In this world, unless aggregators move up the stack and face customers directly, their ability to charge 2C and liquidity layers remains limited.

However, "many-to-many" fragmentation may soon occur: the increase in dynamic range AMM + OTC / quote request type solutions brings additional trading possibilities for most top-tier assets, also making These liquidity can be directly withdrawn from the capital pool or chain, and directly differentiate the liquidity on the chain.

While somewhat capital inefficient and not suitable for trading at scale, the aggregated liquidity xy=k model AMM is still the most elegant model for long-tail small-cap assets today. However, the rise of NFTs is expanding the market for long-tail, illiquid/book-traded assets. We believe that a P2P + OTC-based exchange that is tightly integrated with social interaction may emerge and challenge DEXs targeting the ERC20 niche.

Multi-chain/multi-layer medium-term future will usher in a large-scale explosion of cross-chain and cross-layer solutions. Assuming that end users are interested in multi-platform assets, the "local largest" market share of a single DEX will become the "one global" market share, and this new paradigm is conducive to the formation of a "many-to-many" pattern. Good for aggregators and client-facing applications.

As shown on the previous page, we expect the Web3 on-ramp battle to heat up with the influx of users. This dynamic will move users further away from the aggregation and liquidity layers below. In addition, we do not think that the Web3 portal will soon appear as a dominant phenomenon, so the market structure should not return to the past "less to less" situation for the time being. Generally speaking, we believe that as the industry expands, end users will become less and less likely to seek liquidity by themselves, and their perception of the underlying protocols should become more and more vague.

Therefore, we believe that it will gradually form in this area, which should be bullish for leading cross-chain aggregators/smart routing protocols, and even more so for leading 2C applications.

Derivatives – long-term growth can be expected, product-side innovation and cross-margin should be a prerequisite for explosive growth

Derivatives field – still needs half a cycle, industry consensus is bullish. Further development consists of 6 important factors. Futures lead options + complex derivatives.

There is a lot of competition and no clear winner: the decentralized futures derivatives market has attracted a lot of investment in the past 6 months, with competing projects on the Ethereum network alone. The volume of transactions in this market is still a small fraction of the DEX spot, but the corresponding proportion of the centralized counterpart market is roughly the same. The project itself has great room for improvement in product user experience + lack of depth hinders less mature retail investors and institutions. Given that this market is just getting started, market share today is meaningless for now, and even more so in the options/structured product market. Even so, the industry consensus is that the industry should enjoy unabated long-term growth in 6-24 months:

Regulatory pressure on centralized exchanges has forced avid leveraged traders to look for alternatives. Infrastructure improvements. Significant improvements to the Web3 onboarding experience. Solid prime brokerage/aggregation layer for increased funding depth, better cross margin trading, and more. Due to the demand derived from the Web3 business, there is a natural supply and demand outside of speculation. This is a hypothetical, but very important - users can participate in interesting products that are not available on centralized exchanges. Just as centralized exchanges cannot satisfy users' play of long-tail ERC20s/NFTs + complex spot mining + cross-collateralization.

In view of the homogeneity of products and the lack of a leading position in the industry, we expect that competing products will provide aggressive subsidies to users, and many self-operated platforms/market makers will also conduct arbitrage through spreads and financing. We believe that the current leading position in this field is usually difficult to achieve and maintain unless 1-2 top projects have a much better user experience than their competitors, and can provide particularly first-class UIUX + cross margin + clean liquidation, while being able to A trading variety that surpasses the existing centralized exchanges is born.

We believe that the options and complex derivatives markets are heavily dependent on the futures market, and the former will not really take off until the futures market develops.

Others – The insurance industry will turn to automation, B2B, and deep integration with the audit side. Asset management development takes time

Other #DeFi verticals - expect insurance to become more curated and automated with consolidated audits. Passive investment strategies are a competitive field, considering that talent goes it alone, and active strategies are still in their very infancy.

Insurance - With audit and insurance workflows merging, expect real experimentation with carefully collected and/or automated insurance.

We are now seeing project attempts in the market that go beyond just direct-to-user, vote-driven. New trends in the industry either through more carefully curated projects, such as Cozy and Sherlock, or more automated claims assessment models, such as Risk Harbor, and OpenZepplin's Forta.

Both of the above directions should be challenged with engineering intensity and timeliness/complexity, but seem to be solvable with a strong team. After all, it is much easier to rely on a team to push or review projects than to try to convince retail investors to buy insurance for 3 days of mining. We believe that putting insurance buying action on the end remains a significant challenge, so embedded costs may be a better solution.

We believe that the smart contract audit business model should be integrated into the insurance business model - whether it is the deployment of proprietary capital by audit firms, or the decentralization of audit work to crowdsourcing on platforms such as Code 423n4.

One of our thoughts is that an adverse state change is just a mirror image of a positive state change, and perhaps an insurance platform can also help teams address incentive/spend issues at the same time.

We believe that the 2C terminal should be able to directly underwrite its users after the capital is abundant and the realization ability is reflected. For example, Metamask can rely on its monetization revenue to underwrite high-end users who use plugins.

Asset Management – Passive strategies in platforms vs. individual combat, as Web3 grows, active strategies will emerge.

We generally believe that algorithmic strategy is a platform/incentive design game, and protocols will be well-positioned to incentivize/attract talent if they have assets and touchpoints of sufficient scale to enter B2C channels, as well as excellent business development/API documentation Make strategic deployments – the same principle applies in borrow/loan and market making areas. For example, we think YFI is well-positioned to underwrite the Uni v3 AMM strategy.

That is, the opposite argument is that any good programmer is willing to go it alone and can easily raise/issue tokens with a sizable market cap and provide enough liquidity mining incentives.

The breadth and depth of Web3 scaling often favors those with domain expertise, thereby facilitating asset selection and commissioning cases that support underlying infrastructure growth. Still a difficult problem to solve.

The current open financial sector attracts some of our directions

Beyond peer-to-peer bazaar models and xy=k models may require some special solutions.

But in all fairness, the current cross-chain/cross-layer solution is in its infancy and has significant smart contract risks.

Two immediate use cases are angel investment clubs and VC-DAOs and credit SPVs for direct lending.

A holistic attempt to merge auditing and insurance, and extend the scope of services to SaaS tools and always-on monitoring services.

Take advantage of the above 2 points to actively enter DAOs in insurance underwriting, term loans, unsecured loans and non-standard asset loans.

Prime brokerage protocol that enables clean cross-margining, paving the way for complex derivatives.

Liquidity protocol that can pull liquidity from CEX to DEX/derivatives and vice versa.

Best-in-class 2C solution; it's more infrastructure/tools.

Financialization of MEV.

A Family View on Token Economics and Governance

Token issuance is a new paradigm similar to the SaaS growth model of 2000. Distribution, user acquisition, and value capture will improve day by day

Similar to how the SaaS investment framework has gradually gained wider acceptance, the token distribution and profit sharing model is in the early stages of iteration.

For internet core utilities, declining capital costs over the past 20 years have resulted in lower and lower lease costs for companies.

Looking back 15-20 years ago, the best way to expand a SaaS company has been written: snatch customers and Upsell with low customer churn, continue to upsell at all costs, invest heavily in R&D, And incentives such as 2-3% equity per year are applied to talents to ensure that enterprise software will always be the industry leader. This kind of thinking logic of break-even/loss operation was definitely not the common sense understood by "value investors" at that time.

Today, the above profit and loss curve and business logic have become common sense, and the SaaS investment market has become quite effective.

We believe that token inflation paid for usage and liquidity is just another form of user acquisition cost, but instead of paying "salespeople" in cash and company stock, it's paying customers in protocol tokens / Stakeholders.

For the token design that can bring long-term advantages to the project party, we believe that the following points may be required:

Minimize free food: Token recipients should need to continue to "contribute" to enjoy the value capture of the token. A user's contribution to the project party in different periods is not the same, and it is easy to mismatch the amount of tokens it holds. There is currently no solution to this issue.

Encourage long-term interests: Loyalty to the project should give users some form of perks/benefits.

Limited and well-defined coin owner requirements: this is debatable, but we generally agree that most coin holders are busy, lazy, and apathetic, and unless they get some very clear guidance and limited options, send It is not necessarily practical to expect them to work as a whole.

Both new and old believers should be rewarded: if the early inflation rewards are too aggressive, new entrants may often feel "out of the loop".

We still believe that a well-designed Coin Dong mechanism will have unparalleled power. Compared to just enjoying free or cheap services, it is significantly easier for participants to make profits as the company grows to bring explosive viral growth to the project.

Compared to the simple distribution model of DeFi in the summer of 2020, we expect the token inflation reward mechanism to be issued to protocol participants to become smarter. This change may be more beneficial to the general public.

Fundamental analysis of the token itself similar to DuPont analysis and LTV/CAC will soon become the norm in the industry

The basic framework for the valuation of token projects - the "Dupont Formula" that proposes valuation

We believe that token value assessment should have a rigorous basic framework. Special thanks to the token terminal_ team for working with us to iterate on ideas:

Token valuation similar to "DuPont equation":

This equation allows the general public to compare and dissect a protocol's business model across protocols: companies in the same vertical may optimize for different metrics, whether the business model can lead to meaningful improvements in some metrics, and how , and track these indicators for a long time, and identify weaknesses + realistically predict the possible impact of catalytic events.

Needless to say, the ethics of the protocol team is extremely important in this type of related metrics - otherwise no metric can ultimately translate into a return for the token holder.

Note that if the protocol has no rake on the token and is committed to long-term value building, this is not a bad thing for the token holder, but then the protocol's funding needs to be tracked to ensure good capital allocation.

The basic framework for the valuation of token projects - the "lifetime value of users / customer acquisition cost ratio (LTV/CAC Ratio)" for the valuation

We believe that token value assessment should have a rigorous basic framework. Special thanks to the token terminal_ team for working with us to iterate on ideas:

Calculation of token distribution efficiency similar to "LTV/CAC ratio":

Obviously, LTV/CAC is not directly comparable to the ratios we create here - inflation isn't entirely used for customer acquisition costs, and neither annual recurring revenue nor churn rates are precisely defined here, and current protocols typically are pro-cyclical and capital-light, so there may be significant timing and cycle mismatches.

Nonetheless, at its core, this metric is better suited to answer the question: "For every dollar of inflation issued by the current protocol, how much dollar of enterprise value does it really deliver, assuming the valuation of a particular KPI remains the same?"

A project with low to negative inflation but delivering meaningful KPI growth will have a very high ratio indicating that its product power engine is more or less healthy, organic, and has a chance of being sustainable.

One of the challenges in designing this indicator is obviously that the periodic token inflation data is mostly not programmed and can require a lot of manual work.

LTV/CAC Indicator Case – Assuming the valuation remains the same, when the KPI growth rate exceeds the inflation rate of the circulating token, it means that the token should appreciate in value

The above figure shows a framework for token valuation: if the key KPI growth exceeds the inflation growth of the tokens in circulation, all other things being equal, the token price should appreciate under the premise of keeping the valuation constant. A KPI can be anything relevant, such as transaction volume, protocol revenue, etc.

Depending on the time period, the weekly/month/3 month/6 month/annual inflation rate may be more helpful.

Predictions of future KPI growth may be more useful than historical KPI growth rates. After all, the market's expectations for certain catalysts and favorable conditions will make market prices reflect more quickly.

The framework fails to account for cyclical and business model customer stickiness.

The valuation metric of market capitalization / key performance should change with the bull-bear cycle and the team's own proof of its strength.

Token Rights and Governance Boundaries Need Iterations for Accountability and Business Development Efficiency

We will generally not guarantee network security Tokens are considered options for the financial entry of the project. These tokens are an extension of the typical equity agreements that have been around since the 1600s, and today are mostly gentlemen's agreements between token holders and the agreement on governance rights and other matters.

Given that this set of guidelines is still in its infancy, and the uncertainty surrounding the regulatory structure, the problems with tokens are clear:

Relaxed founder obligations: Founders and token holders are not necessarily contractually binding, so today token holders mainly rely on equity holders' recourse and replay-based punishment mechanisms. We believe that the number one key to token speculation is the ethics of the founding team, and nothing else.

Loose governance practices: Similar to the previous point, the founding team is not bound by any recourse action, just updates according to the implementation/push protocol.

Conflicts are likely to arise when the interests of the majority of token holders conflict with the interests of the team/stakeholders.

Blurred and confusing boundaries of "rights": Token holders technically appear to have governance over all "significant" decisions of the protocol, control over the protocol's treasury, and whether or not value is captured. In practice, this boundary is often not held accountable by the token community.

Tokens vs. Equity: Typically, equity holders own a significant portion of the market value of the tokens in circulation through token call warrants. While token holders and shareholders usually have the same interests, when token holders directly affect the equity value through their decisions, we are very curious as to where the team will go.

For the reasons above and many others, governance participation in general is low, leading to poor delivery of some projects, a complete lack of oversight on some projects, and a general inability to hold the protocol management team accountable. That said, we are optimistic that best practices will emerge in the next 12-24 months.

Better governance should result in a premium valuation for the project, all else being equal. Specific governance may involve KPI-based rewards, clear delegation of responsibilities, and delineation of stake/token power boundaries.

While we don't consider ourselves to be insightful on this subject, there are some shallow insights on token governance. Other things being equal, we strongly believe that protocols with excellent corporate governance should command a valuation premium that drives the industry in the direction of best practice.

Token inflation is expected to be co-planned with expected potential growth and increasingly distributed to more aligned participants to manage market cap and market expectations.

Continued, uncapped inflationary rewards for contributors are expected to become the norm.

Incentive mechanisms will increasingly adopt a stock-like restricted stock/equity incentive model, tied to quantifiable KPIs.

We generally believe that the modern delegated representation model works well and will be adopted more and more, and that "best practice" playbooks will emerge, as will some form of "token holder agreement" that persists permanently on-chain Appear.

We generally believe that the shareholder rights of founding team entities should be clearly limited. One design is to limit the value capture of equity to X% of the protocol's revenue, and to only withdraw funds from the protocol's treasury on a "top-up" basis. The remainder of the protocol revenue goes to the project treasury and can be distributed entirely at the discretion of executives/boards/token holders.

About the birth and development of Web3's new business sector

User portraits will be self-contained, creating a further step for differentiated services and communities

User Profiles and Decentralized IDs – The abundance of on-chain and off-chain data enables user profiles to form their own, further creating differentiated services and communities.

By quickly identifying user profiles and clean on-chain + off-chain datasets, projects should be able to provide differentiated services to their users.

Examples: credit scores, user track records of users as traders/investors, etc.

Unlike Dune/Nansen, the management and cleaning of user on-chain data is a slightly different vertical area, where high-fidelity filters, new pulls and whitelists are very useful for on-chain data to be used for user analysis and service differentiation Necessary.

Example: NFT/achievement system as a service, user portrait construction.

We are well aware that as long as the user is willing to disclose, multi-chain and multi-layer + off-chain data can be used to create an overall user background identity to maximize his/her privileges in the Web3 world.

For this problem, a cross-platform toolkit + decentralized storage protocol like Spruce can solve this problem very well.

In addition, Kyve on Arweave is also working on reading fidelity data.

Assuming we can continue to retain state-based data richness, the gradually mature application ecosystem will be able to take full advantage of the emerging user portrait + decentralized ID vertical ecosystem.

The encapsulated and filtered on-chain + off-chain history is used as an on-chain NFT for the "achievement system" that can be quickly queried/accessed.

Differentiated protocol treatment based on on-chain + off-chain history + conditional access.

Use data analysis to help the protocol serve customers with low or no collateral + and can transplant user portraits across chains and layers.

Software-as-a-Service middleware and tools will rapidly mature with the development of decentralized communities

Software-as-a-Service middleware and tools - Web 3 will facilitate the explosion of decentralized organizations, leading to the birth of SaaS tools and middleware projects of a certain scale.

As sovereign entities come together to digitally collectively manage resources across all segments of Web3, we expect a complete industry chain of SaaS tools will emerge to serve these increasingly large and numerous decentralized organizations. While the market size and profit pool targeted by these tools may still be too small for the foreseeable future, the industry should see some self-sustaining SaaS businesses emerge in the next 36-60 months. Our optimism stems from the following fundamental beliefs:

The value network will minimize the marginal cost of capital cooperation, and because capital can now flow seamlessly around for returns, expertise in the individual domain can gain significant leverage compared to Web2,

Due to the composability and native nature of the value transfer, the cost of signing up to use the SaaS service will be trivial.

Combining these factors is conducive to the explosion of the number of customer groups and the final commercial realization of these customers.

For example, PleasrDao, a unique investment collective founded in March 2021 by DeFi leaders, early NFT collectors and digital artists, aims to obtain culturally significant works from various sources and is committed to philanthropy. This organization will benefit greatly in managing treasuries, partners, investments, and memberships after a series of tools have been created.

Games will be the first segment of the Web3 ecosystem to be born similar to the real economy, and it will also be the most exciting track in the industry.

Game players become production participants who own asset ownership and bear profits and losses. The game business model will be more inclined to seek rents in a government-like manner within the game economy, and the game economy itself will have a boom/bust cycle.

We think gaming may be the first sector with the greatest chance to provide real economic activity in the Web3 space. For online games with the characteristics of Web 3 value network, players now have the digital property rights of the native economy in the game to directly and legally participate in value exchange, and the human rights to cash economic value directly from the game. The powers that these two blockchains give players have profound implications for the entire gaming industry:

Game business model may be more "government-like" rather than "service-like": While the sale of in-game items is still a potential major source of revenue, we expect game companies themselves to diversify their revenue streams, such as "shareholding" A key part of in-game utility and taxing the in-game economy and more. Game companies themselves will play the role of central bank, central government, and sovereign wealth fund, regulating the functions of the economy, providing support during recessions, addressing the gap between the rich and the poor, etc., and adjusting tax rates/taxes to drive/slow economic growth.

Game players have changed from "consumers" to "production participants": the establishment of property rights and the actual participants in the in-game economy will allow the extraction of economic value from the game, and the return on investment is the guide for pure gold players. ratio becomes higher. This wealth transfer effect on emerging markets is similar to the global division of labor brought about by the globalization of the real economy in the past – namely, the pattern of consumption in the United States and production in China and Southeast Asia.

This dynamic reinforces a "government-like" business model - how to impose reasonable initial capital expenditure requirements, incentivize activities with high multiplier returns, and smart taxation of value extraction will be key points in the design of the game's economic mechanism.

Introducing a clear "boom/bust" cycle in the gaming industry: composability with the Web3 ecosystem means: #DeFi liquidity will lead directly into the high ROI areas of gaming and provide Leverage. At the same time, the design of the game property means that players will have a clear incentive to help the game pull new, in order to promote economic growth. The combination of the two could easily create an extraordinary boom, or it could then lead to an in-game economic bust as organic user growth slows and value extraction exceeds value inflow.

The relatively independent economic system in the game helps it develop its own decentralized finance and NFT system instead of relying on external agreements.

As the integration of different data standards, non-standard tokens will evolve far beyond the single category of artwork

Non-Standard Tokens – As a free encapsulation of non-standardized data, NFTs carry meaning far beyond the scope of art, and should be able to bring a new paradigm shift to Web3 within 1 cycle like ICO finally turned into #DeFi.

Similar to how ICOs are driving DeFi, we think the current wave of NFTs represents the prelude to a bigger story:

A deeper and richer exploration of metadata.- Make metadata point to robust and permanent decentralized storage and retrieval items, and infinite composability with emerging digital native applications and the #DeFi space.

As a free encapsulation of non-standardized data, an NFT is inherently very broad in its design: it can of course be a verified digital work of art, but it can also represent complex financial instruments, memberships, access rights and/or a badges for some history, track records, actions performed, or anything in general. We generally expect the following to happen within the next 6-12 months:

The financialization of NFTs is now a reality: Given the infinite composability of #DeFi protocols, segmentation of illiquid NFTs, valuation-based lending, P2P exchanges beyond the bazaar model, etc. will happen in this cycle. We believe the intersection of NFTs and #DeFi is one of the most exciting next steps in #DeFi 2.0.

1 NFT, multiple rights on multiple protocols/layers/chains: While some value of an NFT is intrinsic, we believe that a lot of extrinsic value can also be attached to the same token, whether through privileged access, cross-border The benefits of the agreement are also business development and cash flow payments through #DeFi. At the same time, we think NFTs will find a very clean way to finally be presented in public/community/to Web3 users.

The physical/digital boundaries will start to blur: Unisocks, Sake, etc. are great attempts, but we are more excited about a metaverse combined with real life, ie: in real life you can scan various QR codes to Grants permission to access/exchange items to prove NFT/token ownership. This may be a niche market at first, but we believe that the B2C layer and user base may eventually reach a critical mass of experimentation

We generally feel that a16z does an excellent job summarizing what is happening in the field today, so recommend it to interested readers.

At present, these four new sectors attract some of our directions

A user profile service that can integrate cross-chain, cross-layer and off-chain data.

Recruitment platform, expert network, and product collaboration platform, especially for engineers, and can clearly identify on-chain/off-chain user portraits.

A full stack SaaS product offering best-in-class DAO management tools, software covering token holder relations, governance, treasury management and stakeholder management.

PVP-centric RTS game with a well-designed, flexible and user-defined in-game economy. The key economic components can be combined with the existing #DeFi ecosystem.

A Steam + Shopify + Plaid hybrid that brings games on-chain, provides the necessary services for their monetization, and connects them to various existing on-chain ecosystems.

Betting, esports betting and sports betting platforms directly involved in #DeFi financialization and #NFT packaged components.

Music copyright financialization platform. Need to integrate real-life royalty sources and convert bank wires/ACH to digital fiat currencies like USDC, and the ability to ride the waves in the legal quagmire of non-standard music rights.

Centralized hosting in real life and trying to bridge the physical/digital divide.
Know more about NFT.

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