Decoding & Democratizing Web3

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This research was originally posted on April 24, 2022.

Table of Contents

  1. Executive Summary

    1. tl;dr: Crypto Good, NFT Good, DAO Good, DeFi Good, WEB3 GOOOOD.
  2. What is web3?

    1. Innovation Trifecta

    2. Shift from web1 to web2 to web3

    3. Value creation levers in web3

    4. web3 ecosystem— NFTs, DAO & DeFi

  3. What are NFTs

    1. Economy Growth Phenomenon

    2. NFT categories & use cases

    3. NFT business models— BAYC vs. Crypto Punks

    4. Value creation levers in NFTs

  4. What are DAOs

    1. Value creation levers in DAOs

    2. Centralized Organizations vs. DAOs

    3. Valuing DAOs— Metrics to look for

  5. DeFi or Open Finance

    1. TradFi vs. DeFi

    2. Value creation levers in DeFi

    3. DeFi Value Proposition

  6. Macro trends that are driving the mainstream adoption of web3

  7. Predictions for the coming decade

    1. NFTs will be the catalyst for driving engagement between & within communities

    2. ETH will eventually become the crypto reserve currency

    3. DeFi’s trillion-dollar idea is building on users’ native TradFi expectations from web2 platforms

  8. Final Thoughts

Executive Summary

Centralization comes with trust and security issues. Blockchain, web3 & peer-to-peer interaction are poised to build a transparent view of how the everyday world operates.

Web3 is a business model canvas heavily influenced by Blockchain, Distributed Ledger Technology & Cryptocurrencies advocating true ownership & engagement within platforms.

web3 manifests itself as a need to innovate through new technologies empowered by the movement that people worldwide see a shift in how the internet is viewed and valued for their participation.

Internet was primarily about text, and then we kept seeing a shift in engagement from

Text -—> Photos -—> Visuals

web2 really defined how interactions between communities & peers can be streamlined with ease. With web2, we saw the incumbents structuring their technologies to focus on growth through profits. With web3, the technology & underlying infrastructure is structured to focus on growth through engagement.

My primary theory of why new technologies are built or existing technologies are simplified is driven by the attributes of the Innovation Trifecta—Demand, Infrastructure & Utility (explained in detail below). A trifecta is defined as a series of three grand events. The implications of Innovation Trifecta are seen in the shift from web1 to web2 to web3.

web1 ignored the power of network effects, and with web2, we witnessed information asymmetry, intermediary overhaul, and a relatively centralized & one-sided monetized adaption of web1 business models. The Value Creation Levers in web3 are more about creating a simplified path to user accessibility across platforms, across different protocols. With that said, web3 is at the intersection of identity (NFTs), expression (DAOs) & commerce (DeFi).

History is witness that every developed (& developing) economy initially progressed through

  • Urbanization (of communities), then

  • Globalization (of its products & services), and now the trend is apparent,

  • Tokenization (of tangible & intangible assets and stores of value).

NFTs are the backbone of the digital asset economy. The value creation levers in NFTs are pretty straightforward— Bordering traditional assets, assigning ownerships (through mints, airdrops, bounties), computing usage permissions & defining use cases & utilities in real life.

NFTs have also created two distinct business models:

  • Decentralized Collaboration Model (De-Collab) (Yuga Labs: BAYC) &

  • Centralized Collaboration Model (Larva Labs: previously CryptoPunks).

The idea behind DAO is that one does not need to be a gig worker, part-time employee, or a contracted worker to work for a centralized organization; instead, they could find someone with similar interests and build their own business. It’s about how we, as a community, coordinate at scale.

The value creation lever in a DAO starts with the focus on community building first rather than focusing on product-market fit initially, which then prospers into an effective community engagement platform.

DeFi’s value creation levers are more aligned toward bringing innovations to the traditional value transfer mechanisms while its value proposition continues to identify top priority areas for transformation, such as scalability, security, affordability, decentralization, interoperability & sustainability. What’s next?

Several macro trends point towards the shift in mainstream adoption of the decentralized economy. Digital assets are a $3T market. Facebook, Nike, Adidas, and Nomura Holdings among others, have all announced plans to collaborate & invest in the next phase of community engagement through cryptocurrencies, NFTs, Tokens, and much more.

With this thesis, I predict three outcomes for the coming decade:

  • NFTs will be a catalyst in driving engagement between & within communities that shapes all units of value by being interoperable, programmable, & scalable.

  • ETH will eventually become the crypto reserve currency to provide the economy with what it truly needs— Stability.

  • DeFi’s trillion-dollar idea is building on users’ native TradFi expectations from web2 platforms that include exposure to an extensive list of financial products, higher returns, and financial inclusion.

What is web3?

Web3 is a business model canvas heavily influenced by Blockchain, Distributed Ledger Technology & Cryptocurrencies advocating true ownership & engagement within platforms.

For me, adopting the web3 business model is an important business strategy because it offers a way to use the underutilized assets, services, and especially talents.

In a global and highly integrated economy, providing

  • a reliable exchange of value and

  • a consistent stakeholder value

is challenging.

The rise of digital technologies escalated these challenges as the transactions started to take place in a virtual environment with service providers worldwide.

Web3 manifests itself as a need to innovate through new technologies empowered by the movement that people worldwide see a shift in how the internet is viewed and valued for their participation.

Internet was primarily about text…

We primarily started with the idea that information shared through newspapers can be consumed and utilized faster. This based the primary intention of the Internet: Text. Now, we see phones with cameras and portable internet, and the internet has become a lot more visual and agile. The engagement between the masses accelerated with the invention of mobile phones. So, we see this trend that information has adapted from

Text ——> Photos ——> Visuals

The reason for web3 to exist is to build upon the rectangles and policies set up by the web2 incumbents that somewhat limit the kind of technologies being constructed to enrich between

  • Growth focused on engagement or

  • Growth focused on profit

Technologies are built around people interacting with one another, and that’s how we process the world—through people, through one another.

The future of web3 is to build something fundamentally more interoperable. The fundamental experience of you being embodied in your identity, your digital avatar, your digital engagement, your financials, is based on the natural expectation that all the above can be tokenized seamlessly to be a part of the transparent ecosystem. The intention is to build an internet for and by the users orchestrated by tokens.

We are seeing the displacement of web2…

Throughout our diverse history of innovation, the need to simplify the existing technology has always been driven by three components:

  • Demand

  • Infrastructure, and

  • Utility

These three components build up the Innovation Trifecta, which forms the building blocks for why we invent new technologies.

Innovation Trifecta
Innovation Trifecta

Innovation Trifecta

Trifecta means a series of three grand events. Demand, Infrastructure & Utility create a series of events that act as a catalyst for Innovation.

  • Demand for simplifying a business process or personal activity over time always creates a need to build new technologies in a healthy saturated market.

  • The demand then urges us to build new infrastructure to help develop innovative technologies faster. The infrastructure component consists of three attributes:

    • Technology to build the infrastructure (through feedback inputs)

    • Technology to supply the infrastructure (Supply chain, feedback inputs)

    • Technology to upgrade the infrastructure (through feedback inputs)

  • When a business process or a personal activity is simplified with the help of the new infrastructure, we then test the utility, the total satisfaction of consuming a good or service in our value chain.

    When the service reaches a threshold of maximum utility, the Innovation Trifecta repeats itself.

We see the implications of the Innovation Trifecta on the shift from web1 to web2 to web3.

Web1 was the first generation of the web, also known as the informational web. Users only can read and share information over web pages. Web1 was a one-way communication & engagement platform. HTTP and HTML were the core protocols.

The first iteration of the web was to implement connectivity beyond a community (web1).

The next iteration was implementing the internet beyond email, which gave us Amazon, Google, and Meta (web2).

The next iteration of the web is to increase connectivity beyond engagement and encourage actual ownership.

What went wrong with web1?

Web1 ignored the power of network effects, consisting only of a few writers and a large number of readers, and it causes the network to slow and makes users starve for resources. If more people use a networked service, it becomes more useful for everyone using that network, but web1 ignored this concept by allowing it to be read-only.

It assumed the web as a publishing platform, not a participation platform, where we can read-only information and make no interaction with the web pages. As a result, we misunderstood the web’s dynamics and used software as an application, not a service.

Web1’s utility reached a peak when users wanted active participation in whatever was happening on the web. As a result, the demand for better engagement within the web led to the development of a better infrastructure model, now known as web2.

The idea behind web2

Web2 is known as the read-write-interact web. It is a new way to use existing internet technologies. In web2, the web user can read the content and write, modify, and update it online; it supports collaboration and helps gather collective intelligence rather than web1.

The drawbacks of web1 (a one-way platform) led to several building blocks that comprise web2 today.

  • User-generated content: Concern about letting an individual create and share content through the web with Wikipedia, blogs, vlogs, etc.,

  • User-driven engagement: Re-use and curate information available through active participation

  • Data-driven engagement: Use of user-driven data collected and aggregated to build services on a larger scale

  • Interoperable infrastructure participation: Facilitating information through an interoperable technology for collaborative information exchange (e.g., sending an email from Gmail to yahoo)

  • Network effects: Increasing the system’s usefulness when more and more users join the system (e.g., Facebook, WhatsApp, Snapchat) through efficient information exchange and continuous user feedback.

  • Openness: Facilitating the idea of openness through free use and sharing of data. With increasing connectivity through smartphones, laptops, and smart wearables, we saw that users weren’t aligned with incentives provided to them by the platforms for their continuous engagement. Instead, platforms such as Facebook, Instagram, Reddit, and Airbnb—all collect our data, abuse it to profit from them, and sell it to third-party apps for cross-selling revenue streams.

  • Data Privacy: web2 has a service-oriented architecture. A specialized database backs every significant web2 platform—Google’s web crawl, Yahoo!’s directory, Amazon’s database of products & services, eBay’s database of buyers and sellers, Facebook’s database of users’ likes and dislikes based on advertisement engagement—has led to two questions:

    • who owns the data? and

    • who benefits from using this data?

  • Content Ownership: web2 is an indexing mechanism in that it is known to link information from the questions asked to answer that is ‘needed’. It constantly provides masked information in abundance without actually protecting content ownership, i.e., intellectual property.

  • Information Asymmetry: Hyperlinking is the foundation of the web. web2 works on ‘collective intelligence’ that shifts the task of creating and maintaining from centralized resources and restructuring them, without context, to a dispersed wider community.

  • Centralized Governance: The web is centralized, and a few incumbents control every aspect of how information is constructed, shared, consumed, and incentivized. It now belongs to a few select, enormous organizations. They contain the platforms and algorithms that control what we see.

  • Intermediary Overhaul: Creators get peanuts for their effort, and users are monetized without properly incentivizing them for their engagement; the intermediaries of the Internet take almost everything.

Web2 was supposed to be different regarding how information and digital goods (including money) are exchanged and utilized for the greater good.

Instead, we witnessed information asymmetry, intermediary overhaul, and a relatively centralized & one-sided monetized adoption of web1 business models.

The actual beneficial shift from web2 to web3 will be in

  1. understanding where the actual user attention is,

  2. building a community-driven approach to engage & onboard users, and

  3. referencing the said approach to the existing business models.

Web3 is here, whether we like it or not.

If we assume that the WWW has revolutionized information and web2 revolutionized interactions, web3 has the potential to revolutionize agreements and value exchange. Instead, it changes the data structures in the backend of the Internet, introducing a universal state layer, often by incentivizing network participants with a token.

The type of content has changed as well.

  • The web is no longer just text, but it is more interactive—pictures, likes, shares, messages, chats, and so on.

  • Infrastructure changed from desktop computers to mobile devices to smartwatches.

  • Storage and computing power moved from physical drives to the cloud.

The shift from web1 to web2 to web3 has been primarily driven and consolidated by platforms (web2) and protocols (web3) that built a user-friendly and viable infrastructure to access the web.

In web2, we have two competing models:

  1. open protocols that laid the foundation for an open collective initiative and

  2. centralized close protocols that made accessing and sharing information on the web more accessible

The open protocols, such as RSS, were limited in what they could do. So, if you wanted to set up a website in 2008 and you want it to simulate the functionality of Twitter, you'd have to get like a web hosting provider, buy a domain name, and do many other things.

We have all tried to own and use domain names, and it’s one of the few things on the internet that you can actually own & control—your domain name. So, the open protocol made you use the domain name and the functionality you needed it to do, but it cost a few $$, and in the long term, it gets very technical. Meanwhile, you go to Twitter, Facebook, and Instagram and create an online profile for yourself in more or less three clicks, choose your name, and boom, you’re in. Your friends are there, you don’t have to market your content extensively, mobile phones came along and continuous developments in 2G, 3G, 4G, 5G, it all accelerated the way we share, interact, and consume the internet and best of all, it’s free, or we thought it was.

Our interactions, friends, content, purchases, and travel history all have been used, abused, and monetized to benefit the five-plus companies that own the internet. They own the platform and the economic benefits, and then we get our scraps. We put up content, a podcast, and maybe we get a few playlists from Spotify. Perhaps we've got a few hearts on Twitter and a few retweets, but it's not a lot. The extent to which our engagement in internet platforms for a heart validation on a blue bird app is standardized is extraordinary. The owners of these platforms get far richer than the creators and the podcasters.

The beauty of web3 is that for the first time, data is actually open, that is literally living on the blockchain or in distributed systems, and it’s secured—secured by our own private key; we each have our own safe box.

Now, who owns the platforms underneath? The contributors on the platform and all the people who are now value co-creators, an active role assumed by the users that create value together with the firm.

…developers love this new idea of being open instead of being closed. Open code means each system or application plugs into each other. For example, imagine you’re a kid playing Minecraft or Roblox, and when you grow up, you move on to Fortnite or Pubg of Call of duty. All the money you invested in Minecraft or Roblox over the years is still stuck there, and your personal utility for that particular game might run out. The GTA or Roblox of the future will be where you can cross-sell whatever you own onto different platforms. An excellent example of this is Lego blocks—it connects to every Lego piece that you or your neighbor or someone in Australia owns. It connects to all the other Lego pieces no matter where it is and who owns them, and that's how coding on web3 works.

- Naval Ravikanth

That's how data on web3 works, and that's how even ownership will transfer from one platform to another, all thanks to peer-to-peer networks.

Value creation levers in web3
Value creation levers in web3

Value creation levers in web3

The Value Creation Levers in web3 are more about creating a simplified path to user accessibility across platforms, across different protocols. Web3 is expected to be composable, and it is the next step to simplifying user accessibility.

Imagine if you bought an FC Barcelona jersey, and imagine you were only allowed to wear that jersey in the shop you purchased it or at Camp Nou. Imagine the disappointment of FCB fans when they realize that they wouldn’t be allowed to wear the jersey at Bernabéu stadium. It would just be lame, it would significantly reduce the value of buying it, and if the amount of commerce is less, it will attract fewer people to the fan club or the extended community.

It truly is a revolutionary concept.

  • Platform and users are the data to the open code contributors (Identity);

  • users use their own data (Expression), and further, along the way,

  • the product and/or service built within that platform will eventually be composable because that’s what communities do— share (Commerce).

To make the web3 ecosystem more dynamic and inclusive, we need to dive deeper into the intersection of Expression, Identity & Commerce.

web3 ecosystem
web3 ecosystem

web3 ecosystem

What are NFTs?

Web3 works in the sense that you and I can own a little piece of every platform on the internet that we contribute to or interact with. Blockchain runs on a network of interconnected computers which in itself can be defined as a computer. This computer can build and create smart contracts that will continue to run in a certain way specified by the code. Many have utilized these smart contracts to:

  • create fungible tokens, e.g., BTC, ETH, SOL, etc. that crypto natives can use to store and transact value, and

  • create non-fungible tokens, e.g., NFTs, that represents proof of ownership to physical (real estate, jewelry, art) or digital (media, blogs, art) assets

Non-fungible tokens (NFT) are a form of smart contract that provides proof of ownership of digital assets on a blockchain protocol with unique identification codes (metadata) that help differentiate them from each other.

NFTs’ distinctive attributes make them impossible to be replaced or exchange. For example, the tokens can represent real-world assets such as real estate, digital artwork, online articles, event passes, etc. These tokens are unique, each containing distinguishing information that makes it different from other similar NFTs but easily verifiable on the blockchain.

The NFT gives its holder the exclusive right to resale, physical redemption, digital functions, financial benefits (such as royalty share), or other intangible rights (such as participation in building the roadmap for the NFT project). Recently, several artists, content creators, brands (Nike, Adidas, etc.), and influencers have adopted issuing NFTs to monetize their upcoming campaigns. At the same time, collectors/users/consumers purchase the tokens as proof of ownership, hoping to share the success of the NFT campaigns.

It is important to note that NFTs are leading the tokenization aspect of mass decentralized economy adoption.

History is witness that every developed (& developing) economy initially progressed through

  • Urbanization (of communities), then

  • Globalization (through products & services)

    and, now the trend is apparent,

  • Tokenization (of both tangible & intangible assets and stores of value, i.e, digital assets)

The figure below accurately describes how technology mass adoption works, and subsequently how I view an economy over time progress.

Economy Growth Phenomenon
Economy Growth Phenomenon

Economy Growth Phenomenon

Digital assets have been around for a very long time, and we have been accomplices to further its use case. For example, in Farmville, the agriculture-simulation social network game on Facebook, users bought in-game currencies, such as farm cash or farm coin which they then used for digital sheep, land, seed, water, electricity, and whatnot, and the reason why many users favored the in-app purchases was to show their social currency to their friends about what they own and prove that they are good at it.

NFTs have gained importance because, in recent times, our social clout, equity, or our social currency (online followers, portfolio, blue tick on Instagram & Twitter, etc.) is more important than just our physical appearances.

The next stage of revolutionizing our social equity, that is, verified accounts, follower counts, is through verified visualization.

This is the extremity of the NFT space.

If we’re spending a lot of time in a peer-to-peer network, we’re going to care about our digital identity.

Because of this, all the things that we have been doing are going to be more transparent, collateralized, and obvious.

These NFTs, digital assets, are like fashion; their culture is constantly emerging. So they're always combining with something that one can represent online, and at the same time, they're always going out of style. And just like in the real world, anything that's trending in public can hold value.

Real estate is an actual use case. It could be every single house, every single business; it could be oil, gold. It could be every asset with a community and a culture around it, which can use NFT as a use case. Now, of course, the execution and the actual use case will be very non-linearly distributed.

The vast majority of NFTs will trend towards zero value because users’ will eventually realise NFTs are more than just HYPE, but an accessory to an extensive lists of utilities that they derive actual value from.

NFT Categories & Use Cases
NFT Categories & Use Cases

NFT Categories & Use Cases

What you buy when it comes to an NFT is one question most users are concerned about. Hence, we can expect more utility use cases for NFTs.

For example, some might argue that they are buying a piece of a digital asset representing something sensational on the internet (for example, music, art, exclusive membership to a Paris Hilton metaverse club), or some might own property or exclusive rights to a digital asset (for example, land in the metaverse, royalty share in real estate projects).

However, we can be confident that we are instead investing in a digital asset, and we do not own the copyright or trademark of that said digital asset.

When you buy an NFT, you get the exclusive rights associated with that NFT. You have a certificate of authenticity (on the blockchain) towards a project that identifies you as the rightful owner and is easily verifiable by anyone.

As explained in Table: NFT Categories & Use Cases, the exclusive rights could be anything. Thus, when you buy an NFT, you get access to certain utilities that no other person on the planet can get access to.

For example, a sale of an NFT typically comes with a content license allowing the buyer to make some use of the art or content. Often, such licenses do not allow buyers to make any commercial uses, much less to create derivative works of the underlying art or content.

Key developments in the NFT Space:

  • Michal Jordan's Solana-based fan engagement platform, HEIR, recently launched its first NFTs. 5,005 NFTs were initially minted for 2.3 SOL each or approximately $220. HEIR's 6 Rings NFTs were inspired by Jordan's career and his six NBA championships. While 10,010 NFTs were initially planned, the supply was reduced due to lower-than-expected sales.
All-time NFT Sales Data (CoinMarketCap) as of April 18, 2022
All-time NFT Sales Data (CoinMarketCap) as of April 18, 2022

All-time NFT Sales Data (CoinMarketCap) as of April 18, 2022

Now, why do NFTs hold value? Why is the certificate of authenticity necessary?

One way to think about why digital assets such as NFTs hold value is to think of them as a part of trading cards, or Jordans, they all have their unique value, but many of us can just speculate. In the crypto and the NFT community, they may reason for them to have a theoretical value. They are monetizable, meaning the value for these digital assets may have been derived without any conscious thought or by how much one is willing to pay for those digital assets like art in museums.

Now, let’s take an example of two pioneers in the NFT ecosystem:

  • Bored Ape Yacht Club (BAYC), and

  • CryptoPunks

The answer to why these two NFT projects are so valuable lies in their respective business models

Creative licensing through an NFT has been the go-to case for Yuga Labs generated Bored Ape Yacht Club (BAYC). This business model of Yuga Labs can be described as a Decentralized Collaboration (De-Collab) model. BAYC owners, Yuga Labs, have allowed its users to monetize the ape to make derivative works of BAYC and permit them to monetize the underlying IP.

BAYC holders have used the brand name to sign some fantastic exclusive deals in the past. In November 2021, Universal Music reportedly signed a music deal with Jimmy McNelis, the owner of 4 Bored Ape NFTs, to monetize the band Kingship. The same month, Grammy award-winning producer Timbaland United With BAYC Owners to form artist-owned Ape-In Productions.

The CryptoPunksmonetize had no luxury to monetize their NFTs individually. The CryptoPunk NFTs reportedly have a license prohibiting buyers from making commercial uses. It’s more of a centralized collaboration model. (before they were bought by Yuga Labs)

The difference between the two business models is significant. Why?

A De-Collab model allows a BAYC holder to launch another new creative ecosystem through their new entity using the bored ape. They can sprout new collabs organically from the bottom up. And instead of hiring employees, the BAYC holder can entice passionate NFT enthusiasts to grow the said business.

For example, the prospect of monetizing and making commercial uses of artwork sold with NFTs may be more desired by NFT buyers & hence command higher NFT sales prices. If buyers know they can monetize the NFTs, this will factor in the future income into the price they are willing to pay right now.

Now that's an attractive money-making opportunity— owning well-known brands NFT and monetizing it.

One potential advantage of the BAYC de-collab model: The BAYC model unleashes 10k NFT owners to monetize the Bored Apes. Because of the high price of BAYC NFTs, one might speculate that most owners are successful in their respective fields. And it's true.

@justinbieber (#3001) @mcuban (#1597), @neymarjr (#6633), @serenawilliams (#5797), @eminem (#9055), @GwynethPaltrow (#6141) and many more own the BAYC NFTs.

NFT projects are different from any other revenue-generating business. While we measure the success of any web2 startup/company through user growth metrics but since web3 is decentralized, transparent & open, one of the important metrics here is user retention.

While it’s still early to determine which approach, De-Collab or Centralized Collab, will be successful, recent deals of BAYC holders with Universal Music and Timbaland to create bands for the metaverse show the great potential the Decentralized Collaboration model offers.

The type of business model and ownership rights factor in how NFTs are perceived and valued.

However, the pointer is that with NFTs, the majority of the population will have access to the ownership rights on digital property of all kinds, which provides them with ownership over their data and the data they interact with. This will, in turn, ensure that the community enjoys economic freedom with the engagement they have with connected platforms, and this is what makes it so valuable.

However, one could argue that the value is more abstract. An NFT may represent, for example, the trade-in of a commodity, like a sneaker, or, an NFT might represent the right to be featured in an artist’s next piece. In this case, the pointer is toward the artist’s community, backed by the artist’s reputation.

Value Creation Levers in NFTs
Value Creation Levers in NFTs

Value Creation Levers in NFTs

The value creation levers in NFTs are pretty straightforward, but the complexities in everyday life do make us ask specific questions.

Hence, the underlying pointer can be toward any platforms or services building on top of NFTs along with the following:

  • financial benefits for the owner such as royalties, airdrops, staking, revenue-generating opportunities, and many more.

  • Non-financial returns such as software access or publishing rights, or access to events through tickets to concerts, limited-edition merchandise, or access to an exclusive community-focused event.

Many collect NFTs at speculative value. Many promote NFTs for speculative value.

Speculation is the essence of human existence. Without speculation, there would be no conspiracy theories, value for abstract art, content for media channels, rivalry in politics and much more.

Just like cryptocurrencies and traditional art, the more people who think an asset might have value—even for subjective reasons—the more accurate value it can typically fetch if the argument is still a good one.

How an asset makes someone feel is becoming accepted as an essential factor when determining value.

And it’s often large groups of people where the sentiment becomes increasingly common around a valuation.

To summarise, NFT can have value if :

  • proof of one’s ownership of the NFT enables one to do something that cannot be done without such evidence,

  • NFTs allow holders to monetize the underlying asset and buildFractionalizationom thfractionalizeNFTs can find a balance between a value being transacted with digital assets and the NFTs accurately representing those assets.

  • NFTs can find a balance between a value being transacted with digital assets, and the NFTs accurately represent those assets.

Quantitively, the intrinsic value of NFTs are derived from five factors:

  • Mint Price: The first time an NFT gets a valuation is at its minting

  • Airdrops:

    • Free Airdrops: NFTs are airdropped for free by a platform or project relying on users’ ability to add value to those NFTs by continuous use and sell. Also, airdropped NFTs are randomized, so getting access to a scarce NFT might ultimately depend on the users’ activity/engagement.

    • Paid Airdrops: Popular within the gaming platforms where users pay a fee to get access to newly minted NFTs or even directly airdropped to users’ wallets on a monthly or quarterly basis

  • Fractionalization: To fractionalize an NFT, participants NFT into a pool and receive fungible tokens in return, which can be redeemed for a random NFT in the pool at any time.

  • Floor Price: The lowest listed sale price of an NFT in a collection

  • Median Price: Median sales price of an NFT collection listed from lowest to highest

We’d all be uncertain if we only knew the true intrinsic value of a single NFT but were unable to determine what the actual collection is worth. Hence, valuing the utility of the NFT collection as a whole is essential.

NFTs are seldom sold as proof of admission to enter a DAO, so it might be useful for us to understand DAOs and how we value the utility roadmap of DAOs.

What are Decentralised Autonomous Organisations (DAOs)?

A DAO’s duty is to abide by its specific programmatic set of rules, so in theory, a DAO can be set for any purpose or objective.

A DAO’s architecture may determine

  1. whether it is capable of carrying out a “specific and optimistic task” (For ex: Co-organized DAO), or

  2. something more sophisticated where people or machines interact to achieve a specific purpose (For ex: AMM DAOs such as MakerDAO)

Ultimately, the way a DAO operates depends on its degree of automation, and/or a DAO may act as a platform, where members interact according to a self-enforcing, open-source protocol.

The idea behind DAO is that one does not need to be a gig worker, part-time employee, or a contracted worker to work for a centralized organization, instead, they could find someone with similar interests and build their own business. Why work for someone else when you can work with your friends?

It’s about how we, as a community, coordinate at scale.

The power shifts from the companies to empowered and networked individuals. DAOs are organized to coordinate a set of rules enforced by the DAO constitution. It could be finance in-house projects utilizing risk existing investments, share profits within the community, and much more. The structure itself is key to understanding why a DAO exists because in the long term it provides a mechanism for the community to moderate the content shared and published and provide the future framework for how the community views value creation within the structure.

In the Web3 Ecosystem, we saw NFTs as tokenization of one’s beliefs, one’s identity, one’s loyalty; while DAOs are how the community comes together and expresses their views towards a certain milestone set by the DAO, with a reward that puts the community at the center stage and activities offer a much better value proposition for both investors and regular users alike who wish to utilize the platform to transact over various blockchains.

Value Creation Levers in DAOs
Value Creation Levers in DAOs

Value Creation Levers in DAOs

I believe DAOs are still in their early stages. Many users worldwide are still experimenting with it. Just like with Facebook groups or Subreddits or with a discord server. There’s curiosity and desire out there to experiment with new models of community building tools along with creative value creation & collaboration. The reason for all this experimentation is that not many completely understand the core differences between a centralized organization (business) and a Decentralised Autonomous Organisation (DAOs).

The defining factor for any DAO is the focus on community building first rather than focusing on product-market fit initially.

The utility roadmap of the DAO brings in a unique set of member attributes that can be economically utilized to invest in revenue-generating projects because, at the end of the day, DAOs are benefitting and monetizing the value from that person.

Eventually, Founders need to be able to unburden themselves of responsibilities as others in the community show active participation.

Centralized Organizations vs DAOs
Centralized Organizations vs DAOs

Centralized Organizations vs DAOs

The DAO structure may also drive down labor costs by paying for many services as needed, with less friction than a traditional organization.

One of the main benefits of a DAO is that they are more transparent than traditional companies since all actions and funding in the DAO are viewable by anyone. This significantly reduces the risk of corruption and censorship. Despite blockchain’s promise of decentralization and Web3’s promise of a user-owned internet, with the exception of Bitcoin & Ethereum, only a very limited number of projects or initiatives or products live up to this golden standard.

Tokens, both fungible & non-fungible, are the backbones of the DAO internal economy. Not only do they provide liquidity for future operations but also ensure that all members in the DAO are equally involved because the success of the DAO directly benefits each member.

DAOs are actually the enabler of NFTs.

They issue NFTs for various purposes:

  • proof of admission,

  • access to participate in governance voting,

  • voting on future operations of DAO, and many more.

Hence, the roadmap for a DAO determines whether investing in a DAO through an NFT is worth it. Ultimately, the prospect of creating a DAO is to secure financial returns for its members.

It’s a family business looking to monetize its community, network, and experiences.

The DAO landscape is growing every day now. As mentioned earlier, community building is more about the utility rather than the hype. Another pain point that many DAOs would face is context building & staying on the utility roadmap.

There are three specific attributes I prefer to evaluate a DAO or a community platform:

  1. Community building approach

  2. Community participation approach

  3. Community engagement approach

Hence, it’s important that before any project/ initiative is considered to be built as a DAO, the founding members:

  • Understand the goals & directions the DAO needs to succeed and be collectively managed

    • Metrics to look for:

      • % of active contributors,

      • % of active contributors retained every quarter,

      • community GDP

  • Map the ecosystem of its operational abilities— Users, competitors, market, ethical diversities, etc.

    • Metrics to look for:

      • % of individual income generated,

      • Volume of transactions between DAO and its members,

      • community GDP

  • Provide an opportunity for every member to situate its purpose for the better value economic contribution for sustained viability

    • Metrics to look for:

      • Voting power,

      • Coalition attribute: # of active wallets/Total wallets,

      • Activity on governance forum,

      • community GDP

Over time, with the above-mentioned metrics coming into play, it is essential that the overall control of the DAO is progressively shifted from the founding team to an ecosystem of incentive-aligned contributors & participants— the community.

The idea of a self-governing protocol minimizes the need to spend on financial & social stability

The overall goal is to become a fully accountable community that is directly responsible for the:

  • DAOs long-term operability,

  • roadmap laid out, and

  • the economic viability of its operations.

Building a truly participative & informative community is tremendously important for the founding members of the DAO as it

  • stimulates reputations deserving of delegation and trust;

  • helps to brainstorm ideas that would otherwise remain hidden or abstract and unable to be acted on; and

  • reinforces community bonds that strengthen longevity and resilience.

As mentioned earlier, NFTs and fungible tokens are an essential part of a DAOs internal economy, hence it is necessary to assess the community GDP based on the activity members see through the trade of NFTs and Tokens.

It’s still early to determine the true value but the above-mentioned metrics are a good start. Moreover, it’d be impossible to determine whether an NFT or DAO holds value to a community unless we understand the core components of decentralized commerce (DeFi) that drive volume, activity & engagement in any given community.

DeFi or Open Finance

Decentralized Finance refers to applications on public blockchains aiming to create financial services without centralized intermediaries. It is viewed as a potential long-term, world-altering future where individuals can coordinate economic activities peer-to-peer on a global scale.

With the current geopolitical situation in the EU and past tensions between the US & China, it’s hard to appreciate the importance of access to an uninterrupted financial system for the entire world as the majority of the world population is still unbanked and has lesser and lesser access to the entire plethora of accessible financial products.

TradFi vs DeFi
TradFi vs DeFi

TradFi vs DeFi

TradFi Financial Transaction Process
TradFi Financial Transaction Process

TradFi Financial Transaction Process

DeFi Transaction Process
DeFi Transaction Process

DeFi Transaction Process

The Traditional financial system overlooks some very important aspects of how money is owned and exchanged:

  • First, the concept of Financial Inclusion seeks to give disadvantaged people and small enterprises worldwide better access to the financial system and low-cost financial services

  • Two and a half billion people in the world cannot use banks, open savings accounts, obtain credit cards, borrow or lend money and are therefore separated from the global economy.

  • Ordinary investors can only buy relatively low-end financial products from banks and other financial institutions and can't take part in early-stage investments of technology companies such as Google and Alibaba before they are listed.

  • It is also difficult for many small to medium enterprises to obtain loan support from banks, despite good credit and outstanding performance, because they are not the target customers of traditional banks under the 80/20 rule

  • Last, lack of financial literacy among the majority of the world population is no less than a threat to financial freedom

To combat these problems, cryptocurrencies (a digital asset that stores & exchanges value) along with the decentralized attributes of blockchain work together to build an inclusive financial system around the world.

The DeFi market size in December 2021, as measured by the amount of cryptocurrency locked, decreased by over $85B. Partially, this could have been caused by significant changes in the price of nearly 100 different cryptocurrencies, which may have led to investors pulling out, or China banning the use of cryptocurrencies & mining operations, again. Another factor is the growing gas prices (transaction fees) of Ether, the leading cryptocurrency of use within DeFi.

The volatility observed in the crypto market arises a need for alternative blockchain networks that do not run on Ethereum. Hence, it’s important to understand and simplify the value creations levers to build an alternative.

DeFi’s value creation levers are more aligned toward bringing innovations to the traditional value transfer mechanisms

Value Creation Levers in DeFi
Value Creation Levers in DeFi

Value Creation Levers in DeFi

While its value proposition continues to identify top priority areas for transformation

DeFi Value Proposition
DeFi Value Proposition

DeFi Value Proposition

The main setback for DeFi to actually realize its value proposition is Composability.

Composability (or Interoperability) is an important aspect of DeFi as mentioned in web3 earlier. Any financial infrastructure to ever exist continues to innovate and expand services and act as a stimulus for other platforms to grow and interact. The interoperability of digital assets, both fungible and non-fungible, will significantly contribute to simplifying the DeFi platforms and their use cases.

Core Components of DeFi
Core Components of DeFi

Core Components of DeFi

The two popular categories of DeFi, DEXs and Lending & Borrowing, are the ones more relatable to most users as we’re still seeing the shift from the web2 alternatives of TradFi.

There are still some pain points that still need to be addressed:

  • Decentralized Exchanges allow for owners of crypto assets to rebalance their exposure according to their risk preferences & risk profiles and adjust portfolio allocations, but…

    • Speed & Affordability: DeFi is slow and expensive. It costs dollars to do a trade, and minutes for it to clear. This is fine for some use cases–but many centralized exchanges offer fast, cheap execution of orders. It’s hard to stare at your Metamask wallet waiting for a trade to be confirmed without missing centralized exchanges.

    • Centralization: When you trace all the way through, most DeFi protocols bottom out in a centralized oracle–often in the most crucial step. Sometimes, this is a liquidation price oracle pointing to centralized exchange APIs. Other times it’s a council of token holders. Sometimes it’s the team of the protocol itself.

    • Orderbooks: DeFi doesn’t have orderbooks, by and large, because the ETH network (the dominant network) is too slow and expensive to support them. Matching bids and offers with each other involve a bunch of operations.

  • DeFi loans are completely permissionless and not reliant on trusted relationships but…

    • Overcollateralization required on the current crypto lending protocols prevents the vast majority of borrowers in the world from participating, and

    • Extreme short-term returns for a loan attract unethical players and distort user expectations. Limited usability impedes large-scale adoption.

There are two major trends we see in the mass adoption of DeFi services:

  • Businesses that once relied on paper-based payment methods and in-person transactions have marked tremendous shifts to digital processes during the pandemic. Providing fully secured experiences requires more than simply shielding payment details, however.

  • We have billions of digitally organized individuals on the planet who have learned how to transact life in the virtual world for the last eight months. The world is witnessing a large-scale push toward decentralization, and users are looking for ways to digitize their payments securely.

Following the Innovation Trifecta, these trends are rising up because the demand for extended utility in the new phase of crypto + web3 is built to enhance the prior stages:

  • Phase 1: Bitcoin launched the initial phase of DeFi market adoption by forming the fundamental pillar required for any successful transaction and a well-functioning society: A trusted system where value is stored and exchanged using blockchain.

  • Phase 2: Ethereum, Solana & Cardano contributed to building the second phase of DeFi by building a digital native infrastructure: A system building smart contracts.

  • Phase 3: MakerDAO,, Uniswap, and Polkadot built the actual DeFi infrastructure making it more sophisticated and efficient to use: A system for open & composable monetary system.

The scope and breadth of DeFi are still expanding, and many DeFi applications are still working to find product-market fit. Still, any financial interaction between two parties that requires an intermediary today can be facilitated via a dApp using smart contracts in the future.

curated by Arhat Bhagwatkar
curated by Arhat Bhagwatkar

curated by Arhat Bhagwatkar

Key developments in the DeFi space:

  • London-based startup Argent recently launched a new crypto wallet intended to reduce the costs and environmental impact of interacting with DeFi systems. According to the firm, more than 500,000 people have signed up for a waitlist to use the firm's layer-2 wallets. The original Argent wallet was built directly on Ethereum and launched in 2018, but the firm's new layer 2 wallets will become the default for new users.

  • The PCI Security Standards Council, a global council developed to improve payment data security worldwide recently welcomed Scallop, a regulated DeFi banking app. The council, which includes firms such as American Express, Discover, Visa, and Mastercard, added that Scallop is helping improve payment security globally. Scallop will be joining 800 other organizations in the council, will take part in council meetings, and will share cross-sector experiences

  • Circle, a crypto payments company and stablecoin issuer, recently announced that it will be delaying its DeFi API product. The product, which is being developed to provide companies with easier access to DeFi lending protocols such as Compound, is delayed due to the need for further regulatory guidance on its rollout. In a statement to the Block, the company said that resources are now being dedicated to launching the Circle Yield product and making the USDC stablecoin available on new blockchains.

  • Digital Asset Adoption: Digital assets are now a multi-trillion dollar market with the market value of all tokens peaking at ~$3T in Nov’21. Blockchain tech & blockchain-enabled applications have implications across every industry. We can expect the digital asset ecosystem to develop rapidly and companies to increasingly incorporate blockchain tech into their businesses.

  • The Crypto ecosystem is strong as ever and we’re seeing organic growth in all aspects of crypto applications.

    • NFTs are meant for everyone.

      • Blockchain & NFTs went mainstream in 2021. The Beeple’s first 500 days NFT sale for $69M made headlines as the first steps the art ecosystem took into web3. The physical art space contracted ~30% during the pandemic. NFTs are here to upgrade the proof of authenticity, ownership, provenance & scarcity of any asset in the digital world

      • Gaming NFTs with Axie Infinity & Immutable took off in a massive way as they reached and onboarded millions of users with their play-to-earn model of gaming where the in-game assets, NFTs and token rewards, have actual value, have actual utility.

    • Interoperability with digital assets in web3 spring up a combination of technologies that were never explored extensively in the past. In-game assets have always been limited to their respective games, such as skins in Fortnite & weapons in Counterstrike. Interoperability within wallets that holds assets along with games in the web3 space will spring up new ways to trade & display digital assets.

  • With advances made in DeFi, the web3 applications through digital assets have the potential for significant monetization

    • DeFi’s reach, size, and scale of services put forward the significance of digital assets by building innovative business models and monetization opportunities.

    • Nike has manufactured physical products through so-called “forging events,” where owners of the studio's NFTs can request to have their virtual sneakers made into real ones.

    • In November, the NFL announced that fans could receive complimentary virtual commemorative tickets as a limited-edition NFT. Created in collaboration with Ticketmaster, those fans who attended select games from Thanksgiving up until the end of the 2021 season were eligible for an NFT ticket, which could then be traded or sold.

    • This gives users an opportunity to develop financial products that can be the source of payments (such as deposits or lending) and destination of payments (such as wealth management)

  • Incumbents are betting big on NFTs and Metaverse

    • Facebook rebranded to meta to embrace the open, collaborative nature of web3 and blockchain by betting its entire existence on the growth of metaverse & blockchain applications in NFTs & DeFi. Meta betting big on web3 is a big catalyst for its adoption. With parent company Meta deeply engaged in building its version of the Metaverse, Instagram's involvement was largely expected. It is speculated that users could showcase their NFTs with "collectibles" labels to verify ownership.

    • Adidas Sells ~$22M of NFTs in First Weekend: In Mid-Dec (12/17/21), Adidas minted and sold out its entire 30,000 NFT "Into the Metaverse" collection within seconds. Holders of the NFT will have "exclusive collaborative physical merchandise and ongoing digital utility".

    • Japanese financial services firm Nomura Holdings announced plans to reorganize its Future Innovation Company into a newly established digital company, which will become effective as of April 1, 2022. The Future Innovation Company has historically focused on developing digital services that support Nomura's digital transformation. Nomura hopes that the Digital Company will strengthen collaboration in the digital domain across groups and geographies and will accelerate the uptake of digital technologies that include cryptocurrencies, security tokens, and non-fungible tokens.

    • Innovative business models enabled by the web3 ecosystem are driving mass adoption in the metaverse:

      • Decentralized Collaboration Models: Allows better utility of NFTs and branches of existing NFT brands can be monetized with limited marketing

      • Advertising: better ad targeting capability with more data (with users' permission) and richer forms of advertising. Ex: BAT & BAT tokens

      • Virtual real estate development: NFT based assets on the metaverse have led to increased commerce & scarcity leading to developers building houses, shopping malls, stadiums, and so on in the metaverse. Ex: Sandbox, Upland, Decentraland

      • Workspaces: Meta, Microsoft have already launched virtual AR collaboration apps. The shift is from online to virtual

    • Venture capital investments keep flowing in:

      • Following a record 2021 with $32.4B of VC investment globally into crypto/blockchain startups, 2022 is off to a strong start with $6.5B of VC investment as of March 3. The $6.5B figure already exceeds most of the prior full-year totals and is approaching the full year 2020 total of $6.7B. The largest deals so far in 2022 include infrastructure firm Fireblocks raising $550M at an $8B valuation and FTX and FTX US each raising $400M at a $32B and $8B valuation, respectively.

      • OpenSea Receives $13.3B Valuation: On January 4th, OpenSea announced that it had raised $300M in new venture capital from investment firms Paradigm and Coatue Management, bringing the start-up's valuation to $13.3B just 4 years after its 2017 launch. The funding will be used to add +90 members to double the size of its trust & safety team, invest heavily in product development to more easily

      • Crypto venture capital firm Electric Capital has raised $1B for 2 new VC funds - a $400M venture fund and a $600M token fund. The capital will be invested in various projects including web3 infrastructure, DeFi protocols, and platforms powered by NFTs and DAOs. The average check size for the funds will be between $1M and $20M.

      • Aptos, a firm comprised of a team of individuals with knowledge of the Facebook-initiated Libra stablecoin project is raising $200M at a $2B valuation. According to CoinDesk, individuals with knowledge of the deal said a16z & several other crypto venture firms were involved. While operating under a different name, the team aims to bring the Diem blockchain to life. Aptos plans to launch a new layer 1 blockchain that will have increased reliability, safety, and scalability. The new blockchain will use the same coding language originally developed for diem known as Move

      • Hack VC, a San-Francisco-based venture capital firm has raised $200M. The capital will be used to finance early-stage crypto, blockchain, and web3 startups. Alex Pack and Ed Roman co-led the funding round with participation from Sequoia Capital, Fidelity, a16z's Marc Andreessen, Chris Dixon, and some others. The firm focuses on investments in early-stage startups operating in crypto, open-source, fintech, artificial intelligence, machine learning, and business software sectors.

      • Since the third quarter of 2020, the number of new crypto funds launched worldwide exceeded the number of funds closing down. In 4Q21, 22 new crypto funds were established worldwide, and 11 closed.

Leading investors worldwide ranked by AUM. The list is not exhaustive. Curated by Arhat Bhagwatkar
Leading investors worldwide ranked by AUM. The list is not exhaustive. Curated by Arhat Bhagwatkar

Leading investors worldwide ranked by AUM. The list is not exhaustive. Curated by Arhat Bhagwatkar

  • NFT Participation & Interest Continues to Trend Higher:

    • Over the course of 2021, both emerging and established brands/companies came to see the value of leveraging NFT opportunities. The role that NFTs can play varies across different industries and platforms, but it is becoming clear that offering avenues of ownership and community is a key value to the modern consumer.

    • Defining the winners and losers of digital marketing in the coming decade will come down to how brand owners & service companies utilize the Metaverse & NFTs to connect physical, digital, and experiential offerings. We believe in projects and companies that not only believe in the tech, but also those that are investing to phase it in properly when it comes to ease-of-use, value-add, and digestible cadence. Over the past 23 months of the pandemic, we have witnessed a new emphasis on micro-fandom, and NFTs can be a key to sustaining the interest in nostalgia and emerging properties by maintaining relevance and keeping communities engaged.




  1. In this thesis, the NFTs are explored in three diverse roles:

    1. NFTs as a currency: They are traded for value & utilities

    2. NFTs as an Asset: They provide ownership & utility benefits to holders

    3. NFTs as a catalyst for the virtual economy (Metaverse): They provide a bridge between physical & digital representation of assets

  2. The Market sizing for NFTs would be across three use cases:

    1. Cryptocurrencies

    2. NFTs

    3. Metaverse use cases

  3. L2 scaling solutions will drive enhanced commerce in NFT marketplaces

Case Study

  1. GameStop ($GME): The American video game, consumer electronics, and gaming merchandise retailers are preparing to build something more than a “meme” imprint.

    1. On $GMEs Q3 earnings, they mentioned, “…we have been exploring emerging opportunities in blockchain, NFTs and web3 gaming. With this context in mind, here are a few recent initiatives of note. We continued growing our catalog by adding new products across consumer electronics, PC gaming, and other categories with significant addressable markets.”

    2. They have hinted at building an extended NFT marketplace for creators of all kinds and working on establishing key partnerships in this space

    3. Main Focus: NFTs as a catalyst for Virtual Economy.

  2. Warner Music & Universal Music Group: Many including the incumbents are emerging NFT and metaverse prospects in the music space.

    1. Music NFTs are additional growth vectors beyond the traditional global recorded music business

    2. Main growth vectors are: Virtual concerts, digital merchandise, NFTs

    3. The activity in NFTs is astounding & it’s worth exploring the possibilities to size the market

    4. Ex: 3LAU released a tokenized album & raised $3.6M, Grimes released digital art raising $5.8M, Doja Cat sold a crystal token for $188k

    5. Main focus: NFTs as an Asset

  3. Match Group ($MTCH): The next iteration of communication between communities for personal interactions is more interactive.

    1. In the company’s Q3 investor call, they discussed plans to develop an ecosystem for in-app currency to support a virtual goods & services ecosystem for Tinder.

    2. They believe that exploring the ability for daters to better express themselves with digital goods & services like apparel, AR filters, and exclusive content should enhance the online dating experience

    3. $MTCH recently acquired Hyperconnect in 2021 for ~$1.8B. Hyperconnect released a virtual dating experience “Single Town” that enables users to engage with avatars & communicate in shared virtual locations

    4. Main Focus: NFTs as a Currency


  1. The opportunity in this space for any existing web2 company and emerging web3 startups & projects is to size the market through leveraging physical markets that are comparable to emerging digital assets.

    1. Hence, the collectibles market is the best starting point to project a better view of the NFT use case penetration

    2. Hence, the important metric to note and compare is: User Penetration Rate in existing industries

    3. For example: Music collectibles are a $4B - $5B market, including album purchases, CD sales, etc. NFT collectibles market size is an estimated $11B. If NFTs penetrate 10% of existing music collectibles, it correlates to a $400M-$500M market. NFT trading volume in 2021 was $23B, based on this activity, $400M-$500M seems very achievable for music-related NFTs.

  2. NFT leading the Tokenization revolution:

    1. Various real-world assets like a house, a car, an antique watch, etc. can be tokenized on a blockchain, making it efficient to buy or sell them. Tokenization also reduces the probability of fraud as ownership of these tokenized assets can be easily verified and their past owners traced.

    2. A tokenized real-world asset could be used to secure loans from decentralized lending platforms. It also has the potential to make the lending process involving asset valuation, disbursement, monitoring, foreclosures, etc. more efficient

  3. I expect NFTs to become a key part of DeFi with the tokenization of particular value for illiquid assets. NFT is a web3 business model while the Internet was a web2 business model. Current use cases for NFTs are in digital entertainment including art and music but are increasingly being used as assets in gaming

  4. Digital Assets will eventually go mainstream: The rise in adoption of digital assets by institutions & retailers will continue but

    1. Institutions will be leaning towards considering digital assets for their corporate treasury management (MicroStrategy, Tesla, Block among many others hold BTC on their balance sheet).

    2. Individuals will continue to invest in digitally native assets such as NFTs & cryptocurrencies to take advantage of higher capital appreciation compared to equity, bonds & real estate investments


  1. Over-Supply:

    1. Creating NFTs is not difficult if you know coding and the concept of smart contracts. The booming NFT summer quickly attracted numerous people and groups to create NFTs.

    2. Production of new NFT projects grew rapidly from a few to nearly a hundred per week, which makes supply nearly infinite. A simple project might just require 3–5 people (developer, designer, marketing operator). Quite a profitable business model, so why not?

  2. High Gas fees:

    1. High gas fee hurts demand, particularly in low-tier NFTs. On average, one pays 0.02–0.03 ETH (~$80-$120) for an NFT purchase and the cost could go much higher to 1–2 ETH when minting new collections.

    2. There’s good reason to believe that short-term flippers account for the majority of participants. The presence of flippers in the market is not necessarily bad, as they create liquidity. But when they leave, that liquidity leaves with them.


  1. NFTs will multiply in market cap as new money keeps coming into the ecosystem

  2. L2 adoption will drive enhanced commerce in NFT marketplaces

  3. The utility will overthrow hype around quality projects

  4. The increasing liquidity, efficiency & accessibility of NFTs will drive mass adoption


  1. NFTs will play a strong role going forward in determining which brands and services can connect their physical, digital, and experiential offerings.

  2. Accurate representation of categories of physical assets that can be materialized efficiently in the virtual world will have more transparency and will eventually filter out redundant projects

  3. NFTs will play a major role in creating liquidity & increasing commerce in the virtual economy



  1. I believe ETH is in the process of moving from a nascent & speculative bet to an organized & institutionalized ecosystem with a number of recent developments in the last 5 years (smart contracts, dApps, DeFi & NFT adoptions, L2, etc.) further validating its power & long-term potential.

  2. While Solana and other crypto assets are immature by historical standards, the resiliency and expanding adoption are notable and cannot be dismissed.

  3. A compelling argument is to view ETH as a store of value & the more reach it has within its network, the more value it derives and commands.

  4. A network effect can be defined as a phenomenon whereby a product or service gains additional value as more people use it. In blockchain & crypto, the network with the best tech or user experience is not the winner but it is its ability to connect users within that network & provide a utility that expands the ultimate value to those users.

  5. In this thesis, ETH is not treated as a company, but there is a broader approach to its expansion in the crypto ecosystem as the

    1. network evolves (from PoW to PoS),

    2. mass adoption increases (through L2), and

    3. demand for a store of value increases (applications in NFTs, DeFi & Metaverse).

Case Study

  1. First, I define ETH’s store of value under six characteristics:

    1. Durable: Cannot be destroyed, perished, or fake printed

    2. Portable: Easy to store, transport & trade

    3. Fungible: Interchangeable with other ETH in circulation and cryptocurrencies that are built on ERC-20

    4. Verifiable: Transactions are readily available & verifiable through on-chain recorded data

    5. Free from influence: No single or group of entities or people have undue influence over ETH

    6. Reliable smart contract platform: Reliable automated agreements— ERC-20 (API for fungible tokens), ERC-721(NFT standard), ERC-809 (Rent rival NFTs), ERC-1238 (non-transferable tokens), ERC-223 (prevents accidental contract transfers)

  2. What makes ETH stand apart from BTC, Solana, and Terra among others is the underlying technology. The Ethereum network currently dominates dApp development, hosting almost 3,000 dApps. Ethereum makes dApp development easier by offering a development interface that reduces programming time and helps projects quickly launch.

  3. dApps are built by combining a user interface front-end and smart contract back-end.

    1. Further, dApps can be characterized by:

      1. Open source: The code is public for anyone to look at, copy and audit.

      2. Decentralization: dApps don’t have anyone in charge, so no central authority can stop users from doing what they want on the app.

      3. No downtime: After deploying the smart contract on the blockchain, the network can always serve the needs of clients who want to interact with the smart contract. Furthermore, dApps can also ensure that any malicious actors cannot launch denial-of-service attacks on specific apps. It will continue to function even if parts of the network architecture are non-functional.

      4. No censorship: dApps do not allow control of the data & processes to a single entity.

      5. Complete Privacy: You would find that a major share of decentralized applications does not demand the real identity of users.

      6. Data Integrity: With the power of cryptography, decentralized applications ensure the secure storage of data on relevant blockchain networks.

  4. One of the major use cases

    1. I see tokenization as one of the major foundations of Ethereum. Tokens are used to define smart contracts & are a core element in dApps. But there are two standards that have emerged on Ethereum ‒ ERC-20 & ERC-721.

      1. ERC-20 tokens represent a single asset and are interchangeable,

      2. ERC-721 tokens are indivisible and represent a collection of assets.

    2. In order to interact with the dApps, users need to purchase the dApp’s native token. One purchases an Ethereum-based NFT using the ETH token, for example. Generally speaking, a token represents something specific in a given ecosystem. This could be economic value, a dividend, a stake, a voting right, really anything. It’s important to understand that a token is not limited to one particular role; it can fulfill various different roles in its native ecosystem (ERC-20). These are:

      1. Usage Token: Tokens required to use a service.

      2. Work Token: Tokens that give users the right to contribute work to a DAO and earn in exchange for their work

      3. Security Token: An external, tradable token that represents value in a particular system

  5. Additional infrastructure creates functional utility and a positive feedback loop. The entire ecosystem that connects users to the crypto market has developed dramatically over the past few years.

    1. Exchanges for buying and selling, like Coinbase, are substantially improving the user experience and capabilities; certain retail brokers like Robinhood, eToro, Webull, and others have created the ability to directly buy and sell crypto assets within a more traditional brokerage construct;

    2. Platforms like Square and, most recently, PayPal are improving the payment infrastructure in addition to other services within the market;

    3. Fidelity created Fidelity Digital Assets to offer custody and trade execution, amongst other services that are helping institutionalize the market;

    4. Firms like BlockFi are building out a number of capabilities where crypto intersects with traditional banking

  6. As mentioned on the web3 ecosystem figure, the driving force behind the web3 economy are NFTs, DAOs & DeFi. Ethereum network has been at the forefront of building an extensive infrastructure to support the web3 ecosystem.

    1. NFTs: ETH ERC-721 denominated NFTs have dominated the NFT ecosystem.

      1. Games such as Axie Infinity, Decentraland, Sandbox, with their Play-to-Earn model, allow users to create, build & sell NFTs.

      2. PFP projects such as BAYC, CryptoPunks have dominated the NFT space. BAYC also released $APE which uses the ERC-20 token format.

    2. DAOs: Several DAOs have utilized the ERC-20 tokens such as USDC, and USDT on their platform for a variety of services.

      1. the investment DAO lets users create a crypto-focused investment syndicate using their platform where tranches of investments can be raised in USDC

      2. PartyDAO: Lets people pool their capital together to purchase NFTs as a team

    3. DeFi: Several DeFi verticals including DEXs, Lending, Derivatives, Payments use the ETH smart contract to build their platform.

      1. CurveDAO, DEX that lets us trade & swap cryptocurrency built on ethereum with a TVL of ~$17.7B

      2. AAVE: A fully decentralized, community-governed protocol holds ETH TVL of $8B

      3. dYdX: The most powerful open trading platform for derivatives holds $990M in TVL on the Ethereum chain.

    4. Ethereum dominates the web3 ecosystem and is better suited to be the reserve currency of the crypto ecosystem. With NFTs & DeFi applications soaring across several platforms including Solana, BSC, Avalanche, and the volatility we see in the crypto markets, having a reserve currency would stabilize the ecosystem given ETHs use cases and deeper user penetration.


Ethereum’s success and popularity have created a number of problems for the network.

  1. Gas Prices: With increasing numbers of fungible and non-fungible tokens running on Ethereum, network congestion have driven gas prices/transaction fees to rise materially for Ethereum-based transactions.

  2. Interoperability Issues: Ethereum is energy-intensive and doesn't communicate well with other blockchains. It's a bit like having a cellphone that can only text users on the same network. Something that hasn’t been much of an issue on the Binance Smart Chain.

  3. Scalability: Ultimately Ethereum’s problem has been its limited ability to scale with the increasing popularity of the network. As more dApps use the platform, transactions increase significantly, if there are too many users, it gets more expensive to transact things. L2 solutions solve this problem but we’re still early.


  1. The cryptocurrency market is building on the innovations developed with Ethereum by launching other blockchains that address some of Ethereum’s shortcomings. Ethereum has the first-mover advantage over all other altcoins and smart chain platforms and is recognized as the biggest decentralized marketplace for financial apps, services, and games.

  2. Hence, ‘Ethereum Killers’ as so subtly termed, will only pave way for a more interoperable service between the L1 platforms. It’ll be how USD, EUR, CNY & other currencies transact with each other but USD still is the reserve currency as it is more stable and is used in most transactions worldwide to purchase valuable assets.

  3. With Ethereum’s shift from PoW to PoS, L2 solutions are only expected to get better faster and composable still maintaining the same security measures and decentralization as the ethereum mainnet. Eventually, the shift will drive an immediate improvement in decentralization and security.


  1. Crypto markets have been receiving increased attention alongside unprecedented central bank intervention and record liquidity injected into the financial system across the globe. Against, the uncertainty of inflation & unprecedented war, the demand for alternate perceived stores of value has been rising.

  2. Ethereum dominates the web3 ecosystem. It is only natural that the community adapts to ETH as a reserve cryptocurrency to limit the overall volatility of the crypto ecosystem and find an alternative hedge to the pricey, yet underpriced, Bitcoin.

  3. With many incumbents in diverse industries experimenting with the idea of in-app currency, digital assets (NFTs, fungible tokens)— this is how we interact, relate, and communicate with each other. The next natural progression is to adapt to a native reserve currency in the crypto ecosystem that corresponds to the underlying utility of the decentralized economy and provides the economy with what it truly needs—Stability.



  1. Cryptocurrency has already been speculated as an alternative to fiat currency and DeFi is seen as an alternative to a centralized, traditional financial system.

  2. Central Banks around the world have eased interest rates in the past and recently raised rates but it doesn’t completely justify the inflation we see around us affecting our daily lives. Investors have been looking for alternatives for increased returns and have turned to CeFi and slightly towards DeFi. The shift is apparent.

  3. The Total Value Locked (TVL) in the DeFi ecosystem in December 2020 was $19B and today, as of March 23, 2022, it is $260B. It’s incredibly smaller compared to the $180T of assets (0.14%) under the global banking system. The growth, however, has been significant from a low base, as crypto traders have turned to the crypto markets themselves to get leverage, and DeFi applications offer high yields/returns to attract users, which in turn increases the value of the platform.

  4. Decentralizing banks & banking activities are an excellent approach to positioning itself in an industry with high structural growth potential.

  5. We are seeing a change in how banking activities are perceived by the extended communities and there is a shift in how institutions are established & set up. The trend is going completely digital:

    1. Banks

    2. Crypto Fintechs

    3. DeFi Applications

Case Study

  1. The current centralized scenario existing with the traditional, private & central banks has greater scope to innovate.

  2. Blockchain protocols (L1s & L2) and dApps provide greater access to more-efficient financial services at a fraction of their historical cost. From payments to lending, crypto assets and DeFi applications & protocols have enabled individuals to bypass traditional financial intermediaries and access financial products and services.

  3. DeFi is nothing but an ecosystem of financial applications built on top of a blockchain. Hence, the evolution of DeFi is a gradual shift from:

    Banks -→ Fintechs -→ Crypto Fintechs -→ DeFi Applications.

  4. The key growth drivers for the above-mentioned shift are:

    1. ease of completing transactions;

    2. high speed of transactions;

    3. lower cost of transactions;

    4. flexibility to exchange fiat currency for cryptocurrency and vice versa;

    5. Higher returns; and

    6. Increased exposure to an extensive list of financial products

  5. The apparent shift from banking activities to DeFi applications has untested views:

    1. Exposure to DeFi and altcoins (cryptocurrencies other than BTC) has significant potential to drive value appreciation: The exposure to DeFi could provide extended exposure to the public through mainstream financial activities initially.

    2. High-value appreciation potential by staking in altcoins as an option to bitcoin: After formally considered an “alternative” investible asset, BTC climbed the price trajectory and grabbed the attention of institutional investors. In a few years, bitcoin has skyrocketed, reaching $63,346 on April 16, 2021. I believe altcoins could replicate similar trends in the coming years to create value in the long term for participants who missed out on the BTC rally. Also, altcoins such as ETH, Solana, Cardano, Tezos, and Avalanche among others have stabilized their ecosystem to the market volatility by extending their ecosystem to the widely viewed web3 ecosystem of NFTs, DAOs & DeFi protocols.

    3. DeFi is currently experiencing phenomenal growth & increased investor attention: What the millennials & GenZs now describe the crypto rally to be— to the moon, many investors & users are constantly looking for alternatives to exploring:

      1. insurance solutions;

      2. lending and borrowing activities and;

      3. participation in crypto and synthetic assets via decentralized exchanges and derivatives market operations.

  6. The financial services use cases for crypto and blockchain technology are widespread and include capabilities such as:

    1. staking, yield farming, and peer-to-peer borrowing and lending via DeFi protocols like Aave and Compound

    2. near-instant settlement of transactions & peer-to-peer payments, both within and across borders, with limited to no fees

    3. trading of cryptocurrencies, other assets, and options and derivatives products via both centralized exchanges (e.g., Coinbase, Binance, or FTX) and decentralized exchanges (e.g., Uniswap, SushiSwap, or Synthetix);

    4. staking, yield farming, and peer-to-peer borrowing and lending via DeFi protocols like Aave and Compound;

    5. peer-to-peer insurance via protocols, such as Nexus Mutual; and

    6. the tokenization and fractionalization of real assets to democratize access to investments such as real estate.

  7. Given their decentralized nature, we see crypto and blockchain technology playing a fundamental role in this economic system, which could go well beyond money & transactions and instead mirror what we know of today as the entire internet (and connected applications).

  8. While this concept may seem abstract, and we are still early in crypto’s development, I believe some areas of the crypto economy are not far behind existing systems and technology, and in my opinion, crypto is actually ahead in some areas.

  9. For example,

    1. money movement in the crypto economy can occur at any time for zero to marginal fees with no settlement latency, unlike in the existing financial system, and individual investors are the beneficiaries of lending out their assets through staking yield.

    2. The crypto economy also enables customers to better monetize their time and selves, which we discuss further in this report.

    3. Ultimately, I do not see blockchain technology or crypto disintermediating all functions, and many areas of the economy will still thrive with trusted middlemen, both in the physical and digital economy.

  10. The companies, and more importantly, project communities operating in this space are driven by problem-solving innovations, which in my opinion, have significant potential to further wide-scale adoption.


  1. As DeFi is constantly evolving, and very early as an alternative to the existing financial ecosystem, the full extent of opportunities is certainly difficult to determine.

  2. The landscape may also significantly change and evolve once we have CBDCs as potential underlying assets for the DeFi protocols beyond cryptos. The introduction of CBDCs within the largest economies around the world would set a foundational layer of DeFi protocols and adjust to existing user demands, infrastructure needs, and demand/supply economics to fully encircle the idea of financial inclusion.

  3. With this, the line between the banking sector and the crypto industry will continue to blur, with crypto protocols, companies & startups offering banking products and some banks looking to add the technologies that underlie crypto into their business models.

  4. However, the crypto markets are, at present, highlighting that alternatives do exist, and as decentralization of services continues to push value to the end consumer, I believe adoption and, more broadly, a trend toward greater decentralization will continue.


  1. Many incumbents are hesitant to incorporate digital assets on their platform or dabble with the idea of native cryptocurrencies because cryptocurrencies are digital assets that are TAXED.

    1. Cryptocurrencies are an asset rather than being considered sovereign fiat currencies. This has important tax implications. Crypto incurs capital gains tax on realized gains and income tax when a yield is earned.

    2. The taxation of crypto as assets in this way detracts from their practical use as fully-fledged currencies for transactions and is a headwind to volume growth. This helps maintain fiat currencies as the main medium of exchanges

  2. Every quarter, there’s a new protocol, protocol update, or new dApp, so it is hard to know how different the DeFi landscape could look in a year's time.

  3. A lack of monetary & fiscal policies that acknowledge the viability of cryptocurrencies makes it harder to move forward with the expectation that the underlying blockchain technology will operate without any governmental restrictions or provide governmental support to those who use these services.

  4. The transition from currency to cryptocurrency would require new infrastructure to be developed in order to allow the world to adapt. Hence, targeted spending from each player in the financial ecosystem would need to invest heavily in reliable infrastructure.


  1. DeFi protocols and networks are poised to capture significant value and appreciate, leading to index and basket product prices rising over time. The generation of heightened demand by institutional hedge funds, OTC desks, market makers, and liquidity providers towards DeFi demonstrates this movement’s longevity.

  2. The ethos of Decentralized Finance has far-reaching and revolutionary implications. DeFi is actively innovating to rebuild the current financial infrastructure in a way that is not only faster and more cost-efficient but also fully transparent. This is a future where transaction settlement is not only instant but openly verifiable and one in which counterparty risk is significantly mitigated. This is the future of finance.

  3. Essentially, as the world becomes more digital, I expect it will also become more decentralized, utilizing technology to facilitate more peer-to-peer interaction and disintermediate traditional middlemen in industries like finance, media, and technology that take the value that could hypothetically be shared with the end consumer.

Final Thoughts

As technological innovation transforms our economies, companies, and start-ups all over the world are performing developments. Web3 is designed to facilitate the move from data monarchy to data democracy where individuals will have 100% ownership and control over their data.

The shift has been to realize convenience at scale.

Convenience is not just about being fast - it's about being what the end-user wants across multiple channels and needs.

Early adopters of web3 & its innovative business models seem to be characterized by applications with:

  • very strong individual affinity and

  • community that has created or collaborated on NFTs & DAOs and/or has a thoughtful presence

While it would be counterintuitive to think that decentralization does necessarily encourage innovation, and centralization does not necessarily discourage innovation.

The key is to striking a balance.

Thank you for reading through. I’d really appreciate it if you shared this with your friends who would enjoy reading this.

If you’re a founder building the web3 infrastructure, I’d love to chat with you.

If you’re an investor and looking for pre-seed / pre-series A dealflow in the web3 space, I’d be happy to share my thoroughly researched investment memos of incredible startups building in the space.

I can be contacted on LinkedIn or Twitter.

Thank you for reading through.

Read more:

  1. Digital Assets are worth ~$3T

  2. Why are people building DAOs?

  3. Decentralized Finance: Internet banking beyond borders, Grayscale Research, November 2021

  4. Total Crypto Market Cap

  5. NFT Sales

  6. Dove Metrics

  7. Beginner’s Guide: What Is A Decentralized Application (DApp)?

  8. Could These Altcoins Be Ethereum Killers?

  9. Collectibles Market and NFT Market Size, Statistics, Growth Trend Analysis and Forecast Report, 2021 - 2031

  10. The future of collectibles is digital

  11. NFTs in the Music Business: From Collectibles to Communities

  12. Top 10 NFT marketing initiatives by leading brands in 2021

  13. NFT Collectibles Market Size, Statistics, Growth Trend Analysis, and Forecast Report, 2021 - 2031

  14. NFTs generated over $23 billion in trading volume in 2021 amid craze for digital assets

  15. The Role Of Tokens

  16. How Correlated are the Web 2 and Web 3 Software Markets?

  17. The Investor’s Guide to DAOs

  18. Humans at the Edges — why people are building DAOs today

  19. DAOs, Organization Theory, and Klima’s Decentralized Autonomous Organization

  20. DeFi market size 2017-2022 - Statista

  21. The DeFi wave is approaching

  22. GameStop (GME) Q3 2021 Earnings Call Transcript

  23. Companies Investing in the Metaverse

  24. Startup Upstream Raises $12.5 Million For Its ‘DAO In A Box’ Web3 Tools

  25. Web 3.0 Thesis - Alterna Invest

  26. The Tim Ferriss Show: Chris Dixon and Naval Ravikant — The Wonders of Web3, How to Pick the Right Hill to Climb, Finding the Right Amount of Crypto Regulation, Friends with Benefits, and the Untapped Potential of NFTs

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