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31 May, 2022

What is Web3 and why should investors care about it?

It has been gaining billions of dollars in investment, but is Web3 simply the latest tech buzzword or is it the deconstruction of big tech?

By Ruth Strachan

In today’s digitally agile climate, investors and businesses understand very well the importance of adapting to advanced technologies in order to remain competitive. For industrial sectors, this has meant embracing industry 4.0, which has evolved from iterations of 1.0, 2.0 and 3.0.

Yet industry 4.0 isn’t the only technological evolution; Web 3.0 or Web3 – the third iteration of the World Wide Web – is being hyped on investment blogs, dissected on podcasts, and is gaining billions in investment from both Big Tech and venture capitalists. So, what exactly is Web3 and why should investors be paying attention?

The evolution of the internet

Much like other industries and sectors, the internet is undergoing continuous evolution. Between 1991 and 2004, Web 1.0 was the very beginning of the World Wide Web. It was a collection of static websites, had very few content creators and was a mostly decentralised, neutral space. This was the era of personal blogs, Ask Jeeves and dial-up internet.

Web 2.0 – the present digital era since 2004 – is centralised to closed platforms (a software system that is completely controlled). These platforms are owned by Big Tech companies, notably Amazon, Facebook and Google.

There are multiple content creators, countless adverts, it is easier to live and display your life (at least partially) online, and there are numerous ways to interact both with the internet and with others through the internet. It is the era of tracking users to build profiles, store data and then sell that information for profit.

Web 2.0 has seen the rise of giant corporations capitalising on the online space and perfecting the art of turning user into consumer or product (often unknowingly). So, with Big Tech having such a strong hold on what the internet is and how it operates, could the internet ever evolve outside of Big Tech companies?

Believers in Web3 certainly think so. The term Web3 was created in 2014 by Gavin Wood (a developer of cryptocurrency Ethereum), and similarly to the previous web iterations, it is open to broad interpretation.

What is Web3?

At its core, Web3 is the movement for the internet to become less centralised under Big Tech. In blue-sky thinking terms, Web3 is a space that is built, owned and operated by users who can earn an ownership stake by developing and maintaining the internet.

Web 3 seeks to use blockchain technology to create a more decentralised online space, with the aim being to change the user from product to owner. This is a similar concept to the metaverse, although there are important differences. While Web3 is a decentralised internet, the metaverse is more of a virtual world that could, in theory, sit within that.

Benjamin Dean, director of digital assets at WisdomTree – an investment management firm specialising in exchange-traded products – offers the following definition: “Web3 is one of a few competing visions of what the next phase of internet-connected interactions will look like… In some ways it is a branding exercise for venture capitalists and on the other hand it encapsulates those initial utopian hopes for what all this digital technology can do to people’s lives.”

Who is investing in Web3?

So, if Web3 is both a philosophical view of what the internet should be and a growing tech investment space, who is actually investing and how do you invest in something designed to belong to everyone?

Dean says: “There is a whole subgroup of people out there actually building the technology itself and building new companies and applications on the technology.”

Investors are essentially strategising to ensure their current tech investments are relevant in the next wave of technological change by discovering and investing in pioneers of Web3. Dean says that venture capitalists and Big Tech companies themselves are the biggest investors in Web3 and highlights Facebook’s decision to rebrand to Meta as an indicator of just how seriously Web3 is being taken.

He explains that Big Tech companies such as Facebook are trying to mould the metaverse concept as a means to ensure that “interactions that happen in the future continue to happen on platforms that they can control”. This is at odds with the main concept of Web3, however (the rejection of the Web 2.0 big-tech-owned model), and there is a tricky balance yet to be struck between the involvement of Big Tech in Web3 and the funding streams coming from them during the construction phase.

Unlike Web 2.0, however, Big Tech companies aren’t the only dominating investors. On 25 May 2022, Andreessen Horowitz – a private venture capital firm based in the US – announced a new $4.5bn fund targeting Web3 opportunities, coming on the back of the launch of a $2.2bn crypto fund less than a year prior.

“[Andreessen Horowitz] is going to put that investment to work in the hopes of creating the next generation of businesses built on and using crypto or digital asset rails,” says Dean. “This will be to try and give people back this Web3 vision of autonomy.”

What are these investments paying for when it comes to Web3?

Idealism aside, the Web3 concept has seen mammoth investment funds set up and brought about a rebrand from social media giant Facebook. So, if investments are pouring into the ownerless future of the internet, what exactly is being invested in?

According to Dean, a lot of these investments are in protocol-level development. For example, a blockchain start-up, ConsenSys, raised $450m with backers including Microsoft, Temasek and SoftBank. Large investments such as these indicate a vote of confidence in the future of Web3. Dean says that the investment was essentially “turned into Ether [a cryptocurrency]”.

Alongside this, there is application-level investing – the building of Web3 platforms and apps – which Dean describes as the meshing of video gaming and crypto networks.

“Finally, you have got investment flowing into the peripheral services that are attached to Web3 technologies,” he says. “Even if you have a decentralised application, built on top of an open-source protocol, you still need a strategy to get customers, you still need a business development team, you need a legal team, you need all the other stuff that is associated with just running a start-up company that is growing.”

A lot of the investment is going towards scaling the businesses that are building upon the Web3 concept and technologies, so investment is going into who will operate, maintain and develop these applications.

It is impossible to know at what pace Web3 will continue to develop and what the investments being made by Big Tech and venture capitalists will mean for the future World Wide Web. What is clear is that this evolution is something that Big Tech is taking seriously and that there are many influential (and wealthy) voices who believe in the idealistic concept of an internet that takes the user off the digital ‘for sale’ shelf and into the owner’s chair.

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