Silent Engines: Capturing Web3’s value

Crypto

While Bitcoin still dominates with 60 percent year-to-date gains, lesser-known projects are silently forging the foundation of Web3. These projects are driven by the ambition to decentralise the internet and empower users, although they have yet to record the performance that matches their transformative potential.

The recent market slump and a decline of over 70 percent in crypto-based venture capital backing this past year, continues to stress the market’s reliance on narratives and the waning confidence in crypto sectors beyond Bitcoin. Even Ethereum, despite major technological breakthroughs that positioned it as an institutional-grade asset, struggles to match Bitcoin’s market momentum.

Contrary to appearances, though, the crypto landscape is far from stagnant. Beneath the headlines, a stream of projects is shaping the emerging realm of Web3, and their impact, if successful, could be substantial.

The question is, why do they remain overshadowed in the broader crypto dialogue?

Web3 – An emerging economic paradigm

Under this often-misinterpreted umbrella term, Web3 represents a fundamental shift in the crypto and digital economy. It is composed of various subsectors, including decentralised finance (DeFi), privacy and identity, data sharing and storage, to social media networks and artificial intelligence (AI), to name a few.

But in short, Web3 refers to a shift towards a decentralised, user-centric internet with a core emphasis on interoperability, cross-chain communication, security and user empowerment – using blockchain, machine learning and token-based economics at its core.

To appreciate the relevance of Web3 service providers, we can simply address the myriad challenges in the crypto sector. For instance, vulnerabilities in cross-chain bridges introduce transaction risks across different blockchains and applications. Between 2020 and 2022, bridge exploits allowed hackers to steal over USD 2.5 billion, accounting for nearly 70 percent of all funds stolen from crypto users last year. Additional challenges include scalability and efficiency, user experience, regulation and sustainable token models. However, these issues are gradually showing signs of improvement.

Today, there are hundreds of solutions each addressing a key challenge in their respective subsectors.

Infrastructure providers, like Cosmos, Internet Computer and Polkadot, aim to promote seamless interoperability between different blockchains, and empower developers and businesses to build applications using these networks efficiently. Oracle solutions, like The Graph, Chainlink and Band Protocol, aim to bridge the gap between on-chain and off-chain data needs. Decentralised social media and identity systems, like Mask Network and Ontology, promise to empower users, enabling them to regain control over their data and privacy, while decentralised marketplaces and autonomous organisations (DAO) like SingularityNET aim to provide unrestricted access to algorithms and voting transparency. Name service networks, like the newly launched SpaceID and Ethereum Name Service (ESN) aim to simplify the long string of random characters in blockchain addresses. Meanwhile, other solutions are also converging with emerging trends like Virtual and Augmented Reality (AR/VR) and Artificial Intelligence and Machine Learning (AI/ML) – and this list is by no means exhaustive.

Innovation vs. Valuation

For assets like Bitcoin, its “first mover” advantage cannot be ignored. A recent PwC report on crypto hedge funds, found that almost 90 percent of funds invest in crypto as a store of value (Bitcoin), while almost 80 percent in Layer 1 (L1) infrastructure providers (like Ethereum and Solana). However, only 40 percent invest in oracles (like Chainlink), around 30 percent in data storage providers (like Filecoin) and around 20 percent in privacy and security solutions.

The emphasis on larger assets can overshadow the advancements of Web3 initiatives, possibly resulting in the undervaluation of their tokens. Naturally, this is due to Bitcoin’s strong safe-haven value proposition, along with other external factors. Yet, beneath this valuation misalignment lies a robust foundation for growth. As more traditional institutions and investors assess the crypto market, alongside the anticipation of a potential new market cycle, the value of these projects will continue to evolve. Encouragingly, PwC’s survey found that the percentage of traditional hedge funds investing in tokens (apart from Bitcoin and Ethereum) are diversifying their crypto portfolios, potentially marking a shift towards appreciating alternative assets and the broader crypto economy. If this continues, we could witness the market values of Web3 projects aligning more closely with their technological contributions in the medium to long-term.

An intricate yet essential transition to Web3

Much like any innovative sector in a state of constant evolution, the value realisation of Web3 demands patience and time. This includes global regulatory progress, security guarantees for both users and businesses, integrating the foundational principles from conventional markets, all the while leveraging the potential of decentralised technology and token-based economics.

It is complex, but certainly merits close observation from those in search of new diversification opportunities.

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Disclaimer: This information was prepared by Sygnum Bank AG. This information may contain forward looking statements and may be subject to change. The opinions expressed herein are those of Sygnum Bank AG, its affilitates, and partners at the time of writing. This is for informational purposes only and contains general material. It does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum Bank AG to purchase or sell assets or securities. It is not intended to be used as a general guide to investing, and it should be used for informational purposes only. When making an investment decision, you should either conduct your own research and analysis or seek advice from an expert to make a calculated decision. The information and analysis contained here have been compiled from sources believed to be reliable. However, Sygnum Bank AG makes no representation as to its reliability or completeness and disclaims all liability for losses arising from the use of this information.

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