HashKey Capital: What are the opportunities for WEB3? What is the difference between WEB3 and WEB2

Dec 21, 2022

Author: Aifang Lu

Editor: WuBlockchain

Original link: https://mp.weixin.qq.com/s/nfkZ7ErGQRrlnTB5hvYn9Q

Web3 entrepreneurship is very fashionable and trendy this year. Whether in China or the United States, many young people from big Internet companies have resigned and joined web3. But recently, many people feel that web3 is too difficult, and they may not be able to last, and they start to consider returning to web2 to find a job.

ThreeDAO, the Chinese Web3 venture capital community, recently invited Deng Chao, the head of HashKey Capital, an investment fund under Wanxiang Blockchain, to share with entrepreneurs.

HashKey Capital is a leading blockchain investment institution in Asia and the earliest institutional investor in Ethereum. HashKey Capital has invested in more than 500 blockchain projects around the world, spanning L1, protocol layer, encrypted finance, NFT and other tracks , including imToken, Animoca, Polkadot and other well-known projects, has rich practical experience in web3 venture capital.

Deng Chao dismantled web3 entrepreneurship from five aspects:

1. The current fundamental analysis of web3;

2. The business cycle, laws and opportunities of web3;

3. What is the difference between web3 entrepreneurship and web2? Is the experience play of web2 still effective?

4. What opportunities do Chinese have in web3?

5. How to finance the web3 project?

Fundamentals of Web3

What exactly is web3? Those who do technology see distribution, and those who do business see more control and ownership. After practice and research, our team believes that web3 is different from web2 in four levels:

First, the underlying technology is decentralization, to be precise, it should be distributed. In the past, the computer room was provided by one company, but now it is scattered and many people are involved.

Second, web3 applications have financial attributes, starting from Bitcoin, it is very different from the Internet. The Internet is more of a technical attribute. It was not until Alipay and WeChat payment that it had financial attributes while the blockchain has been financial attributes since its birth.

Third, the business model of the blockchain is also very different from the Internet due to the difference in the underlying technology.

Fourth, governance rights, that is, the relationship between users and the platform. In the application of the Internet, users follow the rules of the platform, and the platform formulates rules to control everything, including user data.

The balance of web3 is gradually inclined to users. The account of web2 is that you have to apply to the platform, and the web3 is that you authorize the platform to connect your wallet. Users have a say in the direction of the platform. On DAO, you have the right to speak and decide on an organization.

We divide web3’s investment into four segments:

1. L1, public chain;

2. the middle layer;

3. the application layer — GameFi and DeFi are the most popular now;

4. Encrypted finance.

Now an encrypted financial layer parallel to traditional finance has been formed, with infrastructure, centralized and decentralized exchanges, custody services, etc. There are financial services, lending, trading, and asset management, which are very similar to traditional finance, but are fundamentally different. For example, borrowing does not need to go through an intermediary, but directly borrows through an agreement.

As long as those who have used it know how much more efficient it is than traditional banks, those who have used digital asset financial services will not be willing to return to traditional finance. Just like using Alipay, you will never go back to the paper money era.

Web3 is currently around the year 2000 of the Internet, which is still very early.

First of all, the underlying technology module has been formed, but it has not yet reached the stage of large-scale commercial application. The TPS that everyone criticized is not enough, and it cannot reach Alipay’s peak capacity of 200,000 transactions per second.

Second, commercial applications have been explored. Everyone only sees GameFi and DeFi, but in fact, there are a large number of applications that are integrated with traditional business, related to data traceability, supply chain and payment.

There are more than 300 million blockchain users in the world. Coinbase has 103 million users who have been verified by KAC at the end of last year, plus those who have not been verified, a conservative estimate of 300 million.

From an investment point of view, web3, like the Internet in 2000, has experienced the bursting of an asset bubble. Bitcoin fell from $69,000 to less than $20,000, a big drawdown, the same as the previous round. After the bubble burst, it would begin to return to rationality and brew the next stage.

Business Cycle and Track Opportunities

Since I entered the blockchain in 2014, I have gone through three cycles in total. Every cycle comes with price, then interest, then idea, then development, then hype.

The cycle of 2015 was ICO, and everyone was unanimously negative about it, which I disagreed. ICO was an innovation of project financing. Because there was no supervision, it was confounded by some people who want to make quick money. After a few years of silence after the ICO, various Os appeared. Recently, large-scale DeFi and NFT have emerged, surrounding the upsurge of on-chain assets.

After the end of each cycle, even at the low level of the cycle, compared with the previous cycle, there is an order of magnitude increase in terms of technology maturity, number of applications, number of users, and the scale of assets on the chain. Although there are bubbles appearing and bursting, the whole is spiraling upward, and the application track and field are constantly changing and evolving.

Those recognized by the market will continue in the next cycle while those not recognized by the market will be eliminated in the next cycle.

For example, DeFi did not appear in this cycle. It existed as early as 2015, when it was not so hot. At that time, the assets on the chain were only at the level of 100 million or hundreds of millions of dollars, scattered in the hands of millions or tens of millions of users, with thousands or tens of thousands of dollars per person, and there was no financial need.

In the last cycle, some landmark events made everyone discover that assets were not safe in centralized exchanges, so a large number of assets were transferred from centralized exchanges to the chain, and the on-chain assets rose from a billion dollars to thousands of dollars. When hundreds of billions of dollars of assets are gathered together, there will be various financial needs, such as needs of transaction, borrowing needs, and asset management that derive various financial models.

NFT also existed in the last cycle. At that time, offline artworks were transferred to the chain, and even offline artworks were burned in order to attract people. But this round is the original on-chain artwork.

DID used to just register a wallet, but now it gathers your behaviors from various perspectives on a carrier, turning it into your mobile phone, bank account, and social platform.

The development of any industry will go through a stage. The first stage is academic thinking, which is to come up with this thing in the laboratory. The second stage is geek thinking. If you smash this thing out, it counts. Satoshi Nakamoto smashes Bitcoin and becomes famous. The third stage is the engineer’s thinking, which is to make the product run well and make no mistakes in engineering. The engineers above are product thinking, user thinking, and then the company must be bigger and business thinking.

Before 2015, blockchain was geek thinking. Now from the perspective of engineers’ thinking, it is not perfect. In the past, the geek stage faced millions of users, and then there will be hundreds of millions of users. For example, after the Ethereum upgrade, whether the current roadmap can be realized requires more people with technical strength to join.

Further up the business level, there are many explorations and opportunities, games, social networking and so on .

The core of Web3 is to forget web2, first look at what web3 should do, and then introduce the successful experience of web2.

For example, a problem that everyone may face is digital wallets. If you have used metamask and imtoken, you must have had a frightening experience. When I used these apps in 2014, I was shocked every step of the way. You had to copy 24 mnemonic phrases and hide them at home so that no one could find them, and you were afraid that there would be a problem with your phone and someone would see them. This experience is very similar to my computer learning when I was a child. At that time, we were in a computer classroom. The teacher taught us how to type the dos command line, and taught us how to turn on and off, but now we only need to click to turn on and off the computer.

The current blockchain application is still designed for engineers, but users don’t want these things. Our ideal wallet is very simple: you don’t tell me the mnemonic phrase, I just need to set a password, and you hide the most complicated things below , the underlying technical guarantees are done well.

Now the barriers to entry for blockchain users are too high, and user experience is lacking in this industry.

In addition, how do professional institutions enter the blockchain. In foreign countries, there are already many banks with digital asset custody, but not yet in Asia. Looking at the on-chain data, there are no data institutions like Bloomberg and Wind.

Therefore, the on-chain infrastructure is still at a very early stage. It is difficult to generalize which track has more opportunities. I can only provide a framework for your reference.

What is the difference between web3 entrepreneurship and web2?

What is the difference between Web3 entrepreneurship and traditional entrepreneurship?

In traditional Internet companies or companies in other fields, how long does it take for a founder to have an idea in his/ her head, to make a product, push it to the market and get feedback? Basically, it takes at least 6 months to write a business proposal, register a company, raise funds, build a team, buy equipment, do development, do promotion, and then get market feedback.

But what does a blockchain startup look like? If you have an idea, you can write a white paper and write out the code framework. There is no need to register a company or buy equipment, because the development platforms are all open source, and you can access the platform with a computer. You don’t have to recruit people. As long as your ideas are interesting, people will naturally come. There are hundreds of thousands of developers on Ethereum, working tirelessly and regardless of pay. Promotion can also be done in the community. Naturally, hundreds of thousands of users are here, and they can get feedback soon.

And user feedback is real-time. If you are not skilled, you will be hacked very quickly. Web2 products, from the product to being hacked by hackers and being challenged by technical personnel, are not so fast. And if your web3 product mechanism design and business model design are not good, you will immediately be smashed to nothing.

From the perspective of financing, blockchain financing is not as dependent on VC as the traditional Internet. The attributes of the community are very strong. Instead, we don’t like that a project is dominated by one or several institutions too much. Especially when a certain participant exceeds 50%, it is called a 51% attack in the blockchain, which means that you can be evil, you can try to manipulate something.

I have sneaked into some Web2 entrepreneur discussion groups, everyone was talking about control, don’t lose control prematurely. But with web3, on the contrary, the more control the founder has, the less prestige he/ her has in the community. For example, Vatalik, the founder of Ethereum, accounts for only single digits in Ethereum, less than 5%, and the entire Ethereum Foundation holds no more than 10%. There are also a large number of public chains, and the founder’s holding rate is very low.

In terms of product design, the relationship between platform and users. Those who do traditional games will criticize web3 for being difficult to use and the user experience is poor, but web3 will criticize web2, you will treat me as a kryptonian machine, the platform makes money, you must share it with me, and your interests must be consistent.

Web2 is easy to binary opposition — you have it, I don’t have it. But web3 needs to build and share together, which is a big difference in product design.

Airdrops can be used for the promotion of Web3. Some people think that airdrops are coins, but in fact, they transfer the ownership of the project. You can understand that this is the traditional project promotion fee. It used to be taken out from the balance sheet, but now it is from taken out of ownership.

What opportunities do Chinese people have at web3?

In the history of blockchain development, Asian and Chinese teams have always controlled more than 70% of the world. Until now, in the mining industry, the Chinese still control at least 30–40%, but these people are not in China.

Everyone also has some misunderstandings about mining. Mining is not consuming electricity in vain. In fact, its accurate name is to provide power for the underlying computing of the blockchain, which is translated as ‘mining’ in Chinese.

Many terms of blockchain cannot be understood literally, including digital currency. Digital currency is not a currency, but an asset. It is divided into three categories: the first category is Bitcoin and Ethereum, which are the attributes of currency; the second category is the vast majority, token,if you invest in a blockchain project, it is your benefit certificate; the third type is NFT, non-standardized digital assets.

In addition to mining and mining machine companies, Chinese account for more than 90%. Among the top ten exchanges in the world, there are five or six Chinese founders. There are more Chinese investment institutions in Web3, but everyone is relatively low-key.

But we have to face the reality objectively. The Chinese are good at areas that require strong execution and need to be implemented. Commercialization is our strength. But in terms of underlying thinking and creativity, Western entrepreneurs are stronger, especially in the mechanism design of the underlying chain.

In the first few cycles of the blockchain, the technology and the bottom layer were all done. Next, as Mr. Xiao said, it will enter the stage of blockchain application explosion, and the Chinese team is very competitive.

Especially those with experience in traditional finance, technology, and social media, who have both commercial experience and understand the underlying logic of web3, can be said to have a promising future. At the stage of web3 commercial application, as more web2 people enter, our advantages are more obvious.

How to finance the Web3 project?

There has been a period of de-VC in the blockchain. Many projects do not need VC money, and crowdfunding is enough. It is also a reality that Web3 projects are financed less frequently than web2, but more institutions are involved.

How a project gets financing during the seed round depends on the situation of the project. If you are partial to the community, you can raise funds in the community, airdrop tokens, and attract user groups. When your tokens are valuable, there will be a price and money will come in.

But if your project is more commercial, it is best to use equity financing.

70–80% of the investments we made in the past were token financing, and equity financing only accounted for 20–30%. But now there are more and more projects of equity financing, because more and more projects are going in the direction of application. To make an application, you need to deal with the real world. For example, if your application needs to be pushed, the supplier of the ground push must have to deal with a company, and not willing to deal with the foundation, then you need a corporate entity.

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