In 2021, when the global crypto market was at its peak, it was worth approx. $2.8 trillion — 6 times more than the previous year. The reason behind this growth was the hyper-adoption of crypto sectors such as DeFi and DAOs. With NFTs, anyone can create a unique digital collectible, whereas, with DeFi, you can earn up to 100x more yield than a savings account. Lastly, DAOs let online communities implement billion-dollar treasuries.
When these individual sectors are grouped together, they fall under the overarching theme of Web3, a trustless, permissionless, and decentralized internet where users have full ownership of their content. Certainly, you have a few questions by now such as “What is Web3?” and “How did it start?”, “How to invest in Web3 if it has such good returns?” To better understand Web3, let’s start with the first question.
What is Web3? How Did It Begin?
In the ‘90s, a simple version of the internet, called Web1, became available to everyone. This version mostly has static content such as news, digital print media, classified ads, and more. In simpler words, it was a basic read-only internet for users.
Next, came Web2, the dot-com boom as a result of the increased internet speed. The main distinguishing factor between Web1 and Web2 was interactivity and socialization. The latter allowed users to create content via social media and personal websites, even though there was no monetary advantage to it. Meanwhile, Web2 giants such as Facebook and Google extracted maximum value by selling users’ personal data.
Then came the next phase of the evolution of the internet, Web3. This new edition empowers the users to read and write content, and at the same time, fully own their data and digital assets with the help of blockchain technology. By using Web3 the users can selectively share or monetize their content.
What is the Web3 Ecosystem Like?
Now that we understand what Web3 is and how it started, let’s take a look at the types of networks, protocols, and applications that are its building blocks.
Below is a tabular representation of all layers involved in the Web3 tech stack and an-over-the-top breakdown of the different components to start depicting the fundamental architecture:
Let’s now understand the system in detail:
It encompasses virtual machines and platform-agnostic protocols that provide the foundation for building blockchains. Examples of L0 include WebAssembly (Wasm), a binary instruction format for a stack-based virtual machine, and Inter-Blockchain Communication Protocol (IBC), which allows blockchains to interact with each other.
This layer consists of blockchain platforms such as Ethereum and Bitcoin, which maintain a distributed ledger and allow tokens and applications to be built on them. There are two reasons developers work on Layer 1s. One, it captures the maximum value in Web3, and second, it is currently limited by the blockchain trilemma, the main hurdle in crypto’s mainstream adoption.
The Protocol layer is made of technologies that make L1s more scalable. For instance, Bitcoin has the Lightning Network made on top of it for cheaper and faster transactions. On the other hand, Ethereum has solutions such as Arbitium, Polygon, and Optimism. Not only that, cross chains that allow other platforms to move crypto tokens from and to Ethereum are also characterized as L2s.
Services and Optional Components
This layer comprises decentralized applications or dApps that are good at performing a specific task. In a few cases, Layer 3s are siloed apps that users directly can interact with such as Uniswap. However, predominantly, these apps act as elements that developers can pick and choose to integrate into their consumer-facing apps. A few examples of Layer 3s are:
- Aave, a lending protocol
- Arweave, a storage solution
- Yearn Finance, a DeFi aggregator
It is also important to note that a majority of these components are built atop Ethereum.
The Application layer is the uppermost layer of the Web3 stack and generally functions as the point of entry in a user’s Web3 journey. Some examples of Layer 4s are:
- Brave, an open-source web browser
- MetaMask, a crypto wallet
- Axie Infinity, a blockchain-based game
- OpenSea, an NFT marketplace
How to Invest in Web3 in 4 Easy Steps
In the Web3 space there is a shared commitment from both the crypto and traditional companies (e.g., MetaMask, Crypto.com, and cryptocurrencies) which provides investors with two asset classes to choose from: equities and digital assets. Investors can also invest in a mix of both asset classes and benefit from the diversification of their portfolios.
Here’s how to invest in Web3 and create a portfolio with 4 easy steps :
- Step 1: Passive Investing Vs. Active Investing - Decide if you want to be a passive investor or an active one
- Step 2: Asset Selection - Pick the projects or individual companies you want to invest in
- Step 3: Choose the Right Mix of Assets - Choosing assets is based on risk tolerance
- Step 4: Monitor & Rebalance - Track and rebalance your portfolio regularly
Let's discuss each step in detail.
Step 1: Passive Investing Vs. Active Investing
Passive investing means buying a diversified portfolio that is already picked out for you—in other words, an index. On the other hand, active investing is hand-picking individual digital assets or equities that you believe will perform better over time.
While Web3-focused equity indexes are quite a few, their numbers are slowly increasing. This year, Simplify Asset Management, a popular ETF issuer, filed an application to launch a new ETF, which will mainly invest in the US and foreign Web3 firms. However, it is unclear when this ETF will be listed.
Passive Web3 investors can invest in Metaverse ETFs such as Roundhill Ball Metaverse ETF (METV) as well.
Let’s look at the types of passive Web3 investments.
Types Of Passive Web3 Investments
Whether it is Web3 or traditional, investments are always a good thing. If you are planning to invest in Web3 passively, here are a few types you can try your hand at.
Cryptocurrencies - The Talk of the Town!
These are versatile digital assets, which can be used as a medium of exchange or a store of value.
Investing in cryptocurrencies such as Bitcoin, Ethereum, Solana, Litecoin, and others is an excellent way to earn some passive income and a great way to hedge against inflation.
That being said, cryptocurrencies are extremely volatile so you should only invest after carefully analyzing the project or consulting with an investment professional.
Now when selecting digital assets, you have thousands of crypto tokens and NFTs as options. You can use tools like DappRadar, CoinMarketCap, and DeFi Llama to find out projects in every layer of the Web3 ecosystem.
Platforms for Lending Crypto
These platforms allow you to lend your tokens to borrowers who pay you interest in exchange. It not only diversifies your portfolio but also is a great way to earn some passive income.
Before choosing from a bunch of lending platforms, comparing them to find out their pros and cons is absolutely necessary. This is an important step because crypto lending platforms are a relatively new phenomenon and you should opt for one that suits your needs.
Non-Fungible Tokens (NFTs)
NFTs are digital assets that represent items such as music, art, or even virtual real estate. There are several NFT platforms with popular NFTs such as the Bored Ape Yacht Club, which is being sold for over a million at the time of writing this article.
Investing in NFTs is also a great way to earn some passive income. You can create your own digital art and turn it into an NFT using artificial intelligence offered by various decentralized applications. By selling your NFT, you can earn some passive income. Also, you can invest in NFT stocks. This strategy includes traditional stock investing with hot and fresh NFT popularity.
Step 2: The Selection of the Asset
If you want to become an active investor, you’ll want a Web3 portfolio consisting of global digital assets and stocks.
To find worthy Web3 stocks, you can use FinViz, a stock screener, or Crunchbase where you can sift through companies by ‘Blockchain’ with their IPO status. Coinbase (COIN), Meta (FB), and Block (SQ) are currently the most famous Web3 stocks.
Types of Active Web3 Investments
Let’s look at some active Web3 investments.
Earn Money On Web3 By Airdrops
AirDrops are a brilliant way to get free tokens. Airdrops occur when a start-up is giving away free tokens within its community. This marketing strategy is used to boost new blockchain projects awareness and encourage user adoption.
Here are a few tips to participate in Airdrops:
- Find well-known airdrops: The crypto world has a lot of scams, and Airdrops are no exception. Make sure you take part in reputable projects.
- Join relevant Telegram groups: Crypto projects often use Telegram to discuss Airdrops in the group. This is an excellent way to stay updated on the latest opportunities.
Once you receive tokens via an Airdrop, you can either hold them or sell them for a profit.
Technically, mining is not an investment, but you can still get rewarded if you go through this process. Mining is an integral part of blockchains and it allows you to earn some rewards by verifying transactions on the blockchain.
With Web3 evolving faster than ever, mining has also become more profitable. However, if you decide to take this route, make sure that you research and understand the equipment needed for this.
The Play To Earn Model
There are several Web3 projects that involve playing games as a new play-to-earn model. This allows users to earn crypto tokens for playing games. Famous games such as Gods Unchained, Axis Infinity, and Splinterlands have adopted this model.
Step 3: The Right Mix Of Assets
Mainly, there are two ways to figure out the right mix of assets in your Web3 portfolio: mathematics and intuition.
If you take the mathematical route, using frameworks such as Modern Portfolio Theory (MPT) would be highly recommended as it optimizes for maximum return at a given level of risk.
If you decide to rely on your gut feel, you can choose a position depending on your sense of risk tolerance or conviction. In this case, you’d hold only a few digital assets and equities that each represent a large chunk of your portfolio.
However, if you are optimizing for risk, set a certain percentage limit for each investment. Also, the longer your investment period, the higher your risk tolerance.
Please Note: Applications on Web3 especially on Layer 4s use several underlying protocols, which means if one of these protocols fails, everything could come crashing down.
Nevertheless, if you are choosing based on intuition, you’d want to hold only a few digital assets and equities that each represent a large chunk of your portfolio.
Step 4: Monitoring & Rebalancing
According to the rules of entropy, your Web3 portfolio will have certain assets that outperform others. For this very reason, we recommend regular monitoring and rebalancing of your portfolio. To do this, you have to sell some overweight assets and buy more underweight ones. Assuming your risk tolerance and conviction haven’t changed.
Final Thoughts on How to Invest in Web3
Web3 is a nascent yet fast-growing user-owned internet. As the next phase of the internet, it will give users the right to create and own their content, and at the same time, give them several monetization options. The Web3 environment provides investors access to two asset classes: equities and digital assets. It is better to choose a bit of both to diversify your portfolio and maximize your ROI.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.