During the peak of the global crypto market in 2021, its total value amounted to approximately $2.8 trillion, which was six times higher than the previous year. This growth was fueled by the rapid adoption of crypto sectors like DeFi and DAOs. DeFi enables users to earn yields that are up to 100 times higher than traditional savings accounts, while NFTs allow anyone to create unique digital collectibles. Moreover, DAOs permit online communities to manage multi-billion dollar treasuries.
Collectively, these sectors come under the umbrella of Web3, which is a trustless, permissionless, and decentralized internet that empowers users with complete ownership of their content. You may have some questions at this point, such as “What exactly is Web3?” and “How did it originate?” or even “How can I invest in Web3 given its potential for high returns?” or How to invest in web3 without any hassle? To gain a better understanding of Web3, let’s address 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:
|Web3 Tech Stack
|Services and Optional Components
Let’s now understand the system in detail:
The infrastructure layer of Web3 includes platform-agnostic protocols and virtual machines that serve as the basis for building blockchains. An example of L0 is WebAssembly (Wasm), which is a binary instruction format that supports a stack-based virtual machine. Another example is the Inter-Blockchain Communication Protocol (IBC), which enables blockchains to communicate and interact with one another.
The Layer 1 of Web3 includes blockchain platforms such as Ethereum and Bitcoin, which serve as decentralized ledgers and provide a foundation for creating applications and tokens. Developers focus on Layer 1 for two main reasons: to capture the maximum value in the Web3 ecosystem and to address the blockchain trilemma, which is a key obstacle to the widespread adoption of cryptocurrencies.
The Protocol layer of Web3 includes technologies that enhance the scalability of Layer 1 blockchains. For example, Bitcoin has the Lightning Network, which enables faster and cheaper transactions. Ethereum has various solutions such as Arbitrum, Polygon, and Optimism that improve scalability. Additionally, cross-chain protocols that facilitate the transfer of crypto tokens between Ethereum and other platforms are considered to be part of Layer 2.
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
Now, let’s get to the main question, how can I invest in web3? 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 Web 3.0 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 of how to invest in Web 3.0 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.
To have a better idea for investing in web3, 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
To gain a better understanding of investing in Web3, let’s explore some active Web3 investment options.
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
The third step to invest in web3 is to determine the appropriate asset mix for your Web3 portfolio. Generally, there are two approaches to finding the optimal mix: using mathematical analysis and relying on 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.