The world of finance has a major role to play in the Web3 story. How financial institutions choose to engage with blockchain as a technology and tokens as an asset class will significantly shape Web3’s path toward mainstream adoption.
Institutional investors are already financing Web3's most important projects, from non-fungible token marketplace OpenSea to MetaMask and Infura creator ConsenSys. Polygon recently raised over $450 million from blue chip financial firms that range from storied venture capital funds including Sequoia and SoftBank to hedge funds like Third Point and prominent individual investors like Kevin O’Leary.
Last week, we gathered some of those investors for the first in a series of talks titled Building Web3 to get a reading on where things are going. The full video of the event is available online. Below are some highlights from the panel discussion about Web3 and finance.
Investment in blockchain technology reached a record $30 billion last year and the mega-financing rounds continued in 2022 with Polygon, OpenSea, Alchemy, Fireblocks and FTX being some of the most prominent. At the same time, there are macro headwinds in the form of rising inflation, higher interest rates and the war in Ukraine threatening to upend the geopolitical order.
"Investing in tokens has become relatively commonplace for venture investors," said Shailesh Lakhani, Managing Director at Sequoia Capital India. "Probably 80% of the investments we have made out of our Asia funds in crypto has been in tokens."
The monetary pullback and reduction of balance sheets is going to have an effect upon all assets, according to Tom Cheung, a partner with SoftBank Investment Advisers. But broader institutional adoption is still in its early stages and the next wave of financial capital can be “enormous,” he said. The key to unlocking it is in the hands of the regulators.
U.S. President Joe Biden recently signed an executive order regarding the responsible development of digital assets. The prospect of regulatory clarity sparked a rally in the price of Bitcoin and Ether.
“That's an incredibly positive catalyst,” SoftBank’s Cheung said. “Time is on the side of the industry as more voters and consumers, at least in the U.S. political process, become engaged with the Web3 universe.”
The executive order’s emphasis on privacy, national security and consumer protections is good news for the Web3 space as a whole, according to Kevin O’Leary, Chairman of O'Shares Investments and O'Leary Ventures. But the focus on climate change has some troubling short-term implications for Bitcoin, he said.
“There is going to be a big dislocation occurring in data centers because of that order,” O'Leary said. “It’s going to force capital out of existing miners and into miners that use sustainable energy sources such as hydro, maybe wind and solar at some point,” favoring locations like upstate New York, Montana, Quebec and Norway.
While regulations in the U.S. have a disproportionate impact on the industry, other countries may be setting the pace. O’Leary points to Ontario in Canada which was first to license a crypto exchange with a dealer broker attached to it. Abu Dhabi has since followed suit and O’Leary believes the U.S. Securities and Exchange Commission is closely watching these experiments.
“Policymakers in many markets engage very thoughtfully on what Web3 and crypto could do for their countries,” said Sequoia’s Lakhani. “We see across Asia, between the Middle East straight through Southeast Asia, an increased friendliness in many jurisdictions.”
The policy vacuum has also allowed Web3 upstarts collectively known as DeFi to carve out a space apart from major financial institutions. DeFi offers a regulatory-free way of doing financial innovations, said Lakhani.
The pace of change has been particularly remarkable, said SoftBank’s Cheung. What takes a bank five years to accomplish, a fintech startup can do in twelve months. In DeFI, you see the same thing happen in 30 days.
“During the summer of 2020, the eye-opener for everyone was the speed of innovation,” Cheung said. “This space continues to be among the most interesting to watch because the speed of innovation that's occurring simply can't be matched by what you see within traditional clients.”
Going forward DeFi will have to contend with growing regulatory pressures. The budding industry also has to address its over-reliance on incentive programs and find more ways to connect to the real world assets.
“Clearly 2021 was the year that crypto, from a capital formation perspective, became an investable asset in scale. But I would say that's still very early,” said Cheung. “But the real question here is penetration either at the consumer or the capital level going to continue. So I think that that's clearly heading in one direction.”
One of the biggest barriers to mass adoption is the user experience, according to Lakhani. Another one is creating services that are just much more unique than anything that we have on the Web as it is today, giving users a sense of ownership, security and trust they didn't enjoy in the past.
But Web3 has already reached a point where the next 12 to 18 months will witness a significant rise in more scalable applications, Lakhani said. And Polygon will have a key role to play in making that happen.
"Polygon appears to be the default choice for building scalable blockchain applications,” he said. “Given the aggressive acquisitions and roadmap, it was a relatively easy decision for us to double down on them and become a significant investor.”
Polygon is building a complete suite of solutions that is similar to what Amazon Web Services offers Web2 developers -- a tool for every possible use case and scaling at a click of a button. For Web3, Polygon PoS already offers an execution layer with low fees and high transaction throughput secured by the Ethereum mainnet. With Polygon Edge, projects are building custom blockchains from scratch. In the near future, Polygon Avail will deliver the general-purpose, scalable data availability piece of the puzzle and zero knowledge solutions will make network congestion a thing of the past first and then tackle applications around privacy.
"We will see a new wave of these decentralized applications and many Web2 and gaming developers coming into Web3," said Polygon’s Co-Founder Sandeep Nailwal. “Probably we will reach a total 100,000 dApps in the next year, which will mean that the network effects of these things will grow.”
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