Follow the growth

Two years ago, we waved the flag when DeFi hit $1b in Total Value Locked in LongHash’s Newsletter. The building blocks or primitives in DeFi - stablecoins, lending, decentralized exchange - became the minimum viable trio which unlocked the surface area for innovation and growth, propelling the sector beyond $200b in assets. Today, DeFi’s meteoric rise has somewhat plateaued, while further growth catalysts such as institutional involvement and regulatory clarity are just a little beyond the horizon.

Meanwhile, new wellsprings of innovation have sprung up. NFTs and debates on the “metaverse” have permeated dinner tables and boardrooms alike. DAO musings have made headlines in the New York Times and TIME, drawing both skepticism and fascination. As a VC, it is clear that these are the new surfaces upon which the next phase of Web3 will be built. But how exactly?

Swirling in Web3’s hot mess of experiments, I struggle every day to walk the tightrope between being open minded and calling out fluff. But at some point, we have to make a stand. This piece is an honest personal reflection, and a call to action for entrepreneurs and investors alike.

1. Make NFTs useful

NFTs have the potential to eclipse tokens, because they are a more natural representation of assets, with less resemblance to “printing your own currency”. It is no wonder that NFTs have penetrated the mainstream consciousness in the form of cute (or not) pictures beside big auction numbers.

However, most NFTs today are currently useless except for speculation. The market is pricing in future utility or value. Even for the current leader, Bored Ape Yacht Club, after raising $450m, acquiring Larva Labs (behind CryptoPunks and Meebits), and launching ApeCoin - its value still mainly lies in potential and promises. We should be more sensitive to real value creation - either in fundamental value, or utility value.

Fundamental value

An NFT itself can capture fine art, music, videos, 3D environments and blueprints - these are like public goods with private ownership, like exhibited art that is free for everyone to enjoy but with a record of ownership. Tokenizing these valuable assets (instead of simplistic generative art) helps creators reach their Thousand True Fans. In music NFTs, for example, a few investors have expressed similar sentiments (e.g. Delphi Digital and Coopahtroopa), and there are already case studies like Audius and Royal. The timing may be close for a breakout in adoption given mainstream familiarity and widespread experimentation with NFTs. We are looking for infrastructure such as platforms and DAOs with clear advantages in targeted niches to onboard a critical mass of creators and collectors.

Utility value

Utility NFTs are more akin to private goods with private ownership - gated access to games, communities, events, or any digital product/service. Ownership and usage of these NFTs enable a direct loyalty relationship with the brand or business, which can also be transferable as the user base or community evolves. As a basic start, virtually every PFP NFT project already implements a token-gated Discord server, where only verified holders can join. We have invested in infrastructure that enables various use cases, like Smart Token Labs, Grape Protocol, and Lit Protocol. These players are positioned to serve any project issuing NFTs.

On the NFT horizon

As these useful NFTs proliferate, curation datasets emerge organically through ownership and usage, with verifiable purchases and interactions by users and collectors. This social graph will be invaluable for derivative use cases like appraisals, reputation, and personalized experiences.

2. Empower more creators in games/ metaverses

It is obvious by now with the breakout of Axie Infinity that Web3 gaming is here to stay. Giving ownership and growth upside to players forms a strong feedback loop which drives value creation and stickiness. Of course, tokenomics need to be improved to ensure long-term sustainability (e.g. monetizing engagement, lowering entry barriers with freemium models). In the meantime, the influx of players, developers, and capital into this segment over the past couple of years are about to bear fruit as a host of highly anticipated games are preparing to launch in 2022 (e.g. Ember Sword, Illuvium, Guild of Guardians).

However, there is an overemphasis on AAA titles for Web3 games. They take much longer, need more capital, and therefore carry higher risk. Instead, we look to alternatives with faster iteration cycles.

Casual games

Casual games are much easier to ship, have wide appeal, and are massively profitable in web2. Mobile gaming especially, leads in revenue and growth. Games in Web3 are still largely browser-based, which is the smallest segment in gaming. This is partly because entry into consoles and the mobile app marketplaces are guarded by incumbents, and Web3 games have been censored, sometimes on a blanket basis (see Steam), due to some bad actors. This presents an opportunity for novel platforms and marketplaces to capture the long tail of Web3 casual games. We are looking for platforms with a wide network and experience in both gaming and Web3. One example from our portfolio is OPGames, which provides an SDK and aggregator. Existing gaming projects and publishers may also expand into an ecosystem, such as Gala Games.

Metaverse games

Metaverses tap into the community to innovate at scale. In Web2, sandbox games like Minecraft and Roblox are smash hits because they unleash creativity. Similarly, open-world or MMO games with vibrant modding or role-playing communities have attracted cult-like followings, like GTA V, Skyrim, and World of Warcraft. In Web3, these games are dubbed metaverses - a persistent virtual reality where assets can be truly owned, creating a real economy with real businesses via open integration. These worlds rely heavily on strong initial momentum, usually driven by founding developers, and a clear transition towards community-led content creation. Some initial success is already seen in Decentraland, Sandbox, Cryptovoxels, and Somnium Space. We will continue investing in teams with clear advantages in targeted niches, like Realy on Solana/ fashion, Mona Gallery on Filecoin, and Bitcountry on Polkadot.

On the meta-horizon

As Web3 games mature, a metaverse native economy emerges. Players come together in guilds, builders congregate in DAOs, and tools are tailored to the idiosyncrasies of web3. Coupled with immersive digital experiences driven by hardware innovation (e.g. VR, AR, Mixed Reality), the world is moving towards the tipping point where we actually prefer to socialize and work in the metaverse.

3. Give DAOs purpose and scale

Along with digital assets in the form of NFTs and digital experiences in metaverses, the natural extension is to also have digital organizations and ways of working. The concept of DAOs date back to the Ethereum whitepaper, evolved into modern forms in recent years including regulated investment DAOs like The Lao, product-focused DAOs like MakerDAO, or ad-hoc ones like ConstitutionDAO which raised $47m to bid for the US constitution. It is no coincidence that the rise of DAOs dovetails with the rise of the freelance economy and The Great Resignation - people are looking for more flexible, equitable, and personalized opportunities for work. Jobs are clearly ripe for disruption.

DAOs work well when there is a clear purpose and mission, like the few examples above in investment, product development, or crowdfunding. However, these fall short of a global scale, which is the true potential for DAO coordination. There are a few with a grand enough vision, like GitcoinDAO, which aims to build and fund public goods, but we still need mechanisms to recognize contributions and contributors at scale.

“Proof-of-contribution” infrastructure

We need to be able to standardize and gamify DAO activities, and in that process, create new primitives for novel economies. On an individual and project level, this already exists in the form of liquidity mining in DeFi, or social tokens (e.g. on Roll) which incentivize engagement and consumption of products/ services. For infrastructure, robust examples also exist - Bitcoin’s proof-of-work, despite all its trade-offs, is an equitable measure of security contribution, while Filecoin’s proof-of-storage has amassed mind boggling 15 exbibytes (15 million terabytes) of storage space. A newer experiment is move-to-earn, adopted by Genopets and Stepn, which could attract governments, employers, and insurers to sponsor improved wellbeing through exercise. Imagine experiments like “proof-of-carbon-capture” or “proof-of-research-replication” - each of these could spawn huge industries. These use cases may start off as smart contract applications, and perhaps evolve into independent chains using flexible infrastructure such as Polkadot’s Substrate or Cosmos SDK. To put it into perspective, the attention economy that still powers the internet giants of today, was largely built upon the discovery of a simple primitive - “proof-of-clicks”.

Governance mechanisms

On the other hand, targeted governance fills in the gaps for non-standardized interactions or strategic contributions. In Web3, the immutable nature of blockchains often leaves little room for legal recourse, which means governance mechanisms linked to code execution are critical infrastructure. An early example among our portfolio is Snapshot X, which links voting to on-chain execution. Also, the needs of governance evolve over time as a DAO grows and strives towards decentralization. Here, an upgradeable, modular tool like Zodiac provides a seamless experience for all stages of a DAO’s lifecycle. We need to fund more targeted infrastructure to improve the setup and operation of DAOs for all purposes.

On the DAO horizon

As we increasingly organize ourselves in digital tribes via clusters of DAOs, digital nation states begin to form, delineated by culture and clustering around underlying blockchain security. It is not improbable to foresee rights, benefits, and taxes (voluntary or enforced) tailored for each state.

Look again

As it is in venture capital, and even more so in Web3, our understanding and outlook adapts as new pieces of the puzzle are put together. At the same time, we must collectively play our role in consciously curating what Web3 should achieve - to challenge and augment the existing order, towards a more open, transparent, and inclusive world.

The same applies to this article itself. We will be following and contributing to the growth of Web3, while adjusting our thesis. If you have feedback for me, please reach out. If you are building anything relevant to the topics above, please reach out, we will go further together.

WAGMI yet, frens.

P.S. Wait there’s more?

While not yet solid enough for an entire writeup, here are 5 more areas where as a Web3 user, I have a nagging intuition that clear gaps still exist. For the next post, perhaps?

• Programmable data - data assets as primitives enabled by Web3 storage
• Identity - attestations and non-transferable identifiers as NFTs
• Cross-chain Infrastructure - for a seamless multi-chain world
• Privacy layer - protecting individuals and making Web3 feasible for institutions
• Social money - to complement social NFTs and DAOs