A collection of my web3 scribbles that I am turning into something more useful. The text will be updated on a weekly basis.
A Brief History of Cryptocurrency, Blockchain, & Web3
Pre-Bitcoin Era (1989-2008)
The world’s first “cryptocurrency”, eCash was developed by David Chaum in 1983 to allow people to send money anonymously over the Internet. In 1989, Chaum went on to create DigiCash, and the project started to take off in the mid-90s by when he entered partnerships with large corporations such as Deutsche Bank. However, the general market wasn’t yet ready to adopt this new digital currency and as a result, the project fell apart.
It wasn’t until 1998 the term cryptocurrency was coined and during the same year, Dai Wai launched B-money with a heavy focus on decentralization. Despite the term cryptocurrency outlasting B-money, Dai would go on to become one of the most important names in the history of crypto.
Cryptocurrencies Rises (and collapses) (2008-2018)
The 2008 financial collapse shook the foundations of the financial industry. As traditional money declined, public confidence in banks and financial institutions declined. The same year, a person (or group of people) using the name Satoshi Nakamoto invented the blockchain as the public ledger for bitcoin transactions using Proof-of-Work.
In early 2009, Bitcoin was launched to the public, and the same year the very first cryptocurrency exchange, New Liberty Standard was introduced. It was not until 2011 that true competition to Bitcoin started to emerge with new altcoins (meaning alternative coins to Bitcoin) popping up such as Litecoin. In 2012, the Proof-of-Stake concept was introduced as a safer and more energy-efficient alternative to Proof-of-Work. The same year Coinbase was launched, which today is the largest exchange in the world.
Although conceived in 2013, blockchain Ethereum (co-created by Vitalik Buterin) wasn’t launched until mid-2015. Compared to the blockchain invented to support Bitcoin, developers can implement a significant amount of functionality enabling smart contracts using Ethereum as a protocol.
After an unprecedented boom in 2017, the price of Bitcoin plummeted by 65 percent in early 2018. Nearly all other cryptocurrencies then followed in Bitcoin's footsteps. By Q3 2018, cryptocurrencies had plummeted 80% from their peak in January 2018, making the 2018 cryptocurrency crash worse than the Dot-com bubble's collapse. During these two years, the ICO (initial coin offering) boom also took place with about 1,000 different token projects raising around $22 B. Several of these projects went unremembered, some were outright frauds, and a few are still known today.
Web3 Goes Mainstream (2019-)
In 2019, large enterprises and financial institutions such as Microsoft, JP Morgan, Chase, Amazon, IBM, and Walmart started to make massive investments into cryptocurrency and Ethereum becomes a major focus. During 2020 we saw how cryptocurrency lending went mainstream as a result of the worldwide pandemic when interest rates fell and lending opportunities plummeted. In 2021, the cryptocurrency market cap surpassed $2 T and new ways of using the technology and strategies for generating income are rapidly emerging.
Future of Web3
In the past year there has been a lot of buzz around “web3”. Web3 is described as a new iteration of the internet, based on blockchain technology and incorporating concepts such as decentralization, and token-based economics. According to Crunchbase numbers, in 2021 around $17.9 B was invested in 1,312 deals in web3-related startups up from $2.1 B and 790 deals in 2020. In 2022, we have so far seen $173 M poured into 34 deals.
Criticism of Web3
Optimistic developers, investors, and early adopters imagine a decentralized future in which the technologies that enable Bitcoin and Ethereum will break up the concentrated power of today’s tech giants. However, others have a more pessimistic view of the space and believe we will see a similar bubble to the “dot-com” boom. Some argue that there have already been several cycles of decentralization and recentralization in the tech industry. For example, the personal computer decentralized computing by creating a commodity PC architecture that anyone could build and that no one controlled. However, Microsoft was able to recentralize it and made huge profits. People argue that we are about to see the exact same thing happening in the web3 space.
Blockchain as a technology itself is also being questioned. For example, blockchain networks can’t expand on a large scale without centralizing. Ethereum has been compared to an Atari 2600 from the 1970s in compute power. In terms of bandwidth blockchain technology is vastly more expensive and complex to maintain than centralized current solutions. Lastly, storage is another concern for blockchain technology.
Basic Blockchain Technology Overview
Essentially, a blockchain is a digital ledger of transactions duplicated and distributed across the entire network of computers. These transactions are very difficult to change, hack, or cheat. Blockchain technology was invented to facilitate Bitcoin. However, many new blockchain protocols all with their unique features have been launched in recent years.
Proof-of-Work & Proof-of-Stake
The two most widely used consensus engines for blockchains today are PoW and PoS. In a PoW system, the goal is to become the first person to produce a new block on the blockchain (miner). In a PoS system, being the first person to produce a block is replaced by the competition to attract the native cryptocurrency. This is known as a stake and allows the network to operate without large amounts of electricity. It’s the network's total stake value that provides it with security. Moreover, in PoS there are two additional reasons why the stake of the validator is important. Validators' stake amounts are directly proportional to their chances of being elected to add new transactions to the ledger, thereby influencing how much reward they earn. Validators' stakes also serve as collateral to disincentivize adverse behaviors. The higher the collateral staked, the greater the likelihood that validators will adhere to network norms, thereby ensuring chain security.
Since critics have pointed out the negative externalities created by PoW’sits security model and lack of decentralization, PoW has fallen out of favor, and blockchains are transitioning from PoW to PoS consensus mechanisms. As a result of their energy efficiency and greater decentralization, PoS designs have seen tremendous growth. It's estimated that PoS-based chains would account for 44 percent of Layer 1 market capitalization if Ethereum 2.0 (Eth2)'s "merge" to PoS were completed, which many expect to happen during 2022. By shifting away from PoW-dominated networks, new business models like staking-as-a-service are emerging. According to JP Morgan staking currently, generates $9 billion worth of revenue annually and is expected to grow into a $40 billion industry by 2025.
Digital Assets Investment Opportunities
The digital asset investment landscape is vast and full of opportunities. There are currently several ways of investing in the web3 space:
- Coins tend to be native to a blockchain and are used to trade currency and store value. It’s a medium of exchange and transactions are handled on the blockchain. For example, Ethereum (ETH) and Bitcoin (BTC) are coins.
- Tokens often operate on other blockchains for example Ethereum. They can represent many different things (see the type of different tokens below) and represents a digital asset. Tokens can be held for value, traded, and staked. Examples are Maker (MKR) and Komodo (KMD). Private tokens are only accessible through OTC exchanges and are riskier assets but can generate great rewards.
- Type of tokens:
- Exchange tokens – grant unit or means of payment for goods or services
- Utility tokens – grant access to goods and services
- Security tokens – grant an interest or right in a business
- Stablecoins – grant value pegged to an underlying asset (e.g., US dollars, gold, and oil)
- Startups investing for equity. Some people would argue that you’d see a much faster return if investing in a web3 company compared to a traditional B2B SaaS startup as the market is moving at a rapid pace in the web3 space. There is also the possibility of investing as an LP into web3 funds.
- Trading as the name implies crypto traders make money by speculating on cryptocurrency/tokens price movements via a CFD trading account, or by buying and selling the underlying coins via an exchange.
- Staking, you can stake a portion of your cryptocurrency holdings and earn a percentage-rate reward over time for cryptocurrency using PoS. Yield varies greatly between protocols and platforms you stake from.
- Mining has become highly competitive with higher barriers to entry but you can still make a profit out of mining crypto.
- NFTs some investors utilize NFTs like stocks and profit by buying and selling them. You can also rent out your NFTs to make money. However, NFTs in their current forms are highly speculative and volatile.
- Airdrops by investing and engaging in web3 projects you can get free distributions of crypto. Airdrops could also be seen as a marketing ploy for the web3 space. Although most “airdrops” don’t make you a millionaire there are stories of people who have successfully been airdropped crypto and then exchanged into fiat making a lot of money.