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From digital apes to properties in 3D worlds and battling trading cards, Web3 offers an exciting array of opportunities for investors, but experts warn the promise of high returns or new investment models shouldn’t blind people to the risks.
Binance Labs, the venture arm of the world’s largest cryptocurrency exchange, Binance, recently launched its own US$500-million fund to invest in this market, even as cryptocurrency values dove. But what is Web3, and how much risk are speculators taking on?
Web3 is the latest evolution in a 30-year-old technology that began with the original worldwide web. Web1 focused on companies posting their information online and building e-commerce empires. With Web2, social media companies like Facebook Inc., now known as Meta Platforms Inc., shifted the focus to users by enabling them to post their own content.
Those Web 2 services are still centralized in the hands of big tech players, says Satraj Bambra, managing partner at Round13 Capital Inc.’s Digital Asset Fund in Toronto, which invests in Web3 infrastructure companies.
“The user is the content creator, but they get really nothing out of creating so much value for these companies,” Mr. Bambra says. “The general idea behind Web3 is around user-owned economies.”
In this emerging space, the online service providers no longer own their users’ digital content. Instead, users have control of it. They can trade it as a non-fungible token (NFT), which is a digital file uniquely representing that content on a blockchain, the digital ledger that emerged to support bitcoin.
NFTs can represent anything from an online collectible to a piece of virtual property in an online environment known as the metaverse. NFTs close the gap between digital content and e-commerce because their owners can buy and sell them.
As investor interest in this technology grows, investment funds are opening up.
In July, Calgary-based Accelerate Financial Technologies Inc. invited accredited investors to “own a piece of Web3″ with the launch of its Accelerate NFT Fund LP. It collects what chief executive officer Julian Klymochko calls “blue-chip” NFTs from companies including Bored Ape Yacht Club and CryptoPunks, both of which sell collectible digital avatars.
Mr. Klymochko is banking on capital appreciation for the fund’s NFT collection, describing it as a form of seed venture capital investing. Many NFTs will lose all of their value, he warns.
“You just hope that a small handful goes up 100-fold,” he says. “One great NFT can generate your entire portfolio return.”
The evolution of NFTs
NFTs promise to be more than the digital equivalent of hockey cards. They support smart contracts, which are like programs that run on the blockchain, enabling them to interact with each other and update their data.
This opens up opportunities for NFTs to become membership tokens, explains Andrew Agopsowicz, an NFT economist at Web3 tools company nameless.io in Ottawa.
“It makes things easier for companies that want to issue those memberships to reward their collectors and fans,” he says. An NFT could grant someone VIP access to an event or earn them limited-edition merchandise. It could even pay commission or charge rent.
Such properties have a lot of potential in the video games market, says Aly Madhavji, managing partner at Web3 venture capital and consulting firm Blockchain Founders Fund.
“If there’s utility and reason to have an NFT and I gain value from it, someone else may be willing to rent it,” he says.
Mr. Madhavji cites the digital collectible card game Splinterlands, which allows people to battle each other with their NFT-based digital playing cards.
The battling NFTs generate rewards that can be converted into cryptocurrency – and, therefore, fiat currency, via digital exchanges. The game allows players to rent their cards to others that want to play with them, generating still more value. “We think that this model will grow a lot,” he says.
Andrew Kiguel, chief executive officer at Web3 company Tokens.com in Toronto, is also courting the gaming market through subsidiary Hulk Labs. It will grant thousands of Web3 game players access to gaming NFTs owned by Tokens.com, enabling them to play games for rewards convertible to fiat currency.
The company has signed a deal with the Democratic Republic of the Congo to train and provide internet access to residents there who will collect a small commission while generating revenue for NFT owners, he says.
Eventually, Mr. Kiguel hopes to expand this venture into an app that will connect other NFT owners to players who will generate revenue for them.
“What we’re trying to do is build the Uber of the crypto gaming world,” he says.
The risks investors face
Play-to-earn NFT-based gaming presents a potential revenue-generating investment for NFT owners, but the space is fraught with risk. One of Hulk Labs’ partner gaming platforms, Axie Infinity, was recently rocked by the theft of US$615-million in Axie NFTs via Ronin Blockchain Corp., the blockchain project that powered the game.
Security issues have long plagued cryptocurrency and NFTs – so has price volatility.
Cryptocurrency values have plummeted in recent months. Tokens.com’s value on the Frankfurt Stock Exchange dropped from a high of €2.56 in January 2021 to languish below €0.30 this summer.
Even Accelerate Financial rates its own NFT fund as a very high risk, and Mr. Klymochko advises investors to put no more than 1 per cent of their assets into this nascent fund.
It’s important to educate yourself by dabbling as a user of Web3 services before becoming an investor, say industry watchers.
Still, Mr. Agopsowicz says there are limited data on what makes a successful Web3 venture.
“There is tons of opportunity for entire new industries to be built up around this technology,” he says. “But at the same time, it’s very hard to know right now what’s going to work and what’s going to fail.”
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