How to Invest in Web3 And What Are The Risks?
The Web3 project is meant to be a more democratic and better version of the Internet as it currently exists. It is supposed to totally change the way we interact on the Internet with one another. However, the development of Web3 is still in its early stages. Also, some people say that Web3 is just another hyped-up utopia, the only purpose of which is trading NFTs and speculating with decentralized finance, meant only for enthusiasts and “geeks.” But is it so?
In this article, we will take a closer look at what Web3 is, how it works, and what risks and benefits it presents, as well as how to invest in Web3. Ultimately, we will try to make a modest prediction for what might await us in the future.
What is Web3?
There are a few key distinctions between the current Web2, which we all use, and the upcoming Web3. And decentralization is the most important difference.
With a few extra features, Web3 improves the Internet as we currently know it. Web3 is a new, progressive concept consisting of verifiable, self-governing, uncensorable, resilient, decentralized systems together with its own built-in independent payment system.
As opposed to Web2, where data is usually managed by a single cloud company, Web3 apps do not typically use a single server or database to maintain their data.
Web3 programs are running on blockchain technology, a decentralized network of numerous peer-to-peer nodes (servers) that creates a crypto-economic framework. The word dApp, abbreviated for a decentralized app, which is frequently used in the Web3 environment, commonly describes these applications or programs.
You’ll note that crypto is frequently discussed when Web3 is mentioned. It is because they play a crucial role in modern digital networks. All participants in the development, running, contributing to, or enhancing of the projects receive rewards in crypto tokens.
Participation in the system can be done by completing various technical and non-technical actions to support sufficient functioning. These can include computation, storage memories, communication, identification, web hosting, and other online services that cloud providers have always supplied us with in the Web2 system.
Service users typically pay to use the protocol instead of paying for a cloud platform such as Amazon Web Services (AWS). Therefore, funds are sent directly to other network users.
You might notice that in this case, as in many other cases of decentralization, intermediates that are meaningless and ineffective are eliminated.
When it comes to payments, it differs from the traditional system provided by centralized corporations, such as Stripe or PayPal. They make billions of dollars and still do not enable genuine global interoperability between users as most would like. In addition, in order to use them, you must provide your private, highly sensitive data and other information. With the decentralized network, you can integrate quick, personal, and safe money transfers and interactions with Web3 applications employing crypto wallets like MetaMask and several others.
Networks like Solana offer a few hundred-millisecond latencies and transaction prices of a fraction of a penny. Users do not need to go through complicated authorization procedures and other processes to interact with others and participate in the network, unlike the current financial system. All they have to do is to begin sending and receiving funds without gatekeeping by installing a crypto wallet. Therefore, the simplicity and effectiveness make it attractive to invest in Web3 and to use it on a daily basis.
How does Web3 work?
Now that we have the theory, let’s take a closer look at how Web3 should work in reality and what it should offer to reach intended targets.
The whole concept was built on enhancing data ownership. When you use a platform like Facebook or Youtube, these businesses gather, own, and recoup your data. This is not the case with Web3 since all your data is kept on your cryptocurrency wallet. When exploring Web3, you’ll interact with apps and communities through your wallet, and when you log off, you’ll take personal data with you. Since you’re the data owner, you may choose to interact with it in any way you want.
Moreover, confidentiality is a crucial feature of your wallet, just as information privacy. Your wallet is your identification on Web3, making it difficult to connect it to your identity. Therefore, even if someone can observe the operations made through your crypto wallet, nobody will ever know that you are behind them.
Web3 is said to feature decentralized autonomous entities running DAOs. As a result, decisions are no longer made by a centralized authority but rather by users who own and govern tokens, which may be acquired by taking part in the maintenance of these decentralized programs or by buying the said tokens.
In a typical corporation, the CEO is responsible for implementing changes approved by the shareholders. Token holders in a DAO can vote on particular modifications. If the vote is approved, they are immediately incorporated into the DAO’s script via a smart contract. Everybody involved gets the permission of a DAO, which shows an accurate picture of democracy.
Although Web3 might not replace Web2 anytime soon, it can undoubtedly offer unforeseen ideas and projects for the entire system. Therefore, as new ideas come, the way Web3 could eventually work might differ from what we see today.
Now that you are familiar with the concept, let’s look closely at how to invest in Web3 and promising strategies to get the best out of it.
How to invest in Web3?
If you want to build your new Web3 investment plan, below are several ideas:
Do you want to be a passive or active investor?
Purchasing an index or a portfolio already adjusted is an example of passive investing. On the other hand, active investing involves choosing particular assets and digital products that you think will beat the overall market predictions over time.
Web3-focused equity indices are, as of now, relatively uncommon, although they are gradually increasing. Simplify Volt Web3 ETF, which predominantly focuses on U.S. and overseas Web3 businesses, was proposed by well-known ETF issuer Simplify Asset Management in January of 2022. The precise date when this ETF will be listed is still unknown. Another example is the WEB311 ETF from Hashdex, which is publicly traded with a net worth of assets of more than 6 million U.S. dollars.
Additionally, passive Web3 investors can invest with crypto-specific advisers or purchase Metaverse ETFs like the Roundhill Ball Metaverse ETF.
What projects and startups do you want to invest in?
If you choose to invest in Web3 assets actively, it would be best for you to build a selection of equities or digital assets that are widely known. You personally should also have the confidence that they will perform outstandingly in the long term.
Among the most popular Web3 stocks currently are Meta (former Facebook), Coinbase, Block, and others. Assuming they might eventually join the club, some investors even classify Web2 tech giants like Apple or Amazon as Web3, as well as Metaverse enterprises.
With tools like CoinMarketCap, you have a chance to find projects in each tier of the Web3 ecosystem by filtering assets by category. You can choose from tens of thousands of coins as well as NFTs and other digital assets. The most significant assets that are highly likely to be widely used in the Web3 to invest in are as follows (filtered by categories):
Market cap: Bitcoin, Ethereum, Tether, BNB
Total Value Locked (TVL): BNB, Tron, Avalanche
NFT Volume: Bored Ape Yacht Club, CryptoPunks, Moonbirds
Proof-of-Stake coins: Solana, Cardano, Algorand, Tezos
DAOs: MakerDAO, BitDAO, Curve, Compound
Metaverse: Decentraland, The Sandbox, Axie, ApeCoin
Think of your asset allocation
In general, mathematics or perception can be used to choose the ideal asset mix for your Web3 portfolio. Using math allows you to apply Modern Portfolio Theory (MPT) concepts to maximize return at a specific level of risk.
According to your sense of conviction or tolerance for risk, you can choose position amounts intuitively. If you’re speculating, it is recommended to only hold a few assets that together account for a certain portion of your portfolio. Make it around 25 to 30%.
On the contrary, if the risk is your main concern, you should restrict every investment to like 5%. Generally speaking, the greater your risk tolerance is assumed to be, the broader your time horizon.
Remember that apps, especially Layer 4, use a variety of underlying protocols, which means that everything laid within may crash if one or more of the foundational elements fails for whatever reason, be it Denial-of-service threats, smart contract issues, or oracle errors. Therefore, when you decide to invest in Web3 projects, take this into account.
Regularly check and modify your portfolio
The Web3 portfolio you have assembled will inevitably stray from your selected allocation when some assets surpass others.
It is highly recommended to constantly review and adjust your portfolio by selling some of your overweight assets and acquiring more of the underweight ones to sustain your risk tolerance level. Generally, this is recommended assuming your conviction and level of comfort with risk have not changed.
Now, when you have a bigger picture of how to invest in Web3 and understand the theory, let’s look at its ups and downs.
Advantages of Web3
First of all, it is the widely spread optimism that the whole concept will be reliable and functioning. This concept is meant to give companies and customers more autonomy. Decentralized networks will be used to guarantee that users always gain control over their personal data.
Because Web3 will be able to recognize your interests, you will have the chance to customize your online user experience. Additionally, this will help you browse the web more effectively.
With the use of Web3 artificial intelligence, sellers can understand your purchasing needs and present the items/products that you might be willing to buy. As a result, you can browse as usual and have access to more appropriate advertisements that will be relevant to you.
Also, no online activities will be held back anymore. Decentralization will prevent users from constantly worrying about their credentials being banned or operations being interrupted for technical or other factors because all data would be held on distributed nodes.
Thus, Web3 does not need centralized management. The probability that more prominent companies no longer have total authority will attract new investors. Decentralized programs cannot be censored or restricted in any way.
Bear in mind that Web3 has benefits for everyone, not just large organizations with vast capital.
Disadvantages of Web3
Regulating is among the most complicated topics. In several experts’ opinions, decentralization might make Web3 harder to supervise and control. Hacking, cyberattacks, and online harassment may also surge due to this.
Moreover, there are doubts about the property. Contrary to popular perception, Jack Dorsey, the former Chief executive of Twitter, believes that “ordinary people won’t own Web3 businesses. Investors and venture capitalists will own it.” Because of this, control from above might remain centralized.
Stronger computers will be necessary for Web3. There is a good chance that older devices won’t be able to browse it. Therefore, you’ll need a device with solid hardware to browse the internet of tomorrow.
Operators of current websites will be required to update them to offer their digital services as Web3 applications and webpages become more widespread to maintain market share. Such an upgrade could be really costly and time-consuming.
Connection to one’s personal information could grow because Web3 might eventually become a vast, interconnected network. This is one of the network’s benefits, but it also makes it simple for anybody to access your online public and private information. Therefore, there is a chance that your privacy could be compromised because there are no third-party companies guaranteeing the protection of your personal data.
Given how frequently technology gets innovated, it is likely that the Web3 concept is here to stay. This trend is yet another innovative idea for further expansion that might bring us a bright future. Many people claim that the question “When will Web3 take off?” is not relevant anymore. We should instead ask, “What is the future of Web3 going to look like, and what will it be developed into?” These are challenging questions, yet every current pattern indicates that significant changes are on the horizon.
We may look to DAOs, the creative economy, NFTs, and other progressive ideas as well as entertainment to start putting the puzzle pieces together. We must begin to contemplate how these technologies will improve our environment as cryptocurrencies and blockchain become standard terms in daily conversation. Besides that, the whole concept will give millions of people new ways to invest in Web3.
This is just the start of the effort of upcoming generations to build a better web, open for everyone. Our Internet’s future is optimistic as long as we continue to enhance the foundation that will support it.
Thus, Web3 is very promising despite several issues. By the end of the ongoing decade, we will find out whether it was too utopian to implement or if we have witnessed a revolution.