In the face of rocketing Web3 development and emerging projects, Jocy Lin, the founding partner of IOSG Ventures, called on all blockchain enthusiasts to see through the tide and figure out what’s bringing real value to the ecosystem’s growth.
While speaking at IOSG’s eighth Old Friends Reunion Scaling Summit, one of the most influential blockchain events in Asia, Jocy took the opportunity to reiterate his enthusiasm for layer-two scaling, DeFi, GameFi and SocialFi, while offering a comprehensive view on building Web3 through a multichain world and the Metaverse.
Web3 is unstoppable
In the Web2 era, ownership and value of user data are monopolized and controlled by major platforms. In contrast, Web3 is an internet of builders and users, and tokens are the link. Users will have more control over their identity and data in the Web3 world. High replacement costs, strong network effects and user experience are the barriers set by today’s internet giants, which will not be subverted in the short term. Nonetheless, users’ pursuit of identity and data-control rights will eventually usher in the new age.
The Web3 technology stack constitutes the overall skeleton of blockchain projects, while a large number of innovative, open-source and modular protocol stacks make up its app ecosystem. The open, transparent, inclusive and collaborative community management culture will become the consensus.
The multichain world, stimulated by Ethereum’s congestion, is thriving. The phase of bubble-pushing growth (the second round of the bull market), where the inflow of investment capital (speculative value) is faster than productive capital (utility value) while asset prices continue to inflate, leads to inevitable collapse. However, infrastructure tech projects will still establish themselves as the industry’s new default initial value, while platforms that continue to procure apps defining niche industries will proliferate during the cycle. Soon, as the technical cycle of Web3 expands and integrates, the Metaverse will also gradually penetrate everyday life and lead the industry to a bubble.
The industry’s shift is being driven by open-source innovation. Furthermore, the market’s changes behind each wave follow a similar pattern of market decentralization, an expansion period and a consolidation period, and the process is repeated in a continuous cycle. The support behind the decentralized value advocated by Web3 is a decentralized technology stack, the development of which is accompanied by scalability and security issues that are becoming crucial to solve.
Investing in crypto trailblazers
“Our main focus areas this year include layer-two scaling, DeFi, GameFi and SocialFi,” Jocy declared at the IOSG Summit, “from infrastructure to the application layer.” He further gave unique insights on related challenges and future opportunities.
Layer-two scaling thinks highly of the future of modular blockchains
The current landscape of layer two is still dominated by Ethereum scaling solutions, while cross-chain liquidity protocols and some non-Ethereum layer-one data availability chains are still in the early stages. Layer one is rapidly iterating to layer two, and competition within layer two is intensifying.
Simply put, a blockchain has three basic responsibilities: execution, security and data availability. All three have long been conducted on one chain with relatively low efficiency, leading to the scaling trilemma for blockchains nowadays. The main role of layer two is the execution of transactions. Under the modular blockchain concept, execution, security and data availability are separated, with the development of the execution layer being the most compelling in 2021.
In terms of security, this layer is limited to Bitcoin and Ethereum because of the high barriers established, and there is no plan for Bitcoin to compete with Ethereum in the near future. In terms of data availability, Ethereum is still leading, mainly because of the large number of fragmented chains developed upon the security of its main chain. At the same time, we cannot ignore the potential of other data availability chains. With the development of Ethereum 2.0, when more and more data availability is provided thanks to rollups, the main chain’s transaction speed will be greatly improved and the fees reduced.
Our investment thesis for layer two is a continued focus on rollup, middleware (cross-chain bridges) and DApp ecosystem opportunities. We believe that the key to solving the scalability problem is separating the execution layer from data availability.
DeFi is still sexy — infrastructure, layer-two DeFi and NFT financialization
Spot market DEXs are in the most mature stage in the core (primitives) DeFi layer with extremely high barriers to entry. Hence, new projects trying to move in this direction on Ethereum are facing a high likelihood of failure. On the other hand, lending and synthetic asset directions are still open for new entrants. As for lending protocols, the design space hasn’t been fully explored, thus even on the Ethereum mainnet, an innovative lending protocol design could present an interesting investment opportunity.
The interesting trend that we see is multichain expansion of Ethereum-native protocols such as Sushiswap. Generally speaking, the Sushiswap/Uniswap version 2.0 forks on these new chains have much better performance, as they are able to use token incentives and are fully focused on community-building within the ecosystem.
Regarding layer-two innovation on DeFi protocols, the core idea is about building protocols on top of the existing DeFi primitives, providing value to the existing ecosystem, and optimizing liquidity and user experience as top priorities.
Another exciting area is the financialization of NFTs that could be used as the collateral in DeFi protocols for loans, minting synthetic assets, or margin trade.
Finally, the cross-chain DeFi protocols are developing in a similar direction as layer ones, becoming a tech infrastructure, on top of which new cross-chain primitives and related apps will be built.
With the improvement of layer twos and the rise of cross-chain solutions, it is expected that DeFi will have greater interaction with traditional markets in the future, most likely in the decentralized exchange market and within real asset collateralization. Currently, DEXs are mainly driven by arbitrage opportunities, with bots being the main market players. layer-two development will lower fees and thus incentivize more people to use DEXs. In the medium to long term, DeFi will have more interactions with the traditional fintech industry.
GameFi — We don’t need faster horses
Current blockchain games are experimental infrastructures that are still being built, with software development kits, middleware, platforms (Web3 Steam), and metaverse platforms (DCL, Sandbox, etc.) are the three key catalysts.
We found the core of GameFi is a fundamental shift from a centralized supply of entertainment to a decentralized, collaborative and democratized paradigm of producing and consuming fun. TikTok, for example, cannot compete with centralized content producers like HBO, but TikTok has empowered creators through its fair distribution algorithms, creating a larger multilateral content market. Blockchain games are similar in that they rely on empowering communities and thus motivate gamers to become participants and producers of the game ecosystem. The future of GameFi is the popularization of the “guild” concept, which brings together a wide range of players through the binding of interests.
SocialFi — Social financialized value and how to price influence?
SocialFi will empower social value through a tokenization scheme. When categorizing people by their level of influence, it is clear that their underlying social value has not received corresponding economic returns in Web2, regardless of category.
- Celebrities: Lack of ways to monetize influence; solve by publishing a personal social token or NFTs.
- Macro key opinion leaders (Youtubers): Agencies take the bulk of profit and exploit creators; solve by tokenizing creators’ works through DAOs and other Web3 models, and weaken the role of platforms.
- Key opinion consumers (general public): User data and privacy are sold to advertisers; solve by tokenizing their social relations, which will be unbinded from social platforms in turn.
In terms of the market’s size, the lower the category, the bigger the market opportunities targeting the general public.
Five years ago, we started envisioning how exciting a Web3 world would be. Fast-forward to 2021, witnessing the impressive tractions made by different crypto apps, we can now proudly announce that Web3 has finally arrived!
To check the full video: https://www.youtube.com/watch?v=BkbgJ-q3FNg