Framework to evaluate Metaverse and Web3
It seems that every corner we turn to, we see another news or launch on metaverse and Web3. Just last week, Microsoft announced spending $68.7 BILLIONS in cash to buy Activision.
The onset and growth of NFT in 2021 combined with this year's enthusiasm in metaverse and Web3 feel like AI in 2013 and blockchain in 2014. All of us are inundated with so much information, conflicting or confirming signals, and a sense of, dare I say, FOMO.
How can we evaluate metaverse and Web3 in a noisy and nascent environment? Below is a framework that I have developed to evaluate emerging technologies and themes. I hope you will also find them helpful.
Understand what are the "pipes" in an emerging space. Metaverse and Web3 will have to co-exist with the current Internet irrespective of what people say. So, companies that play a significant part hosting, moving, and store information and data using the Internet have very interesting adjacent use cases in Metaverse and Web3, whether that is in infrastructure or data analytics or compliance. This leads to the next point.
Understand the apps layer and what infrastructure enables them. Gaming or crypto exchanges or NFT marketplaces would not be what they are today without the technology that enable rapid development of scalable and secure apps. Yes, per Chainalysis and other analyses, it is estimated that about 30-40% of Ethereum is self-hosted but the rest runs on major cloud providers. From this lens, Microsoft's acquisition of Activision makes even more strategic sense. It is not just about the games themselves, it is also the infrastructure that powers those games.
Follow how money flows. Knowing how money and wealth flow in any complex and dynamic system helps develop clarity about that system. If you write a simple diagram of how money flows in Web3 today, unless you are extremely wealthy, you have limited capacity to meaningfully participate in the Web3 economy today. Not many can just buy 10 ETH in one day and use it to buy things. You must understand who reaps the value in the process, how that 10 ETH cycles through the system today and potentially tomorrow. Supply and liquidity are controlled by major holders and players in any market. Today, I would argue most Web3 apps are intended to encourage more inflow of capital so the existing major holders can leverage that to grow a nascent Web3 economy. So every time you look at a new Metaverse or Web3 application, understand how money flows.
Understand the makers and buyers and their short and long-term incentives. What is the use case or digital service that can be provided? What problem is the app solving? Does it matter? For most emerging technologies, if there is no use case with clear makers and consumers at a big scale and solving a real problem, then more likely than not the excitement eventually fizzles out, and the only stakeholders who continue to be excited are those that have too much to lose.
One of the biggest competitors often ignored is human being's time. We are only getting busier and yet each day is still 24 hours a day. The use of any new apps could imply that time is taken away from doing something else. The user must want to devote time to something new. How will Metaverse and Web3 compete with our time? I think we don't know the answer yet (at least for working adults whose cost of time is higher).
People and organizations need security and transparency. For any new technology or apps to take off at massive scale, they must be secure and transparent which are foundational for long-term trust and user loyalty. What does it mean for Metaverse and Web3 to be secure? This is an interesting question that must be answered by both the private sector and regulators. Cloud took off in more enterprises in part driven by the maturation of security standards and data protection rules.
My perspective is that unless you are a major thematic investment funds that has the (financial) capacity to bet on many projects and effectively create its own "index fund" to invest in an emerging space, we can use frameworks such as the above to help evaluate and understand new technologies and emerging technology topic.
This writing is my own opinion and does not represent investment advice.