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The Web3 World

January 2022

Canvas Ventures | Jan 2022

Defining Web3

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Why now?

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Categories

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VC Landscape

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Appendix

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Table of Contents

• DeFi
• Decentralized Apps
• DAOs
• NFTs
• Guild Education/Reskilling

Canvas Ventures | Jan 2022

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Defining Web3

Canvas Ventures | Jan 2022

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The Paradigm Shift - what is Web3?

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Web3 represents an ecosystem of software apps, tokens, protocols & networks that are decentralized & built atop the blockchain, enabling greater individual user transparency, control & power

• Self-sovereign ownership + control of data (no central server owning or controlling)

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Key characteristics →

• Open - developed by open & active communities of developers/OSS
• Trustless - can interact public or privately on network w/o need for trusted third party
• Permissionless - without approval of governing body + anyone can participate

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Web3 - a historical timeline

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Web 1 (1990-2005)

Open protocols decentralized & community-governed

Most of value accrued to edges of the network — users and builders.

Web 2 (2005-2020)

Siloed, centralized services run by corporations.

Most of value accrued to handful of companies like FAANG

Apps are built on single server/single database

Web 3 (2020-present)

Combo of decentralized Web1 w/ advanced modern function of Web2

Most of value owned by builders & users

Apps built on blockchains, decentralized networks of P2P servers or hybrid of two

Source: Fabric VC

Canvas Ventures | Jan 2022

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Web 2 vs. Web 3

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Source: Ethereum.org

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Corners of the World in Web3

dApps = Decentralized Apps that interact with the blockchain through smart contracts

DAO = Decentralized autonomous organization powered by Web3, membership orchestrated by tokens & governed by smart contracts - not governed by single person

NFT = non-fungible token -- has a rare, indivisible digital identifier (often manifested via art) that cannot be copied/substituted & recorded in blockchain

DeFi = decentralized finance, suite of products acting as replacements to financial institutions - lego blocks w/ lower fees, no intermediary

Blockchain = A P2P (peer to peer) model instead of centralized network

Blockchain based transfer - chain of blocks over decentralized network with no single entity in control

New block appended to chain of blocks to process a transaction from sender to receiver via 1 of two consensus mechanism

Proof of work PoW (miners compete to validate transactions)

Proof of stake PoS (use deterministic selection process based on proportion to quantity of currency to validate transaction)

Ethereum =

blockchain platform w/ its own cryptocurrency, called Ether (ETH), and its own programming language Solidity.

- As a blockchain network, Ethereum is a decentralized public ledger for verifying and recording transactions.

- Enables the creation of smart contracts + decentralized applications

-Almost all of DeFi today runs on ethereum smart contracts

Smart contract (powered by ethereum) = self-executing contract w/ terms of the agreement between buyer and seller being directly written into lines of code.

Gas Fees = Cost for performing a transaction or executing a smart contract, measures cost of computation. Price is variable and usually is paid in ETH to miners or validators

EVM = ethereum virtual machine, executes ethereum smart contracts (coded in Solidity). Acts like a decentralized computer engine that has millions of executable projects

Source: DeFi Masterclass

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Flow of Funds in Web3

Invest in tokens, yield farm, NFTs, DAOs etc.

Bank

Crypto Exchange

Wallet

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Why Now?

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Explosive Growth in Web3 Adoption + Assets

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Explosive Asset Growth + Return Profiles

• Network cap of Bitcoin/Ethereum → over $2T
• $250B+ DeFi market in Jan 2022 up from $14B in 2020
• 2 months → $1.5B market in user-owned media & crypto collectibles emerged

Increasing User Adoption

• 161M ethereum addresses, 450K ENS domains
• Coinbase, 73M verified users, $180B+ crypto assets, Gemini, $30B+ assets

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Increasing corporate/financial institution adoption

• US 10-year treasuries yield < 1% APY vs. stablecoins, 2-12%, exotics 250%+
• Goldman, JPM, Morgan Stanley, BNY Mellon offering
• Trading desk for digital assets
• Clients exposure to digital assets
• JPM digital token and blockchain platform

Source: CoinMarketCap, EtherScan

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Canvas Ventures | Jan 2022

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Growing Maturity of Ecosystem

Economic interest in crypto grows in waves (in middle of third wave) BUT ecosystem beneath has been maturing quietly underneath “hype”

• Early days → coins & trading
• Now → highly diversified set of opportunities spanning exchanges/brokerages
• Global + Regional, beyond BTC & ETH

• Experienced & new developers attracted - more robust code & apps
• Influx of Capital - $8B investments in crypto & blockchain H1 2021 vs. $4B in all of 2020
• Crypto Regulation - getting mainstream attention, stance toward regulation vs. banning

Source: Lightspeed India, Google Trends

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Canvas Ventures | Jan 2022

• Adoption + asset growth rapidly growing, but not yet mass market
• Opportunity to solve core issues blocking from greater mass market accessibility → core DeFi pipes, UI/UX experience
• Opportunity to place bets early in next-gen Web3 apps e.g. P2P marketplaces, vertical apps built atop blockchain
• Paradigm’s Matt Huang joined Stripe’s BOD - Stripe Crypto relaunched

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• Increased development of DeFi pipes built atop blockchain
• Increased DeFi builders + building blocks creating pipes to enable more applications, decreasing barriers to entry
• Innovation especially in lending & borrowing (decentralized exchanges, AMMs, yield farming)

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Why Now - Key Themes

• Paradigm shift in software architecture toward decentralization/self-ownership of data
• Backlash against FAANG, Web2 companies monopoly of data
• Explosion of data sources w/ rapid maturation of cloud & ML
• Software serving us in intimate/personalized ways, but apps can’t maintain true data self-ownership & anonymity
• Blockchain offers high-integrity way to share data across users/apps

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• NFTs & Trading Cards & Games brough greater consumer adoption + novelty/assets in crypto
• NFT trading volume hit $10B in Q3, 700% increase from Q2
• OpenSea - 280K users passed $10B in cumulative transaction volume (Nov 21)

Canvas Ventures | Jan 2022

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• DeFi
• dApps (decentralized apps)
• DAOs
• NFTs
• Guild Education/Reskilling

Categories

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DeFi Overview - “Money Legos”

MOST DEFI APPS BUILT ATOP ETHEREUM

• Collection of open source products built atop blockchain to replicate pieces of financial institutions, “legos”
• Existing resources used as building blocks
• Allow developers to do more with less → rapid and compounding innovation

Source: DeFi Masterclass

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Canvas Ventures | Jan 2022

• Wallets, DeFi-Native Frontend & User Apps
• Third-party vendors that connect various applications across layers to provide clearer UI/UX user visibility
• Usually combine something from application layer with better UX/UI
• E.g. Metamask wallets, Zapper - dashboard of positions & value, InstaDapp- view & move positions of different protocols
• DeFi Primitive/Application & Tooling Layer
• Apps & services that users engage with turning settlement & protocol layers into product
• E.g. decentralized exchanges, lending platforms, yield farming, derivatives, trading, most common DeFi apps
• Oracles Layer
• Oracles = form of communication between outside world & blockchain
• Provide external data to smart contracts that operate on blockchain tech to execute disbursement of money
• Ex: Chainlink, UMA
• Units of Value Layer
• Base layer upon which DeFi transactions are built, “layer 0” - units of value
• Example: Public blockchain and the cryptocurrency (e.g. Ethereum / ETH) OR tokenized version of IRL assets
• Transaction Layer
• Include protocols, rules written to govern tasks and transactions, are interoperable, creates liquidity
• E.g. trading protocols - Solana, Ethereum, Polkadot

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The DeFi Layers

Source: DeFi Masterclass

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Canvas Ventures | Jan 2022

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DeFi Areas of Opp - Infra Applications & Tooling

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DeFi Area of Opp - UI/UX, Frontend & User Apps

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Decentralized apps - app built atop the blockchain leveraging smart contracts, unbundling data ownership + application logic

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EXAMPLES

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Decentralized content sharing →

• Open-source/decentralized P2P model of sharing, regulating & managing content
• E.g. Twitter launching crypto team for decentralized social media + creator crypto

Decentralized data networks →

• Apps leveraging decentralized data networks for ML/AI for precision medicine, climate modeling etc

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New Web3 stack emerging to power these apps

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Decentralized “Web3” Apps Overview

Apps

dApps

Source: London School of Economics

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Canvas Ventures | Jan 2022

Potential other applications… more food for thought!

• Healthcare - specifically data interoperability, PII protection/de-identification could find huge impetuses from web3 apps.
• Supply chain management - e.g. inventory tracking, provenance verification, automated credit financing and auditing
• Community-owned networks - e.g. openness and transparency around info ranking and filtering
• Highly personalized UI - e.g. cryptographically connecting data from individuals, machines & corporations with ML
• Financial compliance - e.g. automatic compliance built into transfer function of every asset, credit scores

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Decentralized App Sector Applications

Insurance

• Insurance for smart contracts
• Blockchain apps to
• Automate claims functions, verify coverage between companies/reinsurers
• Automation of payments between parties for claims
• Gartner estimate: Blockchain will generate $3.1T for insurtech industry
• Ex: Tari Protocol, Opyn, Nexus Mutual

P2P Marketplaces

• Trading data, value creation, info with counterparties you don’t know or trust w/o intermediary
• Can now trust all network constituents implicitly w/ instant payments, trusted data transfer
• Ex: P2P marketplaces beyond crypto collectibles for labor, exchange of goods & services, platforms to bring crypto/blockchain principles to existing marketplaces

Canvas Ventures | Jan 2022

Crucial Properties

• Rare
• Indivisible
• Cryptographically unique w/ unique value

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Use Cases (to date)

• Gaming (fortnite skins)
• Digital assets (virtual land, name services)
• Identity (academic credentials, medical records)
• Collectibles (Sports/trading cards)

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History

• 2017 - first NFTs, “CryptoKitties” collectible cats
• 2018 - first minting & marketplace platform
• 2021 - creators experimenting with NFTs across verticals - arts, sports, fashion, music
• Future - new NFTs + NFT infrastructure

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NFT (Non-Fungible Tokens) Overview

Stats

• Dapper Labs of NBA Topshot Game/NFTs $7.4B valuation
• Blockchain-based fantasy soccer gaming platform Sorare $4.3B valuation
• NFT trading volume hit $10B in Q3, 700% increase from Q2
• OpenSea NFT Marketplace - 280K users

Source Credit: The Block

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Canvas Ventures | Jan 2022

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NFT Areas of Opp

Source Credit: The Block

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Canvas Ventures | Jan 2022

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DAO (Decentralized Autonomous Organization) Overview

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Common characteristics:

• Not governed by a single person and governed by smart contracts, e.g. company/co-op with no managers
• Members join by buying token which buys them partial “ownership” in terms of governance tokens to have a say in decisions, making proposals & management of DAO
• Geared toward shared purpose → creation of value

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Technically vs. Socially-Oriented DAOs

• Technically-Oriented - focus on building, perform actions on-chain
• E.g. MakerDAO - technically oriented with extremely strong social component
• Socially-Oriented - bring together groups of people to interact and convene
• E.g. Friends with Benefits DAO - cultural membership

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April 2021: Wyoming Governor recognized DAOs as LLCs

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Source: DeepDAO, Nov 21, Skadden

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Canvas Ventures | Jan 2022

DAO Picks + Shovels Tooling

• DAO Formation & Governance
• Ex: Snapshot - voting, Aragon - formation, Orca Protocol - governance
• Community management software for DAO
• Feed to follow friends, see what contributing
• Project management & payments tooling for DAOs
• Task management for getting things done
• Ex: Utopia Labs, Parcel.money

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Managing the UI/UX of DAOs

• How do you manage + communicate accessible user experience
• Ex: ENS AirDrop

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DAO Areas of Opp

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Source Credit: Lisa Xu

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Canvas Ventures | Jan 2022

Web3 = new stepping stones of how we coordinate human work + extract value

• Coordinate humans at scale w/o knowing or trusting each other
• EXAMPLE
• Axie Infinity - players acquire digital pets (Axies), battle teams & sell using in-game currency, can be traded for actual money

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Guild scholarship model

• Development of new “play-to-earn” model
• Players face high start-up costs for join new play-to-earn games, scholarship funds are fragmented, new toolsets
• Bottleneck at human/skill level not capital
• Future of “guilds” catering to different play-to-earn social guilds (beyond gaming)
• EXAMPLE
• Yield Guild Games - play-to-earn gaming guild that gives players resources/funds to start playing

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Gap between new platforms + workforce skills

• New skills required in Web3 world - solidity coding for engineers, yield farming classes

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Guild Education + Reskilling in Web3

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Canvas Ventures | Jan 2022

Guild Scholarship & Coordination

• Guild scholarship funding, education & hyper-specialized skill training for gaming & overtime more metaverse applications
• More “play-to-earn” social guilds, social tokens
• Examples
• GuildFi - infrastructure on onboard, connect, add value to players, guilds and games alike
• dOrg - Full stack Web3 development collective
• Others: LexDAO, Bankless, Deep Work

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Guild Education + Reskilling Opportunities

Web3 & DeFi upskilling

• Providing education & tooling on key coding languages - e.g. Solidity, RUST & Web3 app development
• Examples
• HackerDAO - training Solidity engineers
• Braintrust - connecting to technical crypto talent

Canvas Ventures | Jan 2022

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Web3 VC Landscape

Canvas Ventures | Jan 2022

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Canvas Ventures | Jan 2022

Regulatory Risks

• Increased SEC regulation especially of exchanges & any token-issuing company that does not register
• Likely more compliance, AML + regulation of any companies especially those issuing cryptocurrencies
• NO regulation of NFTs or DAOs yet
• Good news → US reg as recognized cryptocurrency as legitimate currency & asset
• Bad news → no clear regulatory framework yet

DeFi Bugs + Security Risk

• Contract bugs, poor protocol parameterization, on-chain congestion, oracle failure
• Security & central/decentralized exchange hacks

Market Timing

• Crypto, blockchain + Web3 adoption does not happen as quickly as expected, takes longer for consumer and B2B dApps to reach escape velocity
• Still early in adoption cycle of crypto assets

Sustained Bear Market

• Lower trading volume, negative sentiments from traditional finance, low liquidity

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Key Risk Areas

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Why Are We Excited?

Massive positive societal implications of Open Finance

• Making units of value—stocks, bonds, real estate, currencies, etc.—interoperable, programmable, and composable on open ledgers → capital markets more accessible to all

Implications of Web3 & Self-Sovereign Ownership & Control of Data

• With users able to own more of their data, data monopolies will crumble (e.g. FAANG of world) and developer ecosystem will operate & cooperate in tandem more than ever before

Paradigm Shift in Business Models

• Decentralized biz models don’t reward single central entity, instead fairly incentivize all contributors & participants, creating digital economy leveraging trustless P2P networks & token-driven incentives
• Shift from zero sum game capitalism to collaborating communities
• Today - central entity e.g. Facebook attempts to capture entire value created by community of users, but users receive no financial upside in return

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Canvas Ventures | Jan 2022

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Appendix

Canvas Ventures | Jan 2022

DeFi is decentralized, hard to regulate in single jurisdiction

• Teams leverage decentralization to stay away from regulatory pressure of launching securities

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What a company needs to do today to transfer fiat:

• 1) License as as a Money Services Business with FinCEN (US) and FINTRAC (Canada)
• 2) Money Transmitter Licenses on a state-by-state basis
• 3) BitLicense for each state (or e-Money License in the EU)

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Canada

• First company to approve Bitcoin exchange-traded fund Feb 2021
• Business must register as Money Service Business with FINTRAC

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Europe

• Cryptocurrency legal throughout most of EU, exchange governance depends on different asset states
• MiCA - markets in crypto regulation framework to increase consumer protections, licensing

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Regulatory Breakdown

United States

• US Treasury OFAC (Official of Foreign Assets Control) taking greatest action
• Has yet to develop clear regulatory framework for asset class across organizations
• Securities & Exchange (SEC) - views tokens as security & regulated under Securities Act if meets Howey Test
• ICOs limited from US investors
• Commodity Futures Trading Commission → views cryptocurrency as commodity
• IRS - taxes as property not currency
• Most SEC crypto cases → related to unregistered securities or AML regulations
• Blockchain Credit Partners, Poloniex, BitMex, BlockFi, SUEX
• Consequences -> fines or sanctions
• Look out for
• More investor protections
• AML/Fraud protections
• Registration of securities

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Source: World Economic Forum, Reuters

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Canvas Ventures | Jan 2022

Layer 1

• “Layer 1” are different public blockchain platforms which are alternatives to ethereum to fund & execute transactions
• Often offer better speed/processing time or cheaper transaction fees
• E.g. Polkadot, Solana, Binance, Terra, Avalanche
• EVM Compatible - Binance, Avalanche, make networks compatible w/ EVM making it easier for devs to access
• Non-EVM Compatible - Solana, Terra
• Interoperable Chains - Polkadot, Cosmos, let developers create application specific blockhains that can talk to each other

Sidechains

• Very similar to EVM-compatible layer 1’s but purpose-built to handle ethereum excess capacity
• Application Specific Ex: Axie Infinity Ronin sidechain
• Allows users to move NFTs/token from ETH to lower fee given ETH fees so expensive - made game affordable & accessible to more users, has moved 7.5B from ETH to Ronin to pay Axie
• General Purpose Ex: Polygon POS
• Framework to scale ethereum instead of compete w/ it, transaction fees < $0.01

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Layer 1 vs. Layer 2 - Ethereum

Source: Ethereum.org, Coinbase

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Canvas Ventures | Jan 2022

Layer 2

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• “Layer 2” are solutions designed to help you scale your blockchain application by handling transactions off the ETH main layer 1
• Transitioning to Proof of Stake
• Why needed → transaction fees too high + take too long for many blockchain decentralized apps to make sense, building anything that isn’t DeFi is pretty hard given ETH latency & fees

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Rollups - Intermediary Step to Layer 2

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• Independent ecosystems sitting atop Ethereum & relying on it for security
• Solutions that “bundle”/perform transactions outside Layer 1 (thus computation offloaded) but sends updated transaction data to Layer 1
• Includes smart contract in layer 1 that can efforce correct transfer execution on Layer 2, no native token needed
• Ex: Optilistic Rollups - 10-100x improvements in scalability dependent on transaction
• Ex: Arbitrum ($2.5B deployed), Optimistic Ethereum ($300M deployed)
• Key risk - assume transactions are valid and turn to others to prove fraud in “Fraud proof window”
• Ex: ZK RollUps - bundle transfers offchain & generate cryptographic proof on Layer 2
• Key difference - does work to prove to Ethereum network that transactions are valid - via “validity proof” to every ethereum smart contract to make it impossible for relayer to cheat system
• Key risk -- validity proofs are computationally expensive + complexity surrounding validity proofs makes its harder to support EVM compatibility
• Ex: Starkware, Matter Labs, Hermes, Aztec

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Layer 1 vs. Layer 2 (cont)

Source: Ethereum.org, Coinbase

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Layer 1 vs. Layer 2 (cont)

Smart Contract Scaling Landscape

Source: Coinbase

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Canvas Ventures | Jan 2022

• “Tokenization is to ownership as digitization was to content”
• Tokenization = conversion of physical or virtual assets into digital units that can be built & sold
• Enables fractional ownership of assets, relying on smart contracts (usually built atop Ethereum)
• Almost any asset can be tokenized from artwork to gold to real estate
• Example of Tokenization
• Real estate worth $10M USD - tokenization allows you to fractionalize ownership to broader investor group
• Create a digital token, e.g. “LAND” to fractionalize ownership each of which owns 0.1% of land itself
• Can sell LAND tokens each representing small chunk of ownership to investors
• Types of Tokens
• Utility tokens → user tokens or app coins, do not derive value from external asset, cannot trade on exchange (e.g. Filecoin)
• Security tokens → digital assets representing legal ownership of asset that can be bought & resold (e.g. governance tokens providing ability to vote on critical decisions)
• Coins
• Native digital assets of a blockchain, defined at blockchain protocol level
• Keep base layer of blockchain operational
• E.g. Ether
• Tokens
• Enable the protocols/applications atop Layer 1 chain
• E.g. ERC-20 Tokens

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Tokenization + Tokens vs. Coins

Canvas Ventures | Jan 2022

• Network
• System of devices connected to internet working together to create + validate ledger of transactions happening within their shared system
• Protocol
• Predefined rules that dictate how the blockchain network operates
• ALL participants must abide by in order for blockchain to function
• E.g. how nodes interact with each-other, governance structure, incentives, pnealities, application interfaces

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Networks vs. Protocols

Canvas Ventures | Jan 2022

• Even though Bitcoin is open/permissionless, it is NOT private - history of every bitcoin transaction displayed on public blockchain
• Zero knowledge proof – allow someone to prove they know something w/o giving up information they know
• Proving that state of blockchain ledger is true & make senses
• Applications – identity, credentials, possible “credit scoring” in the blockchain, “programmable privacy”
• Examples:
• Zcash - digital currency public/private transactions with option for user to selectively disclose info
• Others - Iron Fish, Penumbra, Secret Network, Aleo

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Zero Knowledge Proof & Privacy

Canvas Ventures | Jan 2022

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Types of Cryptocurrency Networks

Stablecoins

• Coins tied to value of US dollar, can lock in gains regardless of market conditions
• Fiat-collateralized - tied to USD, lowest risk
• Crypto-collateralized - locked in blockchain to guarantee
• Non-collateralized - no collateral, highest risk

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Ethereum & Cosmos focused on DeFi, all networks listed on left use smart contracts

Source: Investopedia, Gemini, adapted from DeFi Masterclass

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Canvas Ventures | Jan 2022

• Investors lock-up crypto assets in lending platforms
• Borrowers deposit collateral in terms of crypto asset (e.g. ethereum)
• Borrower borrows crypto
• Borrower pays back loan + interest
• Loan + interest - fee paid back to investors
• All happens in trustless way on blockchain, no central authority

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Lending in DeFi

Source: Aave

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EXAMPLES

Canvas Ventures | Jan 2022

APE

Haven’t done any research of own, someone showed and walked in blindly

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SHILL

Get you in on a project

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NGMI

Not going to make it

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GMI

Gonna make it

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Coins vs. Tokens

Tokens can build on top of coins�

ATL

All time low

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FOMO

Fear of Missing Out

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Rug Pull

Start to engage with product or platform and rug pulled out beneath you

BUIDL

Building & contributing to blockchain & crypto ecosystem instead of passively holding

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GWEI

How gas fees measured

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HODL

Hold for long term

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SAFU

Secure asset form for users

Means assets are safe

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ATH

All time high

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SAT

Satoshi - homage to creator of bitcoin

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WHALE

Wallets holding massive amounts of ETH

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DYOR

Do your own research

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Terminology

Canvas Ventures | Jan 2022

• Classes
• DeFi Masterclass
• Media
• TheBlock
• CoinDesk
• Decrypt
• Data Sources
• DeFiLlama
• DeFi Pulse
• CoinGecko
• Blockchain.com
• GasNow - to check gas fees
• Etherscan - to check transaction history
• GitHub Tracker

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Additional Resources

Canvas Ventures | Jan 2022