In the late 1990s, most of the Internet activity was around user consumption of data build around networks like Yahoo, Netscape, AOL and others. The second generation of the Internet came a decade later with the advent of social media where consumer data became the product. It created monopolistic technology companies built on advertising revenue.
The Internet is moving towards a decentralised community-driven Web 3.0. This new version of the Internet is built around the user owning the data. If the initial versions of the Internet benefitted the investors, this new version aspires for a fair, decentralised, equitable and participatory Internet. We are not there yet, but we sure are headed that way with many hurdles to overcome.
Building confidence in Web 3.0
The crypto crash this year knocked USD one trillion off the combined market capitalisation of the world’s cryptocurrencies, according to Goldman Sachs. The taxation approach of the Indian government and the crypto market crash is a source of concern for investors. It affects their confidence in the underlying blockchain technology that enables Web 3.0. Recent events however could be viewed as price discovery events, and these occur annually. Every asset class goes through a cycle of bull run, a pullback, which is followed again by a bull run.
Investors must view market price as just one indicator of the adoption of Web 3.0. They should consider other parameters such as developer and social media activity around an asset. They could also look at how many institutional investments are being made in the Web 3.0 ecosystem.
Venture capital interest in blockchain and cryptocurrency start-ups was under USD 10 billion in 2020, and the funding shot up to USD 32 billion in 2021, marking an annual increase of more than 370 per cent, according to PitchBook data. As of 2022, there are now 65 total crypto unicorns as per The Block Research. So overall, the world is invested in this technology shift and an average investor could consider these price corrections as lagging indicators.
Changing investor mindset
Investments in the Web 3.0 space are not merely an opportunity for short-term investment gains. Instead, they should be viewed as investments in a technology opportunity.
In the late 1990s, there was the dotcom bubble, a rapid rise in US technology stock equity valuations fueled by investments in Internet-based companies during the bull market. The Nasdaq rose five-fold between 1995 and 2000, but when the bubble burst, it saw an almost 77 per cent drop, resulting in losses worth billions of dollars. Price corrections in the early stages of Web 3.0 are similar to the dotcom bubble.
Had Indians pulled back their investments at the time, they would have missed opportunities presented by the Internet of today. However, in certain ways, India did miss out on that opportunity. We lacked the framework that would have helped create homegrown tech innovators and giants. The best we were able to manage was to become an IT services hub, and we are still reliant on foreign companies coming to India with technology and investments. We are now presented with an opportunity again.
Increasing taxation could be a deterrent
Investments in Web 3.0 development should be made by the Indian government as well as retail and institutional investors. These investments should be geared towards spurring growth in the Web 3.0 infrastructure and those who are supporting its development.
Policymakers in India are mulling over a 28 per cent Goods and Service Tax (GST) on cryptocurrencies, which is over and above an already imposed 30 per cent tax on profits made from crypto assets and Non-fungible Tokens (NFTs). It can act as a deterrent to the growth and adoption of the Web 3.0 ecosystem within India. It’s advisable to develop a supportive policy framework geared towards directing investments in the technology and start-ups working in this space to help them grow. The technology is still in its infancy, but India must course-correct to avoid losing out on the opportunities presented by the future of the Internet.
The government must communicate that it is fully committed to investments in the technology and is supporting the companies.
Developing the right framework
What the crypto industry can do now is to try changing the mindset of the public and the government from merely viewing it as a short-term investment vehicle. The industry must create high-level educational opportunities for policymakers, guiding them on how to best regulate the sector. The crypto industry must work with the government to develop the right regulatory framework that enables full disclosure and identifies risks Such an effort can help educate retail investors so they can invest more in the Web 3.0 infrastructure besides crypto and tokens.
Web 3.0 is not limited to cryptocurrencies; the focus should be on the technology that enables the next generation of the Internet. The future includes stable coins, metaverse, gaming and real-world applications of NFTs. The most important of these shifts is peer-to-peer decentralised finance that enables borrowing and lending directly without relying on traditional financial institutions. It will play a major role in financial inclusion and in spurring the next wave of entrepreneurs.
Kapil Rathi, co-founder and CEO of CrossTower. He has experience and expertise in building exchanges in regulated markets. Prior to founding CrossTower, Kapil was the Chief Operating Officer (COO) at AlphaPoint.