Creative Disruption: How Web 3 Models are Capturing Markets & Customers

Good afternoon. I'm Jackie showback, co-founder and managing director of 14, 14 ventures and early stage digital identity venture capital fund. We invest in Pree and seed stage startups focused exclusively in the digital identity space. I'm very excited to be here with all of you today, virtually coming to you from Boston, Massachusetts. I'm hoping next year that I can be in person and make it over to Berlin. Cuz it sounds like you all had an amazing time there. So web three businesses are gaining traction.

I'm gonna talk a bit about some of the businesses we see emerging on blockchains, where disruption is happening now and where else more is likely to follow from areas like D five to DCI. New web three models are proliferating, but are largely separate from the traditional web two platforms. The opportunity for hybrid models exist and will explore what a bridge from web two to web three would need to encompass to realize the huge growth opportunity. So let's start with the definition of web three from Wikipedia.

Web three is an idea for a new iteration of the worldwide web based on blockchain, which incorporates concepts, including decentralization and token based economics. Some technologists and journalists have contrasted it with web two wherein they say data and content are centralized in a small group of companies sometimes refer to as big tech.

The item, the term was coined in 2014 by Ethereum co-founder Gavin wood. And the idea gained interest in 2021 from cryptocurrency enthusiasts, large technology companies, and of course venture capital firms like my own. There's a huge debate going on right now though on what web three actually is. So that's the definition, but what is it actually some say it's the worldwide web.

As we know it becoming more intelligent and more self aware others claim that it will be the death of the internet as we know it, but then others believe it will actually be the savior of the web by sorting out some of the mess which has been created over the decades. The internet we use today, doesn't have a native mechanism to transfer what computer science refers to as state the status of who is who, who owns what and who has the right to do what state, however, is a key property for managing values.

Today, servers are by default. The holders of state in web three, transaction execution and verifiability are part of the network. Protocols states captured in the network and always available. Decentralization is a core enabler communities set the validation rules for ownership, creation, behavior and other contextual features, not the centralized third party server platforms, which results all of this in a reconstructed value chain, web three economics favor creators or the user and disrupt intermediaries and brokers who generally connected users and creators to their customers.

This leads to greater transparency, visibility, and peer to peer exchange. And so we have the rise of tokenization and a fundamental shift in the economic model of the web shifts from the attention economy where the platform extracts economic value to a participation economy where the creator or owner of a digital asset or token extracts value and micro payments unlock value as well.

Network behavior is incented by tokens, which includes fungible or non fungible tokens NFTs, which have a utility or storage of value and are purpose driven or programmable with access rights or credentials underpinning. And in this web three ecosystem, everything lives on the chain and has an address. All the nodes work together to compute, verify and record the state change of the tokens. The crypto wallet is a human interface to the blockchain and holds the seed phase.

All the corresponding public keys and private keys, tokens and above all initiates the state change in this web three ecosystem, the human who controls the wallet, controls the tokens. And this is very important.

We'll, we'll talk about that a little bit later when we talk about bridging from web two to web three and potential hybrid approaches and last but not least VCs are all in on web three, VCs deployed 30 billion globally in 2021 in crypto startups, there are 65 plus crypto unicorns. Well, at least there were a few days ago. I know the markets have been moving a bit, but, but we'll see with over 40 of them created just in 2021. And there are close to 50 crypto startups that have raised over a hundred million in 2021.

And all of this web three ecosystem is an enabler to the metaverse and the myriad of business models. There I'd be remiss if I didn't mention this though, I'm really not gonna focus on this in, in the rest of our time today, but physical to digital, to physical and digital, to physical, to digital, et cetera. All of those are things that are really underpinned by, by this web three ecosystem. And so let's, now let's talk a little bit about growth and, and kind of where we see things going.

So if you just look at this chart, if we use blockchain growth as a proxy for web three economy growth, you can see that the blockchain is expected to increase a hundred X from 2018 to 2027. So huge growth. And if we look at a few consumer metrics, they show how web three traction is gaining momentum and increasing consumer adoption and usage.

The upper left chart shows the growth in Ethereum addresses of almost 10 X in just under four years from 18.7 million at the start of 2018 to 171 million by the end of September, 2021, the chart to the right and even more pronounced for steeper upward trajectory is with meta mask users. And then the chart on the lower left shows a very steady upward slope with unique wallets buying NFTs and the growth in Dows. It'd be remiss if not to take a couple minutes on Dows here, the growth in Dows seems to corroborate a very similar story with usage adoption and people engaging.

There were over 4,200 Dows as of January with a myriad of different across a myriad of different areas. As you can see on this page with all the logos and with over 2 million members and over 21 billion in market cap.

Now, some people might say that this is just a passing fad. Well, let's take a deeper dive into this and, and see. And so according to Forbes, at least from them from a business perspective, they're not a fad.

In fact, they're a platform here are three recent examples of Dows to illustrate this point. So let's double click, let's do a Dow double click on each one of these to kind of get a little bit more perspective. So first you have the constitutional Dow in November of 2021, which really put a spotlight on Dows as it raised 47 million in a bid for a rare copy of the us constitution while it lost, it showed how effectively people could organize to raise funds for this purpose. Second is the sunflower Dow. I'm sure some of you are aware of that.

Some of you may have even contributed to it aid for the Ukraine, which was 42 million was raised in the very first week globally. This is significant and demonstrates reach because it was done globally and with no government intervention to help people suffering in one country, get aid from people scattered across other countries. And then finally the planner Dow, this is super interesting. So this is us based and it is a guided defi decentralized finance defi do that's focused on providing certification for traditional financial advisors to be knowledgeable in digital assets.

It's based on the premise that digital assets and traditional financial assets will get integrated into people's portfolios. So financial advisors need to be knowledgeable or certified to deliver advice on both of these different asset types. Maybe this now was prescient, but in fact, just last week, my former employer fidelity investments announced that they would be enabling their 401k platform or retirement savings platform to accept digital assets as part of a worker's retirement savings and plan offering. This move is great. It's just a great example, really.

And it's a great move because of rather than waiting to be disrupted, Fidelity's embracing web three innovation and pushing to create a hybrid model to capitalize on future growth. Sure. It will require a framework of regulations and protocols and, and compliant processes, but they're proactively pushing this versus reacting to a startup staking out the white space. And since we're talking about finance, let's double click on another area in financial services that I think is also obviously right for creative disruption. Okay.

So digital asset exchanges and brokerages are really well positioned to become the next generation marketplaces for payments and for commerce. They have all the key ingredients, consumers, businesses built in defi capabilities to enable value transfer. I'm gonna share with you a few stats that I think just really frame this up and show how compelling this is. And in fact, even an example or two of companies I've come across that are actually already playing in this space and, and very well could be the next, the next platform.

So a few stats on the us credit card market illustrates how these exchanges can be viable contenders to replace credit card payment. So 17% of us credit card volume is driven by small businesses and micro merchants. Yet this group equates to 55% of credit card net revenue. There is a web three company in the us that I recently came across flexa, which is doing exactly this, except on an even broader scale. They're looking to minimize the cost of payments for merchants and are in production with several large merchants and smaller ones to drive this exact alternative.

While the initial focus of exchanges right now is digital asset growth. They have a growing suite of financial services that are enabling greater economic inclusion. Exchanges are eCommerce hubs that extend beyond investments in payments. Exchanges are both enabling and becoming a new marketplace platform that could one day compete with Amazon eBay, Etsy, Shopify, just to name a few because they can connect merchants and consumers.

And the chart of the right of the page shows the trillions of dollars in growth expected from marketplace platforms, which these new web three exchanges can play in using payments as a point of entry and additional opportunities abound where web three and blockchain can. Re-engineer new, more streamlined business models, creating greater efficiency, transparency, and peer-to-peer exchange. Here are our five quick areas where I've seen new businesses or models emerging on web three tech stacks. I'm not gonna get into all of the details, just paint a picture of each pretty quickly.

So you can get a flavor for how these are evolving and where they can very easily end up. So the first one is higher education, digital credentials using block certs in places like Malta, The Bahamas Estonia, of course, and Switzerland, we see the creation of digital academic credentials or certificates, replacing paper a second area where we've seen a lot as well is supply chain. And in Europe, Catena X is an automotive data exchange, including firms like Siemens and BMW, bringing greater speed and transparency to automotive supply chain.

It has the power to reinvent the way these big firms run their businesses. And then healthcare and decentralized science or Desi efforts are underway to use decentralization to streamline the clinical trials process for cancer research.

In fact, you know, funny enough, very, very recently in the last few weeks I was approached by a startup from MIT and they pitched me on the concept to do exactly this, this model would be less costly, more efficient and would reduce barriers to patient participation. So we'll, we'll sort of, we'll have to see they're they're in proof of concept mode, but we'll have to see how, how they're able to sort of bring that to life. The fourth area I wanted to quickly mention is content creation and distribution. The smart contract capability enables endless end user use and consumption of assets.

Underlying smart contracts can facilitate royalty payments to the original content creator for a true bottoms up approach where the user maintains control and, and is not only entitled to the payments for what they've created, but it's easily tagged to them and follows them. We've seen this in a myriad of industries. I'll just mention gaming, you know, as an obvious one, as an example, and then finally broader financial services beyond payments our fifth area.

I won't go into the details here, but in France, for example, document certification services, collateral management and KYC know your customer are ways businesses are using the French blockchain ecosystem. They have over 20 million document hashes. This paves the way for future businesses like foundational identity verification services and things like digital wallets, But even with all this opportunity, right? All of these web three models separated from web two and web two businesses trying to break into web three and having a discreet project of their own.

We see a lot of challenges right now. Here's a, a whole list of them.

I'll just, I'll pick on a few, but we're missing ramps on ramps from web two to web three, with agreed upon standards and protocols. We still have lots of fraud. Believe it or not. Right with the fishing of private keys, we see spoofing problems transacting across different chains, just to name a few. And we're also seeing the concentration of assets.

We're, we're still seeing that. And that's still happening of course, right?

In, in places like with Coinbase or, or with open sea. And that creates a very target rich environment. So those are just a few examples, but so how can we address these challenges so that we can realize the full potential of web three business models?

Well, one option is to use verifiable credentials through a digital wallet with verified data from the real world, by building a bridge, this particular bridge.

In fact, it not only begins to address some of the web three challenges I just mentioned, but it can create an on ramp from web two into new web three business models, having a digital wallet or an identity container where verified data is passed into the digital wallet and can be safely held and then presented to an identification, relying party for verification, and then can also be leveraged for countersign D I D credentials with a private key. Well, that's all potential path for this bridge. Sure.

There's still a lot of requirements to work out standards, ease of use privacy compliance and other regs, but beginning with verified credentials and data is a really good starting point. And so a few closing thoughts here, a verified identity solution can bridge the two worlds in all likelihood, successful web three businesses and web two businesses for that matter will buy versus build this on ramp. As complexity will be steep and really require specialist expertise. There are solutions in the works I've seen. I've seen a bunch of them.

In fact, one of them in particular, a recent company Unum ID, which is based upon a network, which is a marketplace for verified identity data shared with full user consent, enabling solutions. Like this can be a first step in bridging the two worlds and enabling the adoption and realization of web three growth potential.

You know, as I, as I reflect on what I've seen over these last few months, just as growth has accelerated and more and more companies are, are branching into the web three world. It feels like, you know, if we, if we take the two extremes, web two is all around permissioned and regulation, we web three is more about permissionless and really no regulation, full transparency. The hybrid is really meeting in the middle and maybe figuring out a way to have some protocols, some guardrail permissions, and of course some regulation.

So I will say thank you for allowing me to share my thoughts with you today. And I'm very excited to, to have been able to participate and happy, happy to take any, any last minute questions. If there are any.