What is Web3?

– Misconceptions, current adoption, and the potential

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 What is Web3? – Misconceptions, current adoption, and the potential

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 What is Web3? – Misconceptions, current adoption, and the potential

Web3 – the buzzest of buzzwords

A foreword by Anders Helseth.
People frequently misuse many words and their
associations for a variety of purposes. The
phrase 'Web3' has risen high on that list lately.
Numerous companies and projects brand
themselves as Web3 – but often, this could not
be further from the truth.

In my opinion, the so-called Web3 space is filled

with hypemen presenting Web3-irrelevant
visions in buzzwords. In addition, before hitting
the genuine Web3 projects and people out Anders Helseth
there, you will meet the exploiters, technically Vice President, K33 Research
sound groups of people exploiting the latest
craze for profits – under the guise of leading a
revolution.

That said, Web3 is a vague term that is not well-defined anywhere. Consequently,
evaluating the state of Web3 is an exercise of interpretation – and opinion. I am of
the opinion that Web3 is about the principles for interaction on the internet and that
technical solutions enable those principles – not the other way around. Technical
solutions that enable Web3 can also serve non-Web3 purposes.

The principles of Web3

1. Self Sovereign Identity – identify yourself without

revealing more than you need

2. Proof of ownership is directly attributed to you -

and you can move the proof freely

3. Together this will -> Break down walled gardens,

reduce rent-seeking, and shift the power to the users

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 What is Web3? – Misconceptions, current adoption, and the potential

Web3 is a promise to revamp the power structures of the internet. Large companies
control internet access and own the data on today's internet. On Web3, the users
are in charge.

Many of the current power players of the internet will be strictly worse off on Web3.
Governments and big businesses blocking or hijacking the Web3 movement, not
necessarily planned, but by continuously protecting their best interests, should
therefore be expected. True Web3 companies will, therefore, likely have to operate
on the limits of the law or beyond.

The incentives for initially well-meaning Web3 builders also highlight a crucial
obstacle for Web3. From a purely rational perspective, it would often be smarter to
build a centralized service with better chances of extracting more rents if the service
becomes popular – than to make it in a Web3 format. A proper Web3 company
gives more power for users to leave the service, hence kneecapping the potential
for rent-seeking profits. As a consequence, the valuation of the 'same' service is
lower in a Web3 setup.

That said, the progress made towards a more decentralized internet is substantial.
Blockchains enable Web3. Decentralized money has more than ten years of track
record for niche use. And the billions of blockchain transactions performed use a
simple variant of self-sovereign identity.

Further, good solutions utilizing blockchains are built, and better ones will be made
in the future. The obstacle is to create popular services built on Web3 principles or
pivot existing services to apply those principles.

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 What is Web3? – Misconceptions, current adoption, and the potential

Report summary
The promise of Web3
The Web3 principles promise to create a more decentralized and fluid version of the
internet, where users own their data and control their identity credentials. Through
blockchain technology, users can have a permanent, portable, and interoperable
identity that can be used across different systems and logins, reducing the need for
trusted intermediaries.

Web2 applications currently trap user data and assets in application-specific silos,
which means that when users move from one application to another, their digital
identity and assets do not follow them. This creates high switching costs for users
and gives the platforms significant leverage. In contrast, Web3 breaks down these
silos by allowing users to control their data and assets. Web3 empowers users to
take their whole, authentic selves across cyberspace by enabling data portability
and interoperability.

Blockchains enable Web3

Blockchains are a foundational technology that enables the development of Web3.
Unlike traditional databases managed by a central authority, blockchains are
distributed networks where all participants have a copy of the same ledger. This
mitigates the need to rely on a single party as the sole source of truth - an essential
cornerstone of Web3.

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 What is Web3? – Misconceptions, current adoption, and the potential

Specifically, blockchain technology presents practical solutions for self-sovereign

identity, asset portability, and execution of agreements without intermediaries.
Cryptographically controlled identity on the blockchain enables self-sovereign
identity, tokenization creates portable assets, and smart contracts execute without
middlemen.

Web3 investments skyrocketed in 2021 and 2022

After totaling just over $1 billion in 2019 and 2020 combined, Web3 funding increased
to more than $8 billion in 2021. The investor appetite rose further in 2022, with Web3
investments totaling more than $13 billion. In line with the crypto markets and
general crypto funding, investments tailed off in late 2022 and have stayed
subdued through April 2023.

Figure 1 – Web3 investments as defined by K33 Research

K33-defined Web3

$15bn
$13.3bn

$10bn
$8.6bn

$5bn

$0.9bn
$0.4bn
0
2019 2020 2021 2022

Source: Crunchbase, K33 Research

Web3 adoption depends on your definition of Web3

It is inherently hard to measure the size of anything that is not well-defined. One
example of the ambiguity around Web3 is evident when presenting funding
statistics. Crypto and Web3 investments tend to be pooled together and
represented as Web3 investments. This practice grossly overstates Web3 funding,
as centralized exchanges and financial services receive most crypto funding.
Depending on how we define Web3, the funding numbers vary. Applying a strict
Web3 criteria puts Web3 funding slightly above 25% of all crypto investments. A
more lenient criterion increases this percentage to almost 40%

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 What is Web3? – Misconceptions, current adoption, and the potential

Figure 2 – Web3 and crypto funding in 2021 and 2022. Categorized by K33 Research.

Web3 - Strict,
$15.2bn

Non-Web3
Crypto, $34.3bn
Web3 - Lenient,
$6.6bn

Source: Crunchbase, K33 Research

NFTs receive the hype

NFTs receive much attention in most online primers on Web3. From the wild
popularity of crypto punks and bored apes to using NFTs to represent in-game
assets, NFTs became the all-conquering promise of getting rich and tech revolution.
The persistence of the use cases seen to date is highly debatable. NFT minting,
which is cheap, shows sustained higher levels, while NFT sales volumes strongly
indicate the current iteration of NFTs was a fad.

Figure 3 – Monthly NFT statistics on the Ethereum network.

Minting transactions NFT sales volume

4m $20bn
Monthly minting transactions

NFT monthly sales volume

3m $15bn

2m $10bn

1m $5bn

0 0
Aug 19 Feb 20 Aug 20 Feb 21 Aug 21 Feb 22 Aug 22 Feb 23

Source: FlipsideCrypto

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 What is Web3? – Misconceptions, current adoption, and the potential

Other use cases better highlight Web3 progress

Defining Web3 adoption by the demand for NFTs is misleading. Web3 goes far
beyond trading pictures embedded into the blockchain – or in-game characters
mirrored onto the blockchain. Any blockchain transfer is a transaction from one
individual to another using cryptographic proof of ownership. Since the inception of
Bitcoin in 2009, each of the billions of blockchain transactions has showcased a
form of Web3 sovereign identity.

Decentralized Finance (DeFi), although its use so far can be questioned, shows how
markets can function better without intermediaries. When centralized exchanges
and services stopped withdrawals and trading, DeFi stayed open and solvent for
anyone cryptographically proving their asset ownership.

In In 2022
Bitcoin and Ethereum Decentralized Exchanges
502 million transactions $1,255 billion in trade volume

Crypto for Darknet purchases is hardcore web3

Bitcoin, the first cryptocurrency, was originally intended to be a decentralized
internet currency. While it may not be as hyped as mystic NFTs, decentralized
money has found clear use cases in smaller circles, such as dark markets and other
circumventions of regulations and judicial borders.

While it may not be mainstream, decentralized money represents a truly

decentralized financial system that is not subject to the whims of any central
authority or institution. Although it may not have the same level of hype as some of
the newer trends in cryptocurrency, the niche applications for decentralized money
arguably should be considered systematically significant, as it, more than NFT
projects, has sidelined central control.

User preferences drive Web3 adoption

Web3 and Web2 already operate in parallel, with Web3 fully applied for some niche
use cases. The extent to which Web3 principles will dominate the internet in the
future remains to be seen and depends on how unpredictable events affect user
preferences. We believe that when Web3 use cases arising from persistent demand
first gain traction, they are likely to remain. Therefore, true Web3 adoption will be a
gradual process with an unpredictable ceiling.

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 What is Web3? – Misconceptions, current adoption, and the potential

Web3 is not a free lunch for all

At its core, Web3 is about user control. Large tech companies may view widespread
Web3 adoption as a failure due to lost profits, and governments may find it harder
to govern. On the other hand, lower barriers to entry increase the probability of the
best ideas and services winning and, significantly, being offered to users at a fair
price.

Web3 is a paradigm shift in the distribution of surpluses and a change in the

balance of power between different stakeholders. There will be winners and losers,
and the losers will resist change.

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 What is Web3? – Misconceptions, current adoption, and the potential

Contents
WEB3 – THE BUZZEST OF BUZZWORDS .............................................................................................. 2

REPORT SUMMARY ............................................................................................................................... 4

CONTENTS ............................................................................................................................................. 9

1 INTRO - THE PRINCIPLES OF WEB3 ..........................................................................................10

2 BLOCKCHAINS ENABLE WEB3 ...................................................................................................11

2.1 CRYPTOGRAPHIC PROOF OF IDENTITY ON THE BLOCKCHAIN ...................................................................................... 11

2.2 TOKENIZATION - MOVING YOUR ASSET OWNERSHIP PROOF TO THE BLOCKCHAIN .............................................. 12
2.3 SMART CONTRACTS TO ENFORCE AGREEMENTS .......................................................................................................... 13

3 THE PROMISE OF WEB3 ............................................................................................................ 14

3.1 YOU CONTROL YOUR IDENTITY AND CREDENTIALS ........................................................................................................ 14

3.2 BREAK APPLICATION-SPECIFIC SILOS............................................................................................................................... 14
3.3 REDUCE THE NEED FOR TRUSTED INTERMEDIARIES ......................................................................................................... 15

4 WEB3 IS WELL-FUNDED ............................................................................................................. 16

4.1 WEB3 INVESTMENTS ARE LESS THAN HALF OF TOTAL CRYPTO INVESTMENTS ........................................................16
4.2 INFRASTRUCTURE, GAMING, AND NFTS RECEIVE THE WEB3 FUNDING.................................................................... 19
4.3 U.S.-BASED COMPANIES DOMINATE THE WEB3 SPACE............................................................................................ 20
4.4 FUNDING PLUMMETING IN 2023 ....................................................................................................................................... 21

5 WEB3 ADOPTION DEPENDS ON YOUR DEFINITION OF WEB3 .............................................. 22

5.1 BLOCKCHAIN TRANSACTIONS ARE THE MOST EVIDENT USE OF WEB3 IDENTITY TO DATE ................................. 22
5.2 DEFI AND NFTS – JUST HYPE OR SOMETHING PERSISTENT? ................................................................................... 24
5.3 DON'T FORGET DECENTRALIZED MONEY! ....................................................................................................................... 25

6 WHAT IS THE PROMISED LAND OF WEB3? ............................................................................. 27

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 What is Web3? – Misconceptions, current adoption, and the potential

1 Intro - The Principles of Web3

Web3 is the next evolution of the internet, representing a shift in how we interact
with information and data online. Web3 is not primarily about technology. It's about
a new way of using technology to connect and share information.

In Web1, the internet was a one-way street where users could only consume
information that was made available by websites. Then came Web2, which added
the ability for users to contribute their own content to the web through social media,
blogs, and other platforms.

Web3 takes this even further by introducing the concept of ownership. With Web3,
users can not only read and write information, but they can also own the
information they create and interact with online. This means that users have more
control over their data and can choose how and where it is shared.

Overall, Web3 represents a new era in the evolution of the internet, where users are
empowered to take control of their digital lives and interact with information and
data in a more meaningful and secure way.

The principles of Web3

1. Self Sovereign Identity – identify yourself without

revealing more than you need

2. Proof of ownership is directly attributed to you -

and you can move the proof freely

3. Together this will -> Break down walled gardens,

reduce rent-seeking, and shift the power to the users

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 What is Web3? – Misconceptions, current adoption, and the potential

2 Blockchains Enable Web3

Blockchains are a foundational technology that enables the development of Web3.
Unlike traditional databases managed by a central authority, blockchains are
distributed networks where all participants have a copy of the same ledger. This
mitigates the need to outsource the source of truth to a single party-an essential
cornerstone of Web3. In the following, we shortly explain some of the specific use
cases of the blockchain to enable Web3.

2.1 Cryptographic proof of identity on the

blockchain
Blockchains enable the creation of self-sovereign identities, allowing individuals to
own and control their digital identities. This significantly differs from Web2, where
large corporations or governments typically control user data. With blockchain, an
individual's identity is tied to their private key. The private key's owner can use it to
create as many seemingly unrelated public identities as they like.

However, some services may require third-party attestation for an individual to

access and use them. For instance, a birth certificate or driver's license might be

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 What is Web3? – Misconceptions, current adoption, and the potential

needed to gain access. In a centralized process, the issuing government would

confirm an individual's identity and issue an attestation to their driver's license or
other identifying document, which can be linked to one of their public addresses on
the blockchain. This ensures that the individual retains control over their identity
while still being able to access necessary services that require third-party
verification.

2.2 Tokenization - moving your asset ownership

proof to the blockchain
The concept of tokenization precedes blockchain technology, but while past
tokenization mechanisms were primarily designed to protect sensitive data,
blockchain-enabled tokenization allows for more flexibility in the tokenization of
assets, which has significantly broadened the potential applications of digital
tokens across a wide array of industries.

Tokens are representations of a particular asset or utility. Within the context of

blockchain technology, tokenization is the process of converting something of value
into a digital token that's usable on a blockchain application. Practically anything
can be tokenized if it's considered an asset that can be owned and is of value to
someone, but the most common ones are summarized below:

Physical asset tokens are digital representations of tangible assets (e.g., gold, real
estate, art) created and maintained on a blockchain.

Intangible asset tokens are any traditional intangible asset (e.g., royalties, loyalty
points, content licensing).

Utility tokens are tokens issued by individual creators or communities that enable
community members to unlock unique content or experiences or have a stake in
the creator's work. (e.g., social tokens)

Governance tokens represent ownership and often voting rights in a decentralized

protocol.

Non-Fungible Tokens (NFTs) are unique digital assets that are verified on a
blockchain, providing proof of ownership and scarcity.

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 What is Web3? – Misconceptions, current adoption, and the potential

2.3 Smart Contracts to enforce agreements

A smart contract is a self-executing computer program capable of automatically
enforcing the terms of an agreement between parties. It is essentially a digital
contract that contains a set of rules and conditions encoded onto a blockchain.

Smart contracts are designed to automate the execution of transactions and

eliminate the need for intermediaries such as lawyers, banks, and other third
parties. They can be used to facilitate a wide range of transactions, including the
transfer of assets, the exchange of currencies, the issuance of bonds, and the
execution of complex financial derivatives.

Smart contracts work by using a series of if-then statements. When certain

conditions are met, the smart contract automatically executes the corresponding
action, such as transferring funds or releasing assets. Because smart contracts are
performed on the blockchain, they are tamper-proof, transparent, and immutable,
ensuring that the contract terms are enforced accurately.

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 What is Web3? – Misconceptions, current adoption, and the potential

3 The Promise of Web3

Web3 technology promises to revolutionize the way we interact with the internet by
creating a more decentralized and fluid version of the web. Its core principles,
including self-sovereign identity and individual data ownership, promise to create
a significant power transfer from centralized services to users.

Third parties have controlled people's identity credentials for decades, and
centralization has inherent risks. When too much information is concentrated in a
single point, that point becomes a target for hacking (i.e., Equifax data breach).
There are also severe privacy concerns—for instance, the Cambridge
Analytica scandal revealed the extent to which some organizations will go to
monetize and exploit personal information.

3.1 You control your identity and credentials

Self-sovereign identity (SSI) restores an individual's right to own and manage their
own identity; They allow anyone to own and control their digital selves and the data
attached to them. The user controls all claims, proofs, and third-party attestations
in relation to their self-sovereign identity and can choose which pieces of
information to release to specific parties. Identity is not 'issued' by any authority and
is not stored by any custodianship system. Such identities cannot be confiscated or
revoked by any centralized entity, physical or digital.

Using blockchain technology, identities can become permanent, portable,

platform-agnostic, and interoperable. SSIs empower users to maintain their
personal reputation universally across all different systems and logins. They allow
for limitless continuity: by attaching data, we can accrue a personal history, where
a fully credible identity is created over time.

3.2 Break application-specific silos

A key pain point of Web2 is that as we move from application to application, our
digital identities don't follow us. Instead, they are scattered across various websites
and applications.

At the heart of Web3 lies "composable data." Instead of being trapped in

application-specific silos, the information that powers our online experiences can
be read, remixed, and built on by applications across the web. Data composability
is a paradigm shift because it changes how applications are built—and what an

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 What is Web3? – Misconceptions, current adoption, and the potential

application is. What it means: Integrated and customized experiences across the
Internet, taking all your information and assets with you.

While Web2 may be built on such a backend, composability is not reflected in Web2
companies themselves. Effective monopolies like Facebook, Amazon, and Google
are centralized solutions built on a decentralized network and have little incentive
to break themselves into composable services. But in the presence of shared
network effects, these incentives change.

Using blockchain technology and SSIs, users can opt to log in with their wallet
address instead of their email address or social media handle. The platform can
then "read" what they have in their wallet – offering insights into which types of
assets they have acquired — without revealing gender, age, or geographic location.

3.3 Reduce the need for trusted intermediaries

Another promise of Web3 is reducing the need for intermediaries and enabling
direct monetization for content creators and publishers. Blockchain technology
allows for micropayments directly from readers through smart wallets, eliminating
the need for advertisers and subscription models. This has the potential to make it
easier for creators to monetize their work and build a sustainable business model.
Furthermore, blockchain technology can be used for rights management, adding
ID stamps to published materials, and protecting ownership rights for creators and
publishers.

Moreover, using blockchain technology to create contractual agreements can

significantly reduce the time and cost of creating contracts, from advertising to
subscriptions, making offering a much wider variety of options possible. This can
lead to more efficient processes, faster transactions, and greater flexibility for
businesses, creators, and publishers.

In combination, Web3's core principles of decentralization, data ownership, and

direct monetization can help reduce the problem of large rent-seeking companies
by promoting a more decentralized and democratic internet. By shifting power
towards users and creators and enabling more equitable monetization and
decision-making structures, Web3 can create a more level playing field and reduce
the dominance of large companies.

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 What is Web3? – Misconceptions, current adoption, and the potential

4 Web3 is well-funded
A discussion of Web3 funding is futile without visiting the definition of a Web3
company, as the numbers vary greatly based on whether you apply a wide or
narrow definition. The most cited statistics apply what we will call the widest of
definitions of Web3, where Web3 and crypto are pooled into the category
Web3/crypto investments. These numbers are often presented as Web3
investments, which is not factually correct, in our opinion.

4.1 Web3 investments are less than half of total

crypto investments
Pooling Web3 and crypto investments into one pot makes proper Web3 funding
seem more abundant than what's the case. Crunchbase keeps the most cited
statistics in the business on Web3 and crypto investments. According to their
numbers, Web3/crypto companies received nearly $60 billion in funding in 2021 and
2022 combined. When we investigate the funding rounds on an individual level and
apply a lenient definition of Web3, we find that only $22 billion of these were Web3
investments.

Figure 4 – Web3 investments as defined by K33 Research and Web3/Crypto investments as

defined by Crunchbase.

K33-defined Web3 Web3/Crypto per Crunchbase

$35bn
$31.0bn
$30bn
$25.1bn
$25bn

$20bn

$15bn $13.3bn

$10bn $8.6bn

$4.1bn $4.4bn
$5bn
$0.9bn $0.4bn
0
2019 2020 2021 2022

Source: Crunchbase, K33 Research

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 What is Web3? – Misconceptions, current adoption, and the potential

We admit that defining a Web3 company is not an exact science, and we have
accordingly applied a lenient criteria for a Web3 company when aggregating the
numbers.

Table 1 – Guidelines for defining a Web3 company.

Web3 Non-Web3 crypto

• A service or a product that relies • A service or a product that requires
heavily on the use of self-sovereign extensive KYC
identity • A service or a product that requires
• A service or a product that enables trusting a centralized operator
people to interact directly in a • All companies where the most
decentralized way significant part of their operation is
• All companies where the most reliant on the above
significant part of their operation is
enabling the above

From our lenient criteria, some of the Web3 companies do not necessarily feed
significantly into the principles of Web3 outlined earlier in this report. Consequently,
we have also applied a stricter definition of Web3. Using the narrow definition of
Web3, slightly more than 25% of Web3-funding disappears.

Figure 5 – Web3 and crypto funding in 2021 and 2022. Categorized by K33 Research.

Web3 - Strict,
$15.2bn

Non-Web3
Crypto, $34.3bn

Web3 - Lenient,
$6.6bn

Source: Crunchbase, K33 Research

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 What is Web3? – Misconceptions, current adoption, and the potential

We have listed the ten most funded companies/projects in the strict Web3- and
non-Web3 categories to better understand the numbers. Starting with the Non-
Web3 crypto companies, exchanges and centralized financial services for both
retail and institutional investors dominate the big funding rounds.

It's not illogical that the crypto companies with a centralized structure become the
highest valued. The centralized companies are about building walled gardens to do
rent-seeking. Hence, the profits should be larger, and valuations become higher.

A proper Web3 company gives more power for users to leave the service, hence
kneecapping the potential for rent-seeking profits. As a consequence, the valuation
of the 'same' service is lower in a Web3 setup.

The above fact also highlights an obstacle for Web3. From a purely rational
perspective, building a centralized service with better chances of extracting more
rents would often be smarter if the service becomes popular.

Table 2: Funding by category - Top 10 companies

Web3 - Strict Non-Web3 crypto

Company $m Company $m
Forte 910 Robinhood 5,556
NEAR Protocol 884 FTX 1,829
Animoca Brands 753 NYDIG 1,405
ConsenSys 725 Trade Republic 1,271
Alchemy 564 Circle 1,095
Polygon 451 Fireblocks 1,039
OpenSea 425 BlockFi 954
Aptos 350 Celsius Network 843
Mysten Labs 336 MoonPay 642
Sky Mavis 311 Amber Group 628

Source: Crunchbase, K33 Research

In the strict Web3 category, it can often be argued whether the motivation behind
the funding has been Web3 principles. As an example, take blockchain projects like
Near, Polygon, and Aptos. They are true Web3 protocols. On the other hand, the
space is flooded with smart contract platforms, and the motivation, especially for
investors, has been to profit from the crypto craze that has very little to do with
Web3.

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 What is Web3? – Misconceptions, current adoption, and the potential

The projects in the lenient Web3 category fall somewhere in between. The common
denominator among these projects is that they utilize Web3 technology to a degree,
but the business has little to do with Web3 principles except for that.

4.2 Infrastructure, gaming, and NFTs receive the

Web3 funding
In this section, we look closer at what type of projects Web3 funding, according to
the lenient criteria, has gone to. The striking but unsurprising finding is that most
funding goes into general enabling technology. As alluded to earlier, this is often
already existing technology and is best highlighted by the 'Layer 1 war.' Whether all
the new blockchain networks added anything to the Web 3 movement is highly
debatable.

Gaming and NFTs received one-third of the funding in 2021 and 2022. How well-
aligned with the Web3 ethos these projects vary greatly. Some of the most funded
gaming and NFT projects have little to do with the Web3 principles but rather utilize
the Web3 tech stack to create demand.
Figure 6 – Web3 investments in 2021 and 2022 by category. Lenient definition of Web3.

Other
10%

DeFi
7%

NFTs
12% Infrastructure
50%

Gaming
21%

Source: Crunchbase, K33 Research

DeFi protocols have also received significant funding. These protocols are
undoubtedly proper Web3 projects and are widely used for decentralized trading.

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 What is Web3? – Misconceptions, current adoption, and the potential

Yes, many of the traded tokens in DeFi are questionable, but the trading is genuinely
decentralized in line with the Web3 ethos.

As Web3 gains traction, you'd expect investment to move away from competing
infrastructure technology and into Web3 applications. Monitoring the makeup of
Web3 investments can, therefore, be of interest. Investments skewing towards
concrete use cases would likely be a symptom of Web3 adoption rising.

4.3 U.S.-based companies dominate the Web3

space
The United States is the center of gravity for crypto and Web3 development. U.S.
headquartered companies received close to 60% of Web3 funding. Adding Canada,
the North American funding share closes in on two-thirds of every dollar.

European projects received 15% of Web3 funding in 2021 and 2022. Funding in Europe
is geographically distributed in the big advanced economies like Great Britain,
Germany, and France.

Figure 7 – VC funding for Web3 companies in 2021 and 2022 by the funded company's
headquarters.

70%
64%

60%

50%

40%

30%

20%
15%

8% 8%
10%
4%

0%
U.S. and Canada Europe Singapore and Other Asia Other
Hong Kong

Source: Crunchbase

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 What is Web3? – Misconceptions, current adoption, and the potential

Singapore and Hong Kong are seen as crypto-friendly jurisdictions. Projects located
in these two countries are hence overrepresented in Web3 funding. 8% of all Web 3
funding went to projects in these two small country states.

The rest of the world received 12% of the Web 3 funding combined. Japan, India, and
South Korea received half of this. The remained of investments are spread out with
no apparent pattern.

4.4 Funding plummeting in 2023

Web3 and crypto funding dropped significantly in the last half of 2022. The trend
continues so far in 2023. Web3/Crypto funding in Q1 2023 was cut in four compared
to Q1 2022. The companies receiving funding over the last years are often funded
for years to come. The drop in Web3 funding is, therefore, not an imminent threat to
Web3 services being built in the coming years. But like all projects, the coffers must
refill before they run dry.

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 What is Web3? – Misconceptions, current adoption, and the potential

5 Web3 adoption depends on your

definition of Web3
For all its promise, Web3 technology is yet to gain widespread traction. The majority
of traction so far is within the crypto community. Even though the specific use cases
look 'bubbly,' the crypto community's application of Web3 technology showcases
the possibilities.

5.1 Blockchain transactions are the most evident

use of Web3 identity to date
Any blockchain transfer is a transaction from one individual to another using
cryptographic proof of ownership. Even though it's highly blockchain specific, a form
of Web3 sovereign identity has been showcased with each blockchain transaction
ever since the inception of Bitcoin in 2009.

Figure 8 – Cumulative transactions on Bitcoin and Ethereum.

3,500 m

3,000 m

2,500 m
Cumulative transactions

2,000 m

1,500 m

1,000 m

500 m

0
2009 2011 2013 2015 2017 2019 2021 2023

Source: Etherscan.io and blockchain.com

Web3 is not about the entire internet moving into blockchains – that would be an
inefficient and restrictive way of offering most services. As noted several times,
Web3 is primarily about handling identity and data. Using a service with Web3-

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 What is Web3? – Misconceptions, current adoption, and the potential

enabled identity login, therefore, is not substantially different in terms of the service
offering or the user's experience. Since you can't define a service as Web3 by looking
at it, it's hard to measure Web3 adoption. However, we can try to find a suitable
proxy. We believe the number of active users on Metamask is currently among the
better proxies.

MetaMask is a cryptocurrency wallet available as a browser extension to help you

store tokens and interact with decentralized applications. Metamask is the most
common way to interact with decentralized services and is growingly integrated as
a login to internet services.

The monthly number of active Metamask users peaked during the DeFi and NFT
mania of late 2021 and early 2022. However, even as the hype subsided, about half
of the users from the peak mania are still active. The latest report from Metamask
stated they had 15 million active users in March 2023.

Figure 9 – MetaMask monthly active users (MAU).

Reported Intrapolated / Guessed

40 m

30 m
Monthly Active Users (MAU)

20 m

10 m

0
2020 -> 2021 -> 2022 -> 2023 ->

Source: Various tweets and podcasts from Consensys

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 What is Web3? – Misconceptions, current adoption, and the potential

5.2 DeFi and NFTs – just hype or something

persistent?
Regarding specific Web3 applications, decentralized finance and NFTs stand out.
Instead of trading at centralized exchanges with the associated counterparty risk
and unclear picture of who knows what, decentralized exchanges like Uniswap have
proven to work tremendously well while being transparent and fully decentralized.

DeFi exploded onto the scene in 2021. In a year, DeFi volumes went from virtually zero
to more than $200 billion traded per month. Volumes have subtracted since the
absolute craze of 2021, but like the Metamask numbers, they remain at around half
of the peak volumes.

Figure 10 – Monthly volumes in DeFi on all blockchains.

$250bn

$200bn

$150bn
Monthly volume

$100bn

$50bn

0
Oct 19 Feb 20 Jun 20 Oct 20 Feb 21 Jun 21 Oct 21 Feb 22 Jun 22 Oct 22 Feb 23

Source: Defillama.com

Once upon a time, in the Metaverse, long before Ethereum existed, a concept called
'Colored Coins' was introduced for the Bitcoin blockchain. Dating back to
2012, it described methods for representing and managing real-world assets on the
blockchain to prove ownership, laying the foundation for the experiments that led
to the invention of NFTs.

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 What is Web3? – Misconceptions, current adoption, and the potential

NFTs are blockchain-based digital assets designed to be unique, unlike traditional

cryptocurrencies, whose units are meant to be interchangeable (trade one bitcoin
for another, and you'll have the same thing). Each NFT consists of a digital file
(image, video, audio, etc.) paired with a smart contract: an immutable contract
written in code that sets out the rules of ownership and authenticity of the NFT.

NFTs are essentially data wrappers.: You can now transact any IP, synthetic asset,
consumer digital good, identity token, etc., on the blockchain. They look like toys to
start, but they are almost unfathomably crucial as a technical primitive.

NFTs receive much attention in most online primers on Web3. From the wild
popularity of crypto punks and bored apes to using NFTs to represent in-game
assets, NFTs became the all-conquering promise of getting rich and tech revolution.
The persistence of the use cases seen to date is highly debatable. NFT minting,
which is cheap, shows sustained higher levels, while NFT sales volumes strongly
indicate the current iteration of NFTs was a fad.

Figure 11 – NFT minting transactions on the Ethereum network.

Mint transactions NFT sales volume

4m $20bn

3m $15bn
Mint transactions

NFT sales volume

2m $10bn

1m $5bn

0 0
Aug 19 Feb 20 Aug 20 Feb 21 Aug 21 Feb 22 Aug 22 Feb 23

Source: FlipsideCrypto

5.3 Don't forget decentralized money!

Bitcoin, the first cryptocurrency, was originally intended to be a decentralized
internet currency. While it may not be as trendy as mystic NFTs, decentralized

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 What is Web3? – Misconceptions, current adoption, and the potential

money has found clear use cases in smaller circles, such as dark markets and other
circumventions of regulations and judicial borders.

While it may not be mainstream, decentralized money represents a truly

decentralized financial system that is not subject to the whims of any one central
authority or institution. Although it may not have the same level of hype as some of
the newer trends in cryptocurrency, the niche applications for decentralized money
arguably should be considered systematically significant, as, more than NFT
projects, it has sidelined central control.

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 What is Web3? – Misconceptions, current adoption, and the potential

6 What is the promised land of Web3?

Web3 adoption depends on the point of view

It is essential to recognize that Web3 adoption depends on the layer of observation,
and one part of a whole can be entirely Web3 while the other is not at all. For
example, most current stablecoins are a centralized promise to convert a
blockchain entry into dollars. The issuer, operating under regulative and legislative
pressures, decides right and wrong. If they deem your blockchain transactions
criminal, the promise to convert evaporates. On the top layer, stablecoins move
freely, but the centrally controlled layer below controls the value of freely moving
stablecoins.

Is world dominance the measure of success?

Web3 and Web2 already operate in parallel, with Web3 fully applied for some niche
use cases. The extent to which Web3 principles will dominate the internet in the
future remains to be seen and is dependent on user preferences. The demand for
self-sovereignty and trustless solutions is subject to unpredictable events. We
believe that when Web3 use cases arising from persistent demand first gain
traction, they are likely to remain. Therefore, true Web3 adoption will be a gradual
process with an unpredictable ceiling. As a result, world dominance may not be the
most accurate measure of success for Web3 adoption. Instead, success can be
defined by the extent to which Web3 principles are embraced by users who value
self-sovereignty, trustless solutions, and transparency.

Everybody will not be better off on Web3

At its core, Web3 is about user control. Large tech companies may view widespread
Web3 adoption as a failure due to lost profits, and governments may find it harder
to govern. On the other hand, lower barriers to entry increase the probability of the
best ideas and services winning and, significantly, being offered to users at a fair
price.

Web3 is a paradigm shift in the distribution of surpluses and a change in the

balance of power between different stakeholders. There will be winners and losers,
and the losers will resist change.

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 What is Web3? – Misconceptions, current adoption, and the potential

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