Ten Paradigm Shifts in Entrepreneurship and Investment in the Web3 Era

Author: Tian Hongfei, Yuanwang Capital

Chain Catcher authorized to reprint

When a new paradigm arrives, traditional business logic and success paths become ineffective. In the eyes of those accustomed to the old paradigm's success paths, the new paradigm is often labeled as a bubble or even a scam, but no force can stop the shift of paradigms. The power of paradigm change and the resistance against it often exceed our imagination, frequently requiring the older generation to pay the price of being eliminated to promote the development of the new paradigm.

The development of information technology that began in the 1970s has propelled forward for 40 years, experiencing three paradigm shifts:

• Web 1.0, starting with the IPO of Netscape, created a series of giant companies like Netscape, AOL, and Yahoo. All services revolved around publishing information, with the slogan that "on the internet, no one knows you are a dog";
• Web 2.0, starting with the launch of Google Maps and Facebook, created companies like Facebook, Google, and LinkedIn. These companies provided information interaction services, centered around social networks; in this era, anyone registering on Facebook with a pseudonym would be seen as strange;
• Web 3.0, starting with Satoshi Nakamoto's invention of Bitcoin using blockchain, represents a new paradigm where users will own information.

The development of the web has always revolved around people and information, from information to people, to interaction between information and people, to people owning information, reflecting the industry's evolution from being information-source-centric to being people-centric.

Since 2017, I have written a series of articles: "The Innovation Anxiety Behind the Blockchain Boom" discussing how the internet industry has entered a phase of monopoly and a lack of innovation, after which both the US and China began investigating the monopolies of internet companies in 2020; "The Development of Blockchain Relies on 1% of Faithful People" discusses how every cycle of blockchain development sees some people retire by profiting from bubbles, just as those who profit from real estate will be eliminated by the times. Some who question the industry's development exit the industry. However, each cycle sees more newcomers joining, some of whom are more capable and more faithful; it is the persistence of these people that drives the development of the industry.

The essence of bubbles lies in human nature's tendency to overestimate the present and underestimate the future. Therefore, the future of industry development is always created by a small group of people who adhere to their inner beliefs and can delay gratification.

In 2018, with the burst of the ICO bubble, the blockchain industry entered a bear market. However, blockchain is a bubble, not a scam. Scams do not resurrect time and again, while the essence of a bubble can be reborn. A group of capable and faithful teams that emerged from the bubble nurtured strength, and after two years of development, in 2020, they once again pushed the entire blockchain development into a new climax.

In my view, Web 3.0 represents a huge paradigm shift because it changes every aspect of entrepreneurship, with an influence far exceeding that of mobile internet. After all, everything that happened in mobile internet was clearly described in "Being Digital" by Negroponte in 1996. Yet, no one can draw a blueprint for everything in Web 3.0, just as in 2015, no one could predict that Ethereum would have the chance to surpass Bitcoin, and in 2018, no one could foresee that the hot topic in 2020 would be DeFi.

If entrepreneurs and investors still approach Web 3.0 with the thinking logic of the old paradigm, it will fulfill the old saying, "The arrival of a new era must come at the cost of the previous era's people."

Future companies will be replaced by projects, equity will be replaced by tokens, and shareholder meetings will be replaced by staking… For today's entrepreneurs and investors, the biggest enemy they face is their own paradigm logic.

If you do not want to be abandoned by the new paradigm shift, the only choice is to turn upside down and rebuild your logical framework. Below, we discuss the paradigm shift we face in the Web 3.0 era from the perspectives of entrepreneurship and investment:

1. From an overall environmental perspective, internet industry practitioners have enjoyed the dividends of overall industry growth for the past 40 years, and the paradigm of growth driven by advertising will be replaced by community-driven growth.

Since the birth of the internet, the penetration rate stagnated at 60% until 2015, while the penetration rate of mobile internet reached 78%. The entire internet industry has entered a red ocean of competition, where every company needs to compete for users from its competitors, and the cost of traffic will continue to rise. User growth strategies driven by advertising will be replaced by user community growth and operations.

2. The blockchain has evolved from Bitcoin to Ethereum, from token issuance for fundraising to decentralized finance (DeFi) and NFTs, transitioning from wild growth to regulatory compliance, and is now on the eve of development.

Since 2010, with Bitcoin's halving cycle every four years, accompanied by alternating bull and bear markets, along with media frenzy and indifference, a batch of entrepreneurs has emerged, eliminating the older generation of entrepreneurs. Each cycle has a different narrative. What remains the same is that in each cycle, Bitcoin's price at least multiplies tenfold, Bitcoin accounts for no less than 40% of the entire crypto market's market value, and the number of blockchain practitioners is increasing, transitioning from a single-chain world to a multi-chain world.

The narrative of the 2020 cycle is DeFi, which attempts to change the current financial industry. I believe that the technology of DeFi will be preserved, but the narrative of DeFi will not last into the next cycle. Since the modern financial industry has developed slowly since its inception, rarely deviating from its own rules. In a situation where high-tech companies occupy such a large share of market value, modern banks still cannot lend to entrepreneurial tech companies. The representative of innovative banks, Silicon Valley Bank, after more than half a century of effort, still cannot change a hair of this industry.

Therefore, I believe that the narrative of DeFi cannot change the reality of the financial industry; change will occur in the metaverse, creating a new financial system for digital assets and a collaborative framework for decentralized cloud computing digital resources. The emergence of the metaverse solves the long-standing problem of linking the physical world to the blockchain, creating application scenarios for DeFi.

3. From a business model perspective, the model of users exchanging personal behavior data for free product usage rights will be replaced by "who uses, who pays."

Unlike the rental model of cloud computing, the business model of the Web 3.0 era charges based on usage and access frequency. The blockchain network is a massive computer, with all smart contracts open-source and exposing service APIs, encouraging entrepreneurs to freely call upon them. Entrepreneurs develop products based on their own ideas, generating new smart contracts.

A large number of open smart contracts and data not only stimulate innovation but also significantly lower the organizational threshold for entrepreneurship. What used to require hundreds of technical team members will be replaced by distributed small teams; at the same time, since smart contracts are deployed on the blockchain rather than on servers that companies traditionally need to purchase or rent, entrepreneurs no longer need to pay server costs. The computational costs of smart contracts will be paid by the users who invoke them, and since users pay for the computational costs, it is only natural that users should own their data and privacy.

Thus, the current business model of free usage relying on advertising revenue will be replaced.

4. From a technical perspective, software development has shifted from prioritizing high performance and low cost to prioritizing strong security and high reliability.

In the 40 years of internet development, high speed has always been a core keyword, with the ability to support billions of users accessing the internet quickly being a core standard.

Entering Web 3.0 and the metaverse, due to the internet accommodating a large number of high-value digital assets, strong security and high reliability have become the top priority.

Cryptography and distributed computing have become essential courses for future software engineers.

5. From the perspective of software development, open source has become a necessity.

Because future software controls users' assets, open source has become a necessity for software development rather than an option. Moreover, the combination of smart contracts to form new products will become the mainstream development model, thus requiring smart contracts to be open source.

From a business model perspective, current internet companies rely on advertising revenue, so they need to keep users within their product ecosystem. In the Web 3.0 era, users pay fees for using smart contracts, so a large number of third-party contract calls will also generate revenue. Therefore, hiding behind third parties will not result in lost revenue but will instead create new sources of income. Thus, Web 3.0 companies should open source and encourage third-party free use.

6. From a technical architecture perspective, the architecture will shift from server-client to blockchain-edge-client.

Long-standing centralized IDC servers will be replaced by distributed nodes composed of blockchains; serverless code will be deployed close to the user end (edge) to provide personalized security and privacy computing.

The cloud computing platforms monopolized by AWS, Microsoft, Google Cloud, and Alibaba Cloud will be broken, once again replaced by decentralized data centers. Intel's trusted computing CPUs will be widely used.

7. From product design perspective, user experience will give way to software usability in the next decade.

The development of blockchain is still in its early stages, just like Yahoo's webpage in 1996, which was slow and unattractive but still favored by users because Yahoo provided a new way of information dissemination. Just as Bill Gates explained to the host what the internet is, questioning why radio and tape recorders are not better than the internet, the market positioning of blockchain products needs to provide new value: that users control their digital assets. Just as users needed time to understand that the internet is better than radio and tape recorders, most users will need time to appreciate the benefits of digital assets.

8. From product marketing perspective, community marketing has become the only choice.

In the short term, because the user experience of blockchain software is not as good as that of current internet products, users will need time to educate themselves. Since users need to use products to manage their digital assets, they need to gain a sense of security in using the products, and since current blockchain users belong to a minority in society, they need a community to gain recognition and security.

In the long term, because users are both the users of the product and a part of the value creation and ownership of the company, community marketing and operations will dominate product promotion in the Web 3.0 era.

9. From the perspective of entrepreneurship financing and venture capital, users and investors will merge into one, and original investors will need to contribute more than just capital.

Just like Ethereum's token ETH, users can use ETH to pay for transaction gas fees, and in the ETH 2.0 era, they can also use ETH to participate in public chain governance. The scope of token usage in blockchain projects exceeds that of traditional equity; users need tokens to use products and enjoy token appreciation dividends similar to equity dividends.

From a venture capital perspective, future venture capitalists will not only need to provide funds but also initial liquidity for projects, staking, and governance services. As the issuance and trading of tokens no longer have clear boundaries, whether it is POW or POS, miners participate in chain governance, thus requiring future venture capital to involve participation from the technical bottom layer to abstract governance.

10. From the perspective of corporate governance, equity companies will be replaced by DAO organizations.

As mentioned in the paradigm shift of business models, the 40 years of internet development have reduced computing costs and network collaboration costs, significantly lowering the threshold for entrepreneurship and increasing team collaboration and innovation. Future enterprises will be small-scale flexible collaborative project partnerships.

The computing infrastructure has transitioned from self-built data centers in the 1990s to cloud computing centers in the post-2000s, from large commercial software to free open-source software and API internet, and by 2020, to blockchain-driven smart contract Lego combinations, increasingly lowering the funding and organizational scale thresholds for entrepreneurs.

More and more small teams distributed globally can, in a short time, stand on the shoulders of giants, develop their own dApps based on existing smart contracts on the blockchain, and deploy them at zero cost on the blockchain, with the program running costs paid by the product's users, completely breaking away from the current model where users exchange personal behavior data for product usage rights.

On the other hand, since the program is completely open source, after project development is completed, it can easily be handed over to the community for subsequent maintenance and upgrades. Coupled with the aforementioned token distribution model, all these factors together create the possibility for DAO organizational management.

Entrepreneurs will have to learn to find, gather, manage, and motivate a group of team members they have never met; they will have to learn to manage their users from the very beginning as if managing shareholders of a listed company; they will have to learn to design and develop incentive economic systems that go beyond the scope of software engineering.

For entrepreneurs, the strategies of "copying to China" or for American entrepreneurs to "copy QQ and TikTok" for regional arbitrage will no longer be feasible, as all code and users are open source, making copying something everyone can do, and blockchain products are borderless, facing global competition.

Therefore, VCs will have to adapt to investing in a project rather than a team, and will have to adapt to giving up their board seats in favor of DAO governance.