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Web3 Ecosystem
Overview
Web3–the next iteration of the world wide web, powered by blockchain technology
Web3 is the next iteration of the world wide web, which aims to decentralize the web and move ownership of data and services from Big Tech corporations like Google, Amazon, and Meta to developers and users.
Developments in blockchain technology, pioneered by Ethereum, have allowed the creation of decentralized apps using smart contracts. However, blockchain has been a victim of its own success, with network congestion leading to slower transaction volumes and high transaction fees. Layer-2 solutions and newer blockchains are helping address the scalability issues, with planned upgrades to Ethereum itself expected to bring about more long-term fixes.
The need to take away from the influence of Big Tech, along with concerns around digital privacy and censorship due to the centralization of the internet, has been a key driver of Web3. In addition, Web3 promises to open up new monetization opportunities to participants via non-fungible tokens (NFTs) and decentralized social media that directly reward users for engagement instead of monetizing them for ad revenues.
Industry Updates
Market Sizing
The US Web3 Ecosystem market could reach USD 23.3 billion–31.5 billion by 2028
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Use cases
Web3's journey toward widespread adoption hinges on improvements to its foundational infrastructure, which aims to overcome the constraints of transaction speeds and exorbitant fees inherent in existing legacy networks. Most use cases within the web3 ecosystem were seen in the infrastructure space, with companies using novel layer-1 blockchains, layer-2 scaling solutions, and other tools required to develop and scale decentralized applications (dApps) that can be used in the areas of gaming, NFTs, marketplaces, and more. We have identified such use cases below.
While widespread use cases among traditional enterprises of these web3 technologies are yet to be seen, companies are already making significant headway with blockchain applications in their operations using purpose-built platforms and services. This is covered extensively in the Enterprise Blockchain Solutions industry hub.
Market Mapping
The Web3 ecosystem can be broadly divided into three: 1) the use case layer—comprises user-facing decentralized applications (dApps) and projects; 2) the access layer—comprises dApp browsers and wallets to hold the tokens required to interact with the Web3 ecosystem; and 3) the infrastructure layer—comprises the blockchains (layer-1), scaling solutions (layer-2), and developer tools required to build applications on the blockchain.
Overall, over 60% of all the startups in this industry were at a minimum viable product/go-to-market stage as the industry continued to focus on developing user experience and the technical infrastructure needed to bring Web3 to the masses. As a result, the infrastructure layer also accounted for the most number of startups within the Web3 ecosystem. Most disruptors across the use case layer operate as decentralized autonomous organizations (DAOs), where holders of the application’s native token are able to vote on strategic and operational matters of the project.
Incumbent activity was seen across the access and infrastructure layers. In the former, established cryptocurrency exchanges such as Coinbase and Binance are offering Web3 wallets and dApp browsers to engage with the Web3 ecosystem. The infrastructure layer had the most incumbent activity. This was notably among Big Tech companies such as Microsoft and Google, who provide the required infrastructure and tools such as nodes for developers to build Web3 applications.
Blockchains
Scaling Solutions
Developer Tools
Web3 Wallets & App Browsers
Blockchain Gaming
Decentralized Social Networks
Decentralized Storage
Miscellaneous Use Cases
The Disruptors
Startups across the infrastructure layer lead in terms of count and total funding, accounting for more than half of all disruptors and over 75% of all funding as of September 2022. The majority of startups across all layers were established after 2017, but the space only saw heightened investor interest from 2021, having raised over 85% of all its funding since then.
Forte, an infrastructure provider for developing blockchain-based games, had raised the highest amount of funding in this space, following a sizable Series B round of USD 725 million in November 2021 (bringing its funding to USD 910 million). Blockchain gaming, which is one of the more established use cases of Web3 (excluding use cases such as cryptocurrencies and DeFi, which are covered separately) accounted for the most amount of funding across any use case, with non-fungible token (NFT) based fantasy football game provider Sorare leading the pack with over USD 739.2 million in funding as of September 2022.
Andreessen Horowitz was the most active investor in this space as of September 2022, having invested in nearly 30% of startups across all segments with participation in funding rounds where disruptors had collectively raised over USD 3.5 billion.
Funding History
Competitive Analysis
Incumbents
Cryptocurrency wallets expand to include Web3 features; Big Techs positioned to benefit when existing clientele expand into Web3
Across the access layer, established cryptocurrency exchanges such as Coinbase are extending their crypto wallet offerings to provide access to the Web3 ecosystem. These come as natural extensions to their cryptocurrency product offering, as Web3 tokens often operate on the same blockchain (such as Ethereum) and involve the use of cryptocurrencies to acquire native tokens of the application.
Big Tech companies such as Google and Microsoft have begun to accumulate a notable presence in the developer tools segment, as they provide the required infrastructure and tools needed to create Web3 applications. Notwithstanding any centralization arguments against the involvement of these companies in the Web3 ecosystem, they stand to uniquely benefit, as the existing clientele from their very dominant cloud offerings look toward expanding into Web3 and related technologies. Google, for example, already has partnerships with existing disruptors such as Dapper Labs and Sky Mavis to support their network infrastructure.
Notable Investors
