8 Potential WEB3 Pain Points and Their Possible Investment Opportunities

Written by: Tascha

Compiled by: TechFlow intern, Shenchao

The adoption of new technologies is not a linear process; it is stair-stepped: initial innovations trigger a surge in adoption --> the impact of these innovations fades over time, and growth levels off --> new innovations emerge to address bottlenecks, further increasing adoption --> leading to another wave of growth --> cycle, repeat.

Over time, Web3 has gone through some of these steps. The last wave of adoption was driven by innovations in smart contracts, DeFi, and NFTs. Currently, we are in the flat phase of the staircase, where many bottlenecks need to be addressed to unleash the next wave of growth for Web3.

When searching for investment opportunities, focus on projects that help solve the major bottlenecks in the industry. Thus, the problems facing Web3 today are tomorrow's investment opportunities. Look for projects that can address the following eight major issues in the industry:

DeFi

1. Poor scalability and user experience of DEXs

Decentralized exchanges enable the trading of long-tail assets, allowing anyone to earn by providing liquidity. A well-functioning and scalable DEX is essential for the expansion of the value internet. However, today's DEXs suffer from a range of issues that lead to a poor user experience, including:

• Impermanent loss

• High slippage

• MEV / sandwich attacks

• Slow and unreliable transaction execution

• Lack of control over transactions, such as difficulty in executing basic order types like stop-loss or limit orders

• Severe lack of indexing, analytics, and screening tools in the asset domain

Many projects are trying to address these issues, but so far, only sporadic successes have been achieved.

Possible investment angle: Look for projects that combine TradFi exchange and DEX business models to solve scalability and user experience issues.

2. On-chain lending is not integrated with the real economy

The lending demand in decentralized money markets/banks is almost entirely speculative. If decentralized lending wants to attract more liquidity and user base and truly capture market share from traditional banks, this situation needs to change.

Collateral requirements and liquidation rules need to be adjusted, and non-crypto collateral needs to be integrated. These are not easy problems to solve; we haven't even successfully integrated NFTs into DeFi lending, let alone real-world assets.

Possible investment angle: Look for companies that already have distribution, users, and a track record in real-world lending and are mixing and matching existing lending products with cryptocurrencies.

NFT

3. Unreliable 1:1 mapping with/off-chain assets

Today's NFT technology is at best rudimentary. A fundamental issue is the difficulty in ensuring a 1:1 correspondence between the on-chain hash token and the off-chain asset it represents. We haven't even found a reliable way to point NFTs to JPEGs, as the latter is off-chain, let alone pointing to physical assets.

Addressing this issue may require a comprehensive rethinking of NFT technology. However, if this problem is solved, it will open up a thousand-fold opportunity for NFT use cases.

Possible investment angle: Look for projects dedicated to scalable solutions that ensure the mapping between asset objects and tokens is unique and stable, meaning no two NFTs point to the same asset.

4. Weak tools for NFT storage, display, and verification

Today, the primary use case for NFTs is as digital collectibles, which is a limited market. Many future use cases for NFTs will utilize them as verification tools, such as proving identity or obtaining membership benefits.

However, the reality is that most of these use cases could be better implemented through Web2 databases without needing NFTs. To make them killer applications for NFTs, we need to:

a) Better integrate NFTs with other parts of the blockchain ecosystem to create synergies.

b) Provide user-friendly infrastructure and user experience for storing, displaying, and verifying NFT ownership.

Possible investment angle: Look for projects that are committed to significantly enhancing the NFT user experience and integrating NFTs into everyday consumer experiences, such as NFT check-ins.

5. Poor integration with other parts of the blockchain economy

So far, there has been almost no interaction between the worlds of NFTs and DeFi. Concepts like NFT collateralization are still in the promotional stage and have not gone far.

To create a strong moat for blockchain, ideally, different parts of the ecosystem, such as DeFi and NFTs, should leverage each other and grow together.

Why hasn't this happened yet? Part of the reason is that NFTs need stronger use cases and a larger market cap to become a meaningful native asset in DeFi. But to achieve this, we need to address points 3 and 4—it's a bit like the chicken and egg problem.

Possible investment angle: Projects focused on DeFi-NFT may still be "premature" until NFTs become a larger asset class with a significant number of NFTs having relatively stable value and a broad holder base.

Infrastructure

6. High costs and low performance of public chains

The search for faster and cheaper smart contract platforms has been a major investment narrative over the past two market cycles. Despite progress, public chains still perform poorly, so this pursuit will not end anytime soon.

In the medium term, this will be a key factor in determining whether public chains can compete with more centralized alternatives (like CBDC networks) as the infrastructure layer of the value internet.

Possible investment angle: More ETH killers and Solana killers will enter the fray. You can identify mid-term leaders well, even if they are not the ultimate winners. For example, before Google, there were AOL and Yahoo.

7. High friction and low security in cross-chain operations

Cross-chain/information transfer has become a fiercely competitive commercial red ocean. Cross-chain bridges are hacked almost weekly but are handling increasingly larger transaction volumes.

All of this is a sign of an early-stage, high-growth industry. As the name suggests, the "value internet" needs to establish smooth connections between different blockchains. For the scale of Web3, robust cross-chain operations are a key factor.

Possible investment angle: Similar to L1/L2, new participants are constantly emerging in this field. However, unlike public chains, there is currently no strong market leader, and the big pie has not yet been divided. Learn to bet on mid-term market leaders, but do not get stuck on any protocol.

Application Layer

8. Lack of non-crypto native projects/viable products

So far, most Web3 applications have been built around project tokens, which ultimately become products. These tokens have indeed brought new users to Web3 through speculative waves. But once a bear market arrives, they collapse rapidly.

More sticky adoption may come from leveraging Web3 to support the growth of other industries, such as blockchain payments, utility tokens, and NFTs.

Of course, these ideas and prototype projects have existed in previous cycles, but the societal awareness of cryptocurrency may now finally be high enough for some "Web3 + traditional economy" hybrid experiments to see success, which will help drive the next wave of cryptocurrency adoption.

Possible investment angle: Look for projects that bring Web3 business models and tools into rapidly growing industries in the real economy. In the U.S., examples of some fast-growing industries include:

• Direct retail;

• Beverage manufacturing;

• Healthcare;

• Online gambling;

• Personal services;

• Real estate;

• Transportation;

This is not to say that successful Web3 projects will necessarily emerge from these industries, but generally speaking, high-growth industries provide favorable demand conditions for innovation, and Web3 is likely to be one of those innovations.