Yunjiu Capital Niu Fengxuan: The Web3 Ecosystem from a Capital Perspective and the Metaverse in the Context of Web3

Source: 36Kr

In 2011, Marc Andreessen, co-founder of A16Z, wrote an article in The Wall Street Journal titled "Why Software Is Eating the World." Since then, the curtain has slowly risen on the mobile internet, and the grand wave of entrepreneurship has profoundly influenced and changed everything around us.

More than a decade later, Web 3 is growing from its infancy, experiencing the process of going from zero to one. We are watching to see if it will also consume the world and usher in a new era.

However, to outsiders, Web 3 and the metaverse seem almost metaphysical and lack concreteness; they appear splendid yet cannot escape the somewhat awkward reality of being more like castles in the air.

Nevertheless, no one wants to miss any potential opportunities related to Web 3, even if it is still difficult to clearly define what Web 3 actually is.

According to Chris Dixon, a well-known investor at A16Z who topped the 2022 Midas List: Web 3 is built on blockchain, which is a decentralized global computer that anyone can access but no one fully owns. NFTs correspond to the computing power of this supercomputer, allowing every user to own Web 3 services through non-fungible (NFT) and fungible (Tokens) tokens.

In the recent cycle, DeFi, GameFi, and SocialFi have continuously refreshed our understanding. In the new Web 3 social track, each startup in the long list, including Mem Protocol, DeFine, Mojor, Torum, and Project Galaxy, is exploring its own niche, challenging traditional forces like Meta, Twitter, and Snap.

Currently, beneath the ongoing controversies surrounding Web 3 and the metaverse, an unprecedented paradigm shift is quietly brewing. From underlying computing architecture and security protocols to development tools, applications, and terminal devices, all face disruptive opportunities and challenges.

Recently, 36Kr conducted an interview with Niu Fengxuan, a partner at Yunjiu Capital, discussing many open topics about Web 3 and the metaverse.

Niu Fengxuan (Vincent) graduated from Stanford University with a degree in Financial Mathematics and has over seven years of experience in internet and blockchain entrepreneurship and angel investing, focusing on investments in blockchain industry infrastructure, middleware, and application layers (DeFi/NFT). He previously founded the decentralized application data analysis platform DappReview, which was acquired by Binance in 2019. After that, he served as the product head at CoinMarketCap and participated in investments in several early NFT and DeFi projects. Before that, he worked at BlackRock as a quantitative analyst.

The following is a transcript of the interview (edited)

36Kr: From an investment perspective, how do you clearly distinguish between Web 3 and metaverse projects?

Vincent: We believe that investing in Web 3 is a higher-level concept and a larger track. The metaverse is a branch of the application layer of Web 3. Although it also involves some infrastructure, it is more about application products presented to end consumers. Viewing it as a niche within the larger Web 3 track makes it easier to understand.

36Kr: What is the growth potential for Web 3 and the metaverse in the future?

Vincent: This question also involves the coexistence of Web 3 and Web 2. Before discussing Web 3, we should look at the clear timeline between the internet and mobile internet. The mobile internet exploded around 2013-2014, and although Web 3 had already emerged in the following two to three years, people were not as sensitive to this term because we defaulted to investing in the underlying technology of the network.

So in the long run, the metaverse is more like an ideology. It is not limited to using Web 2 or Web 3 technologies; it just happens that around Web 3 and blockchain, we seem to be able to realize our envisioned concepts and products of the metaverse more quickly.

When we talk about the metaverse in the context of Web 3, if the entire internet takes another step forward in the future, the concept of the metaverse may still exist, and people may continue to discuss it, possibly evolving into something akin to what we now refer to as new consumption.

Looking at the development of the consumer sector over the past few hundred years, it is essentially driven by technological upgrades. Our consumption patterns are changing, but consumption itself remains unchanged. Therefore, the metaverse will simply iterate on products with technological advancements. The relationship between Web 3 and the metaverse is not necessarily parallel; they exist in different dimensions.

36Kr: Has there been a landmark event for the emergence of Web 3, and how long is the time gap before it becomes an investment hotspot?

Vincent: A significant milestone was the explosion of the Ethereum ecosystem, which proved the feasibility of building a programmable smart contract platform on blockchain. I tend to view blockchain as an important infrastructure for Web 3, akin to a decentralized operating system or computing platform. Over the past four to five years, various niche tracks and applications have emerged from this ecosystem.

Going back to 2017-2018, people were still imagining what could be done on public chains. Of course, there were many financial directions, but at that time, the term DeFi did not exist; it was only blockchain finance and blockchain gaming, with terms like GameFi only appearing in 2021. The term metaverse must be traced back to the often-discussed "Snow Crash," but under different technological backgrounds, people will have different imaginations. XR and blockchain and other underlying technologies are driving the evolution of Web 3 and the metaverse from different dimensions.

36Kr: Web 3 emphasizes decentralization. Will there be resistance from many traditional internet and tech companies during the decentralization process?

Vincent: Decentralization does not mean there are no centers at all; rather, it means there are no one or two centers with absolute control. The network does not exist in absolute decentralization. The relationship between center and decentralization is not a binary one, but rather finding a balance in between. It can also be understood as evolving from centralized control to matrix optimization.

I believe not all companies will face strong impacts. Since the advent of Internet+, not all internet companies have been completely reshaped. It has been proven that some companies can optimize their efficiency, but it does not necessarily change their business or profit models. Web 3 will not change everything either. For example, SaaS services have business models that are no different from traditional SaaS companies, but the users and industries they face are entirely new. Decentralization will not disrupt all industries, but there may be many changes and optimization opportunities in specific tracks, gradually causing significant impacts on related industries.

Ultimately, while the internet has changed many of our daily behaviors, its impact on traditional industries like manufacturing has not been substantial. Similarly, blockchain and Web 3 will have differentiated impacts on different industries. Some industries may face revolutionary impacts, with traditional giants facing crises; others may have fixed impacts. For example, gaming, despite its previous hype, has limited relevance to blockchain. Hardcore players playing single-player games on Steam are completely unrelated to Tokens and NFTs. Of course, some games with strong social attributes can generate internal circular economies, making it possible to implement NFTs, Tokens, and other rewards.

The more interactions there are among people, the more likely Web 3 and Tokens will bring about transformation and impact.

36Kr: Both Web 1 and Web 2 experienced a transition from flourishing diversity to a state of monopoly. Is Web 3 also unable to avoid the same trend?

Vincent: Monopoly and decentralization are two different concepts. Even if there may be a monopoly in business, the monopoly itself may be due to a blockchain protocol occupying a high market share in a niche market, but the product itself remains decentralized, meaning it is not completely controlled by any single entity or company, which is different from the monopoly perception of Web 2.0.

For example, in DeFi lending protocols, the top two projects occupy 70-80% or even higher market share, but they are different from traditional banks or fintech companies. The inflow and outflow of money occur within a smart contract, and the leading project cannot touch a single penny of the users' funds. All actions can be clearly seen on-chain, and there is no need to rely on third-party audits and reports; the process is very clear and transparent.

Thus, monopoly and decentralization are indeed two different concepts. A monopoly position in business does not affect the product's absolute decentralization; these two things are not contradictory.

36Kr: So from an investment perspective, it is certainly hoped that the invested Web 3 projects and companies can become giants.

Vincent: That is not a problem. In business, becoming the top project with the most users and market share is the result of competition. However, whether the business logic is decentralized is another question. For investors, whether betting on centralized companies, whether in social, fintech, or gaming, they want to become industry leaders, which can be centralized or decentralized. However, these two are not only different business models but also concepts in two different dimensions.

36Kr: In recent years, many fintech unicorns have emerged globally. Is there any correlation between their business and Web 3's financial business?

Vincent: They can be divided into two categories. One category follows a completely traditional model but engages in Web 3 asset and customer business. For example, Robinhood and Coinbase are also involved in crypto trading, but they are essentially centralized exchanges and brokerages that allow users to conduct compliant cryptocurrency transactions. This also includes some underlying data service companies that provide data tools and customized products on a subscription basis.

The second category consists of businesses that are natively Web 3 in terms of business model and product logic, such as decentralized exchanges and games with certain NFT and Token attributes.

36Kr: Is there a significant difference in the underlying logic between investing in Web 3 companies with Bitcoin or Ethereum and the more mainstream dollar investments?

Vincent: Early investments using Bitcoin or Ethereum were just a fleeting phenomenon. In 2017-2018, many projects were conducted on Ethereum, but stablecoins like USDT and USDC were not as popular as they are today. Many exchanges used BTC or Ethereum as base tokens, so at that time, there were many similar investments.

Objectively speaking, at that time, investment institutions were also quite early, with limited funds. Issuing tokens within the Ethereum ecosystem had the characteristics of that era. However, as investment has become more professional, formal LPs have begun fundraising and professional operations, including some crypto funds that have started to raise dollar funds or other fiat currencies for investment. This was merely a phenomenon unique to that era and does not imply right or wrong, or other macro factors.

36Kr: Will the investment heat in Web 3 gradually cool down after the global exit from quantitative easing and the transition to a rate hike cycle?

Vincent: Personally, I believe there will be a significant impact. Looking back at the past two or three cycles, substantial trading began to occur on a larger scale, primarily with Bitcoin, after 2012-2013. Before that, trading volumes were negligible. From 2013 to last year, the entire macro market was in a large easing cycle, continuously injecting liquidity. During this period, cryptocurrencies experienced two to three cycles of validation. This year, the macro environment has changed significantly, and it is difficult to determine whether Web 3 will still follow a four-year cycle (with equal bull and bear markets).

In a bull market, global liquidity expansion and increased liquidity have indeed driven the abundance of funds in the Web 3 industry to some extent.

36Kr: After the crisis in 2008, the mobile internet experienced rapid growth. Will the global economic crisis followed by an adjustment and recovery period also present opportunities for Web 3?

Vincent: Web 3 is developing very quickly, largely because the underlying systems are interoperable. It can be understood that everyone is on the same database, on the same open computing platform. They write code together and create new things together, so the transmission of information is very fast, and it faces a global market. Over the past few years, people around the world have been building and developing together. Moreover, during the construction process, one can choose to copy or choose to rebuild, which is a very natural and smooth process.

In the past, internet entrepreneurship involved long cycles from development to promotion and customer acquisition, facing a lot of unknown competition and uncertainty. However, in Web 3, it is not as competitive; everyone adopts a collaborative working style and can leverage a lot of open-source resources.

Developers can create more interesting things based on other products, components, and protocols, which invisibly enhances development efficiency and quality. The composability of code is an interesting feature of blockchain, allowing global developers to quickly build new products and ideas on each other's code. Therefore, Web 3 can maintain innovation and rapid iteration. Although the funding development of the industry has outpaced the fundamentals, both actual revenue and the value brought to users have changed dramatically compared to four years ago.

However, rapid fluctuations and the extent of volatility are certainly unreasonable from a traditional financial perspective, and the valuations corresponding to the number of users are also unreasonable. Thus, the industry is still experiencing significant volatility. In a bear market, fluctuations in the entire capital market and secondary market will tend to stabilize. Developers will have the time and energy to continue building the industry's fundamentals. Therefore, in the next two to three years, during a period that is likely not a bull market, there may be more focus on the fundamentals of the industry and projects.

36Kr: To enhance the fundamentals of Web 3 and cover more users, what killer applications might be needed?

Vincent: In the past cycle, decentralized finance has completed the validation phase from 0 to 1 and partially from 1 to 100. The gathered funds, users, and trading volumes are very real, and its value has already solidified. However, finance does not cater to hundreds of millions or billions of users.

It is impossible to compare the user base of financial products with that of gaming or live streaming. Large DAU products are still primarily around general entertainment and social-related fields. After all, financial products require principal and investment willingness, which are barriers, while playing games or using social products has a lower user threshold, making it easier to generate large DAU products.

Because blockchain is inherently very close to financial attributes, the development of DeFi in this cycle is also very natural, becoming the first track to explode. Games and NFTs, as well as the metaverse, have completed the process from 0 to 0.5 in this cycle, but have not yet fully reached 1. On one hand, we have indeed seen many products, with phenomenon-level applications like Axie Infinity appearing in GameFi, but their life cycles are relatively short, possibly only a few months to a year. Therefore, it is reasonable to judge that GameFi is still in the exploratory stage, accompanied by the explosion of DeFi and NFTs. This track has experienced a wave of speculation, but the fundamentals remain very weak. Most players are primarily motivated by earning money rather than playing games.

Thus, most users in the ecosystem are exploitative rather than genuinely creating value for the ecosystem. Therefore, GameFi is just quickly moving from 0 to 1, but in the next stage, there is still some distance to go. NFTs have already completed their breakout, meaning the process from 0 to 1 has been completed, but the next step is to see what real value can be created. The value of avatars and similar items is very limited, and the next stage will depend on what gameplay NFTs can create in specific scenarios like gaming.

The interoperability of blockchain essentially allows NFTs to connect with any other applications or associate special added values to NFTs, which is a direction worth exploring in the next cycle. Other areas certainly include social, but social is still in an earlier exploratory stage. If we look at some more practical data, most NFT and GameFi projects have almost no revenue. The so-called revenue comes from speculation during bull markets, and during those few months, there may be outrageous revenues, but once the tide recedes, the fundamentals will instantly return to zero. Therefore, in the new cycle, it is essential to explore long-term sustainability and genuinely valuable business models.

36Kr: When researching NFTs, should we primarily focus on their computational power essence or their business models?

Vincent: Creating an NFT product now is more like using new technology to build a platform and employing a new approach to brand building. With a more fundamental thinking logic, the goal is the same as that of current consumer brand building: to enhance user recognition and the brand's position in users' minds.

In practice, whether online or offline, what kind of experience can the brand create for users? For example, what does Bored Ape actually represent needs to be defined by everyone. It is more like a hybrid with brand attributes, cultural attributes, and community attributes. It is difficult to define, as it is a native Web 3 category that can provide users with more gameplay and value that transcends online and offline. However, its business model is still hard to conclude.

36Kr: What other gameplay does NFT have?

Vincent: Avatars are just the basic gameplay of NFTs; they can also be applied to game items. However, most GameFi projects have relatively short life cycles, and correspondingly, the value of NFTs is also limited. But in the long run, if NFT items are in more sustainable games, they can actually give rise to new gameplay. For example, NFTs could become key connectors in a series of games, serving as keys for the next game or for others' secondary development.

From another perspective, the core of this industry comes from the value of NFTs and their trading volumes. If the core assets of top Killer Apps or Killer games are sought after by everyone, or if they hope to benefit from core assets, then the prices of those core assets will certainly be driven up because they are akin to a pass that can provide unique benefits in another 100 types of games. Thus, NFTs generate value associated with GameFi.

On one hand, it is empowering; on the other hand, it can attract traffic. NFTs can empower while attracting traffic, which is actually a win-win situation. This is the underlying logic that may open up the ceiling of imagination for existing NFTs. Because once everyone can freely reference others' NFT assets, such as digital assets in games, and can reference them mutually, it may create many interesting gameplay.

NFTs in Web 3 are like a vast wasteland where there is likely gold. Now everyone has started to dig, and in the process of slowly digging, they still do not know how to extract the largest gold nugget in what way and with what efficiency. Other NFTs can also have many other scenarios. In the future, some rights-based tokens, such as subscribing to a website's membership as a protocol, can be purchased as a membership that exists in the form of NFTs, with specified validity periods for the rights, allowing flexible trading. Otherwise, in the current centralized subscription model, users cannot freely trade midway.

In the future, using NFTs can unlock premium services and can be resold in the secondary market without barriers, which is much more reasonable for users than the current centralized companies trying to trap users through lengthy user agreements.

36Kr: The term GameFi 2.0 has started to emerge. Is it just a concept, or has it already achieved significant upgrades from the perspectives of business models and technological implementation?

Vincent: This is a question of perspective. The biggest problem with GameFi is its short cycle. Essentially, this is due to issues with the incentive model. Currently, most players complete predetermined tasks in games to earn certain rewards. This logic is definitely flawed. For example, if a game project truly has 10 million DAUs, and each person can earn $10 for 20 minutes of gameplay each day, then it would need to distribute $100 million a day. Where would that $100 million come from? It cannot simply be conjured out of thin air.

Game incentives should reward core value creators rather than indiscriminately giving rewards to every user. Traditional games have two types of people who can earn money from gaming: one type is skilled players who can earn money through competitions, and the other type is those who are decent players and can earn through live streaming by interacting with viewers and fans. The premise is having skills, while GameFi's "Play to Earn" ignores the core of gaming, which is not a reasonable incentive logic.

Under this logic, games become financial products because the output model of GameFi is based on principal output, similar to buying financial products; the more you buy, the higher the returns. This product design is not a game; it is merely a financial product disguised as a game. Therefore, the next generation of GameFi 2.0 users should differ from the current GameFi users.

Future GameFi 2.0 users should have over 50%, or even 70-80%, of users coming for the playability of the game, engaging in gameplay without considering the payback period, invested principal, or how much they can earn, similar to the logic of playing other games. For the core users, who make up about 10-20%, they invest more time and have a deeper understanding of the game, and these are the core users worth rewarding.

In traditional gaming, only less than 1% of players can become professionals or streamers, and their income does not come directly from in-game earnings but from the surrounding ecosystem of the game.

36Kr: In reality, there is at least an order of magnitude difference between the number of gamers and social media users. Does SocialFi have greater imaginative space?

Vincent: First, Web 3 has generated a lot of data. Various interactions in DeFi and GameFi will retain a lot of data, and this data comes from different applications. In current Web 2 applications, each company's data is fragmented, and they try to prevent their data from leaking. Suppose a phone has 10 apps; user information will be stored on different companies' servers, capturing a portion of daily behaviors, which are then attempted to form user profiles.

This has already formed the strategic approach of internet companies. However, on public chains, even if someone uses 1,000 applications, all data is stored in one address. Users can see the interactive operations of 1,000 applications on the public chain. Although they may not know who is behind this node, the profile of this address is clear. Based on this data, it is logically possible to construct a new way of social interaction.

This track is expected to have great potential because there is indeed a lot of data accumulated, and everyone's profile can be clearly drawn. Moreover, this data is real. Users' historical behaviors are recorded authentically and cannot be tampered with. These on-chain behaviors leave behind real information and verification. If we can socialize on-chain through addresses in some way, users can establish trust relationships directly, reducing the costs and friction of trust.

However, the specific form of social interaction—whether it is a new form or a new interaction method, or an iteration and upgrade of existing social tools—is still difficult to clarify. Simply creating a decentralized version of Twitter or Weibo may not necessarily succeed, so SocialFi may require an entirely new model.

Globally, there are at least dozens of teams working on SocialFi. Many teams are doing similar things, but at the user level, the product-market fit has not yet been validated. SocialFi may still need continuous exploration by entrepreneurs in the next two to three years to find the right way to open up.

36Kr: When each node has accumulated a large amount of user data, can AI virtual beings like Xiaoice activate this data? From a technical perspective, can virtual beings represent the computational power value of nodes?

Vincent: This question involves whether the accumulation of on-chain data has value for a person. If a person is a deep user of the industry, they will find that, for example, entrepreneurs developing new DeFi products certainly hope that the most knowledgeable people in DeFi become seed users. So where do they find these users? Entrepreneurs hope that someone can create a DeFi rating system. No one needs to know who this person is, but they need to trust their capabilities. In reality, fair judgment standards include educational background, work experience, professional skills, entrepreneurial projects, etc., and judgments are made based on these.

Our subjective cognition and judgment in Web 3 really do not need to refer to real-world standards. In terms of data processing capabilities, AI virtual beings are much stronger than humans.