Web3 Could See Its Own Dot-Com Boom. Here's How To Survive The Bust.

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The dot-com boom was built on half-baked ideas filled with excitement and promise, but few products actually felt real. Unfortunately for a lot of people, the money they were investing was. When the bubble burst, they lost everything.

I know this firsthand. I was there.

Anyone who lived through that era of internet investing learned an important lesson: There’s a fine line between hype and harm, and it’s crucial to communicate goals and challenges clearly to the public to avoid leading people down a path of falsehoods and financial ruin.

I’d love to say startup founders took that to heart and paved a path of honesty and integrity over the ensuing two decades, but we all know that didn’t happen — Theranos, anyone?

Lately, I’ve been watching the rise of Web3 and feeling it all over again: the unbridled excitement about the potential to get in on the ground floor of the next web-based revolution — and the corresponding profits. But I know from experience that 98% of it will go to zero on the backs of hopeful investors.

Here are a few questions to ask yourself to ensure your bet on Web3 doesn’t end up being the next Enron, or Theranos.

Does it solve a real problem?

Simply put, Web3 is the next big evolution in the purpose of the internet. Web 1.0 was a place where access to information was democratized online; 2.0 was all about connecting people around that information, but it quickly became dominated by a small number of social media giants who controlled the data of its users. In Web3, the platforms will be decentralized, built on blockchain and the users will be in control of their information. You won’t have to worry about what Facebook, Twitter and Google are doing with the data you give them — because you’ll have one profile on a decentralized blockchain that goes between each platform without selling you out to these corporate giants.

While the concept has drawn criticism from influential folks like Jack Dorsey and Elon Musk, the evolution is becoming inevitable as more big players move to Web3 platforms. But it’s important for investors to take a long lens to this — Web3 isn’t here yet, nor is its widespread adoption imminent.

In the rush to build a more robust Web3, some entire blockchains will fall away, and a lot of the companies building on those chains will go to zero.

In the meantime, it’s crucial people ponder actual use-cases before throwing their money at startups in the space. We’ve seen the cracks in social media monoliths really start to widen as more people are questioning the concentration of ownership around their personal data. But big questions remain whether the average user cares enough to move away from the convenience of these platforms and toward a decentralized system. The longer it takes for people to move that way en masse, the greater the chance some blockchain platforms will prove massively overvalued.

We saw this in the dot-com boom, where companies just slapped a pointless “.com” at the end of their name and watched money roll in. It ended with a blazing failure and lots of questions.

A lot of similar questions need to be asked now as more companies flood into the Web3 space. A product may sound cool, but what problem is it actually solving? Why is it important for everyday people? And will they actually use it?

Who is involved?

Elizabeth Holmes’ story is fascinating, but far from unique. Without any evidence to pitch, she roped small-scale investors in with a carefully curated persona and huge promises. For those who looked behind the curtain, though, they found a couple things: a lot of venture capital firms passed on Theranos, and there were obvious questions about the motivations of its founder.

In the absence of hard evidence (or, with evidence that’s hard to understand at all), looking at who’s in charge and who’s bought in can be extremely helpful.

First, do your due diligence on the founder and what might be driving them. In 2018, a number of fraudulent companies took hundreds of millions from investors through initial coin offerings — a common, but largely unregulated, way to raise capital for companies in blockchain. Over three-quarters of them, like Pincoin and iFan, turned out to be scams. While many investors were blindsided, there were tell-tale signs things weren’t above board: promises of unrealistic returns, founders that couldn’t be located, and projects that had no real point.

In this space of mysterious characters and outlandish claims, it can help to sit back and see who is backing what, and which platforms are drawing top talent. Just as with the dot-com boom, there’s a rush to make as much money as possible, as quickly as possible — but you’d be wise to pause and pay attention to details before putting your money on the line.

Where are the picks and shovels?

Those details will show you that not all coins and platforms are created equal. In the rush to build a more robust Web3, some entire blockchains will fall away, and a lot of the companies building on those chains will go to zero.

It remains to be seen who will emerge as the winner in the war between Ethereum, Solana, Avalanche and others. If you’re looking for a safe investment, be sure to look for targets that are chain agnostic — meaning they can be used on any blockchain. These are typically tools that connect a user with the blockchain to perform a certain task, such as mint NFTs or allow them to take payments in cryptocurrency. They’re regarded as “picks and shovels” applications, and they’re garnering huge investment from private and public sources.

Just like the survivors of the dot-com boom, these companies serve an important purpose and they’ve designed themselves to be resilient. While still a gamble, the picks and shovels route is proving to be a safer bet.

While some tech leaders with a vested interest in the status quo argue there will never be a Web3, I see the momentum in this space reaching a critical mass. Corporate giants have had a grip on the way we use the internet for too long, and there’s so much money flooding into the fight against them that the needle is starting to move in the right direction. I’ve been here before, and I know this feeling. This time, I hope more people will be protected against the bad actors as the 98% fall to zero and the 2% live to fight.